Yahoo’s identity crisis is nothing new. And under the reign of the company’s current CEO, Carol Bartz, Yahoo’s identity crisis has arguably turned into an identity tragedy.

Nothing reflects that better than Yahoo’s newfound ‘product development‘ strategy: outsource everything to third parties, some of which were previously competitors. Recently, Yahoo outsourced Yahoo Personals to online personals competitor, and yesterday it was announced that Yahoo is outsourcing a good chunk of Yahoo Real Estate to real estate competitor Zillow.

When the deal was announced, Susan Mernit, who used to head up product at Yahoo Personals, commented:

It is a great idea if you believe Yahoo! should focus on a small set of core businesses and divest of things that are distractions (though, 2 1/2 years out of Yahoo! I have no idea what those core business area).

And it is a great idea if Yahoo’s best plan is to be an aggregator and make $3-4 MM a year in affiliate referrals via partner payouts for customer acquisition rather than manage greater revenue against greater cost.

She concluded by stating “Yahoo! stopped having great ideas a long time ago.

Her strong criticism of the deal raises an important question: is Yahoo really building a stronger company by outsourcing ‘non-core‘ businesses (eg. vertical properties) to third parties? In answering that, I think Google’s recent acquisition of ITA is somewhat instructive. In buying ITA, Google clearly considered the possibility of ‘outsourcing‘, but explained why it didn’t:

We think we can make more significant innovations and bigger breakthroughs in online flight search by combining our engineering expertise with ITA Software’s than we would by simply licensing ITA Software’s data service.

In other words, Google believes that to succeed in the travel vertical, it had to bring the best technology it could buy in-house. Yahoo’s continued outsourcing, on the other hand, seems to reflect a belief that the company can do better by letting others manage its vertical properties.

While it would be naive to believe that Yahoo can compete in every vertical in which it currently has a presence, Yahoo’s approach indicates that the company is no longer prepared to compete on its own in lucrative verticals that are important to its business. There are numerous downsides to this. For instance, it will be virtually impossible for Yahoo to maintain a cohesive, consistent user experiences across its vertical properties as more and more of them are outsourced to third parties, it will be difficult logistically for Yahoo to maximize the results. After all, partnerships may ease some burdens for Yahoo, but they won’t manage themselves.

In short, while there often is a good case for ‘outsourcing‘ in certain circumstances, Yahoo’s outsourcing is really the result of an unwillingness to invest in building up (or revitalizing) vertical properties that can be meaningful contributors to the company’s success. That unwillingness to invest in itself will not strengthen Yahoo; it will only make it weaker. Unfortunately, it looks like Yahoo is going to have to learn that the hard way.