E-commerce grew 20% for Costco in fiscal 2015—20 times faster than store sales.
As e-commerce becomes more complex, more web retailers are turning to vendors for technology and services.
After decades of developing technology internally--including for its factory and call center--retailer Hanover Direct Inc. changed course in recent years, turning to vendors to provide its e-commerce platform and e-mail marketing and fulfillment services.
Other retailers are making a similar shift to relying more on outside service providers. Abt Electronics Inc. (No. 148), a 75-year-old family business that operates a large consumer electronics store in the Chicago suburbs, has brought in vendors to add customer service functionality to its web site. And web-only Overstock.com Inc. (No. 27), while maintaining an in-house technology staff, has no qualms about looking to vendors if they can build and maintain e-commerce technology faster and more efficiently than Overstock can itself.
"We have bigger fish to fry," says Sam Peterson, senior vice president of technology at Overstock.
With online retailing growing and evolving rapidly, many web merchants are moving out--as in looking beyond their own walls for technology expertise. Data from the 2012 Internet Retailer Top 500 Guide show fewer retailers are relying on their own technology in 16 of 25 categories for which data are available for both 2011 and 2010 (see chart). For example, only 28 retailers reported using in-house affiliate marketing services last year, down from 32 in 2010. Last year the percentage of retailers providing their own live chat/click-to-call technology dropped to 10.61% from 12.89%, and for web performance monitoring, to 25.60% from 28.41%. 235 retailers in 2011 managed their own search engine marketing, compared with 250 in 2010.
Behind this trend, retailers say, is the need to add new features and services quickly to keep up with stiff competition, and the fact that in many cases vendors have made technology easier to plug into existing systems than it was in the past. Many retailers say they would rather focus on what they know and leave technology to the specialists.
"It makes sense to outsource things that are not our core competencies," says Richard Sejean, director of e-commerce at Montreal, Quebec-based Browns Shoes Inc. "Browns is a kick-ass company--at selling shoes. It's four generations of selling shoes, not software development."
Overstock.com manages its own e-commerce platform and web site with a technology staff of more than 100. The company couldn't find a site-commerce platform off the shelf commercially that met its needs, Peterson says, and so built it internally. But Overstock finds it more efficient to use commercially available products for add-on applications, like live chat, customer service and web site monitoring.
"If we have the expertise and can do it efficiently in-house, we do," Peterson says, but "we always are first looking to see what's out there."
For example, Overstock uses two vendors for web site performance monitoring, Keynote Systems Inc. and Gomez, a division of Compuware Corp. Each vendor has its strengths, and each provides continually updated tools for the in-house team of four who monitor the site to use, Peterson says. Gomez especially helps the company track not just how quickly its site loads across the United States, he says, but how each page loads and renders, from the first page the shopper visits to checkout.
Build or buy
BuySeasons Inc., a unit of Liberty Media Corp. (No. 7) that sells costumes and party supplies, follows a similar tack of looking outside to add technology applications to its core in-house platform.
"We evaluate third-party products against our own internal efforts to challenge the overall cost of ownership, robustness of features and functionality, and how much we can bring to the consumer experience in the shortest amount of time," says chief operating officer Terry Rowinski. In the case of product recommendations, BuySeasons decided it would get more for its money by deploying iGoDigital's product recommendation engine than developing its own technology. The e-retailer also uses Monetate for testing the performance of web page designs and marketing programs.
ToolKing.com LLC (No. 347), which migrated from an in-house e-commerce platform to Magento software in 2010, still builds some applications itself--but only if they demand specific functionality not available commercially, says Ben Skigen, director of e-commerce. "Whenever possible, we try to not reinvent the wheel and are very open to using commercial solutions," he says. "If we build something in-house, it's either because a commercial solution isn't available or economical, or it has very specific business requirements that justify custom internal development."
Skigen says that it's now easier to plug in vendors' applications because many are hosted by the vendor, with the e-retailer connecting to the software over the web, a departure from the traditional method of the retailer licensing software and maintaining it on its own computers. For example, Tool King is integrating its site with a software-as-a-service customer relationship management application from Nutshell Inc. "It's far more efficient for us to source a commercial SaaS solution like Nutshell and build a connector to it," he says. "The cost of building our own CRM system in house would far, far exceed the monthly usage fees that Nutshell or any on-demand CRM vendor charges."
This software-as-a-service, or SaaS, model is now the norm in areas such as product reviews and recommendations, says technology research and advisory firm Gartner Inc. Gartner expects up to 40% of e-commerce sites to be completely operated with SaaS technology by 2013.
Today's SaaS offerings "are more mature, reliable, robust and ubiquitous today than three to five years ago," says Prasad Pola, chief information officer at Hanover Direct. That adds to their appeal, he says, when e-retailers are busy responding to big changes, such as the evolution of mobile commerce and social networks, and competitive pressure to deliver more quickly and to source products more efficiently.
As they react to these pressures, retailers have to weigh the costs and benefits of in-house development versus the products and services vendors are offering.