Outsourcing versus "Rolling Your Own"

It happens in many kinds of businesses - businessmen consider the components that their upstream suppliers use and imagine.. "Hmmm..  if I buy from or even become the original source, I can bypass the distribution and save thousands of dollars! I don't need anyone between me and the source ".

Why didn't MacDonald's get into the beef business, the soft drink business, and the bakery business, soft drink business, the bakery business and Potato farming? Well, MacDonald's tried raising beef and growing potatoes, but they found out - the hard way - that it isn't nearly as easy to make money in those businesses as it is selling their hamburgers, that's why!  MacDonald's learned that vertical integration - doing everything themselves - is a recipe for disaster.

When this business strategy is successful then the result is called "Vertical Integration". When it is unsuccessful, about 99% of the time, the expression for this business strategy is " losing your focus - and your shirt".

The quest for market domination led Pepsico into buying, running and building pizzerias, takeout chicken restaurants and fast-food taco outlets, so that they could be sure that they had Pepsi products flowing out of the soft drink machines at those restaurants. The plan of the number 2 soft drink company was to become number 1. Well, Pepsi did buy Pizza Hut, KFC and Taco Bell, but they found out - the hard way - that not only is Coca Cola still number 1, but that they are a more distant 2nd thirty years later, and that all the money Coca Cola didn't spend in the restaurant business was spent selling Coke and paying fantastic dividends to its shareholders. Coca Cola could have bought MacDonalds - it easily could have - but the company knew it would be a mistake of losing its focus, and the company sticks to doing what it does best.  Coca Cola's stock was the number one stock in the world during the time that Pepsi was trying to beat Coke with a "Vertical Marketing" strategy.

Sure, if the goal of a soft drink company is to own restaurants, then Pepsi wins, but if the goal if a soft drink company is to make money and to have valuable stock, then Coca Cola wins. Restaurant owners and operators - what are your goals? In the interest of helping those who are open-minded as to why there are limits to vertical integration, we want to raise a few points about why this is usually a BAD idea.. and why it usually costs many times the money which one might think is being saved.

In fairness, sometimes vertical integration works.. like when Texaco gets sued for several billion dollars and loses, then is teetering on the edge of bankruptcy. Along comes the king of Saudi Arabia, who knows a deal when he sees one, and picks up all that distribution. Even then, the king had to have and be willing to spend his oil money on a massive renovation of the outlets. He was probably jealous of the Dutch Monarchy's success with investments in Shell, Phillips and Florida.

 Sure, POS hardware is a commodity, but so are auto parts and bolts of fabric. Does it follow that someone would build a car from parts and make clothing from bolts of fabric during the time that would otherwise be spent running a food & beverage operation? Nope, and it doesn't follow that learning the POS business during the time that would otherwise be running operations is a good idea, either.

"Rolling Your Own" Peril # 1: A presumption that developing a information system is something which food & beverage administrators & managers should do, is based on an assumption that the software which makes it all work, and the support you will need to use it is available as a commodity component. You might want to check this out before you buy all that hardware.

There are other assumptions which need to be examined.

    A.) that the significant requirement of contributing time and resources to vertical integration does not represent a true cost of doing business.

    B.) that the amount of time spent re=-1>B.) that the amount of time spent reinventing the wheels of POS information system design will not have any detrimental effect upon the administration and management of the core business.

    C.) that the end result will be as good or better than the best POS systems which are already available.

Obviously, it is not ethical to list the food & beverage organizations which have expensed $millions to develop POS systems and failed, or to list food & beverage organizations which have expensed $millions to run their own Information Systems Department instead of outsourcing the tasks to an organization which can do a specified job for a known amount of money. Nevertheless, the list is long, and the expense and embarrassment is plentiful. 

Now, if there's something involved besides the $2,000 or the benefits of our POS application package, (like an ego or job security) that's a different situation, and it's one which lies outside of the scope of why we created ViewTouch - to build information tools which make it easier to run a food & beverage operation, and to build information tools which contribute significantly to a better bottom line.

Let's put $2,000 in perspective. Our customers' have average sales of 80,000 to 100,000 cups of coffee a year. Now, if coffee is selling for, as an example, 90 cents, then the data shows that raising the price to $1 will not significantly affect the sales of that product, since cup of coffee is always a 'bottomless cup'. Raising the price of a cup of coffee by 10 cents will absolutely generate not only $40,000 to $70,000 extra dollars of revenue over the 7 year anticipated life of ViewTouch's hardware lifetime, but $40,000 to $70,000 extra dollars of PROFIT! So, that one easy decision pays for ViewTouch twenty to thirty times all by itself.