October 28, 2004, 12:00 AM

Where outsourcing is not a dirty word

Retailers give up their fear of outsourcing for help managing web complexities and technology that they’d rather not face alone.

Riding in a New York cab on his way to another TV appearance to promote the Oct. 1 relaunch of his mass merchandising web site, CrazyGrazer.com president and CEO Mick Hall is focused on his marketing strategy. "This morning we were on ESPN, now we`re on our way to CNBC," he says with the swagger of a media-savvy pro.

Hall, who owns multiple marketing and communications firms, thrives on publicity. "Other retailers spend $23 per person for acquisitions, but we think there`s a better way," he says. He ticks off a list of marketing initiatives, including such innovations as e-mailed incentives to its best sporting goods customers in Detroit to get tickets to Detroit Pistons basketball games.

Because marketing is his game, e-commerce technology is best left to others, he says. It`s a lesson he learned the hard way.

Third platform

CrazyGrazer.com is on its third technology platform. The first one, which came from an outside vendor, wasn`t scalable and cost CrazyGrazer the 2003 holiday shopping season. It developed the second one in-house, but after 10 months and $5 million it threatened to cost CrazyGrazer the 2004 holiday season as well.

The site finally went live Oct. 1 with an e-commerce platform from Vcommerce Corp. "They turned our site around in two months," Hall says. The only thing CrazyGrazer kept from the in-house project was a CRM module. "They took us to market in a much more expedited fashion than we could have done ourselves."

While CrazyGrazer was practically forced into outsourcing, other retailers, daunted by the complexity of the technology and unwilling to invest in keeping up with rapidly evolving systems and procedures, are going outside as a matter of course. For them, outsourcing all or part of their e-commerce operation is becoming a more attractive alternative to in-house development to keep up with the Amazons and Lands` Ends. "In the past 12 months we`ve seen an increasing interest in outsourcing online solutions," says Andrew Bartels, retail industry analyst with Forrester Research Inc. "They don`t expect to compete with Amazon, but they want to be a player in the online channel."

That kind of thinking represents a turnaround for retailers, who traditionally have wanted to keep all technology in-house as a way to keep control over it. But with many IT budgets limited, and often more focused on a retailer`s stores, online managers are forced to find the most efficient means of building out their e-commerce sites. They are turning to outsourcing partners to deploy technology faster and cheaper than their IT departments can in-house.

More control and flexibility

At the same time, vendors are more tuned in to retailers` concerns, analysts say. "E-commerce outsourcing providers are beginning to provide increased control, visibility, and flexibility," says Rob Garf, retail industry analyst with AMR Research Inc.

From that point of view, CrazyGrazer`s decision to turn over site operations to Vcommerce makes sense and is part of a trend in retailing. Nearly a year into the in-house project, Hall and his team came to realize last summer that his site would not be up and serving customers until well into next year. But when he saw an opportunity through an outsourcing arrangement to be ready for this year`s holiday shopping season, he jumped. He was ready to jettison the DIY approach for the prospect of much-needed cash flow during Q4 for CrazyGrazer and its publicly traded parent, Left Right Marketing Technology Inc., which has yet to post revenues.

As CrazyGrazer and other retailers ranging from Crate and Barrel to CompactAppliance.com to Wilsons the Leather Experts Inc. have found, outsourcing can fill a crucial role in providing an effective e-commerce operation often faster than a merchant can develop it in-house--while letting merchants focus on merchandising and serving customers.

But for many retailers, outsourcing also raises concerns over control and visibility. They fear that leaving all or parts of an e-commerce operation in the hands of an outside service provider can result in ineffective selling strategies, inconsistent branding or poor customer service. "Outsourcing can be very good or it can be very bad," says Jason Roussos, senior vice president of strategic development for CompactAppliance.com, who terminated the service of one outsourcing partner who failed to meet its promised service levels in online marketing campaigns.

Not just for small guys

Outsourcing appeals both to start-up e-retailers who need to quickly enter e-commerce with limited capital, as well as to established merchants who need help scaling up to remain competitive, says Jim Okamura, Chicago-based senior partner with retail consultants J.C. Williams Group. "Smaller retailers without enough skill and resources often find it easier to launch with outsourcing, while some bigger retailers will outsource when they`re ready to really scale up their operations," he says.

While it`s obvious that start-up retailers may have limited capital to invest, even larger, multi-channel retailers can have limited funding and internal resources dedicated to online commerce. Although online retailing continues to grow much faster than offline sales, it still represents less than 5% of overall retail sales and often commands an accordingly small share of a multi-channel retailer`s IT resources.

Prices for outsourcing vary widely based on the scope of outsourced operations and a retailer`s size. Fry Inc., for example, charges from $250,000 to $1 million to develop a new site, then charges $1,000 to $40,000 per month to host the site. The hosting fee depends on the volume of transactions hitting its servers; the more outsourced applications, the more transactions. Others charge on a pay for performance model. GSI Commerce Inc., for instance, charges fees ranging from 1% to 5% of clients` revenue.

Outsourcing can also let retailers more quickly deploy a specific application, such as web analytics, which merchants use to view how shoppers are either making purchases or abandoning their site. "If you look at data warehousing projects, it can cost over $1 million and several months to deploy," says Dave Alampi, vice president of product management and marketing for Fireclick, the web analytics unit of Digital River Inc. "That compares to a 2- or 3-week deployment of Fireclick and a monthly fee of about $15,000, based on volume of traffic."

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