Target and Toys R Us posted overall sales declines during the holidays.
Driven by the desire to reduce infrastructure costs and reallocate those funds into marketing, merchandising, and customer acquisition, retailers are moving away from licensing or building their own software platforms in favor of on-demand software, also known as software as a service. While the primary attractions of the on-demand model are standardized features and functionality, and speedier development and implementation cycles for upgraded versions, retailers still need to perform due diligence when selecting the appropriate vendor.
Among the issues retailers need to weigh before entering into any contract are the vendor’s definition of on-demand software, how the on-demand model will benefit their business, what level of support and service they will receive from the vendor, and what it is they are paying for.
Clarification of the vendor’s definition of on-demand software is essential because the definition itself is blurring, according to Scott Olrich, chief marketing officer for Responsys Inc., a San Bruno, Calif.-based, global provider of on-demand marketing automation solutions.
By definition, on-demand software is software that resides at a single location and that multiple customers access and use as needed. It is a low-cost way for retailers to obtain the same benefits of commercially licensed or home grown software without high implementation and maintenance costs or the complexity of customizing the platform to their needs.
True on-demand platforms are multi-tenant, thereby allowing all users to run the same version as opposed to customized applications. The payoff from this approach is that upgrades are universal to the user base so that when one user discovers the need for a new feature, the vendor rolls it out across the platform. Vendors will upgrade their platform as often as once a month, compared to every 12 months or longer for licensed applications. Changes to home grown platforms are slower, too, as IT personnel must be shifted away from their core duties.
“Multi-tenant platforms allow end users to better leverage the power of the software because the cost of upgrades are spread out across the user base, which means they happen faster,” Olrich says.
The confusion over the definition of on-demand software comes from vendors. “Some providers of single tenant, on-demand platforms are blurring the difference between their offering and the on-demand, multi-tenant model for marketing purposes,” says Olrich.
The loose definition of on-demand software often includes the managed service provider model, also known as MSP. While a managed service provider arrangement is similar to on-demand platforms in that both provide such fundamentals as rack space, power, connectivity, security, storage, backups, monitoring, and basic maintenance, there are distinct differences between the two.
“With an MSP, the software is deployed on servers dedicated to the client,” explains Jeff Max, CEO of Venda Inc., a New York-based e-commerce platform provider. “Provisioning clients on the MSP model is as involved as licensed software. Upgrades are infrequent due to the resources required to modify each client’s custom deployment one at a time and performance depends largely on the customer’s dedicated server capacity.”
True on-demand platforms are deployed on a single instance, multi-tenant architecture. “Because of the homogeneity of the code base, better self-service tools are provided that give clients improved ability to customize and administer their own virtual environment,” Max says. “Provisioning takes half the time, upgrades are routine and the shared resources give the system more resiliency and performance.”
The primary question to be asked of a vendor is whether every user on the platform runs the same version of the software. If the answer is no, retailers are apt to pay more money over the long-term for the platform and wait longer for upgraded versions as new features are added on a client-by-client basis. “Single tenant solutions are more costly and the end user bears more of the cost for upgrades than they would for the multi-tenant model,” adds Olrich.
Once retailers are clear on whether the vendor provides a true on-demand platform, they need to consider how it will benefit their business. The most obvious and immediate benefit is that the vendor’s support team has a greater breadth of expertise than that of the in-house IT staff.
“The time spent solving an IT problem in-house takes the retailer away from their core business,” says Shawn Schwegman, chief marketing officer for Vcommerce Corp., a Scottsdale Ariz.-based provider of e-commerce platforms. “Plus, in-house IT staff has to solve problems as they arise. With the multi-tenant on-demand model, problems are addressed for all users at once, which in most cases is before many of the users identify the problem exists.”
This capability allows the client to leverage the skill set of the vendor without having to reinvent the wheel each time. One way Vcommerce leverages this expertise for clients is through A/B testing. As tests are run for individual clients, trends are identified and the knowledge from those tests is applied simultaneously across the user base. “This means clients learn faster about what works and what doesn’t,” says Schwegman.
Having an experienced third-party support staff to operate and maintain the platform is critical, as retailers’ operating platforms become more complex as they grow in proportion to their revenues. Subsequently, retailers struggle to effectively train their IT staff on how to get the most out of the software.
Complexities that arise as a retailer’s business grows include making sure the software platform meets compliance requirements for security across all phases of their business such as PCI, a data security standard created to ensure the safe handling of credit card account information, and compliance when printing shipping labels for package carriers.
The turnover problem
“The average IT staffer stays in their current position about 2.5 years, which means a retailer’s IT staff can turn over within three years and that is a huge loss of resources and experience with the platform,” says John Marrah, president and CEO of ProfitCenter Software Inc., a Uniondale N.Y.-based e-commerce platform provider. “In an SaaS model providing and training support staff are the responsibility of the software provider, not the retailer. It is almost impossible for a multi-channel retailer to afford the depth of personnel to make sure they always have trained and experienced staff. For an SaaS provider, it is a cost of doing business.”