VideoLike the founders of a lot of Web-based start- ups, Larry Gerhard and Michael Osborn were passionate about their product, but not about the technology required to sell it. In their case, the product was wine. Gerhard and Osborn, who both have plenty of experience in high tech, wanted to open a wine shop for the Internet, dubbed eVineyard. But as the two men knew, selling online in the highly regulated liquor distribution industry is a technically complicated task.
To operate in the 22 states in which it is currently licensed, eVineyard had to have an E-commerce Web site that could serve up entirely different product catalogs, pricing and discount schedules, freight tables, and order screens, depending on where an order would be shipped. The site would also require real-time inventory system integration with the company's four warehouses (one more is waiting for regulatory approval). In the wine business, explains Osborn, the company's executive vice president, there are no back orders: "When a particular vintage of wine is gone, it's gone."
Osborn and Gerhard, eVineyard's CEO, evaluated these impending challenges and eventually decided to let someone else conquer them. "There's plenty of work for us to do without worrying about technology," says Osborn.
As a result, the company outsourced its entire E-commerce operation. eVineyard offloaded the creation and operation of its E-business to Pandesic LLC, a Sunnyvale, California-based joint venture of SAP AG and Intel Corp.
In May 1999, eVineyard launched its online store (www.e vineyard.com). The company handles nothing but the content. All transactions are processed by Pandesic, which hosts the Web site; serves up the right version of the catalog to visitors; processes credit-card payments through CyberCash, a leading E- payments vendor; and confirms sales using real-time inventory data, which it houses on its servers. The Pandesic system (which is built on SAP's R/3 enterprise resource planning software) then routes the order to the appropriate warehouse and bills the customer.
Cost? After a start-up fee, eVineyard pays Pandesic a small percentage of its annual online revenue and a nominal monthly hosting fee. Osborn says the company can focus on wine while Pandesic makes sure the site is fully operational, 24/7. Using this operating model, privately held eVineyard anticipates quarter-by-quarter growth of 300 to 400 percent in 2000.
Outsourcing's bleeding edge
Pandesic is one of a new breed of end-to-end E-commerce outsourcers that has sprung up in the past year or so. These outsourcers integrate traditional E- commerce offerings with back-end systems. In some cases, they also offer traditional logistics, warehousing, and supplier services. It's a young service, but one clearly needed, as highlighted during the Christmas 1999 buying season, when Web shoppers complained bitterly about chronic online stock outages and late or nonexistent deliveries.
Although no figures are yet available on the size of the full- service E-commerce outsourcing market, traditional E-commerce outsourcing--usually defined as Web-site design, strategy consulting, and software creation and hosting--was a $6.6 billion industry in 1998 and is expected to grow to $39.5 billion by 2002, according to Gartner Group Inc., a technology advisory firm in Stamford, Connecticut. Gartner also predicts that by 2003, fully half of all package-delivery traffic in the United States will be from electronic retailers.
The new breed of outsourcers seeks to take advantage of both trends. Pandesic faces competition from companies like USWeb/CKS, in San Francisco, and Escalate, a Redwood Shores, California-based company. In December 1999, USWeb/CKS launched iAMcommerce, an E-commerce outsourcing package that lets customers "rent" prepackaged E-commerce functionality, with fees based on transaction volume. Although the company does not currently offer back-end logistics integration as part of the standard package, Brian Winter, vice president of service development for USWeb/CKS, says the company will integrate with a customer's back end on a case-by-case basis, and should have a standardized offering in coming fiscal quarters.
Escalate takes back-end support to its logical conclusion by partnering with warehousing companies and product suppliers, then offering access to those resources as part of an end-to-end E-business package. One such customer, Egreetings Network Inc., an online electronic greeting card and gift service, started selling gift items in November as part of its E-commerce outsourcing contract with Escalate.
Egreetings, which previously had offered only free online greeting cards, hired Escalate this past September. "It was a time-to-market issue," says Scott Derringer, who until January was director of E-commerce and product management for Egreetings. "We wanted to focus on what we're good at, which is merchandising for special occasions, and outsource the back-end heavy lifting."
Egreetings had already established direct links from its Web site to several gift vendors with which it had partnerships, but it wanted to ramp up its offerings. Working with Escalate, Egreetings selected suppliers from a variety offered as part of the Escalate Commerce Network. Together, the two companies approached several others about joining the network. Once a supplier joins the network, its inventory and shipping systems are directly integrated with Escalate's systems to create a frictionless end-to-end transaction. Once a customer clicks "buy" on Egreetings's Web site, the cyber- vendor doesn't have any contact with the buyer until the payment arrives.
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