Where outsourcing is not a dirty word

Guide to E-Commerce Technology

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."

To make outsourcing work, experts say, retailers need to identify how much of an e-commerce operation to outsource, establish short-term and long-term goals, set clear rules of engagement, check that the service provider has the expertise needed to work with the retailer`s infrastructure, and carefully monitor each partner`s effectiveness.

The year of the SLA

The advantages that outsourcing providers offer can become weaknesses if engagements are not carefully worked out, Garf says. By scaling their e-commerce platforms to serve multiple retailers, outsourcing providers can usually offer more features than clients could afford to provide individually. "So it can be a challenge for them to make unique custom integration points for special features like promotions or gift cards," he says.

Outsourcing, however, is subject to stricter engagement rules, experts say. "This is the year of the service level agreement," says Carol Carpenter, director of product management for Keynote Systems Corp., a provider of outsourced services that monitor how well a web site`s infrastructure is performing. "In the past, a lot of SLAs were very technical; i.e., that server utilization must be within a certain percentage. Now, SLAs are written more on business objectives. If a server is down, the agreement covers how that affects an online retailer`s conversion rates."

At CompactAppliance, Roussos says he strives to keep contracts to a minimum length of time. "We won`t sign a contract for more than a year, and we often prefer to go month-to-month," he says. "We`re usually able to get the terms we want."

SLAs are especially important for multi-channel retailers, Garf says. "Many multi-channel retailers are developing online strategies toward outsourcing, but we urge retailers not to look at online as a separate channel," he says. "If a customer buys a product on the web, 20 minutes later they may call customer service or go into a store to change their order and add something. If their order information is not updated in real time, the store associate or customer service rep might not have access to their order to service it."

Crate and Barrel, the multi-channel home furnishings retailer, understands the importance of an outsourcing partner capable of working with a retailer`s underlying infrastructure, says John Seebeck, director of e-commerce. After it launched CrateandBarrel.com in 1999 through an outsourcing arrangement with Fry, which provided its entire e-commerce platform, the retailer wanted to offer an online gift registry that would integrate with its stores and call center. That kind of integration can be more difficult than some web site developers think, experts say. But Crate and Barrel had done its homework in making sure that Fry had experience working with the IBM infrastructure--its AS/400 network and MQSeries messaging software--to support cross-channel use of the gift registry, Seebeck says. "They were definitely an important partner, because they could make the registry work by integrating it with our AS/400," he says.

Seeking an effective outsourcing partner kept Wilsons Leather from falling behind with an under-performing web site, says Linda Angelacci, vice president of marketing. Wilsons had operated a basic e-commerce site since 2000, but the site paled in functionality compared to others. "The platform was limited and didn`t allow us to stay current with what many retailers have, like couponing or special offers, or being able to incent customers to spend a little more to get a discount," she says. Wilsons also operates more than 450 stores.

Wilsons, realizing it needed to offer customers more shopping features, searched for a way to provide those features while limiting its investment. "The site was at the point where it was going to capture a significant portion of limited IT investment capital, but our IT department`s biggest customer is our stores, so we looked to outsourcing," Angelacci says. Wilsons went live in August with a new e-commerce site on a platform developed and managed by GSI Commerce.

Adding features

Replacing what Angelacci describes as a basic e-commerce site with little to entice shoppers, Wilsons now offers features including online gift cards, which can be redeemed either online or in stores, multiple ship-to addresses, gift wrapping, a wish list that shoppers can save for future use, improved site search for more detailed photography and product descriptions, cross-selling suggestions, and a special information section on leather care.

Instead of dealing with several technology companies for site search, fulfillment and other operations, as it had in the past, Wilsons has simplified things by dealing primarily with GSI, Angelacci says. "At one point, we had four or five different e-commerce partners," she adds. "That`s a lot to manage."

And instead of operating the web site with a staff of eight, Angelacci now relies on one e-commerce merchandiser.

The teaching role

But GSI brings to Wilsons more than a set of features that, so far, are functioning well, Angelacci says. To a retailer that hadn`t spent much attention on its e-commerce channel but needed to compete better online, its new partner brings experience and an educational shoulder to lean on, she adds. "We didn`t have the internal expertise and didn`t know how to compete," she says. "They offered the most flexibility for what we were looking for, and somebody from whom we could learn about e-commerce."

Not all outsourcing arrangements go as smoothly. And no one knows that better than CrazyGrazer`s Hall. While he says he`s happy so far with Vcommerce, he agreed to enter a contract with it only after several meetings and extensive research had made him comfortable that it would perform as promised. An earlier technology arrangement, he adds, had left CrazyGrazer without a usable platform.

CrazyGrazer initially tried to launch Oct. 1 of last year. But in a classic replay of how early dot-com companies underestimated the infrastructure they would need to serve customers, the retailer attracted over a million customers--and crashed. "We weren`t anticipating 1.2 million visitors, we had anticipated only a fraction of that," Hall says.

Its initial development partner, iCode Inc., failed to provide the scalability that CrazyGrazer had expected, Hall adds. Hall admits that iCode, which provides e-commerce technology designed for small companies, wasn`t the only one that came up short. CrazyGrazer had selected iCode on the recommendation of its then-CTO, who had used iCode`s Evererst e-commerce platform in the past, and the retailer had retained a third party developer in India to modify the Everest system. "We researched the market, and iCode met our cost and functionality needs," Hall says.

A dual lesson

Although iCode had indicated that its technology was scalable to meet unexpected demand, no one expected CrazyGrazer to attract 1.2 million visitors on its first day. An iCode spokesman declines to comment specifically on the CrazyGrazer matter, but notes that iCode has since developed more robust e-commerce technology.

The experience served a dual purpose for CrazyGrazer, Hall says. "It validated our business model, because so many people came to see us, but we realized we needed a more robust technology package."

When CrazyGrazer could not fix its site in time for the 2003 holiday shopping season, it decided to take the time to build a completely new e-commerce platform. It considered the months and the millions of dollars it had spent on the first site as a learning experience. "We knew we weren`t going to make the holiday season in `03, so we focused on holiday `04," Hall says.

To assure that all went well the second time around, it decided to do everything in-house. It hired a new CTO, who spent the next 10 months and $5 million building a site on an Oracle Corp. platform.

But several months into the new project, Hall again realized that things weren`t going as smoothly as he had hoped. His grand design of launching with more than 1 million products in more than a dozen categories, with a multi-featured site and connections to a broad network of drop shippers, proved too extensive to build and launch within a year. It appeared that, once again, CrazyGrazer would miss its chance to launch in time for the holiday shopping season--a key part of the fledgling company`s hope of building a fast cash flow once it began operating on the web.

The second crash

Then a business associate called Hall`s attention to Vcommerce, which the associate described as a company known for supporting entrepreneurs like Hall with ambitious growth plans. The two companies hit it off.

For the second time in less than a year, Hall and his team forfeited months and millions of dollars spent on building an e-commerce site. Because Vcommerce was able to show how it could get CrazyGrazer up and running quickly on its hosted RetailVantage e-commerce platform, Vcommerce now handles CrazyGrazer`s entire e-commerce platform, including order management, site analytics, site search, shopping cart, fulfillment and returns management.

To make CrazyGrazer stand out in a crowded field of online retailers, Hall and company say they have pushed forward an e-commerce platform designed to provide a shopping experience that`s both fun and helpful for its customers. For example, much of its inventory is delivered to customers through drop-shipping arrangements with suppliers, and CrazyGrazer pulls information on pricing and shipment availability from multiple suppliers within a fraction of a second to present shoppers with the best mix of product specifications and pricing. "Our system grabs information from our suppliers` inventory records to see who has what at the best price, and by figuring the proximity of different suppliers to our customer, who has the cheapest drop-shipping charge," Hall says.

After two months of development work by Vcommerce, including connections to CrazyGrazer`s suppliers, the new site went live on Oct. 1 without a problem, Hall says. "Their system is so robust, we can`t overload it," he says.

CrazyGrazer has complete control of merchandising, he adds. Vcommerce`s RetailVantage system offers a dashboard administrative tool, designed to be used by business managers instead of IT experts, that lets them directly control the placement and editing of merchandising promotions. After logging onto a password-protected administrative web page, Hall`s merchandise managers can move a merchandising display to a different position on an e-commerce page with two clicks of a computer mouse. They can also use the mouse to change product descriptions and pricing and to download new images.

Although other content management tools provide similar administrative features, RetailVantage differs in that users can see the results of their changes on an actual web page within a few seconds, says AMR`s Garf, who has reviewed the system.

Swimming with the tide

Big Al`s, a Toronto-based retailer of aquatics products, operates 20 stores in Canada but does most of its sales on the web at BigAlsOnline.com. Online traffic and sales have grown steadily since the company`s e-commerce debut in 1999, a period during which monthly traffic grew from about 100,000 visitors to about 3.5 million, says Dan Hamilton, director of Internet sales.

But after getting through last year`s holiday shopping season, Big Al`s realized it needed to replace its original platform hosted by a Toronto e-commerce services provider. "Our old system was having an issue with downtime, because the back-end wasn`t up to par," he says.

Earlier this year, Big Al`s switched to an e-commerce platform hosted by Novator Systems, also based in Toronto. Novator provides a complete e-commerce system, though Big Al`s has retained the ability to control merchandising by directly changing images and product descriptions.

Novator has integrated order management, fulfillment and shipping services, replacing many of the manual processes that had restricted Big Al`s ability to process orders. "We`ve gone from struggling to handle 300 orders a day to handling 800 to 1,000 orders a day," Hamilton says.

No more re-keying

Under its old system, the retailer had to print out orders received on the web and re-enter order information into a warehouse management system, which would print a pick-and-pack order for warehouse workers. Once warehouse workers verified that an order was packed, on-site UPS drivers would receive order information to key into their UPS shipment system. Now, the order management, warehouse management and UPS shipment systems are integrated. When web orders are received, they`re automatically shared with the order, warehouse and shipment systems, Hamilton says.

Although Big Al`s could have developed similar functionality in-house, it would have been a difficult and time-consuming project, Hamilton says. "If we had to develop this with our own design team, we probably would not have it done in time for this year`s holiday shopping season," he says.

In some cases, retailers may even decide to take back in-house certain outsourced operations as they develop expertise and reach levels of critical mass that make in-house operation more cost-effective. Since launching in 1999 on a turnkey e-commerce platform provided by Fry, Crate and Barrel, for example, has taken back some operations to have more control of directly making and scheduling changes in functionality of its site, Seebeck says.

"When the Internet first came along, companies like ours didn`t have the experience to go online, so it made sense to get help from outside for building and hosting a web site," he adds. But with a large in-house graphics department for its catalog and store operations, Crate and Barrel is now using its graphics expertise more directly on the web instead of always resorting to Fry. "We`re about to launch zoom on our site, but by not relying on Fry to do the whole project, we`ll know how much time it`s taking day to day," he says.

There also are cost advantages for Crate and Barrel to taking some things in-house if it has the level of in-house expertise, Seebeck says. Fry continues to provide site-hosting and managed services, including monitoring key performance indicators like web page download times.

The right mixture

While finding the right mixture of technology services is important to any outsourcing relationship, perhaps nothing is more important than the trust a retailer has in its technology partner, experts say. When Wilsons decided to go with GSI, it realized that it was going with a company for which apparel was a new category. GSI Commerce just started serving apparel retailers this year.

"They are not as fashion aware as we are," Angelacci says. "But we felt we could teach them that aspect, because they offered the most flexibility in what we were looking for. They have extensive experience with search engines and affiliates--experience we don`t have. And because we`re working with them in a revenue-sharing model, we feel they have an incentive to build our business. It`s a great partnership."

At CrazyGrazer, Hall says he became comfortable with Vcommerce as an outsourcing partner after he learned about its aggressive approach to serving the retail market. Its innovative products would free him up to concentrate on marketing and merchandising, he says.

"Like us, they were a young, aggressive company that wouldn`t let anything get in the way," Hall says. "From an attitude standpoint, we hit it off with them right away."

paul@verticalwebmedia.com

Outsourcing one piece at a time

While retailers like CrazyGrazer, Wilsons and Big Al`s prefer to outsource their full e-commerce platform, others outsource only pieces to optimize overall platform performance. CompactAppliance, for example, owns and manages its own e-commerce platform including order management and inventory management, but it outsources its site search function to Atomz, its site analytics and e-mail marketing to Manticore Technology Inc. and its live chat and inbound e-mail technology to InstantService.com. Although it operates its own customer service call center, it also outsources an after-hours call center operation to Proxy Communications. "That allows us to spend more time on our core business of marketing and merchandising," says Jason Roussos, senior vice president of strategic development for CompactAppliance.com.

Retaining several outsourcing partners can bring both benefits and challenges, he adds, because each outsourced operation can offer more functionality than a small retailer like CompactAppliance is likely to use in the short term, and because each requires monitoring to assure it adheres to the retailer`s objectives.

CompactAppliance chose Atomz to replace an in-house site search function that offered basic search without an easy way to modify results or integrate with cross-selling and marketing efforts. "Now we can go in and assign different relevancy to particular products in search results to promote certain products and brands," Roussos says. "There`s so much we can do with Atomz, it`s almost overwhelming."

When a CompactAppliance shopper searches for a particular product or category, parts of the search function will leave the CompactAppliance.com site to operate on an Atomz-hosted server. Though unnoticeable to most shoppers unless they notice slight changes in the URL address of each page of the search function, the server-switching routine is a process the retailer must monitor for reliability. Roussos reports no problems, however. "We`re getting better conversion rates," he says.

In some cases, outsourcing can improve a retailer`s ability to monitor its own employees` skills and effectiveness. By outsourcing its inbound e-mail and live chat technology to InstantService.com, for example, CompactAppliance can use its partner`s servers to run reports on its customer service agents` activities. "We can see who`s doing more live chat sessions, and we can check the grammar of text of e-mail messages," he says. "If we set a policy that all customer e-mail must be replied to within an hour, we can run reports to show if agents are meeting that."

To build such a system in-house, he adds, would have been costly in terms of both money and time. "We have our own internal e-mail system on Microsoft Exchange, but to install software like InstantService, do it well and maintain it, would take a lot of time and IT resources," Roussos says.

CompactAppliance also keeps close tabs on its outsourced after-hours call center. "There`s a big concern with how call center outsourcing can maintain brand and service levels," he says. "But we can monitor calls to make sure they`re not taking too long, if service is not professional or if a call came in and was not relayed to us. We`ll also look at total sales vs. calls billed to us to see our return on investment."

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