The Bookstore That Outsourced Its Future to Amazon

In 2001, Borders Books — then the second-largest bookstore chain in the United States — outsourced its online retail operation to Amazon. The arrangement, intended as a short-term operational fix that would allow Borders to focus capital on its physical store expansion, sent Borders customers to a co-branded Amazon-operated website where Amazon handled fulfillment, inventory, payment processing, and customer data collection. Borders received a small revenue share from the outsourced operation. The arrangement continued for seven years.

During those seven years, Amazon used the customer behavior data, the order frequency patterns, the product preferences, and the geographic distribution of Borders customers to refine its book-selling algorithms, its category expansion, and its competitive positioning. By the time Borders ended the outsourcing arrangement in 2008 and attempted to launch its own competitive online retail operation, Amazon had built a customer-data advantage and operational efficiency that Borders could not match. The decision to outsource, which had seemed sensible in 2001 — a small chain partnering with the dominant online retailer to access capability the small chain could not build internally — had, in retrospect, given the dominant retailer the strategic data and customer relationships needed to make the small chain commercially obsolete.

Borders filed for bankruptcy in 2011. The chain liquidated all stores by mid-2011. Approximately ten thousand employees lost jobs. The brand was eventually purchased in pieces by various entities. The intellectual-property remnants survive in various nostalgic incarnations.

The Strategic Outsourcing Trap. What Borders had done, with the 2001 Amazon partnership, was outsource the strategic capability — internet retail and customer data — that would eventually become the most important commercial battleground in book retailing. The outsourcing decision had been driven by the short-term economics: building an internet retail platform required substantial up-front capital, while partnering with Amazon required only revenue-sharing. The short-term economics were favorable. The long-term strategic consequences were catastrophic.

The Barnes & Noble Counterfactual. Barnes & Noble, Borders's primary competitor, did not enter into a comparable outsourcing arrangement with Amazon. Instead, Barnes & Noble built its own online retail operation, including the Nook e-reader as an attempt to compete in the digital-book category. The Nook ultimately failed; Barnes & Noble's online retail position remained substantially weaker than Amazon's. But Barnes & Noble survived the early-2010s e-commerce transition while Borders did not. The two competitors, starting from comparable market positions in 2001, ended in very different places, partly because of decisions made nearly a decade earlier about which capabilities to build internally.

The Lesson. What the Borders case demonstrates is that strategic outsourcing of capabilities the company believes are non-core can be exactly wrong when the non-core capability is, in fact, the next competitive battleground. The 2001 management could not have known, with certainty, that internet retail would become the central battle. They suspected. The competitor invested. Borders did not. The cumulative consequences, over a decade, were catastrophic to the chain and beneficial to the company that had absorbed the outsourced operation.

The bookstore experience continues, in much smaller form, at Barnes & Noble's surviving locations and at the independent bookstores that have, somewhat surprisingly, undergone a modest renaissance in the post-Borders period. The chain itself is a particular kind of cultural memory — used in business schools as the canonical example of outsourcing what turns out to be the future of the company.