To build, buy or outsource

Guide to E-Commerce Technology

Neil Kugelman, CEO of online jeweler Goldspeed.com, is convinced there is no better way to run his business than outsourcing his e-commerce platform.

“Today I’d only go with a hosted solution,” says Kugelman, a client of on-demand, software as a service platform vendor OrderMotion Inc. “When you start a company, you are focusing on your product and your customer. A focus on infrastructure takes your eye off the ball. If it’s developed and I can plug into a network that can be used anywhere, I want to do that.”

At home dÈcor and gift e-retailer RandomAccents.com, Bill Patterson, president of site operator Concentric Business Group Inc., is sold on buying much of the software he needs to run the back end of his web site, which attaches to the Yahoo Stores platform on the front end. He believes he’d have less flexibility to make needed changes quickly on the back end if he were using the software as a service model to support his order management system. So instead, he licenses software to do it from Stone Edge Technologies Inc.

“If you own the software, you can pretty much do what you want with it, providing the software allows you to do that,” he says.

Mark Kuhns, vice president of athletic clothing manufacturer and retailer Under Armour Inc., says his company’s e-commerce site thrives on a platform the company largely developed internally. In-house developers wrote the platform using Cold Fusion with a Microsoft SQL server database infrastructure. Under Armour also has added to its platform outside technology from image management services provider Scene7, operated by Adobe Systems Inc., and from web analytics vendor Omniture Inc.

“Our platform is a hybrid—we’ve built it off of what we know will integrate with our operating system, and we’ve purchased best-of-breed solutions to help with the consumer experience and other elements of the site,” Kuhns says.

The basics

The e-commerce platform is the technology infrastructure on which an online retail site operates. It supports all the basic functions needed to make a site run.

“E-commerce solutions have evolved to include core functionality for navigation, shopping cart checkout, shipping and handling, taxes, and some level of integrating with an order management system, enterprise resource planning system or warehouse system,” says Joseph “Tocky” Lawrence, vice president and partner at retail operations, fulfillment and consulting firm F. Curtis Barry & Co. “Then there are Web 2.0 options: rich media with audio and visual tools, customer product reviews, social networking, blogs.”

That array of options means there’s no one-size-fits-all answer for retailers out to decide on an e-commerce platform solution, whether outsourced (also known as hosted or on-demand); built from licensed, packaged software; internally-developed; or using some combination of these choices. While the right choice will be different for every web merchant, however, the path leading all of them to that point is universal: they must balance priorities, resources and business demands.

For many retailers, another factor is in play: a core belief based on experience in the rationale supporting one model or another. Kugelman, for example, is not just a user of the on-demand model, he’s an advocate. “When a typical company starts out, what do they do? They rent an office,” he says. “They don’t say, I have a great idea, let’s first find a piece of property and build an office on it.” Retailers, he says, should view e-commerce platforms in the same way.

In the early days of e-commerce, the two most common choices made by e-retailers setting up a site were buying packaged software or building a platform in house either themselves or with a hired web developer. This was in part because fewer hosted options existed. Purchasing software to support an e-commerce platform—an e-retailer pays a software vendor a license fee up front and then an annual maintenance fee—was and is a way to hand off platform development responsibilities to experts.

This is part of what appealed to multi-channel retailer Casual Male Retail Group Inc. in 2003 when it experienced rapid growth in its e-commerce channel. With that increase and the growth it projected, Casual Male determined the e-commerce platform it was using, an add-on offering from its fulfillment vendor, no longer was up to the task.

Room to grow

Because it went directly into the company’s fulfillment center, the original platform ran on the same operational database as the retailer’s warehouse, call center and other systems that run the company’s direct-to-consumer business, which then was much larger than the retailer’s e-commerce business alone, says Jack McKinney, chief information officer.

“We didn’t see how we could grow e-commerce in that environment,” he says. “When we looked at alternatives, the best options at that time were with the licensed model.” The company went live in 2004 with a licensed software platform from Art Technology Group Inc. and now operates five e-commerce sites on that platform. ATG also offers a hosted platform option.

McKinney says the company did not seriously consider building a platform in house. “We couldn’t see having to worry about being able to support a customer environment on an ongoing basis, or worry about having skilled resources and turnover, when there are packaged application vendors continually making big investments in developing products,” he says.

That is one key differentiator of the licensed option from the build-it-yourself option, says Bill Zujewski, ATG vice president of product marketing. “Retail I.T. departments have very limited resources. When it comes to a question of build vs. buy, companies that choose to build an e-commerce platform and applications in house are often putting themselves at a competitive disadvantage,” he contends.

Zujewski argues that while with time it’s possible for retailers to build their own platforms, they’re following the market rather than leading if competitors buy an e-commerce solution with the latest practical or cool features already bundled in.

Casual Male has done some customization specific to its business on top of the ATG platform using its in-house developers: for instance, making sure that custom online ordering options such as specifications on alterations and hemming are easily communicated to its fulfillment system. “Anytime anyone implements their site on top of ATG, or any other packaged platform, they want their own look, feel and flow,” McKinney says. “But we didn’t make any major customization away from the environment ATG built.”

Experiment gone awry

Patterson of Random Accents cites flexibility and control as other benefits of licensed software. The retailer’s Yahoo Stores platform on the front end had earlier linked to Stone Edge’s order management system on the back end because Patterson found in-house development required too many resources. A subsequent experiment with hosted service from a different vendor for the back-end order management piece eventually brought the retailer back to Stone Edge.

Patterson had tried the hosting option with the different vendor in search of convenience. He wanted to spend less time internally on I.T. management, and he didn’t want to have to concern himself with issues such as security and PCI compliance. “We would not have to worry about managing the system because someone would be managing it for us,” he says.

That was the plan. But once on the hosted platform, he felt constrained. “There were more levels to go through when you wanted to make changes,” he says. For example, order entry via the hosted system was batched, making it difficult to speed up the process from the retailer side.

“It was really a flexibility issue for us,” he concludes of his decision to re-launch on Stone Edge’s platform. Patterson also says going back to Stone Edge’s licensed order management system has saved money, meaning the difference between about $15,000 a year for the hosted service and a license fee of under $2,000 with annual maintenance fees, including updates, of about $400.

Though some retailers say a hosted solution can get expensive if a retailer’s unique needs require a high degree of platform customization on implementation, lower cost of entry is one often-cited benefit of the on-demand model. Nevertheless, some retailers prefer investing and building equity in technology rather than seeing on-demand service permanently on the books as a fixed monthly cost.

But ownership has its drawbacks, contends Jeff Max, CEO of on-demand e-commence platform vendor Venda Inc. Max argues that on-demand service is a model better suited to the frequent delivery of new developments in technology. “The life of innovation on the web now is about six weeks. If Gap comes up with some really great new thing, how long do you think it will take for Urban Outfitters to knock it off?” he says.

Input from fellow users

Max also underscores that on-demand e-commerce platforms such as Venda’s are built for multi-tenanted architecture. Why is this important? It lets user community input as well as the vendor drive new developments on the platform because every retailer on the platform is on the same version of the software at the same time. Shared information and collaborative efforts can be folded into new releases of the platform going forward. The multi-tenanted architecture means that all can participate in contributing if they choose and all receive the advantage of frequent new releases.

Max also positions the hosted model against the do-it-yourself approach. “We are hearing fewer retailers say they have the ability to manage technology projects that are going to be able to remain on the cutting edge,” he says. Max cites but did not disclose one Texas-based consumer brand manufacturer that built its own e-commerce platform but now is considering other options as it begins to run up against limits in its platform’s ability to leverage new Web 2.0 capabilities.

Employing and providing offices and facilities for a web development staff scaled to the needs of that company could cost millions, he says, pointing out, “There are a lot of systems you can get into for less than that.” Venda currently charges $12,000 per month for its hosted platform, which includes development work, production work and software licenses from platform partners such as rich imaging vendors, wrapping it up in 10 new releases a year.

Hosting sounded better than building or buying a platform to organic skincare manufacturer and retailer Jurlique when it relocated its e-commerce operations from Australia to the U.S. last year. Jurlique had been online in Australia since 1993 with a site it had built internally. But in moving its headquarters to the U.S. to pursue the larger e-commerce opportunity, it didn’t want to do that again. I.T. development staff, which remains in Australia, would be better used for global web infrastructure support, the company figured, than for trying to build an e-commerce site for what, to them, would be a foreign market.

Jurlique wasn’t interested in buying the software to assemble its own platform because of the associated cost, according to global marketing manager Jeremy Goldman. And what about the notion that while cost of entry would be lower with on-demand service, Jurlique could over time pay more for hosted technology as a recurring expense than it would by owning its e-commerce platform? Goldman says that after an analysis, that mattered less than speed to market.

“That’s an issue, but we balanced it against the fact that we were missing a selling opportunity,” he says. Jurlique launched a new U.S. site on the Venda platform in September and clones of that site the next month in Australia and the United Kingdom. “If we can project how much something is costing us against how much it will pick up in revenue, that’s a good trade-off,” he says.

A different answer

While Jurlique was looking for a combination of speed, functionality and a predictable cost structure that would also supply a degree of innovation, athletic gear manufacturer and retailer Under Armour did an analysis and came up with a different answer when getting ready to re-launch its site last year. It was time to move up from its original platform built in 2000 by a hired creative agency and tweaked several times since. During that time, the mission of Under Armour’s site had grown from its earlier emphasis on telling the brand’s story to providing a great online shopping experience for customers.

The company surveyed some 50,000 customers and found their desires for the site focused on three specific areas: easier and more simplified navigation, more product detail and description, and the ability to see products so closely that they could better understand the attributes of what they were buying online.

Under Armour had a wish list of its own. Any changes had to integrate easily with its operating system and offer the flexibility to be able to represent its dynamic brand and products in a controlled way. It wanted the ability to control any new platform solution from a central location but distribute it globally across the brand’s other regions. Finally, Under Armour was looking for speed in serving up and delivering on the online shopping experience.

Through 2006, Kuhns and his team looked at ways to meet these objectives with technology and reviewed the options. They ruled out a completely outsourced solution because they concluded it likely would require too much customization, time and cost. Since the internally developed operating system was working well, the platform didn’t need a complete rebuild, though the team did wind up building some new pieces including a global site management tool giving greater control of the site directly to marketers and merchandisers.

In the end, the company settled on a build-buy hybrid. “We focused on best-of-breed solutions to enhance the consumer experience,” Kuhns says. Based on what they had learned from customers, he and his team focused on acquiring technology for image management, search and analytics, eventually partnering with Scene7 for imaging and Omniture for analytics. While still looking for the right vendor for search, Under Armour already has seen a lift in sales. From enhancements to its site so far, sales are up 70% year over year, Kuhns says.

Charming Shoppes Inc. runs a huge e-commerce operation on a platform which, like Under Armour’s, is largely internally built. With recent acquisitions, its e-commerce platform now supports 16 web sites and millions of visits each month.

When the company’s first e-commerce platform went up in 2003, its projected volume already exceeded the abilities of on-demand or packaged software platform solutions available at the time, according to Joe Hardiman, chief technology officer. The company did use as a foundation an enterprise resource planning system from a company now owned by Microsoft, building onto it its content management, merchandising, reporting and analytics, and other site functions.

The new kid’s platform

With the acquisition of merchant Cross Town Traders two years later, Charming Shoppes got even bigger. Because Cross Town Traders’ internally developed e-commerce platform had capacity exceeding that built by Charming Shoppes, Charming Shoppes decided to move all of its brands onto the platform of its new acquisition.

In making that decision, Hardiman says the company never looked at the hosted option as it couldn’t scale to the needed volume at the time. However, it did a full request for proposal process with vendors of licensed software.

“There was nothing we could use off the shelf,” he says. “We would have had to enhance it just to get the functionality we were getting out of our existing system. There is always an element of risk when you enhance anything over and above a basic implementation, and we had to manage that. We had to get the new platform up in time for the holiday last year.” Hardiman’s team, however, did spend almost a year adjusting features on top of the platform build by Cross Town Traders; for instance, adding merchandising functions that the system didn’t have.

All of the retailers interviewed are satisfied they’ve found the right answer to the question of whether to build, buy or outsource their e-commerce platforms. Satisfied for now, that is.

Already, some see where gaps might arise between current capabilities and future opportunities that could make them consider the platform question all over again. Hardiman, for example, says that while licensed software wasn’t able to deliver what his platform needed at the time of the last platform upgrade, it’s a more attractive option now as licensed solutions become sufficiently robust to handle higher volumes of activity. In fact, Charming Shoppes is actively investigating licensed software for its next platform upgrade, he says.

If anything is a constant in the fast-moving online retail environment, it’s change. But as technology advances and e-commerce platform options evolve, the core considerations that start merchants down the road toward any new solution will likely stay the same. “Any online merchant needs to ask themselves, what are their core competencies? And if they have finite capital to invest in e-commerce, where is their best spend?” says Venda’s Max. “Those are the two key questions.”

mary@verticalwebmedia.com

Click Here for the Guide to Providers of E-Commerce Technology