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June 1, 2015

Three strategies to invest in web-development for your e-commerce service: 100% managed, 100% in-house, and 85/15% external-internal

Three strategies to invest in web-development for your e-commerce service: 100% managed, 100% in-house, and 85/15% external-internal

At the start of the e-commerce activity without in-house expertise to create a marketplace, the quickest go-to-market strategy is to externalize 100% of the IT. Indeed the initial market place has few customizations, what keeps its cost low.

However, as the e-merchant develops its business, customer acquisition strategies and conversion rate, he develops his expertise and tend to use more and more specific tools. Some of these are standards and plug in directly in the market place, others are integrable, and some will remain extern.

Problem. Yet the problem of 100% managed is that each customization requires a negotiation cycle:

  1. expressing needs;
  2. making a commercial proposal; and
  3. negotiating the price;

which leads to:

  1. a loss of reactivity;
  2. an cost overruns;
  3. a loss in the accuracy of implementation of the e-merchant's needs.

As well, the prospect of a negotiation cycle limits, in itself, the expression of eventual needs that, in turn, will limit the capacity of the e-merchant to react to change.

Three strategies. The growth of the e-commerce website and its ever-increasing specialization lead to the challenging of the initial strategy of the e-merchant that was 100% managed. Three avenues are opened to the e-merchant :

  1. carry on with the 100% managed strategy,
  2. bring back in-house 100% of the devs,
  3. internalize part of the dev (e.g. 15%) and externalize the standard (e.g. 85%).
Strategy Description
100% Managed The first approach uses the modus operandi of the initial delivery (i.e. commercial negotiation cycle, 100% managed) to maintain and update the marketplace.

Though, the e-merchant should note that a change in version of the marketplace requires the making of a release that, by definition, are disruptives at an IT and a business level, what entails a significant economical risk.
100% In-House The opposite solution is to internalize 100% of the IT of the marketplace. Then, reactivity is boosted since the IT team is in-house and there are no more negotiation cycles who limit the expression of eventual needs, which also contributes to the e-merchant's reactivity.

However, the e-merchant should measure the required level of expertise to internalize 100% of the IT ; integrators have numerous examples of clients who stepped back, in ermegency, after having decided to internalize 100% of the IT, because the internal IT teams could not scale up to the level of domain expertise required to fully manage a marketplace.
85%/15% External/Internal Finally, the last solution aims to externalize 85% of the most standard devs of the marketplace and to get in-house 15% of the specific devs. Indeed the specific is quite time consuming to express for the negotiation cycle and de facto expensive because it is non-standard.

If this approach requires to get some IT expertise in-house, the volume of skills to acquire is much more limited as compared to 100% internalized (#2). On top of this, this approach has the benefit to preserve the eco-system around the e-merchant.

Conclusion. If the growth of the e-merchant carries on, his needs will grow, as well as the specialization and the expectation of his clients, providers, and partners.

  • Hence the metabolism of the marketplace will get more complex and a strategy 100% external is unlikely to be tractable on the long run.
  • In the opposite, internalizing 100% of the devs implies to step over a significant technical lock, in one time, which carries its own significant risk.
  • The middle-way approach would be a 85/15% (external, internal).