Getting those new e-commerce wheels

To capitalize on the growth in online and multi-channel sales, retailers are beginning to shop for a new breed of e-commerce platforms

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It may be the biggest shift in e-commerce since the boom days of the late-1990s: From heavy investments in e-commerce platforms unsupported by sufficient consumer demand then to sharp and steady growth in consumer demand unsupported by investments in new e-commerce platforms now. "At the height of the dot-com boom, there was a lot of e-commerce technology investment but not a lot of consumers online," says Adam Sarner, e-commerce analyst at research and consulting firm Gartner Inc. "Now there are a lot of people online but a flat investment in e-commerce platforms. There's a gap there."

The reason, Sarner and others say, relates at least partly to a fear among e-commerce executives of repeating the early excesses of e-commerce. "Companies that got burned early in e-commerce didn't want to spend money," Sarner says.

Round 2

At least they didn't want to spend until now. The e-commerce industry is entering the "Slope of Enlightenment," as Sarner puts it, which is leading to an undeniable burst of e-commerce technology spending. "This is round two of the e-commerce technology market," says Rob Garf, retail industry analyst with AMR Research Inc. "Several key forces are converging to make this market hot again."

Among those forces, says Garf, are retailers looking to revamp their existing multi-channel commerce platforms, new software vendors challenging the incumbents and consumers expecting nothing but a true multi-channel experience. "This business is very similar to what retailers lived through six years ago," he says.

At the same time, it has become painfully obvious to many retailers that their existing e-commerce platforms are not going to get them to Forrester Research's estimated $300 billion in online sales, or 13% of overall retail sales, by 2010. Only 13% of retailers rated their e-commerce platforms 9 or 10 on a scale of 1 to 10 in a survey by consultants The E-Tailing Group Inc. 87% rated them 8 or under; and 31% rated them 5 or under.

Over the next two years, 48% of the 160 e-commerce executives surveyed expect to change their e-commerce platforms, The E-Tailing Group found. A Forrester survey of 700 companies found slightly different numbers--36% of U.S. and European online retailers, including manufacturers selling direct to consumers, plan to spend more on e-commerce platforms this year than they did last year. In addition, Gartner reports that 75% of Fortune 1000 companies will increase their investments in e-commerce next year.

Hot competition

The actual numbers may differ from one another, but the bottom line is the same: Retailers are buying, the vendors are selling--and that means new competition on the vendor side of the business. "No incumbent vendor should feel comfortable with their current position in today's retail environment," Garf say. "The market is up for grabs, especially for those retailers who are looking to re-invest in their e-commerce platforms."

The major emphasis, as many analysts see it, is toward customer-oriented, multi-channel commerce platforms. "The big thing now is customer centricity and customer convenience--letting customers buy where they want, pick up where they want and return orders where they want," says Paula Rosenblum, director of retail research at Aberdeen Group Inc. But with 5- and 6-year-old technology, many retailers' e-commerce platforms are not up to that new reality.

Indeed, many multi-channel retailers operating legacy e-commerce platforms realize that they're not in a position to benefit from a web-technology-driven multi-channel enterprise--where they can serve customers and leverage customer shopping data across each channel--unless they upgrade to a new platform that can operate in a truly integrated multi-channel environment. "First-generation e-commerce systems were very e-commerce centric, and didn't take in the full multi- channel strategy," Garf says. "So now many retailers are looking to refresh their e-commerce platforms to make them more multi-channel."

The use of web technology in multi-channel retailing, meanwhile, has proven itself among industry executives as a profit center instead of just a tool to increase customer service and cut traditional operating costs. In fact, Gartner reports that the largest companies will invest in e-commerce technology to attract new customers and increase e-commerce revenue, goals that will be more important to them than reducing costs. "The focus has gone from, 'This is a channel we'll offer so customers won't bother us in our call center' to 'This will actually produce revenue and profits for us,'" Sarner says.

The North American e-commerce vendor community is responding to this growing demand with new players and technology platforms. They include brand new players like Venda Inc. and Demandware Inc. and new offerings from established players like Art Technology Group Inc., IBM Corp. and Ecometry Corp.

And while making multi- channel shopping more convenient, the latest e-commerce tools and platforms are also geared to helping retailers capitalize on shoppers' multi-channel behaviors. By recording, viewing and analyzing consumers' shopping preferences, for instance, merchants are better able to customize their merchandising and marketing according to customer shopping patterns.

New contestants

A growing interest by both retailers and shoppers to benefit from e-commerce platforms integrated across multiple channels is presenting the vendor community with a new opportunity to sell new technology as well as new means of distributing it. Of particular note is a renewed interest by retailers in hosted applications, offered in various forms by Venda, Demandware, Vcommerce Corp., Truition Inc., ATG, IBM and others. Hosted applications let retailers with overworked IT departments deploy relatively quickly, with limited start-up costs, e-commerce systems to support their overall operations, whether a merchant is a web pure-play or an all-out multi-channel retailer.

In addition, web services technology-- the use of XML and other technologies that enable new software applications to integrate with older legacy applications--is letting vendors offer retailers the flexibility they need in deploying applications across disparate systems.

E-commerce technology vendors now offer several deployment options:

l A retailer can license its e-commerce software and run the software on its own servers, as retailers have traditionally done, retaining maximum control over operations. Such arrangements are available from veteran vendors like ATG, BroadVision, IBM, CommercialWare Inc. and Ecometry.

l A retailer can license and directly operate the software, but pay the vendor to host it on servers outside of the retailer's infrastructure, an option several vendors are making available.

l A retailer can rent software under a more comprehensive subscription hosting plan, getting use of dedicated software running on the vendor's servers.

l A retailer can rent software under a multi-tenant "software-as-a-service" hosting model, where the merchant uses the same software used by others, the option offered by Venda, Demandware, Vcommerce and others.

A new kind of ASP

Software-as-a-service is the newest of these options and attracting a hard look from retailers, analysts say. It's actually a revival of the ASP model trendy several years ago. ASPs initially created a stir by promising a relatively quick entrČe into e-commerce as a way to establish an online presence by subscribing to software made available to a pool of clients.

But the early hoopla subsided as retailers and other clients realized they had limited flexibility to configure their platforms in a way that would make their web sites stand out from the competition. In addition, the early ASPs were part of the e-commerce-as-a-separate-business mindset. "Retailers were nervous that ASPs wouldn't offer them integration into their back-end systems, so that they wouldn't get real-time access to inventory updates or consumers would try to buy something on their web site that wasn't really there," Garf says.

Today's revised interest in the ASP model, now re-badged with the more literal terms software-as-a-service and on-demand service, stems partly from interest stirred by the growth of Salesforce.com, a provider of hosted customer service applications. Salesforce, many experts say, has greatly improved the multi-tenant hosting model, overcoming some of the earlier shortcomings. "Salesforce.com has done a good job of building steam in the market for hosted applications," says Gene Alvarez, retail technology analyst who joined Gartner as part of its acquisition of Meta Group.

The e-commerce industry's perception of Salesforce.com's success is coinciding with retailers' need to upgrade their platforms without taxing what are often overworked IT departments. Indeed, 29% of retailers think their internal IT departments are incapable of even adequately operating their existing e-commerce platforms, according to The E-Tailing Group's study, much less expanding it. Instead, many retailers now see hosted applications as a good alternative for getting up to date with the latest e-commerce features, such as A/B testing of multiple merchandising pages, streamlined checkout processes, and order management and inventory management systems integrated across multiple selling channels. "Hosting is back in vogue," Rosenblum says.

The revived interest in hosting, and the new competition from the likes of Venda and Demandware, meanwhile, are coinciding with more hosted and on-demand options from existing providers ATG and IBM. "Established vendors are picking up on this and dusting off their hosted models," Sarner says.

The credibility game

So far, there's no clear leader among the new breed of hosted platforms, according to analysts who advise retailers about their technology options. In more than 60 valuations of retailers' e-commerce technology strategies conducted this year by Sarner, more than 30% have asked about hosted models without picking out any single favorite, he says. "We don't have one big vendor that everyone is asking about," he says. "There's no one leader in the market."

Interestingly, both Gartner and Forrester Research have recently published reports on e-commerce technology providers, and each report names ATG and IBM as the two leading overall e-commerce vendors. ATG is cited mostly for its several years of experience in serving retailers with integrated platforms, with a special emphasis on cross- channel marketing. IBM is cited for its market presence with its widely deployed WebSphere Commerce platform as well as its secure corporate finances. ATG and IBM both have moved recently into offering hosted services.

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But analysts also note that, in terms of technology capabilities, the e-commerce platform market is evening out among several vendors. Although each e-commerce technology vendor has a ready argument about why its technology and delivery model are better than its competitions', the features and functionality offered by both hosted and licensed platforms are reaching a common level of value across multiple vendors, several analysts say. "There's less differentiation among vendors in features and functionality, because all the players we've looked at have about 85% overlap," Garf says.

To vendor chiefs like Demandware president, CEO and co-founder Stephan Schambach and Venda CEO Jeff Max, that perception of a new leveling of technology is opening the market door wide for their hosted services.

More flexibility

Unlike early ASPs that offered limited if any flexibility in how retailers could configure their web site features and integrate with multiple selling channels, the new breed of hosted services are designed to offer exactly that, their proponents say. "We take care of the heavy lifting--we provide an e-commerce platform and build features like guided search and A/B testing," says Schambach, the founder and former CEO of Intershop, a provider of b2b as well as b2c e-commerce software. "But we don't hold our customers hostage. We give them drag-and-drop tools to let them improve the shopping experience, change merchandising and the checkout process, and the look and feel of their sites."

At the same time, Demandware's software-as-a-service model frees its clients from ever having to migrate to software upgrades, Schambach says. Because it uses single versions of software shared by clients, upgrades to those single versions are immediately available to all users, he adds. "It's basically designed to support a continuous software optimization philosophy," he says.

Demandware, which began operating in February, is designed to serve retailers ranging in size from $2 million to $100 million a year in sales, though Schambach says its infrastructure, based on a grid computing model, can easily scale up to handle much larger companies. Existing clients include Zabar's, a specialty foods retailer, and bathroom fixtures merchant Village Tub & Bath. Demandware charges fees by either overall sales volume or number of transactions, typically ranging from $5,000 to more than $10,000, Schambach says.

Demandware directly provides only front-end e-commerce capabilities, but it uses web services technology to integrate with the technology platforms of other vendors for back-end multi-channel integration. It integrates with CommercialWare, for example, for back-end order management and with Loyalty Lab for a loyalty program that serves customers in all selling channels.

Deep roots

Venda also appeared on the U.S. scene earlier this year, offering its multi-tenant software-as-a-service model to mid-size to large companies. Like Demandware, it offers software upgrades immediately without each retailer having to conduct its own migration, CEO Max says.

Venda's e-commerce roots go back to the mid-1990s, when its predecessor company operated as Dialog, an online information service. Acquired by management from its former corporate owner at a token cost in 2000, Dialog renamed itself Venda and acquired much of the e-commerce technology of Boo.com, an early online retailer known for offering innovative, high-tech online shopping features before it went out of business.

Now, with its experience, depth in e-commerce technology and low operating costs (including a 90-person software development team in Bangkok, Thailand, and another 40 developers in Europe) Venda expects to shake up the U.S. e-commerce market with its flat monthly fee of $10,000 per web site. While other vendors charge sliding fees based on a retailer's amount of business, rising as the retailer's sales rise, Venda is determined to stick to its flat fee, Max says, noting that Venda's platform is designed to scale up without excessive costs as it takes on more clients.

Venda provides a full range of features for operating a retail web site, including site analytics, personalization engines for tailoring content to segments of shoppers, and merchandising tools, Max says. It also forwards order information to a retailer's in-house or 3rd-party fulfillment center, and it handles customer payment processing at 15 cents per transaction in association with payment processing partners. Recent client wins include RideGear.com, DoItYourself.com and Pokemon.com. "In four years of operating sites, we've never lost a client to a competitor," Max says.

The good news for Demandware and Venda is that analysts recognize the strength of their technology platforms. "They have very strong offerings, just as strong as the enterprise guys," says Tamara Mendelsohn, analyst with Forrester Research. "Venda and Demandware offer the same level of customization as any of the others."

The bad news for the upstarts, she and others say, is that many retailers are likely to stick to more established vendors until more and larger retailers sign up as clients. "Until a big retailer steps in and uses a vendor's platform, it's difficult to prove the vendor's position in the market," Garf says.

The difficulty in breaking further into the retail market at least partly overshadows even Venda's experience in Europe, where for years it has been serving major European players like Virgin Megastores and the European operations of Panasonic and Xerox. Max also notes that Venda is beginning to overhaul the European web sites of a major U.S. apparel retailer.

More alternatives

Still, Europe's e-commerce is mostly divided into relatively small national markets, and its retailers don't face the complexity of major multi-channel retailers in the U.S., experts say.

Moreover, although Venda and Demandware each say they can easily scale up with infrastructure as they take on more clients without adding to their fee structures, they still need to prove they can keep functionality up and costs down while serving large U.S. multi-channel retailers, Garf and others say.

Venda and Demandware, of course, are not alone in coming out with new alternatives for hosted as well as licensed e-commerce platforms.

VCommerce, which introduced an on-demand software model two years ago, is winning business for its on-demand services from Overstock.com, Target Corp. and other large retailers who want its range of e-commerce services, says CTO and founder Dan Kennedy.

Vcommerce goes beyond most platforms by offering front-end web site functionality and back-end order management, fulfillment and drop-shipping management. Its all-web-based platform can either sit behind a retailer's firewall or work as a hosted application managed by Vcommerce.

Ecometry, serving retailers ranging in annual sales from $15 million to $2 billion, also provides end-to-end e-commerce services including inventory management. It's working to integrate its platform with the e-commerce and e-marketing programs of its new sister company, Blue Martini Software, which analysts say could give it a stronger position in the market. "With Blue Martini, Ecometry will be able to let consumers order online and five minutes later get their delivery status at a store POS terminal," says CEO John Marrah.

CommercialWare, whose OrderMotion e-commerce platform handles back-end order management, customer service and fulfillment, also offers a CW Integrate tool for integrating with retail store systems and third-party applications like inventory management. "CommercialWare will continue to evolve with planning and forecasting tools and more options in hosting and licensing," CEO Donny Askin says.

LaGarde Inc., which provides an e-commerce technology designed to integrate web sites with store POS systems, offers a multi-tenant software hosting service for retailers doing up to about $1 million in sales in addition to more comprehensive platforms for larger organizations like V.F. Corp.’s Lee Jeans and the Schwan Food Co.

The options for e-commerce technology continues to grow in number. Other vendors range from established full-service e-commerce platform providers like Fry Inc., MarketLive Inc. and Advanced E-Media Inc. to newcomers like ThePage.com, which plans to launch this fall a fully functional e-commerce platform for retailers with annual sales ranging from $5 million to $200 million, says president and founder Mike Wachner.

No third chance

The breadth of competition, many analysts say, will be good for both vendors and retailers alike. But it's the consumer who will be the ultimate deciding factor, Garf notes, and retailers and vendors both better make sure their systems will meet consumer demand.

"This is one of the few times that consumers will give the retailers a do-over," Garf says. "Many consumer expectations weren't met in the first round, but consumers were willing to give them a pass because of the novelty of shopping online. But the consumer can't be disappointed too many times. This time, the retailers have to get it right." Translation: The vendors better make sure that what they're selling retailers today will meet consumers' expectations.

paul@verticalwebmedia.com