Key Concepts
Classify costs into initial versus operating costs and IT versus line of business costs
Understand the savings of each type of cost that can be achieved by using a shared platform
Before undertaking a large companywide project to develop a shared infrastructure, a business should understand and predict the cost savings that result from using a shared infrastructure for multisite commerce when compared to independently developed and maintained sites. However, depending on the nature of each business, the cost structure and corresponding savings will vary, and it would be impossible in this book to predict the anticipated savings in a generic way. The goal of this chapter is to describe where the potential cost savings would come from and demonstrate how to estimate the magnitude of each type of savings.
To estimate potential cost savings from a shared multisite infrastructure, we must understand both the main factors that determine the amount of savings from each type of sharing, and the relative magnitude of such savings in a typical overall cost structure. Thus, we need to examine the various components of total cost and understand the benefit of shared infrastructure on each cost component.
We can understand the typical cost structure of a site by looking at two angles: whether this is a one-time investment or an ongoing operating cost, and whether the nature of the expense is for the technical computer infrastructure or for the line of business. These classifications are illustrated in Figure 7.1.
Let’s examine these two classifications to see the considerations that apply to each.
Imagine a brick-and-mortar retailer that also has an online commerce operation. To operate this way, the retailer clearly needs computer hardware and software to run the site. In addition, it needs to invest in IT services, either in-house or externally contracted, to customize its site to its specific requirements, and to install the hardware and software. After the initial deployment is completed, there is also a need to retain a core team to do regular maintenance for both software and hardware, such as installing upgrades, doing backups, and performing any other IT tasks required during operation of the site. The expenditure associated with all this information technology will quickly add up to a significant amount, which is usually referred to as the IT costs of the site.
One large component of IT costs is services. Even if the platform is based on packaged application software purchased from a vendor, services will be necessary to set up the platform. It is impossible for any vendor to predict the requirements of all commerce businesses because each company has peculiarities and uniqueness in its philosophy and operations. Therefore, invariably, it is necessary to hire IT staff or contract external services to customize the software so that it meets the company’s requirements. One typical example is developing a presentation template for the sites, which usually requires IT services. Another example is customizing the administration tools to be used by lines of business so that they conform to the company’s internal business processes. The installation and configuration of the software, and the effort to migrate existing sites to the new platform, also require the involvement of IT services.
Part of the services cost is the support of the governance of the project. This includes hiring or contracting of project management and the technical architects who oversee the development of the platform.
In addition to IT costs, the other type of expense is called line of business costs, or LOB costs for short. Line of business costs include all the expenditures to operate a commerce business that are not related to the technical implementation and maintenance of the site. One example of LOB cost for a retailer is hiring a creative team to design the site to be both easy and pleasurable for customers to use. Another example is that the legal team will need to produce and publish such material as a privacy statement and any legal disclaimers that must be posted on the site. Such material may apply, for example, to the general use of the site, the purchasing process, or the delivery of goods.
There are many other LOB costs associated with an e-commerce site. The retailer would need to produce product catalog information in a format acceptable to the online environment, with detailed descriptions, product comparisons, and images. Much of this information is typically not necessary in the environment of a brick-and-mortar store where customers can easily view the products and packaging. However, with an online commerce site, customers cannot make purchases unless detailed product information is displayed to them. Therefore, because of the specifics of shopping in the online environment, much of the product information collateral is an added cost associated with the online site.
Each company has its own partitioning of responsibilities between the IT department and various lines of business. However, as a rule of thumb, typically IT activities require greater technical knowledge and training, whereas LOB activities require greater familiarity with the business and less focus on the technology used to operate the business.
For example, the products that a company sells are determined by the various lines of business; hence, catalog preparation is normally classified as LOB cost. Similarly, price updates and inventory management are usually the responsibility of line of business administrators and fall within the domain of LOB costs. On the other hand, issues with site security and performance are the domain of IT.
To avoid confusion and reduce operating costs, the business must reduce the need to involve IT in implementing business decisions. The commerce platform must be designed in such a way that day-to-day business operations do not require the involvement of IT personnel. Ideally, the line of business administrators should have the tools that enable them to implement business decisions on their own, without the need for extensive technical training.
Thus, if the business decides to create a new marketing campaign or introduce new products, all the necessary activities to implement such decisions should be done by the relevant lines of business without involving IT personnel. Similarly, if the business deems it necessary to create a new site for a country or create a new site targeting a specific group of customers, the implementation of this decision ideally should not involve IT personnel but should be done entirely by the line of business personnel.
Nevertheless, due to limitations of the technology, commerce sites often need services for customization, extension, and configuration of the platform to meet the business requirements. This IT involvement often requires significant expenditure and adds to the IT cost of the sites.
Another way of classifying the expenses is by looking at the initial costs and operating costs. The initial investment includes the acquisition of necessary hardware and software, and the investment in IT services to develop the platform and the sites that use it. Ongoing costs are necessary to operate the platform and sites after they are deployed. For example, ongoing costs include the maintenance of the hardware and software, and the day-to-day management of site content, such as catalog and marketing data.
The initial investment is clearly necessary to create a commerce platform suitable to the company’s needs and deploy the sites on it. Without the software and hardware and without the services, it is impossible to develop the commerce platform or to deploy any sites.
In addition to this necessary spending, a business is frequently faced with the need to expend more resources during platform development to make subsequent administration of the site easier. For example, the business could theoretically manage the products by giving the list in spreadsheet form to IT and asking the technical people to spend time to input it into the site. However, it makes a lot of sense to avoid such an expensive, slow, and error-prone process and instead to create tools that the line of business administrators can use directly, without having to involve IT for every change. Development of these administrative tools requires initial investment but will improve site management and reduce operating costs of the site.
Such expenses are not completely necessary for the operation of the site; even without these LOB tools, it is possible for the site to be operated by IT personnel. However, they are examples of cases in which greater initial investment can reduce the subsequent operating costs. In each case, a cost-benefit analysis must be done to determine whether the initial cost of each additional enhancement is justified by the anticipated savings.
Certainly, each business has unique aspects and can have expenditures that are not characteristic of other sites. However, many types of expenditures are common to the majority of companies when developing a commerce platform. For your reference, we show some of these typical costs in Table 7.1.
Table 7.2 summarizes the cost impact of applying the various kinds of sharing on IT costs, LOB costs, initial costs, and operating costs.
What we see from Table 7.2 is that using the same hardware for multiple commerce sites will likely have a significant impact on reducing IT costs, of which hardware is a large chunk. However, shared hardware will not have noticeable impact on LOB costs because usually LOB administrators are not impacted by the IT infrastructure details. Sharing a single software application for all the different sites will also likely help with IT costs because the business needs to purchase only a single set of software applications for the entire company. In addition, the development effort of the platform, such as software customization and deployment, is shared by the entire company, which also helps reduce the IT costs.
Using the same software throughout the company might also help reduce the LOB costs somewhat. The company would need to have only one training program to help its employees learn to use the tools to administer the sites. In addition, with centralized software, the company could centralize its operations, for example, to have a single internal helpdesk where employees turn for help if they have problems with the application. We thus see that sharing hardware and software can have a significant impact on IT costs and also achieve moderate savings in the area of line of business costs.
On the other hand, the ability for different sites to make use of the same data will likely greatly reduce the cost of administration of the data. For example, the company could use the same products catalog for all sites. The management effort of a large catalog can be enormous, and the elimination of duplication of this effort among multiple sites can achieve tremendous savings. The same applies to other shared content, such as shared marketing collateral, or even the setup of payment and shipping methods that are common among multiple sites.
Sharing data can also help with IT costs because overall there would be less data to manage. However, most likely this impact would not be as great, and the bulk of the benefit of shared data lies with the reduction in LOB costs.
Looking at this situation another way, sharing hardware and software can help with initial costs, which is assuming that the company purchases its hardware and software. Sharing hardware and software would also help somewhat with operating costs because there are fewer administrators to hire and less maintenance to apply.
Compared to that, sharing data is likely to greatly reduce operating costs because with a single set of data to administer, the company needs much fewer staff to ensure all the data is entered correctly and is up to date. At the same time, using shared data for multiple sites would have a smaller impact on the initial cost of loading the data when the site is initially deployed.
We now describe the components of each type of cost and examine how each component is helped in the multisite scenario by applying the sharing principles. Before proceeding with this listing of types of costs, however, we want to make a disclaimer that this list is certainly not meant to be a complete roundup of every possible expenditure that a company might encounter related to the creation of multiple sites. Certainly, other costs will be present in each scenario. Here we focus only on some typical costs to give an overall feel of how these costs are classified and how they are impacted by the use of a shared platform for multiple sites.
The typical initial IT costs fall into three categories: hardware, software, and services. The hardware is all the computers necessary to run the sites and associated network setup required for making the sites available on the Internet. The software consists of all the programs that must be purchased to run the sites. Services refers to all activities involved in developing the commerce platform and the associated sites, such as design and architecture, programming, testing, and deployment.
We now examine these initial IT costs for multiple sites and discuss how the costs are affected by using a single multisite platform rather than running the sites independently of each other.
A large site usually requires many computers, so it can scale up to the needs of the millions of customers that use the site. It is not uncommon for a large site to require dozens, or even hundreds, of computers to handle the required load.
It is reasonable to expect that the total number of computers required for operating many sites will be significantly smaller if the sites share the same hardware, compared to allocating independent hardware resources to each site. The simplest technical reason for this has to do with the more efficient use of computing resources by the single platform. The computing resources required for a site consist of two components:
- The overhead, that is, the resources necessary simply to run the operating system and all the necessary middleware and application software
- The incremental resources that need to be allocated depending on the load, such as the number of customers accessing the site and number of orders placed
If each site effectively uses its own platform, each site must have sufficient processing power and memory to handle the necessary overhead. On the other hand, with a multisite platform, this overhead is shared by all the sites. Consequently, sharing a single commerce platform can be expected to reduce hardware costs.
There are other reasons you can expect a multisite platform to save on hardware costs. For example, the different sites could be sharing the same reserve of computing capacity—that is, the processing power of the computers normally left idle, just in case the load on the site suddenly goes up. Finally, if the sites can share the same hardware, acquiring fewer but more powerful computers may simply be cheaper than having to pay for many smaller machines.
The software consists of a stack of packaged programs that must be used to run the sites. The most common examples of such products include operating systems and middleware used as the basis for the applications. The software might also include packaged applications, such as an application that creates and operates commerce Web sites, an application for managing the catalog, or an application for managing orders.
Examples of Software Needed for a Commerce Site
This book is not intended to be an overview of software available on the market to help create and manage commerce sites. The reason is not only to avoid arousing the ire of software makers whose products are accidentally omitted from the list, but also because this field constantly evolves, based on changing technology, and changing market situations where new products are created, old products are discontinued, and software makers merge or are acquired by each other. Nevertheless, to give you a feel for the breadth of this field, Table 7.3 lists some typical kinds of software that might be necessary for a commerce site, depending on the company’s requirements. Usually, a company might already own some of the necessary software but need to acquire other packages.
If each site uses different software, the company ends up paying many times for largely the same capabilities. Employing a single commerce platform therefore automatically results in savings.
Frequently, software vendors do not charge a single fixed fee for each customer, but instead they have a variable price, depending on how much the software is used. For example, a commerce application vendor could charge an extra fee for each processor that is used. Hence, if a company requires a dozen processors to handle its site, it has to pay a proportionate fee to the software vendor.
As we discussed, using a shared platform for many commerce sites can be expected to reduce the total need for computing resources and reduce the number of processors. So, for example, if two sites were run separately, they might need many more processors than if they were to operate on a single platform. Consequently, under the per-processor fee arrangement, the single platform helps the company achieve significant savings in its software costs.
The effort involved in the creation of a site can include such activities as:
• Planning
• Requirements gathering
• Project management
• Architecture and design
• Programming
• Testing
• Deployment
• Ongoing site maintenance
The first two of these activities are mostly the responsibility of the appropriate planning and lines of business and site planning personnel, with limited IT involvement. All the other ones, however, must necessarily involve technical personnel, such as programmers, testers, or architects, and they contribute to the initial IT cost of the site. The involvement of highly paid IT personnel with the associated need for project management, development tools, and software testing is usually quite expensive.
With an ideal multisite platform, this situation can be completely changed. A good platform would provide the tools necessary to create a new site without requiring significant technical skills. With minimal training, employees who run the business now have the ability to create a site as soon the business makes the decision to do so, without any need to explain the requirements to technologists. Hence, the whole effort and costs associated with design, programming, testing, and deployment can be completely eliminated. Even requirements gathering becomes easier because it no longer involves IT.
To be fair, however, we must realize such a vision of totally IT-free site creation has rarely been completely achieved. Due to limitations of software or of network setup, the commerce platform normally does require some involvement of IT personnel when a new site is created. For example, the IT staff usually sets up the Internet domain name of the site. Another example is that after site planning has created the new site, IT might need to retune the performance of the application server so that the site runs as fast as possible.
The IT group also needs to be involved if the new site requires new capabilities that the current platform does not have. In this case, the company’s commerce platform must be enhanced; that is, designers, programmers, and testers need to spend time and money to add the missing capability to the software. Alternatively, the company might need to purchase additional software applications and integrate them with the platform, again requiring IT work. Modifications might also be needed in the company’s other systems used by the new site. For example, the order management system might need modifications to handle new kinds of items or record additional information.
Nevertheless, with a multisite platform, a lot of IT work in creating a site is truly eliminated because the basic structure and capabilities of the site are all incorporated in the platform. Therefore, using the platform can be expected to greatly reduce the cost of site creation.
Before a site is created, LOB personnel must be involved in a number of ways to prepare for the site. These preparations consume time and resources from the business and therefore must be treated as the initial LOB costs of the site.
The first LOB cost to anticipate is the consultations with business managers. Such consultations are necessary to ensure that requirements are understood by everybody involved in creating the site, including the site planning and IT teams. Frequently, understanding requirements is not an easy process, but takes many weeks or even months. During this time, LOB personnel might need to consult many people, drawing time away from their regular duties. Therefore, this cost of consultation can include two components: the time of the business analysts who are dedicated to collecting and analyzing the requirements and the reduced productivity of line of business personnel who must dedicate some of their time to requirements gathering.
Frequently, requirements gathering also involves considerable travel by analysts and business managers to make sure everyone involved understands and agrees to the requirements. Over the course of the project, such travel expenses can add up to a significant amount and must be treated as part of the initial cost of the site.
With the use of a multisite platform, you can expect this consultation cost to be somewhat reduced, although not by a large amount. The savings come from reduced involvement of IT personnel and removal of the need to interact between business and technical personnel. However, fundamentally, before a site is created, it is essential that the site’s requirements are understood; therefore, this component of the cost is not significantly affected by the use of a multisite commerce platform.
Before the site is created, the business must ensure that it has outlined and reviewed the business processes and procedures that will be involved in the operation of the new site. Examples of such processes include customer service, order management, marketing, and catalog updates.
Certainly, it is important that the business anticipates and prepares for the administration of a new site before it is created, and this is true regardless of whether the new site is created on a standalone platform or uses a shared platform. However, if a shared platform is used, this review of business processes can be expected to be much easier. The reason is that when the platform is created, it would already have outlined many of the processes involved with its sites. Hence, when a new site is required, the business does not need to discover or design the processes, but only validate that the standard procedures offered by the company’s commerce platform fit well with the site. Depending on each site, changes or additional processes might need to be instituted as well.
Therefore, the costs associated with business process review in preparation for a new site could be significantly reduced when a shared commerce platform is used for many of the company’s sites.
Before a new site is deployed, there will be a need to educate new or existing line of business staff who will be responsible for administering the site. These personnel must have training to follow the new business processes, and they also must learn to use the tools provided to administer the site.
This cost of training is unavoidable, regardless of whether the site is standalone or uses a shared platform. However, when a common platform is used for many sites, frequently the same staff can administer multiple sites, which does result in reduced training costs.
Furthermore, the use of a common platform could reduce education costs because the company could introduce a single curriculum that would be used for the administrators of all its sites. This approach is certainly cheaper than having to provide completely different education to the administrators and customer service personnel for each of the company’s sites.
When a site is deployed, IT personnel must necessarily perform a number of technical activities to keep the site operational. For example, there is a need to regularly backup data, such as the catalog and customer orders. It is also necessary to archive and remove old data that accumulates in the database, such as withdrawn products or ancient orders.
There are also IT jobs inherent in operating any large application. For example, there might be a need to monitor the application to make sure it is running smoothly, or examine logs for errors or security exposures. Some IT administration jobs that have become disciplines in their own rights are database and system administration. These jobs involve management of storage, performance tuning, system monitoring, and security checks, and are all part of the day-to-day operation of the overall platform used by the site. Finally, the IT staff are also responsible to perform regular maintenance on both the hardware and software of the site, such as installing fixes and updates.
If a site uses its own platform, it requires dedicated effort for all this application, database, network, and system administration. On the other hand, if many sites share the same platform, they can share all these costs. With a shared platform, there is only one database to administer, one set of computers with the same operating system, and a single instance of the application to maintain.
Therefore, we conclude that IT operating costs of a site can be greatly reduced if many sites use the same commerce platform, compared to dedicating a separate platform for each site.
The final type of cost we discuss here is the business cost of running the site. We already discussed in previous chapters how the use of a multisite platform affects the administrative procedures, such as catalog management, order management, customer management, and marketing. We now discuss how the use of a shared platform affects the business operating costs of the sites.
If each site administers its own orders, the use of a multisite platform does not have any impact on the cost of order administration. This is typically true, for example, in the case in which a site is created for a country and orders are managed on a country-by-country basis.
On the other hand, in some cases order management can be shared among sites. For example, if sites are created for different customer segments or for large customers, from the company’s point of view, it is better to manage all the orders together rather than on a site-by-site basis. A shared platform can provide the tools to make it easy to view and manage all the orders created within multiple sites. This could reduce the incremental cost of order management for each additional site.
Nevertheless, even in cases in which the order management is done across sites, the impact of the shared commerce platform on the cost of order management should not be overestimated. The reason is that most large companies do not use their online commerce software for order management. Rather, they have order management or enterprise resource planning (ERP) systems dedicated to that task. These back-end systems are usually much better suited for order management needs and can already handle orders coming from different commerce systems.
Hence, the introduction of a multisite commerce platform is by itself unlikely to result in significant savings in order management.
Very commonly, multiple sites make use of the same product catalog. Each site does not need to expend any effort in product management but can focus on making only the adjustments necessary for its needs, such as excluding products or categories that are not to be available on the site.
A shared commerce platform makes such catalog adjustments not only possible but also easy to administer. Only a single group within the company is needed for product management, although the platform can provide easy-to-use tools that the administrators of each site can use to view the shared catalog and make the necessary exclusions, set the prices, or add additional information.
Therefore, the cost of catalog administration can be greatly reduced when a single catalog is shared among many sites.
However, in other situations, catalogs are not shared by sites. This is typical, for example, when sites are created for independent brands, and each brand is responsible for its own product management. In this situation, the shared platform does not reduce the LOB cost of product management.
Just as with product management, marketing costs can be reduced by using a multisite commerce platform only if the different sites can reuse a common set of marketing collateral. This is generally the case when the different sites sell the same products. In this case, it would be expected that much of the collateral, such as images or even text, can be prepared once by a central group of administrators. Each site’s administrators can save much effort by making use of information within this library of marketing material.
However, generally even if product information is largely the same among different sites, marketing is more unique within the context of a site. The text of marketing messages and the flow of campaigns must be designed to closely fit the patterns of the site’s customers. Therefore, even when it is possible to share some marketing collateral, the impact on cost savings is not going to be as great as the impact of sharing the entire catalog.
The business performance of each site must be measured, and the site activity must be analyzed to determine whether it is meeting the company’s objectives and also to see how the business results can be improved in the future.
Certainly, the business needs to analyze each site separately in the context of its own revenue and its own customers. However, the business might also want to analyze the results of all sites and compare site performance with each other. Performing this task can be quite different and time consuming when each site uses its own standalone platform.
On the other hand, when a shared platform is used, the data for all sites is readily available in a single database. Therefore, it can be much easier to create the reports and the analytics that truly compare sites against each other or which compare the sales of specific products on different sites or to different kinds of customers.
Therefore, in a situation in which such site comparison is necessary, the company could significantly cut its expense in analyzing the business results of its many sites.
We have discussed a number of typical costs involved in the creation and operation of a commerce site. In addition, we saw how and when these costs can be reduced through the use of a shared commerce platform. Table 7.4 summarizes this discussion by listing the various types of costs and showing the anticipated impact of using a multisite platform.
