Evaluating the Long-Term Viability and True Costs of E-Commerce Solutions

According to a Forrester Consulting study that evaluated the true total cost of ownership (TCO) of e-commerce solutions, 81 percent of online retailers use either a homegrown or licensed on-premise solution from a software vendor. Over the years, these solutions have served a purpose, but many e-commerce professionals are now realizing that they come with a level of operational and opportunity risks capable of keeping them up at night.

These on-premise solutions have evolved over the years, becoming more deeply integrated into legacy back-end systems and corporate processes. As a result, they're so integrated that even the mere thought of replatforming sends supporting IT teams running. While these solutions may appear to be cost effective at first, in the end they're actually inhibiting the ability of businesses to innovate and keep pace with consumer demands. And because the original business case and TCO models lack rigor as uncovered within the Forrester study, many of the additional costs aren't included. The result? Forty-three percent of retail respondents underestimate the actual TCO.

When evaluating the long-term viability of your existing e-commerce solution, be sure to take a close look at these top five considerations:

1. True cost of growth: With the need for technical resources to support the platform and manage lengthy upgrades, hardware maintenance expenses and the cost of additional licenses to support growth, retailers incur significant costs with traditional on-premise solutions. The average retailer surveyed for the Forrester study spends 7 percent of their online revenues supporting the technology that underpins their commerce operations, while 88 percent believe it's important or very important to align ownership costs with online revenue.

Sixty-seven percent of online retailers using a licensed on-premise solution report that they're contractually obligated to acquire additional licenses anytime traffic reaches a predetermined threshold. Furthermore, 78 percent of retailers report that the contract they have in place with their vendor inhibits their ability to launch into new markets, while 54 percent said they cannot launch additional branded sites without purchasing more licenses. As online retail grows, and as retailers pursue global expansion, leveraging their existing solution becomes increasingly expensive.

2. Distraction of upgrades: Only 13 percent of online retailers report that they upgrade their platform multiple times each year. Online retailers can't afford to get left behind. The ability to access new and innovative capabilities is an important factor in keeping up with market demands. The problem with upgrading on-premise solutions frequently is the opportunistic cost. Seventy-six percent of the e-commerce leaders surveyed in the Forrester report said that each upgrade takes more than one month to complete.

This constant cycle of upgrades means that valuable development resources are being used in a tactical manner merely to maintain currency, rather than to develop innovative feature sets that differentiate the retailer in the marketplace. On the other hand, 39 percent of retailers face a different type of upgrade problem — they upgrade only once every two years or three years. These companies have likely fallen behind their competitors in the rollout of table stakes online functionality and user experience enhancements.

3. Overhead of technical resources: On average, online retailers have 34 technical resources dedicated to supporting their e-commerce business. For larger retailers (i.e., those with more than $250 million in online revenue), this number increases to 43. Yearly costs for staff alone can easily reach seven figures and, on average, will run over $9.1 million per year for large customers. Not only are these resources hard to find in the marketplace — 46 percent of e-commerce leaders struggle to hire IT, development and infrastructure roles — but they're also expensive.

4. Ability to support future growth: Many online retailers are already pushing both the scalability and contractual capacity limitations of their existing e-commerce solution. As we fast-forward into the changing retail landscape and the inevitable increase in both load and expectations, 74 percent of respondents report immediate concerns that their current solutions will not scale to support the growth plans of the business. This is a considerable risk given the stakes that online retailers face during the holiday season, where margins from fourth-quarter revenues make or break annual goals, and online traffic volumes can exceed in one hour those normally seen in an entire month. To extend the life of these solutions to support both year-over-year traffic growth and international expansion plans, retailers must allocate resources to purchase additional licenses and hardware infrastructure.

5. Impact on agility: Beyond scalability, e-commerce leaders also have considerable concerns that the solutions they have in place threaten the ability of the company to innovate in the marketplace. Eighty percent of respondents have immediate concerns that their current solution is affecting the pace at which they can roll out new features to consumers. Furthermore, 78 percent report that their existing solutions cannot support cross-channel order management requirements such as the ability to ship orders not only from their web fulfillment centers, but also directly from drop-ship partners, distributors and brick-and-mortar store locations.

Retailers Embrace Cloud-Based Solutions for Predictable Cost, Agility and Time to Market
Because of the predictable ownership costs and improved business agility, 41 percent of retailers included a cloud-based e-commerce solution in their evaluation. As the benefits of cloud are increasingly realized and the myths and misconceptions of cloud-based platforms continue to be debunked, the outlook for cloud-based solutions is strong. Seventy-eight percent of retailers would consider a cloud-based solution even if the TCO outcome wasn't as favorable as an on-premise solution because of the ability of the platform to be agile, innovative and speed up the time to market. While 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, these fears are reduced with a cloud-based solution.

Adam Forrest is the director of product marketing at Demandware. Adam can be reached at aforrest@demandware.com.