November 1, 2010, 12:00 AM

Sponsored Supplement: SaaS – The fast track to the latest technology

Accessing software as a service lets an online retailer get up and running quickly and benefit from vendors' ongoing enhancements. And, because they're not paid a lump sum up front, on-demand vendors have a strong incentive to keep clients happy.

With competition fiercer than ever to drive traffic to e-commerce sites and convert visitors, retailers need to make sure every technology dollar spent either generates a sale or reduces operating costs. That gives retailers more reason to convert all or a portion of their platform to the software-as-a-service model, in which the SaaS vendor hosts the e-commerce fulfillment technology and the retailer connects to it via the web.

A recent study by Forrester Research Inc. showed that 23% of organizations have some SaaS technology in place, and 54% are considering it, a strong showing for the still relatively new SaaS model. The benefits are clear. For starters, retailers pay no upfront costs for licensing and integrating an application, nor do they need to add servers to run it. Plus, retailers can rely on the SaaS provider to provide upgrades several times a year and handle all ongoing maintenance.

Further, retailers can integrate SaaS-based applications as needed, as opposed to converting an entire web-retailing platform at once. That allows retailers to get more mileage out of legacy systems. Finally, SaaS-based applications free retailers to focus more on their core business.

"E-retailers that reach approximately $5 million in annual sales volume really don't want to be focusing a lot of time on managing an e-commerce fulfillment platform because it is not a core competency," says Jim Frome, chief strategy officer for SPS Commerce, a provider of SaaS-based supply chain services. "SaaS provides retailers a way to upgrade legacy platforms by adding new applications to streamline the e-commerce fulfillment cycle."

A middle ground

The benefits of SaaS extend to e-commerce start-ups and bricks-and-mortar retailers that are entering the world of e-commerce. SaaS spares them the cost of having to build a data center, hire an I.T. staff and pay a hefty fee to license software that they host and maintain. The SaaS model also provides an alternative to a retailer completely outsourcing its entire platform to an outside company, with all the loss of control that entails.

With SaaS, also called on-demand technology, retailers can chart a middle course between taking on the entire technology load and risk, and completely giving up control. With SaaS, a retailer can specify the level of control it wants over a given application or its entire e-commerce platform, what responsibilities it wants the vendor to take on, and how the features and functions of the platform or application should contribute to the merchant's marketing and merchandising objectives.

"SaaS is more than a technology play, it is a true service that gives retailers the technical tools and guidance to use them to increase traffic and grow sales," says Michael Turcsanyi, president of OrderDynamics, a provider of SaaS-based e-commerce platforms. "We have a bricks-and-mortar retailer with 20 stores that came to us for a SaaS-based platform because the focus for the first three years was to be on building the customer base, not managing its platform."

As part of its SaaS platform, OrderDynamics includes Dynamic Merchandising, a set of e-commerce best practices and tactics that guide retailers in creating customized user experiences, how to design intuitive navigation paths, and ways to increase qualified traffic, conversions and average order size.

Common code

What makes it possible for SaaS vendors to offer a lower cost of ownership is that the core functionality of their platformÑsuch as order management, supply chain visibility, fulfillment, and gateways to payment processorsÑrun on a commonly shared programming code base, as opposed to custom-built applications for each function.

SPS is leveraging this concept to build a trading partner community in which retailers and their suppliers can exchange order and invoicing data by connecting to the same SaaS platform or service through the web.

"What we provide is a multi-tenant, single-platform model that streamlines integration between retailers and their suppliers," says Frome. "The more end users we can bring onto the platform, the lower the cost of ownership, because they share the application and no longer have to support customized, single-tenant applications to communicate with each trading partner."

Creating multi-tenant platforms allows SaaS vendors to add new features and functionality to each application module and bring those changes to market fast. When a new payments processor certifies the platform, for instance, the code required to integrate the platform into that processor's system is written into the payments module and rolled out to all users, often as part of a quarterly upgrade. Since the module is not a customized application, retailers can turn functions on and off as needed.

"The aim is to create modules that support best-of-breed applications without writing customized applications for each new function," explains OrderDynamics' Turcsanyi. "This approach makes the platform a lot more configurable to the changing needs of the retailer's business."

Measurable savings

Because SaaS vendors typically release several upgrades to their platforms annually as part of their service, the cost savings to retailers can be substantial. As part of its business case for persuading merchants to switch to a SaaS platform, OrderDynamics shows planned upgrades for the coming year and what it would cost a retailer to make similar enhancements to licensed software that it maintains in-house.

"The average value of our yearly upgrades is about $150,000 if they were to be added to a licensed platform," says Turcsanyi. "Even if merchants only use half of them, they come out ahead financially."

As part of any contract negotiation, SaaS vendors ought to walk retailers through the itemized cost of their service and compare it to the all-in cost for licensed software. "It is a very informative exercise for retailers because they see a line-by-line cost comparison between licensed software and the SaaS service model," says SPS' Frome.

On average, SPS saves retailers 40% to 70% over the cost of purchasing licensed software, the hardware to run it and technical support. "For retailers looking to upgrade applications, the SaaS model is a lot more attractive," Frome adds.

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