Is Google at Risk with Outsourcing?

The Internet darling gets 95 percent of its revenue from ads. And one risk, according to Google's filing for its stock offering, is its plan to outsource its billing to a third party.

Search provider Googles highly anticipated initial public offering filing featured a folksy letter to shareholders, stellar financials and plans to allow small investors to purchase shares. But it also listed a technology project as a key risk to its business.

Google Inc. says it is migrating its worldwide billing, collection and credit-evaluation functions to a "third-party service provider," which will track and automate the companys AdSense revenue-sharing agreements whenever ads appear on search results.

"If this transition is not successful, our business and operations could be disrupted and our operating results would be harmed," Google says in its regulatory filings. And the company isnt kidding—95 percent of its 2003 revenue is advertising-based.

Where the implementation stands is unclear, but it bears watching as the search giant—which for 2003 reported $962 million in revenues and $106 million in profits—matures. "We have no experience managing and implementing this type of large-scale, cross-functional, international infrastructure project," Google says.

Google wouldnt comment on the project, and leading providers of billing services say they arent involved in the implementation. Amdocs Ltd., based in Chesterfield, Mo., notes that Google isnt a customer. Convergys Corp., based in Cincinnati, counts Yahoo Inc. as a customer, but not Google. Another possible supplier, Portal Software Inc. of Cupertino, Calif., says it is not involved with Google.

/zimages/4/28571.gifClick here to read about how Google is changing the industry with its IPO and its search-based advertising.

Just how much Google is risking through outsourcing is unclear from its filing because the devil is largely in the details of an outsourcing arrangement, according to analysts.

Did Google choose the best provider for its billing and collection needs? Is the outsourcing contract flexible enough to meet changes in Googles business? Is the outsourcing on shore or off?

"Theres a whole bunch of potential risk, but its not greater than if you insource and do it poorly yourself," said Stan Lepeak, a vice president at IT researcher META Group Inc., in Stamford, Conn.

It is less common for companies to outsource the billing and collections for one of its main sources of revenue than, say, for processing payroll checks, Lepeak said. But given Googles position as a relative startup, outsourcing, if done well, can help it concentrate its investments on technology and products rather than on administrative activities.

The outsourcing approach also seems to fit Googles penchant for breaking convention, said Lance Travis, vice president of outsourcing strategies at Boston-based AMR Research Inc.

Given the importance of advertising to Googles business, the search company needs to make sure that its outsourcer properly differentiates its ad customers, Travis said. If the outsourcer, when handling collections, for example, treats a top advertiser the same as an occasional one, it could alienate Googles largest customers, Travis said.

"Its a move that makes sense if you look at business processes with the right level of granularity," Travis said. "Getting ad revenues is core to the business, but sending out bills and reconciling them is not."

Among other projects, Google noted that in 2002, its auditor urged the company to bolster internal controls—such as restricting employee access to its advertising system—and automate financial processes. The lax controls could hurt the companys ability to report its financial data. Google says it spent "significant resources" in 2003 to improve its internal controls.

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