From June-September 2012, Demandware commissioned Forrester Consulting to examine how online retailers evaluate specific cost considerations when comparing cloud-based and on-premise commerce solutions. During this time, Forrester surveyed 156 ecommerce, marketing and IT leaders in the U.S. and Europe responsible for ecommerce technology decisions at their firms and interviewed seven executives from online retailers who had recently led an ecommerce re-platforming initiative.  We found that while developing a TCO model to compare solutions is customary, the process often lacks rigor. As ecommerce and technology leaders factor in costs to their TCO model, they leave many stones unturned, which leads to a situation – intentionally or not – where the model can favor on-premise solutions versus those from the cloud.

Four key findings for online retailers to take away:

On-premise platforms are expensive.  Between technical resources to support the platform and manage lengthy upgrades, hardware maintenance and the cost of additional licenses to support growth, retailers face incurring significant costs with traditional on-premise solutions. Yearly costs for staff alone can easily reach seven figures and on average will run over $7,000,000 per year. The average retailer surveyed for this study spends 7 percent of online revenues supporting the technology that underpins their commerce operations and 88 percent believe it’s important or very important to align ownership costs with online revenue.

Most TCO evaluations are wrong. Because the TCO models lack rigor many of the additional costs cited above are not included. Furthermore the tool, intended to aid the decision-making process is sometimes used instead to justify the decision that the organization wants to make. The result? Forty-three percent of retail respondents underestimate the actual total cost of ownership.

Retailers embrace cloud-based solutions. With predictable ownership costs and improved business agility 41% of retailers included a cloud based ecommerce solution in their evaluation.  As the benefits of cloud are increasingly realized and the myths and misconceptions of cloud-based platforms continue to be exposed, the outlook for cloud-based solutions is strong.

Agility, innovation and time to market matter. 78 percent of retailers would still consider a cloud based solution even if the TCO outcome was not as favorable as an on-premise solution. Of equal importance to the 78 percent is the ability of the platform to be agile, innovative and speed time to market. In addition, 75 percent or more of retailers are seriously concerned about their current platform’s ability to support: cross-channel order management; global expansion and corporate growth plans.

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About the Author

Adam Forrest manages product marketing for Demandware and can be reached at aforrest (at) demandware (dot) com and he tweets at @adammwoods