How the cloud can cushion the impact of holiday demand

By Thomas Kiblin, cbehrens@virtacore.com

Frenzied shopping trips, unexpected visitors and gift-wrap paper cuts -- I bet you thought consumers were the only ones suffering during the holidays. But have you ever thought that the holiday season is anything but fun for retailers IT departments?  It’s a time of scorching demand, long days and loads of customer transactions on systems typically not designed for peak performance. For retail in December, the pressure is on.

In response, stores and merchants prepare for their peak season by increasing capacity across the board. Visibly, there are more sales associates on store floors, more holiday displays, and certainly more product on the shelves. But behind the scenes, companies are also shifting into holiday mode -- hiring more telephone customer service representatives, adding more hours to the shifts of warehouse workers, even adjusting the HVAC plan and beefing up security measures. And even further behind the scenes -- in the IT department and at the data centers -- holiday demand is felt as well.

IT must scale with demand
The fact is, today’s retailers rely quite heavily on their IT infrastructure to manage demand during the holiday months. Purchasing, supply chain technologies, RFID, warehouse management applications, email, mobile marketing, and even the cash register itself -- each of these technologies in a retail enterprise hums a little (or a lot) louder during the holiday season. 

Recent surveys show that 72 % of consumers plan to shop online for the upcoming holiday season, in order to bypass the crowds associated with shopping malls. Retailers clearly need to be sure their IT environments can accommodate the volume of online shopping taking place compared to slower months.

Even payroll and financial systems need to meet a peak demand in December -- in 2010, retailers are expected to hire an additional 16 % of seasonal workers in order to assist with the surge of retail activity in comparison to 2009. It naturally follows that companies need to expand their technology investments accordingly in order to align with the additional personnel needs, such as payroll.

And it’s not just Christmas.  Depending on the retailer, sales may surge several different times throughout the year. According to the National Retail Federations' 2010 Valentine's Day Consumer Intentions & Actions Survey, 36% of consumers celebrated the holiday with flowers in 2010, up seven percent from 2009. Many online florists have estimated they see more than 10x normal demand on Valentine’s Day.

Some retailers choose to simply over-provision their infrastructure most of the year. In an industry where an additional dollar of revenue is often more difficult to achieve than a dollar of cost savings, this is a very costly choice, and one that will grow more costly as time marches on.

What if you don’t scale up?
Others choose to take their chances with their current infrastructure -- at their own peril. Recent studies estimate that on average, the cost of an hour of downtime for retail organizations on Black Friday ranges from $84,000 to $108,000 -- that’s more than $1,500 a minute. 

Downtime clearly means a tremendous loss of revenue -- abandoned shopping carts are the cardinal sin of e-commerce. With the next store only ever a few keystrokes away, online retailers cannot afford a broken checkout mechanism.

But downtime can also mean high cost in other areas of the business. Customer experiences marred by peak-time technical failures can mean the entire customer service mechanism of an organization is overburdened. When downtime limits access to online product manuals or other self-service resources, or gift givers get package-tracking errors, telephone help lines light up, knowledge bases are accessed at a higher rate, and customer satisfaction starts plummeting.

And these days, it can go even further -- lack of capacity during peak times rarely goes unnoticed in this connected era. As consumers converse with their peers more publicly within social networking sites, retailers that haven’t staved off downtime will instead need to devote resources to responding proactively to frustration across a variety of communications channels -- or face the potential of real damage to their brands and loss of future sales.

When a ‘cloud rolling-in’ is good
It may seem like common sense that it would be cost prohibitive for a small online florist to own enough of its own server space to accommodate ten times normal demand. But increasingly, the largest and smallest of retail players are looking toward the cloud to add capacity during peak times as a more cost-effective play than taking a risk or owning and managing a bunch of iron. Even the most robust IT infrastructures can’t necessarily scale cost-effectively during these periods with an on-premise only approach.

At its simplest, cloud hosting enables organizations to save money by providing computing power on a pay-as-they-go basis.   But perhaps just as attractive as cost savings are the time savings afforded by outsourcing the management of that resource. The best cloud hosts specialize in eliminating downtime through true high availability, capacity planning & load testing, redundancy, and proactive monitoring & management.

With the cloud, retailers’ IT departments no longer have to move into a high-season defensive mode where they are constantly focused on issues around managing for uptime. They can instead focus on maximizing the return on online marketing or on other value-added tasks. With a highly scalable architecture such as cloud hosting, website or web services expansion can be executed with nearly no limitations.

Taking it one step at a time
For some retailers, the simplest way to earn a foothold as far as organizational adoption around cloud computing is to first move e-commerce website hosting and management responsibilities to a hosting provider. This can be more comfortable and logical to those in the organization who may demonstrate initial reluctance regarding the off-site storage of customer information or other company data. Often self-service mechanisms for processes like rebates or returns follow from there. Organizational reluctance usually falls away when they see the efficiency results around these kinds of simple cloud proofs.

From there, retail organizations often expand cloud resources further into operational processes, with managers leveraging cloud-enabled tools like web-hosted conference calls and web-based office applications. The most innovative retail organizations are using the cloud for full-scale customer service chat, CRM, even ERP. All of these technologies, when acquired within cloud purchasing models, scale costs up and down with usage, rather than requiring a huge upfront investment in order to accommodate a few peak times of the year.

It’s more than just cost
In all, for retail organizations seeking a way to contend with peak demand during the holiday season, cloud offerings provide not only protection from the menace of downtime, but also the potential of a variety of operational and competitive advantages. The cloud clearly cuts costs and holds the potential to boost revenue.

But the organizational resource the cloud frees up can also yield the next competitive advantage -- whether it’s a means to fully harness overflowing demand during the most critical days of the year, a way to break into a new geography, or even a platform by which to launch a new smartphone application for in-store shopping -- cloud models mean retail organizations can not only afford to keep the lights running -- but also afford to innovate.

Thomas Kiblin is CTO and founder of Virtacore Systems. He can be reached at cbehrens@virtacore.com.

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