Why are you managing your own power plant?

Companies should question if they really need to build and manage each IT project themselves, particularly if it offers little or no competitive advantage says Jim Frome of SPS Commerce.
Written by Jim Frome, Contributor
Commentary--Every business needs electricity to function, but have you ever thought about what it would take to generate it yourself? You’d need engineers, wire, land to build on, permits from the government, and who knows what else to create the right size power plant to suit your needs. Of course in reality, it makes no sense to waste time and millions of dollars to generate our own electricity. It just doesn’t make economic sense or add value – particularly when there’s already electricity available from a common power plant shared by others in your area. Simply put, no one would try to do this on their own.

Yet just like the absurdity of this example, companies should question if they really need to build and manage each IT project themselves, particularly if it offers little or no competitive advantage. You need it, but like your electricity, you don’t have to burden yourself with the mundane and costly details of doing it on your own.

To that end, here are the top five questions you should ask yourself when deciding whether to manage an IT solution yourself, or outsource:

1. Does it give me a competitive advantage?
2. Are there companies out there who have already created what I need?
3. Are there vendors who have more expertise in this area and stronger alliances with retail partners than me?
4. Does it take up much of my internal resources?
5. Could I benefit from the economies of scale of a Software-as-a-Service (SaaS) model?

These issues are particularly salient as businesses face tough economic times. It is evident that we’ve entered a recession in the United States. Companies large and small are pulling in the reins like never before when it comes to IT spending. So why are B2B integration technologies, especially SaaS solutions, still thriving in the face of strained IT resources and severe cost cutting measures? Simple. Executives recognize that in order to survive, their businesses need to focus all of their internal resources on sharpening their core competencies. As with the rest of the organization, technical staff cannot be distracted by tasks that don’t help to bring the company further up the rung than its closest competitors.

Case in point: A few years ago, consumer packaged goods (CPG) manufacturers invested heavily in in-house electronic data interchange (EDI) systems—and paid staff highly to support them. Yet ultimately this proved foolhardy. Not only were these firms spending money hand over fist, replicating work that SaaS or on-demand EDI vendors were already doing, but all of this financial investment was for naught. It gave them no market advantage whatsoever.

EDI is a basic necessity for manufacturers doing business with big retail chains like Wal-Mart and Target. Think of it like the electricity of the supply chain. Manufacturers need to create detailed EDI maps in order to comply with encyclopedia-thick rulebooks in order to deliver highly-specified data to retailers, according to those retailers’ specifications. No matter the manufacturer, they each have to build and continually update these “maps”. Before SaaS EDI, the exact same maps were being built by each manufacturer doing business with a given retailer. Talk about reinventing the wheel! And there are still hundreds if not thousands of manufacturers out there, each with their own dedicated IT staff, toiling away at building exact replicas of maps that SaaS EDI providers already have readily available. It makes little sense, right?

This scenario becomes even more ridiculous when you consider the sheer number of maps involved. Manufacturers often partner with as many as 50 retailers, each of which could shift their EDI requirements in any number of ways. This means that the CPG firm’s internal team’s task just grew exponentially. And as any EDI professional will tell you, retail partners often alter mapping specs at a moment’s notice. Whether this is a way to test their manufacturers, or simply an oversight on the retailer’s part, the fact is that EDI staff is continually put into “emergency” mode—get this map changed now or risk having your trucks turned away at Wal-Mart’s loading dock. Of course nobody wants that, and nobody can afford it. So the IT team sweats, trying to learn in a vacuum how best to get the job done quickly and without error.

That’s when the “ah-ha!” moment usually hits: Why do businesses struggle unnecessarily to maintain complex EDI systems in-house? They’ve invested heavily in EDI and yet, as a result, what they’ve built is a subset of what already exists in the SaaS EDI world. In other words, there are already SaaS organizations specializing in EDI—people who are in tune with these same retail partner’s whims and requirements from handling countless EDI transactions each day. And because these SaaS providers are tapped in to the leading retailers, they’re often the first to know when a retailer is about to change its ASN or purchase order rules and requirements. This early insight means that participating manufacturers benefit from having a vendor that takes on the burden of proactively updating retailers’ maps for them, rather than try and do it themselves and risk costly errors and downtime.

As we face rockier times ahead, companies are discovering that the old in-house EDI model is not only economically unfeasible, but makes poor business sense. As I stated above: EDI is like electricity. In the interest of saving a dollar here and there, it’s just not one of those things you can shut off, and expect to continue to run a business. Each of us could, if we were so inclined, create our own power plants. We could invest in the infrastructure, we could source the fuel to power it, and we could hunt and peck to find the answer when a technical problem reared its ugly head. Fortunately, power companies exist so we don’t have to deal with such things. And similarly for CPG manufacturers, there’s someone on hand to deal with the EDI mess for them as well!

Jim Frome, chief strategy officer and executive vice president, can be reached at SPS Commerce.

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