August 3, 2005
Overstock.com: Feeling the Need For Speed
By Evan Schuman, Ziff Davis Internet
The Overstock.com Web site is all about pricing, as it pitches itself as saving consumers as much as 80 percent compared with other retailers. But in its rapidly growing IT department, the obsession is speed.
How fast? During a recent major deployment of some large Teradata packages—including CRM, profit analytics and an enterprise data warehouse—Teradata bid on the assumption that such large installations typically take between nine and 12 months to deploy. Overstock's IT department finished the deployment in 70 days, said company CIO Shawn Schwegman.
A less dramatic example came with Overstock's deployment of a massive suite of financial and customer service programs from Oracle, for which the database leader allocated 12 to 18 months: Overstock wrapped up deployment in about five-and-a-half months, Schwegman said.
As the six-year-old company looks to become the newest member of the billion-dollar-retailers club—a goal analysts expect it will reach in less than a year—company executives still paint it as still very much of a startup. The similarities include a doubling of its annual revenue and gross profit growth in this year's first quarter soaring 194 percent.
During its most recent quarter, Overstock.com reported $151 million in revenue, but CIO Schwegman says past company growth rates suggest the company's annualized earnings will top $1 billion within a year. Wall Street analysts agree.
Rebecca Kujawa, with the Stanford Group, said her analysis puts Overstock well over the $1 billion mark during the next year. Asked about the CIO's prediction, she said, "We actually have higher expectations than that. For 2005, we predicted $866 million in revenue and for 2006, we have predicted $1.3 billion."
Derek Brown, an analyst at Pacific Growth Securities, said the billion-dollar prediction "is certainly possible. Our numbers say revenue will actually be greater than $1 billion a year from now."
The number of products being sold has also increased rapidly. Today the company offers 1.2 million SKUs (including about 600,000 active SKUs) compared with 15,000 SKUs (and about 8,000 active SKUs) four years ago.
The company's growth has come due to a business model that benefits both its customers and suppliers, Schwegman says. Customers get discounts on designer merchandise and suppliers get "one avenue to dump excess inventory."
"If you have one channel that you are selling through, that does not destroy your brand," Schwegman said. "We can protect the pricing a bit more. We don't whore it out to the grey market. We save consumers money by allowing them a single place to go to pick up these huge deals."
That kind of growth gets dicey, however, as its technical infrastructure grows to support a vastly larger business, especially when the business is as dependent on IT as is a high-volume retail Web site.
How crucial is IT to Overstock? The company had to delay its earnings announcement this summer partly due to an office move and a corporate acquisition, but also because of the work involved in implementing its new Oracle and Teradata systems.
And when Overstock.com did finally report its quarterly results this month, Wall Street was not thrilled, partly due to Overstock's IT costs.
A report from Pacific Growth Equities, for example, lowered analyst's recommendations of the company's stock and intimated that Overstock is suffering from the same growth-fueled losses as did other dot-com companies during the stock-market bubble of the late '90s.
"It feels like Groundhog Day all over again, with higher revenues driving greater losses," said the Pacific Growth report. "This quarter offers yet another example of Overstock.com's ability to grow revenue rather impressively (albeit not as impressively as we had anticipated), yet lose an ever increasing (and near record) amount of money."
The report criticized higher-than-expected administrative overhead as Overstock "continued to undertake extensive technology infrastructure build-out. Importantly, management made it quite clear that these investments are likely to be ongoing and not one-time in nature." Schwegman says that at least some of the IT projects that are consuming capital will help keep a tighter lid on expenses, which is one reason his crew put so much effort into getting the Oracle and Teradata systems up quickly.
How did they do it? "We are working our asses off, to be blunt," he said.
Schwegman's 95-person IT group represents about one out of our every four people at the corporate headquarters building and has almost tripled in size since October.
To make the Teradata deployment happen that quickly, Schwegman's group worked an average of 65 hours/week. "One guy put in 102 hours last week," he said.
Beyond salaried IT staff, Schwegman also "beefed up consulting" and brought in a lot of extra temporary help, he said.
But there is a question whether the Teradata deployment speed is as impressive as it sounds.
Teradata VP David Scott said that Teradata did, indeed tell Schwegman that the project he was undertaking would probably take nine to 12 months to complete. But he also said it was a rough estimate for a set of services and capabilities much more extensive than the set Overstock initially deployed.
After the project scope was redefined, Teradata's estimate of the time needed for rollout was 70 days, Scott says.
Schwegman, asked about the apparent contradiction between his remarkable time-and-scope description and Teradata's more mundane estimate, said the truth was "a margin between the two stories."
"It would have been a six-month project. If [Teradata] went anywhere else and did it, it would have taken six months," he said. The vendor helped accelerate the project because it "poured in a ton of Teradata resources."
Scott said Teradata's estimate of 70 days was based on the same high volume of resources that impressed Schwegman; Teradata didn't add resources to accelerate the process. But the estimate included equally long hours from Overstock's team. "It was assumed that their people were going to work 16 hours a day," Scott said.
Why assume a client's employees would put in those kinds of hours?
"It's very clear when you meet Shawn," Scott said. "He has a cot in his office and a strong pot of coffee. Once we all agreed to the statement of work, their focus was incredible. I'd give them a 9.9—if not a 10—on a scale of being focused."
The 31-year-old Schwegman freely admits to being a workaholic who puts in 70 hours in an average week and is proud of the futon in his office.
Workaholics or not, Overstock's people were focused, and they went out of their way to understand and internalize what the business, marketing and operations people needed, according to Bill Gassman, a research analyst at Gartner, who spent a half-day with Overstock's marketing department and was surprised at how well it used technology.
"If we were to draw a bell curve of maturity in IT processes, they're definitely on the high end of the curve," Gassman said. "That takes an IT department that understands that business people are their customer."
"I still use [Overstock] as a benchmark. The types of best practices the company had are really rare," Gassman said. "They ask to look at reports of what people are doing on the site all day. Then, based on that, they may change the site several times a day and keep an eye on the effects of changing that home page. There's a lot of cooperation between the developers and the marketing people. At other companies, making a change like that would take weeks or months. These guys do it multiple times a day."
Teradata's Scott agreed. Overstock relies heavily on e-mail marketing campaigns to bring customers in for special offers, new merchandise and sales. But the company's previous mail system allowed only a fraction of the messages to go through.
"Their e-mail marketing went from really bad to world class. They had been able to get just a fraction of e-mails out to customers," Scott said. "When you look at the level of confidence they had in even getting a small number of messages to customers, it went from very painful, very problematic" to something effective.
Improvements in Web-usage reporting will also allow the business side to time special sales more precisely to take advantage of changes in the market, or in inventory.
"Our marketing campaigns will now be optimized on the fly," Schwegman said. "Whether it's a deal with AOL or a down comforter sale on the bedding page, marketing will be able to see the landing page" activity.
Overstock has now dedicated marketing personnel to watching the stats and making quick sales decisions based on them, knowing that many such programs never deliver much of a return because the capabilities weren't used.
"We will have several (marketing) people dedicated to just that for various ad campaigns, and they will be held to strict metrics," Schwegman said. "It's a capability that has existed here, but it's now much better. The focus is on real time."
Schwegman understands that IT people are generally willing to work long hours when their projects are important, as long as they are allowed to have some fun at work. To avoid IT staff burnout, in January, once the holiday selling insanity dies down, his team is offered what he dubs "snowboarding hours."
Alternating groups of programmers are given the morning to go off snowboarding—Schwegman boasts of some serious snowboarding enthusiasts on his team—and are asked to report for work at about noon.
"It lets people rejuvenate," he said. Snowboarding isn't a half-day off, however. Staffers are still expected to work a full day once they do come in, but they are allowed to time-shift to get in a morning of snowboarding.
Looking to this year's critical holiday selling season, Overstock will be deploying some additional customization capabilities, allowing for pages to get closer to a custom page for every customer. Schwegman said the systems won't quite get to that level of individuality, but will be getting a lot closer than they had been.
One of the potentially significant changes Overstock is making involves a migration from Oracle 9i to Oracle 10g. Today, the retailer's shopping database talks directly to its warehouses, logging orders.
With the new system, Schwegman said, "our orders will go to Oracle, and then Oracle will decide which warehouse gets the order. We're then modifying our reporting so that we can match orders to make sure that the orders flow through properly. Is it going to the right warehouse?"
Overstock is using Goldengate Software to help move the data from Oracle in the transition.
Schwegman is also moving to create walls between the company's operations and reporting sides of the IT department. Like most startups, Overstock's initial IT strategy was about consolidation and cramming as much data and capabilities as possible into the fewest number of apps, databases and servers.
But with potential 9-figure revenues this year or next year, Schwegman says the time is now right to split functions and focus on specialization.
"Operations and reporting will be now distinct and in synch. We will keep them absolutely separate," he said. "We've surpassed the size where (that kind of consolidation) works."
Schwegman said that he liked the pace and intensity of the start-up culture in IT, but that he'll likely move onto other roles at Overstock as the company leaves the hyper-growth startup phase.
"I'm a wartime general. My qualities are more geared toward war," he said.
Schwegman has held multiple roles while at Overstock—including serving as the director of the Books, Music & Videos department as well as working in the affiliate marketing program—and he is looking to move on. "Maybe I'll be doing new business development," he said.
For now, though, this general still has to push technology to scale for a rapidly growing company with increasing pressures on low costs. For the foreseeable future, that futon is likely to get a lot of use.