As e-commerce momentum continues to build, many retailers find themselves enjoying success beyond their expectations. With success comes growth, and with growth comes stress on a retailer’s information technology underpinnings.
Where small and medium-sized retailers enjoy a rich array of commercial software products and services designed to help them run and build their direct businesses, large multichannel retailers face greater constraints and challenges with commercial solutions. The larger organizations have legacy systems, IT resources and organization complexity that have not matched up well with commercial platforms.
Small and medium-sized retailers have successfully adopted hosted Software as a Service (SaaS) offerings that allow them to delegate the technology fully to a vendor and apply their focus around domain expertise — buying, marketing and merchandising goods to sell, such as apparel, electronics, sporting goods, books or real estate.
In stark contrast, large retailers have historically been unable to take advantage of commercial packages and services. The requirements for scale, legacy integration, cross-channel business processes, support for organization complexity and perhaps, most importantly, brand differentiation, have driven them to build and run their e-commerce and direct-to-consumer platforms. Even when — as is frequently the case — these systems include commercial packages, the packages become so heavily customized that the retailer is left with the functional equivalent of build and run (shorthand for you build it, you own, you operate it), and is on the hook for innovation and scale.
The Cost Conundrum and Innovation Gap
As large retailers consider the next move, the two biggest drivers on their decision process are:
- The Cost Conundrum. The cost conundrum facing large retailers is the problem many experience as they try to cope with a direct business built on a model using mainframe resources with a Web veneer. As the business grows, the veneer needs a lot of work, which is expensive, but the biggest costs are scaling the mainframe to support unexpected transaction loads. Double-digit growth rates drive the cost conundrum — pay me now by replatforming to technology that can scale at a much lower cost than the mainframe, or pay me later with incremental mainframe capacity.
- The Innovation Gap. The innovation gap speaks to another dimension of build and run. Over the past 10 years, the typical large retailer has made two to three investments to try to keep the direct and e-commerce businesses near the market innovation curve. This approach has kept them in the game. The problem comes as Web 2.0 accelerates innovation, creating the innovation gap — a gap that even a spend of more than US$20 million can’t bridge because the technologies are so challenging to master.
Web 2.0 innovation spans a broad array of new technologies that drive improved business results like larger orders, fewer abandoned carts and lower return rates. These innovations include things like rich Internet apps (RIA) pageless checkout, product displays and drilldowns to provide a superior user experience; user-contributed content and ratings to simplify decision making; and breakthroughs in analytics, personalization and cross-channel integration that dramatically enhance the ability of the retailer to understand and respond to consumers’ needs.
The ‘What Business Are We In’ Question
The reality for large multichannel retailers is that, like most large organizations, they are not attracting and maintaining software developers who are defining the future — nor should they. Another reality is that consumers are looking for more — more help finding what they want, more fun doing it, more selection without being overwhelmed, and maybe most importantly, more simplicity in the experience across multiple channels than retailers can provide today.
Large retailers have to step back from the replatforming question and ask, “What should I be focusing on as an organization?” Specific to technology, “What should I be focusing on with our in-house resources, and if I hire outside resources, what should I have them build for me that I will own long-term?”
For most retailers, the answer is found in a simple metaphor — an old-fashioned analog watch. Take the back off a watch and you find gears of all different sizes. The large gears move slowly — like mainframes and databases. The small wheels move very quickly, completing many rotations for each rotation of the larger gears. They’re moving too fast for most retailers to maintain mastery. Those are like the front-end, customer-touching technologies, such as the Web and the contact center, as well as the order management infrastructure that underpins the front-end technologies.
Build vs. Buy: Is There a Real Difference?
The classic tradeoff with software is Build vs. Buy. Build is good because you own it; build is bad because you own it. Only you can extend it. The architecture, which is the basis for long-term value, is all yours. If you’re running a commercial-quality software shop, you made the right choice. Buy is good because you’re leveraging the effort of all those who came before you who “helped” the vendor evolve a rich commercial package.
Buy is bad because, if you’re a large company with unique business processes you have to customize the software to work for you. A rule of thumb is that “Buy” involves spending anywhere from $1 to $5 of customization services for each $1 of software license. What is the result of all those professional services hours and dollars? Unique software that you own — just like the software you built except the code is better quality. Unlike software you build yourself, you’re forced to upgrade at great expense each time the vendor of the underlying package issues a new release.
Software as a Service
The Internet didn’t just transform the retailing of books, shoes and brake drums. It transformed software, too. At the same time that the idea of an endless aisle was born, so was the idea of “endless software” — a software subscription. A subscription bonded the buyer and seller together over the long-term in creating, publishing and consuming software, taking advantage of the Internet to connect the software company and the customer.
SaaS is another step beyond subscription. Not only does the software innovation flow continuously from the vendor to the buyer, and not only does the buyer pay evenly throughout the life of the relationship, but the software “lives” at the vendor location. It’s a small difference with big implications.
In fact, SaaS not only runs over the Internet, but “true” SaaS is designed to avoid or at least radically minimize customization — the kind that becomes a boat anchor with Build or Buy. Unlike Build, unlike Buy and unlike outsourcing (your applications running at my facility) or the first generation of hosting or application service providers (ASPs — running your highly customized package running at my facility), true SaaS addresses both the cost conundrum and the innovation gap.
At first, SaaS was suited to small companies with simple challenges. Now, the entire software industry has matured into the SaaS model to realize its cost containment and innovation benefits. With maturity comes greater understanding of the real business requirements of more specific markets, like large multichannel retailers. With greater insight into the actual business results that retailers must attain, software can be designed to be more fully configurable, instead of customizable, and those dynamics explain in brief why the software industry is becoming a SaaS industry.
A Clean Starting Point
For large multichannel retailers with seasonal variability and demand spikes, a SaaS approach to e-commerce, contact center and the underlying order management enables the transactional infrastructure to be sized on-demand, instead of having to supersize throughout the year and run mostly idle between peaks.
SaaS can provide a clean, contemporary starting point for a cross-channel strategy that front-ends the warehouse, inventory and logistics facilities with the newest technology, designed to evolve with full backward compatibility, instead of forced upgrades and installations. A key element in the SaaS model is Internet delivery. For example, when a large retailers’ merchants and marketers are traveling the globe they can work through retail workbenches to drive pricing, promotions and other ways of moving products to the market.
If you’re a large multichannel retailer, what criteria should you apply in assessing the SaaS offers in the market? Think hard about seven key characteristics:
- Solution strategy. How does the vendor bridge the inevitable gap between the “out of the box” software and what you need? Avoid “customization” as the answer, except with integration to your back-end systems. At the application level, look for a configuration-based approach to creating a solution.
- Integration strategy. How does the vendor specifically propose to integrate into the back-end systems that are so vital to your operation? Set your sights on a commercial-quality bus integration approach — one that leverages best-in-class integration bus technology like TIBCO.
- End user empowerment. It’s critical to free your merchants and marketers from the bonds of “take a number” from IT when they have to make changes to the direct operation. When you assess the dashboard that your vendor offers to these key constituencies, take a close look and make sure the workbenches provide intuitive, direct control, preferable with RIA interfaces.
- Cross-channel strategy. Take a very close look at how cross-channel features are accomplished. Are they built-in at the lowest level, and therefore are implemented throughout the platform, or are they add-ons that lack ubiquitous availability?
- Cost-reduction strategy. SaaS is supposed to save money. What are the components of the cost-reduction strategy? If you can’t unplug a big chunk of mainframe order processing then you won’t be on the right cost curve as your business scales. Be sure to look at the completeness and robustness of the order management capabilities to verify the how achievable are the cost-avoidance elements of your business justification.
- Retailer differentiation strategy. Traditionally the SaaS tradeoff was simplicity in return for cookie-cutter customer experience. This does not have to be the case any longer. Insist that your SaaS vendor give you the tools and capabilities you need to maintain and extend your differentiation and brand identity. There’s no need for a retailer to compromise branding and identity in order to enjoy the benefits of a SaaS platform.
- Design strategy. At the end of the day, if you’re a large multichannel retailer, you need to roll the dice. Who should you roll them with? A vendor who intended to sell systems to small and medium-sized retailers and is trying to move up-market, or a provider that set its sights on the large multichannel market from the outset? Rooting for the underdog is a worthy exercise, but when your business is on the line, shouldn’t you be taking as few risks as possible? Be safe and choose a SaaS vendor that designed its platform from the outset for large multichannel retailers.
Build, Buy or SaaS?
The question is like asking a business traveler how they would prefer to get from California to New York: Boat, car or airplane?
Each has its distinctive charms, pros and cons. However, only air travel will get you there for the big meeting.
Stan Dolberg is chief platform strategist for n2N Commerce, a cross-channel on-demand e-commerce software provider.