E-Tailers Crash Because Of Outsource Decision

Written by Frank Hayes
June 10th, 2010

This month, we saw two reminders of the dangers of E-Commerce outsourcing. Word came down last week that dozens of E-tailers crashed when long-time Mobile-Commerce technology provider mPoria evaporated. We also learned last week that some 200,000 customers—including an unspecified number of retailers—of Digital River lost their customer information, the unfortunate byproduct from an affiliated marketing program.

Outsourcing is a great way to get into a new technology, because someone else has already made the investment, built the infrastructure and collected the necessary expertise. As a retailer, you don’t have to reinvent that particular wheel?just pick the right outsourcer for the job. But you can’t assume that the outsourcing deal will last forever, or even that you can trust it just to keep doing what you need.

Consider mPoria, an early leader in M-Commerce. It created E-Commerce Web sites specifically designed for low-end mobile phones. By all accounts, mPoria was a good choice for retailers wanting to jump quickly into mobile. But as M-Commerce heated up, the company faced strong competition from rivals and eventually sold some of its technology in late 2009 to Nirvaha, a financial software company. (Nirvaha COO Tom Brubaker says mPoria remains a separate company and Nirvaha never had anything to do with the mPoria’s mobile Web operations.)

After that sale, mPoria’s mobile Web sites “stopped working a few times. That was odd,” said Baxter Phillip, an executive VP at, one of mPoria’s clients. The outages didn’t worry Phillips at first, because the mobile piece of the business was so tiny. But when the site went down and Phillips could no longer get through to mPoria by phone or E-mail, he decided to start over with a different approach and provider. His company’s M-Commerce site is still theoretically live with mPoria, but it’s not working, and mPoria’s phone line has been disconnected.

Conventional wisdom says IT shops have to be very careful about outsourcing choices. That’s true. It’s just not enough. When mPoria was a leader, it was a good choice. But when the business changed, its customers were orphaned by decisions outside their control.

Then there’s the case of Digital River, which last month sued a 19-year-old entrepreneur named Eric Porat, who lives with his parents in Brooklyn, N.Y. Porat allegedly tried to sell information (including names, E-mail addresses and company names) about 198,398 potential customers of a dozen companies, all of which were clients of a Digital River subsidiary that manages affiliated marketing programs.

Porat reportedly offered to sell the names to a Colorado marketing company for $500,000, claiming he got the data from a former consultant for Digital River in New Delhi who downloaded it when security was down for a system upgrade. The Colorado company, Media Breakaway, declined to buy and notified Digital River and the FBI. The whole affair is also being investigated by a federal grand jury in Minnesota, where Digital River is based.

For Digital River’s clients, outsourcing their affiliate programs made sense. Paying commissions to Web sites for links that drive traffic to a retailer’s Web site is exactly the kind of complicated marketing process that IT shops should not be doing in-house. And Digital River sounded like a good choice: It has the right experience and security and is big enough that it outsources some of its own IT work offshore. Unfortunately, customer data in New Delhi ended up in Brooklyn?completely outside the control of Digital River’s clients.

Outsourcing was a good choice for those clients. It may still be a good choice. And choosing industry-leading vendors makes that choice safer. But it doesn’t eliminate the risk. And as soon as a business process moves outside your company’s control, it can quickly be handed off to yet another outsourcer. That’s especially true of IT processes, which can move halfway around the world without you noticing?or be all but abandoned if those processes drop in priority for the outsourcer.

Once mPoria downgraded the importance of that business, it was time for mPoria’s clients to pull the plug on their outsourcing deals, not wait for service to spiral down. And now that Digital River’s data security has been breached, it’s up to the clients to deal with the fallout?and reevaluate how far from home they want data on potential customers to go.

You can hand off IT operations, but you can’t afford to forget about them or take them for granted. And in the end, every outsourcing decision is only about as permanent as a retail price.


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