Every year, Robert Lieb listens as Fortune 500 companies spill the beans about how they work with their third-party logistics companies (3PLs). Lieb, a professor of supply chain management at Northeastern University in Boston, says that when he asks which functions shippers would like to outsource, one thing always shows up: the high cost of information technology (IT) implementation.

"It's always at the top of the list because IT is expensive for companies to put in place themselves," says Lieb. "Making it more of a challenge is the fact that the customers of those companies are demanding it, but they don't want to pay for it."

Seeing an opportunity, 3PLs such as Menlo Logistics, BAX Global, Kuehne & Nagel, C.H. Robinson, and Exel, to name a few, are offering to manage IT functions for their customers. More shippers these days are taking them up on those offers, which Lieb says are particularly attractive for companies that are seeking "one-stop shopping" from their logistics partners.

Providers see IT outsourcing as a mutually beneficial extension of their traditional services. "We can provide more value to the customer than we would by just providing our normal logistics services," says David L. Stubbs, executive vice president and general manager for Naugatuck, Conn.-based KN LeadLogistics. "We both end up benefiting from the significant technology investments that we've made."

Should all shippers turn over their technology needs to a third party? As with everything else in business, the answer depends on individual circumstances. Done right, though, outsourcing IT functions can save money, simplify operations, and make the most sophisticated technology available even to small and medium-sized companies.

Shippers that work with third-party logistics providers on IT outsourcing expect a lot from their partners. They want to retain control over their core competencies, and they want to save money that they can channel back into their own growth. They also want to unload the hassle of buying, installing, integrating, and maintaining information systems. Some expect a little magic, particularly those whose IT systems are not yet up to speed.

"Different companies have different technology sophistications," explains Jordan Kass, general manager of the transportation management division at C.H. Robinson, a 3PL in Eden Prairie, Minn. "Before getting into this, companies must understand their technological abilities—or lack thereof—and realize that this is a business-to-business relationship that involves information sharing."

Customers also expect the latest and greatest technology, says Dennis Waliczek, chief information officer for USF Logistics in Oak Brook, Ill. That places a lot of pressure on the 3PL, Waliczek says, since a provider that can't round up enough customers to use expensive new systems will end up eating the cost of developing and implementing them.

Those costs can be formidable. For one thing, third parties must integrate their own information systems with the disparate systems that shippers already have in place. "When we're trying to hook into system infrastructures, no two are the same," explains Stubbs. "We can't just plug in the same way at two different companies, which means a lot of configuration and customization work before things can go smoothly."

Raquel Garcia, director of e-commerce for BAX Global, the Irvine, Calif.-based logistics company, says 3PLs have largely shouldered the costs of meeting those demands, but the payoff will come as more shippers outsource such functions. "At some point, we're hopefully going to recoup our development costs," she says.

Waliczek agrees. "Once you spread a large investment over a number of customers and sites, then the ROI (return on investment) comes back quickly," he says. "But that's not always easy to achieve."

Shippers, on the other hand, often see a payback soon after outsourcing their supply chain IT. The cost savings are significant, Lieb believes. "If companies weren't saving money, no one would be doing it," he insists.

How quickly a shipper achieves a return on its investment, though, depends on the size and scope of the company itself, says Foster Finley, vice president of the Operations Practice at Chicago-based consulting firm A.T. Kearney. "Large companies like Wal-Mart, Nestlé, or Procter & Gamble probably have enough economies of scale to justify handling the activity within their own four walls," he says. "Smaller startups or regional manufacturers vying to get into the national scene might find outsourcing to be a good strategy because they gain access to infrastructure that they wouldn't be able to afford on their own."

Whether or not outsourcing IT pays off for companies that fall between those two extremes depends on the existing technology infrastructure, Finley says. A shipper that has strong in-house technology skills and a system that's meeting its requirements probably wouldn't be able to make a compelling case for outsourcing, he says. But a company with outdated systems probably could justify outsourcing by comparing that cost to the expense of purchasing and implementing software, training employees, and transitioning to new systems in a manner that avoids business disruptions.

Garcia says most companies that outsource IT achieve cost reductions by eliminating the need for in-house staff to manage those systems. That, she notes, fits with the trend of "pushing back" business functions to suppliers, mostly as a means of reducing personnel costs.

When a third party does the job well, both sides benefit: The customer saves time, money, and the aggravation of running a complex information system. The 3PL, meanwhile, becomes an invaluable part of its customer's organization.

Yet 3PLs aren't always the ideal partners for companies looking to offload IT functions. "Not all of them can pull this off," says Adrian Gonzalez, director of the Logistics Executive Council at ARC Advisory Group in Dedham, Mass. For a 3PL to provide enhanced support for a logistics software application, he says, "there must be a certain level of IT sophistication and investment resources."

Some shippers, moreover, don't want their internal information systems tangled up with those of their 3PL. "The challenge is the level at which companies are comfortable letting 3PLs have more access to their information," says Stubbs.

One shipper that was willing to take that risk—and profited by doing so—is Word Entertainment in Nashville, Tenn. In 1998 Word, a producer of contemporary Christian music with a roster of performers that includes Amy Grant and Point of Grace, was facing a tough decision. The company had been relying on its parent firm to handle its distribution, but lost that support when the producer was sold to a hotel conglomerate with no such systems in place. Word's managers had a choice to make: Do we start a new distribution system from scratch, or outsource the entire setup?

They picked the latter course, and today the company utilizes a warehouse management system developed and operated by third-party logistics provider Menlo Worldwide of Redwood City, Calif.

"We felt that we could leverage the technology advances that the 3PL was making for all of its customers and benefit from those advances over the long term," says Laura McAlister, senior vice president, finance at Word Entertainment.

The early stages of the relationship weren't easy for either partner, McAlister recalls, mainly because Menlo had never provided IT services for the complex music distribution business before. "When you work with CDs and cassettes, there's a lot of volume, and we service a market comprised of many small customers," she explains. As a result, both the warehouse operation and the IT system had to accommodate very small quantities, which the 3PL may not have been expecting, she says.

Those bumps have since been smoothed out, and McAlister says Word's decision to outsource its logistics IT was a good one. Not only has outsourcing freed the company to concentrate on its core activities, but it also helped the music producer be more flexible when it comes to distribution, she says.

Word Entertainment is hardly unique. In an age where managing information has become as critical as handling inventory, more and more shippers will be turning to third-party logistics companies for IT support. George Cavage, director of technology solutions and strategy at APL Logistics in Oakland, Calif., sees several factors that will make that option more attractive to shippers. For one thing, he says, transportation management and IT are "one and the same." Customers also gain the most efficiencies when a 3PL utilizes its logistics know-how to feed accurate, timely data to an enterprise resource planning (ERP), warehouse, or inventory management system.

The spreading popularity of data-generating technologies like radio frequency identification (RFID) will also encourage shippers to outsource their IT requirements, he predicts. "One thing is certain—there's going to be more data, and that data must be transformed into information, and that information into knowledge," he observes. "Looking ahead, more companies will want to push those data management tasks out to third parties who can turn it into meaningful information."