September 6, 2010

Winning in Retail IT - IT Efficiency and Effectiveness Strategies for the Retail CIO

Competitive pressures in the retail sector are increasing, and retailers are looking for ways to improve their bottom lines. Success in the long term will depend on whether they can keep controlling costs while enticing consumers to stay loyal to the products and services they offer. That, in turn, will depend on their ability to develop technologies to please customers in every sales channel they serve, according to a new study by Booz & Company.

To become more cost-conscious, retailers will have to make a major effort in every area of their operations, especially IT, where the role of the CIO must become even more strategic. Information technology is becoming more critical to virtually every key strategic initiative, yet IT budgets continue to be constrained, even as retailers’ technology portfolios grow increasingly complex. Booz & Company has revealed that retailers can gain savings from the following four levers:


Lever 1: Strategic Sourcing

Many large retailers are now outsourcing a significant portion of their infrastructure, application portfolios, and even business processes. In turn, service providers have embraced retailers by offering tailored and integrated solutions targeted to core retail operations. Furthermore, by providing clear and transparent detail on how costs vary by service level, they can help retailers make better-informed decisions on the appropriate fit-for-purpose service levels. “Providing differentiated service levels based on need, rather than a one-size-fits-all high level of service, can achieve significant cost savings,” said Ramez Shehadi, a partner at Booz & Company.

Retailers can also potentially make significant efficiency gains by outsourcing field support, including such devices as point of sale (POS) machines, printers, scanners, and store servers. Service providers can offer retailers increased savings potential by optimizing the number of IT support personnel per store and the geographic distribution of resources, and by spreading operational fixed costs over a broader base. The best sourcing strategy mixes strong internal talent with appropriate capabilities from service providers. The art, however, lies in understanding whom to partner with, how to manage the relationship, and where to drive value.

To win, retail IT organisations must develop a sound sourcing strategy and carefully plan the implementation of that strategy. Selecting the right delivery models and the right transition sequence for IT services is critical. To ensure the successful execution of any sourcing plan, retail IT organisations must structure service provider relationships with the long term in mind. To capture the full value of any outsourcing arrangement, service-level agreements should include clear performance-based incentives, thus encouraging outsourcers to become strategic partners with the IT department.


Lever 2: Application and Infrastructure Rationalization

Retailers are commonly confronted with an IT environment characterized by fragmented applications and infrastructure and poorly structured data. Such environments drive up the cost of maintenance, upgrade, break/fix, data centers, and personnel, while constraining the flexibility and responsiveness of IT. “Application and infrastructure rationalization programs that focus on strict standardization to build consistency and reduce costs can significantly improve the efficiency and effectiveness of retail IT,” noted Gabriel Chahine, a partner at Booz & Company.

The reliance on custom-developed applications creates a fragmented, patchwork IT environment characterized by multiple applications running on any number of technology platforms. This lack of standardization drives up infrastructure and application support costs by creating unnecessary redundancy and limiting economies of scale. Furthermore, to remain competitive, retailers dependent on custom-developed software must incur the full costs of developing new capabilities. Yet forgoing these new capabilities would create a misalignment between the current business operations and the supporting technology, limiting a retailer’s effectiveness.

Recently, ERP vendors have introduced a variety of mature, retail-focused products that present a real opportunity for retailers to consolidate away from fragmented legacy portfolios and onto a common platform that provides integrated retail functionality, from merchandising, warehouse management, and POS systems to human resources and financials. ERP implementations are notoriously costly and difficult to justify, but building a strong business case based on ERP’s many benefits is becoming more and more critical to retail success.


Lever 3: Demand Management

“A strong demand management capability can effectively balance business demand and IT supply while managing costs by carefully controlling the allocation of IT funding and resources,” said Karl Nader, a senior associate at Booz & Company. Retailers can strengthen their demand management capabilities by improving processes, performance measures, tools, and accountability. CIOs should lead the effort to categorize, prioritize, and evaluate all demand for IT services at the enterprise level and establish a strong governance model to support communication and to create transparency into the decision-making process. Rigorous project scoring, gated funding reviews, and tiered approval processes can ensure that IT is aligned with the highest-value projects.

To get the best return on discretionary investments, retailers should target two types of projects. Quick-return projects which should concentrate on improving pricing and merchandising systems, and projects with longer-term strategic importance, such as strengthening loyalty programmes, building business intelligence platforms, and improving cross-channel integration capabilities. Only by putting in place the right demand management and IT governance processes can retailers be sure that critical, urgent needs are met, while less essential projects are put on hold.

“To further track and manage discretionary spending, retailers should consider segmenting the IT budget into “fixed” and “variable” categories during annual budgeting and planning,” noted Shehadi.


Lever 4: A Thin-model Organization

By radically streamlining IT organisations, retailers can take a significant step toward reducing complexity, cutting costs, and aligning IT much more tightly with overall business strategy. The streamlined retail IT organization has a singular mission: to deliver high-value services at best-in-class costs. This means building core capabilities, moving non-core work outside the organization, and making every activity leaner—all within a thin management structure. That thin model will demand major changes throughout the organization, using strategic sourcing to transform supplier responsibilities and leveraging demand management to change the way business clients behave. “The most dynamic change, however, involves how IT itself is organized and how it is managed and staffed. Proper governance, rules, and processes must be put in place to ensure that work gets done with a much smaller internal footprint,” Chahine commented.

Expertise-based staffing demands a dramatic shift in IT thinking. In the typical IT organisation, most staff activity is utility-based, so most of the executive attention focuses on transactional activities. With the transformation to more expertise-based roles, however, retail IT executives can shift their focus to strategic, customer-centric issues, taking on the role of business enabler. Retail CIOs can begin building a small but highly skilled staff of IT professionals who are well versed in the business and IT challenges confronting today’s retailers.


Targeted Investments

The goal behind pulling the four levers described above is often to reinvest the savings into developing market-facing capabilities. When determining what areas to invest in, retailers should take a market-based approach, identifying key emerging trends that will deliver new value for their businesses. Broadly speaking, we see five key trends in the market:

  • Business intelligence: “By developing a better understanding of customer behavior through advanced techniques such as consumer insights and predictive analysis, retailers can customize their product and service offerings to better meet the needs of their customers,” explained Nader.

  • Next-generation in-store technologies: Next-generation retail systems can reduce customer transaction times, integrate new customer management capabilities such as loyalty programs and personalization features, and drive operational efficiencies through better transaction management and less handling of cash.

  • Cross-channel integration: By enhancing retail, supply chain, and back-office systems across the value chain, integrating across every channel allows retailers to offer cross-channel loyalty programs, consistent online and in-store pricing, inventory visibility across channels, and advanced in-store kiosks and mobile commerce solutions.

  • Supplier collaboration: Systems that foster tighter collaboration with suppliers to better manage supply chains include everything from merchandise planning, sourcing, and purchasing to replenishment and inventory management. Building information-sharing platforms that provide near real-time sharing of demand and supply information with suppliers in a secure environment is critical to the success of such systems.

  • Pricing and markdown optimisation: Retailers are moving toward a highly analytical approach to pricing and markdowns. Proper pricing of an item can be the difference between a profitable item and a loser. “By integrating demand forecasts, promotional information, and regional/local variations, leading retailers are already making real gains in profitability,” Shehadi commented.


A Future in Retail

A happy customer is a profitable customer. IT offers the possibility of creating a truly customer-centric environment that can boost revenues and cut costs at the same time. Building those capabilities, however, means evolving to a lean IT organisation, and using the money saved to leverage strategies that are truly focused on the customer. That requires both discipline and imagination, but the long-term benefits will be significant.