Guide

Use intellectual property to grow your business

Advantages and disadvantages of outsourcing product distribution

Product distribution requires a huge amount of planning and painstaking logistics - from order handling, stock control and storage, to packing, despatch and delivery of goods. If your business is not capable of performing all these activities by itself, you may want to consider partnering with an experienced logistics company to distribute your products for you.

If you outsource distribution of your product, confidential information and intellectual property (IP) rights that you own should be critical concerns.

IP issues in outsourcing

IP clauses should be a key element of any outsourcing agreement. They will set the rights, limitations and the protection of your IP rights during and following the term of the agreement.

The key risks in outsourcing IP are:

  • disputes over ownership of IP
  • loss of business knowledge (eg through disclosure of confidential information)

Prior to agreeing any outsourcing deals, carry out a thorough IP due diligence and risk assessment. This should allow you to:

  • identify what IP may be at most risk
  • determine ownership rights in advance of the agreement
  • identify potential issues with the third-party (eg previous infringements, misuse, loss or theft of assets)
  • assess how your IP rights will hold up, perhaps in a different jurisdiction
  • determine the best ways to safeguard your IP

Make sure that you are satisfied with your potential distributor's reputation, compatibility and competence before signing any outsourcing agreements.

Advantages of outsourcing distribution

Engaging a distributor can lead to many advantages. For example, in a typical outsourcing arrangement the distributor:

  • might know or better understand local customs or legal issues
  • is responsible for warehousing and transportation
  • may accept any currency exchange risks if expanding overseas
  • is responsible for marketing your product
  • may have an existing brand that you can use
  • will carry any credit risk arising from the product's buyers

Disadvantages of outsourcing distribution

Outsourcing your distribution involves handing over control of all distribution-related activities to a third party. This comes with certain risks, including:

  • losing control over certain marketing aspects or the pricing of your product
  • distributor wanting discounts on products and privileged credit terms
  • distributor demanding long-term exclusive agreements - which can lock you in a contract even if the arrangements fail

Read more about the advantages and disadvantages of outsourcing.

How to negotiate a distribution agreement

Your distribution agreement should include:

  • physical boundaries, ie territory of distribution
  • clauses about selling your product direct
  • other authorised distributors
  • what the distributor will be paying for your product
  • what credit terms apply
  • bonuses the distributor gets if they meet the targets - eg number of units sold
  • how long the agreement lasts
  • if early termination is allowed

When you are choosing a distributor it is essential that you choose someone who will maximise the sales of your product. If you are going to be selling your product into a new market it is also important to find someone with in-depth knowledge of that market. Businesses selling complementary products can make good distribution partners.

Find more tips to help you choose an outsourcing partner.