September 1, 2009, 12:00 AM

Shopping for SaaS

The software-as-a-service approach enables retailers to add technology quickly. A Good contract is needed to propvide long-term protection.

Apparel and home fashions retailer TJX Companies Inc. is testing an e-commerce presence through its subsidiary TJX Europe, selling handbags online through its U.K.-based TK Maxx brand.

The new retail site, TKMaxx.com, marks the first retail e-commerce presence for TJX Companies since it closed the U.S.-based TJMaxxHomeGoods.com in 2005, at the time citing the site`s inability to operate in a cost-efficient way.

Launched in May on a software-as-a-service platform from Venda Inc., TKMaxx.com is still officially a test. The retailer wants to see how the new e-commerce site fits with the company`s business model of offering a quickly changing array of fashionable merchandise, says Julian Baker, vice president of marketing for TK Maxx in the U.K. and Ireland.

The company`s business model is to acquire fashionable merchandise in excess assortments at low prices from manufacturers as well as retailers and other sources, then quickly sell it while passing on the savings—up to 60% off original retail prices—to its customers.

In closing its sole e-commerce operation four years ago, TJX Companies had decided that its stores were better suited to support that fast-moving-inventory model.

Although that store-based model appears to be working well—with its lean inventory strategy, net income rose 8% year over year to $209.21 million for the first fiscal quarter ended May 2, while net sales rose only 1% to $4.35 billion—TJX Europe is testing e-commerce with TKMaxx.com in an effort to expand on that strategy via the web.

Sold on SaaS
The retailer`s software-as-a-service platform, which Venda provides at a fixed fee of $12,000 per month per web site with no additional set-up fees, enabled TK Maxx to get up and running in four months with a cost-effective platform flexible enough to support its strategy of presenting quickly changing inventory to online shoppers, says Baker, who also serves as head of e-commerce for TK Maxx in the U.K. and Ireland.

"The Venda platform suited our need to get live quickly and relatively cost-effectively, and it allows us to handle quickly turning merchandise," Baker says.

Like a number of other retailers, TJX is finding SaaS e-commerce platforms—which reside on the vendor`s web-based infrastructure and share core technology with other retailers—the best option for quickly establishing an e-commerce presence with a lower initial investment when compared to licensed or in-house-developed technology.

Interest in SaaS is growing "because there is strong demand among retailers for an affordable, quick-to-deploy solution with off-the-shelf functionality," says Bill Mirabito, founder and principal analyst at B2C Partners, an e-commerce technology consulting firm.

SaaS-based technology is becoming so common that a vast majority of online retailers will use it for at least some parts of their e-commerce operations, says Gene Alvarez, vice president and retail e-commerce analyst for Gartner Inc. In the report, "SaaS Impact on E-Commerce," Alvarez notes that by 2013 90% of e-commerce sites will subscribe to at least one SaaS-based service, such as a product recommendation engine, while 40% of e-commerce deployments will use a complete SaaS platform.

Other surveys by Gartner indicated that between 23% and 39% of retailers expected to have some kind of SaaS e-commerce application this year.

Dealing with issues
But while SaaS provides the advantages of quick deployment and relatively low cost of entry, it also raises several issues. Retailers in a SaaS environment usually don`t have direct control of their technology`s basic software source code, for example, and so must rely on the SaaS vendor to modify functionality to the retailer`s specific demands, such as adding or improving basic shopping features like site search and navigation.

Just as with licensed software, there is also the question of how well a SaaS e-commerce platform will integrate with a retailer`s back-end applications, such as inventory and warehouse management systems. "Integration is the biggest challenge," says Baker, adding that TJX Europe spent most of its four-month Venda implementation making the new e-commerce platform work with the retailer`s merchandising, inventory, warehouse and accounting systems.

To ensure that a SaaS platform will be a good fit, a retailer must structure a SaaS contract in ways that meets its long-term as well as immediate needs, experts say.

Although retailers can`t expect full direct access to a SaaS vendor`s software source code, one of the major benefits of SaaS technology is that, as a vendor upgrades its platform, the upgrades can become immediately available to all retailers sharing that platform as long as the code base is a single version. But retailers in the market for SaaS technology should clarify if and how all upgrades will be shared by asking vendors if any of their clients are on separate versions of the code, says Bernardine Wu, CEO of e-commerce technology consultants FitForCommerce. If there are different versions, retailer A might not get the benefit of upgrades to retailer B`s code, she notes.

Merchandising support
TJX Europe, which also considered licensing e-commerce technology, chose Venda because its fee structure suited the retailer`s financial needs and because Venda provided clear contract terms and showed that its platform could scale up to handle growing customer volume and new e-commerce functionality, Baker says.

"They demonstrated to us they had attracted major new clients like Tesco plc because of their technology," he says.

Although retailers don`t have direct access to Venda`s basic software source code, which, for example, determines how site navigation is structured by product category, TK Maxx is able to modify the presentation layer of site navigation, enabling it to display products in a way that supports its strategy of turning inventory rapidly, Baker says.

"We have complete control of how navigation results are presented, which is important because we want to create a sense of urgency among shoppers," he says.

Because TJX Europe acquires much of its merchandise in varying quantities, the retailer needed an e-commerce platform that could show shoppers how many units of a displayed item were still available.

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