With the changing world of retail, business and technology executives must take a closer look at how best to deliver digital commerce across channels. To better understand the role of the contemporary CIO and the challenges they face in implementing and maintaining omni-channel solutions, Demandware’s VP of Product Marketing, Rob Garf recently sat down with award-winning IT leader, Robert Fort to discuss the results of the Forrester Consulting study, “Understanding TCO When Evaluating eCommerce Solutions,” which examined how online retailers evaluate specific cost considerations when comparing cloud-based and on-premise commerce solutions.
Rob Garf: Based on your experience as a retail CIO, what was the most surprising finding, what jumped out at you?
Robert Fort: A couple of numbers caught my attention; not sure they surprised me, but they made me think about the current state of ecommerce operations and the role of the CIO. The significant operating costs of on-premise ecommerce solutions, the real difficulty in deriving a complete TCO and the fact that these costs are probably under-estimated, resonated with my experience. The concerns expressed by CIOs about keeping up with changes and making upgrades did not surprise me. But others, such as vendor lock-in and cloud-based solutions being able to scale kind of did… In general I thought the report gave a good picture of the costs and challenges that retail CIOs face today to support omni-channel growth.
Rob Garf: The report found that ecommerce platforms require, on average, 7 percent of the online revenue. This is a substantial figure compared to benchmarks of 1-2 percent of total revenue for entire IT spend. Does this resonate with your experience?
Robert Fort: Yes, and you have to remember several important things here. First, ecommerce has grown from its “start-up” style beginnings to now becoming an indispensable facet of retail. “Brick and mortar” retailers have embraced ecommerce, and the amount of revenue being generated is often times causing changes in the ownership of ecommerce within companies. eCommerce is now more visible, getting the attention at the board and C-Level – which is a good thing. First generation technology to support this growing channel was generally cobbled together in-house, and now IT is being challenged with creating a more interconnected ecommerce ecosystem to support omni-channel operations. You’re seeing this evolution over and over, where retailers who once had separate ecommerce divisions, or legal entities even, with their own, separate inventory and payment systems, now are being more tightly integrated with corporate merchandising, promotion, fulfillment and other back-end systems.
Now, with respect to operating costs, CIOs have long been tasked to “do more with less.” Thus, as they inherit more responsibility for managing and enhancing the ecommerce platform, they are continually reevaluating the TCO and ROI models – which can be a real challenge! A great example is the difficulty in allocating the costs of computing and network bandwidth. There are many other factors that impact the platform’s TCO that are often absorbed into the P&L. The Forrester analysis showed that several key cost considerations are being overlooked in the typical TCO analysis.
Bottom line, as ecommerce platforms mature and become more integrated, CIOs are expected to reduce the cost to revenue ratio. This is what makes Demandware’s cloud-based model particularly intriguing as it strives to align the ecommerce platform’s capabilities, performance, and costs with the retailer’s business goals.
Rob Garf: Figures from the study indicated that the cost to operate a licensed on-premise platform runs about 7% of revenue, whereas cloud-based ecommerce is about 3%. Wouldn’t that be compelling to the cost-conscious CIO?
Robert Fort: Yes, but despite the fact a cloud-based approach offers significant economic benefits, traditional thinking has been to assign costs to CAPX whenever possible. Anything that impacts net margins or EBITDA is a harder sell. But remember these ‘hidden OPEX’ costs incurred to support cumbersome on-premise platforms are already impacting net margins. In reality, they are an impediment to improved profitability, the speed of adopting new functionality, and supporting the innovation that can increase market share and revenue. I’d welcome a way to reduce them!
I believe the challenge here is to see beyond the traditional CAPX versus OPEX debate and focus on directly assignable, scalable costs and true TCO.
Rob Garf: Beyond the challenge of building a more comprehensive TCO model, and being honest about operational costs, what about some of the objections to cloud ecommerce platforms raised in this research?
Robert Fort: I was surprised how high the fear of vendor lock-in ranked. I suspect that fear might come from the CIOs’ need to be in control. Think about it; they are accountable for the systems that impact customers, suppliers and employees on a daily basis. You could say they “run” the company. So partnering with a third-party is not taken lightly. They are continually concerned about vendors’ performance, development roadmaps, costs, long-term viability and overall service, but deal with that now across the IT spectrum. Retailers surveyed were already utilizing other cloud-based solutions for various aspects of ecommerce operations.
Now, should the business change course in the future, the cost to migrate from a cloud ecommerce platform is significantly less than moving from an in-house or licensed platform, with less sunk costs to have to write-off. And this delta will only increase as the platform becomes more mainstream, more interconnected. I don’t see a material difference for lock-in between a cloud or on-premise approach.
Rob Garf: The study does mention scalability as a concern for cloud?
Robert Fort: Yes, but it seems to me that cloud-based solutions, whether for ecommerce platforms or other enterprise applications, are imminently scalable; it is one of the founding tenets of cloud applications. Demandware’s ability to use a browser to provision additional computing and bandwidth capacity on-demand, even to anticipate demand based on monitoring and alerts, is admirable. Practically speaking, most enterprises could not scale as much nor as rapidly, and investing in this kind of capability becomes prohibitive and tough for the CIO to justify.
What this might really point to are concerns about pricing as solutions scale. CIOs are hauling around tractor trailers of ecommerce OPEX with their on-premise investments that are not readily apparent – and as we’ve discussed, exposing some of these costs can be painful, but necessary for a genuine total cost analysis. Pricing that is completely transparent and scales with growth provides predictability into the cost of ownership, and in the long facilitates improved margins and revenue growth.
Rob Garf: Can we talk more about customization? I guess this too speaks to the CIOs wanting to retain control?
Robert Fort: You have to be careful with the term “customization”. There is the end-user interface, the “skin”, and digital functionality, which the retailer wants to brand and use to drive increased marketshare, enter new markets, and grow revenue. It is always preferable that this “branding” capability be accomplished via configuration that is above the API level. From what I have seen, Demandware’s Development Center, with the open APIs and configurable logic, allows exactly that.
Then there are the under-the-hood customizations, frequently involving integration with supporting applications like supply chain, customer service, or finance. CIOs are less enthusiastic about these code customizations because they limit your upgrade path, require more resources, and failures inevitably lead to finger-pointing. Ultimately you want to accomplish 80 to 90 percent of your customization through configuration.
It was shown in the report that 79 percent of retailers take more than a month to deploy a licensed upgrade. These upgrades get complicated when code is customized. This is just not efficient, and is costly in terms of lost opportunity. This is exactly the kind of complexity and risk of system failure that keeps the CIO up at night.
My experience is cloud-based platforms can provide global upgrades with minimal disruption to the LoB or end-user experience; they are not “fork-lift” upgrades. This allows you to provide timelier functionality to your constituents and not get bogged down by complex licensed application upgrades. And cloud-based solutions also tend to have more frequent releases.
Rob Garf: In the case of Demandware, we average every 6-8 weeks.
Robert Fort: That’s good and means the CIO is in the position of bringing new functionality to the business more quickly, more frequently, and with less disruption. Coupled with the applications available from your appstore model, this is more than almost any enterprise could do on their own.
The bottom line is the CIO needs a platform that is as close to the business needs as possible day one, but can cost effectively scale, grow and flex over time. A solution that minimizes customization – without painting the business into an upgrade corner — but allows the meeting of business needs via configuration is most welcome!
About the Authors
Robert Fort is an internationally recognized and awarded IT innovator and leader with over 30 years of progressive Information Technology and senior/C-level management experience. During his career, he successfully implemented some of the earliest ERP (SAP R/2 & R/3), business intelligence, retail kiosk, voice-over-IP (VoIP) implementations and systems management solutions.
As VP of product and solutions marketing for Demandware, Rob Garf is no stranger to the industry and the challenges retailers face. As the former retail strategy leader for IBM Global Business Services and vice president of Retail Strategies Service at AMR Research, Rob’s been on all sides of the business. He currently leads Demandware’s go-to-market strategy and is responsible for the company’s digital commerce vision.