I asked top marketers to report how much they expected their companies to outsource marketing in the next 12 months. This percentage has grown over time as shown in Figure 1. In fact the last measurement, taken in August 2011, grew by over 100% over the prior year!
Why do companies outsource marketing?
- Companies don’t have the expertise to perform key marketing tasks.
- Companies don’t think the benefit of building knowledge and skills is better than the value they get from an expert partner performing that same task.
- Companies can’t produce the same function at the same low price as they can buy it in the open market because the provider has scale, scope, and experience (and perhaps cheap labor?).
- Companies prioritize other strategic areas more highly than doing marketing internally.
- Companies want a new point of view. It is easy to stop learning when you are stuck listening to the same colleagues every day. An external partner can offer important insights.
- Companies don’t understand the value of marketing.
What are the costs of outsourcing marketing?
- Integration costs: Outsourced marketing doesn’t fit well with marketing the company produces or with other strategies it is pursuing
- Customer costs: Managers lose sight of customers and what the firm is doing in the marketplace. They spend a lot of time on inventory, balance sheets, analyst conference calls, or building plants. This turning inward can be tragic in some cases.
- Control costs: Coase and Williamson both won Nobel prizes in Economics for their study of transaction costs, which are those costs the firm must control, contract, and incentivize away to ensure partners act as its agent. When a company chooses to “buy” its marketing services and not “make” them itself, the challenge is to ensure the relationship produces value.
- Objectivity costs: No marketer wants to be fired for sharing bad news about the value of a strategic decision or initiative. This can make it tougher to be a truth teller if you are providing marketing from outside the boundary of the firm.
- Risk costs: Partners may take more or less risk than a firm would take given they are not responsible to shareholders, employees, and customers in the same way managers are.
- Path dependence losses: A path dependence means that experience matters. The down side to path dependencies from marketing experience is that firms get locked into their own habits and routines. However, the upside of path dependency—grinding out the knowledge and efficiencies that come from learning by doing over and over and over again—is not realized either. These positive path dependencies can make it difficult for competitors to jump in because the firm is so good at what it does.
Is your firm outsourcing marketing? How is the calculus of these costs and benefits working out? Any suggestions on how to tip the scales in the favor of benefits? I’ll share more next week on who is outsourcing. In the mean time, jump in and share your view.