Redefining IT in the digital era
Digitization presents a fundamental challenge to established store chains that have long considered information technology to be an operational support function, not a source of competitive advantage. These traditional retailers still have an opportunity to reverse course if they substantially overhaul their retail IT organizations — both technologically and culturally.
Redefining IT in the digital era
Amsterdam Marco Kesteloo Partner +31-20-504-1942 marco.kesteloo @strategyand.pwc.com Beirut Karl Nader Principal +961-1-985-655 karl.nader @strategyand.pwc.com Berlin Nils Melcher Principal +49-30-88705-819 nils.melcher @strategyand.pwc.com
Chicago Deniz Caglar Partner +1-312-578-4863 deniz.caglar @strategyand.pwc.com Tom Casey Partner +1-312-578-4627 tom.casey @strategyand.pwc.com Christopher Perrigo Senior Executive Advisor +1-312-578-4692 christopher.perrigo @strategyand.pwc.com Copenhagen Per Hannover Senior Executive Advisor +45-3318-70-22 per.hannover @strategyand.pwc.com
Frankfurt Andreas Spaene Partner +49-69-97167-408 andreas.spaene @strategyand.pwc.com Kuala Lumpur David Hovenden Partner +60-3-2095-3188 david.hovenden @strategyand.pwc.com London Richard Bhanap Partner +44-20-7393-3519 richard.bhanap @strategyand.pwc.com
Mexico City Sergio Meneses Partner +52-55-9178-4200 sergio.meneses @strategyand.pwc.com Milan Francesco Lucciola Principal +39-02-72-50-91 francesco.lucciola @strategyand.pwc.com San Francisco Nick Hodson Partner +1-415-627-4276 nicholas.hodson @strategyand.pwc.com São Paulo Fernando Fernandes Partner +55-11-5501-6222 fernando.fernandes @strategyand.pwc.com
About the authors
Tom Casey is a partner with Strategy& based in Chicago. He is part of the digital business and technology practice, and leads the information management practice. He focuses on consumer, media, and information services firms, and has a long history helping companies that serve customers and consumers to execute their retail strategies.
Andreas Spaene is a partner with Strategy& based in Frankfurt. He is an expert in digitally enabled strategic transformation programs, including multichannel transformations in the trade, consumer goods, and telecommunications industries. His focus is on the development and implementation management of complex digital technology strategies and required operating model changes.
Christopher Perrigo is a senior executive advisor with Strategy& based in Chicago. He focuses on digital strategy and transformation and leads the firm’s retail technology efforts in North America. Before joining Strategy&, he was the vice president of global operations and IT delivery devices for Target Corporation.
Nils Melcher is a principal with Strategy& based in Berlin. He works at the intersection of IT and consumer and retail, and specializes in large-scale ERP transformations and e-commerce/multichannel IT architectures. He has also run multiple projects on transforming IT organizations to become more efficient.
This report was originally published by Booz & Company in 2013.
In today’s retail environment, smartphones, social media, “big data,” and other advances are driving gains for retailers that know how to use them — and siphoning sales from those that don’t. Digitization presents a fundamental challenge to established store chains that have long considered information technology to be an operational support function, not a source of competitive advantage. That mind-set explains why they’re losing ground to innovative outsiders that meet consumers’ rising digital expectations. Customers today want more choices in pricing, products, and fulfillment than old-line retailers have ever provided, along with a seamless shopping experience across online, mobile, and physical sales channels. Online-only players such as Amazon and eBay are gaining market share from bricks-and-mortar stores, but traditional retailers still have an opportunity to reverse course if they substantially overhaul their retail IT organizations — both technologically and culturally. IT must expand its focus from back-end operations to the entire enterprise, and create end-to-end solutions that link every function in a digitally optimized business model. The entire IT organization must become more open, responsive, and customer-centric. Although these changes won’t come easily, the payoff will be huge for traditional retailers that develop the multichannel IT capabilities to compete in a digitized marketplace.
Retail’s digital future is here
Digitization is redefining the shopping experience, opening the door to innovative, primarily digital competitors that are using technology to win customers away from bricks-and-mortar stores across the retail spectrum. For example, according to Strategy& analysis of Euromonitor data, online transactions are projected to reach 30 percent of total apparel sales and 40 percent of electronics sales by 2020. The online upstarts are largely taking their technology cues from consumers, who are embracing e-commerce across multiple channels, including online, social media, and mobile technologies. Moreover, customers expect a flexible, seamless, personalized shopping experience that spans these channels as well as the physical store. But old-line retailers are falling short, largely because they regard information technology as a support function for traditional store operations. In contrast, a large share of online sales growth is going to digital interlopers that understand the power of new technologies to create new business models. Amazon and Apple have used digital channels to commandeer entire retail sectors such as books and music. Even consumer packaged goods suppliers are bypassing stores and forging direct online links with customers. And innovators like Germany’s Emmas Enkel are maximizing customer convenience with hybrid business models that combine online, mobile, and storefront outlets. Ironically, retail grocers — often seen as digital laggards — are ahead of many traditional chains in coordinating physical and digital channels. For example, Tesco in the U.K. and Harris Teeter in the U.S. (which recently agreed to be acquired by Kroger, the country’s largest grocer) offer customers the option of ordering online and picking up their purchases at stores. (For more Strategy& analysis on disruption in the grocery business, see “What if Clay Christensen Is Right about the Grocery Business [and Amazon Is Wrong]?” by Nick Hodson and Thom Blischok, strategy+business, Aug. 7, 2013.)
For traditional retailers, the time to act is now: Those that fall behind the digital curve may never catch up. These retailers need to develop the next-generation information technology capabilities to deliver goods to today’s digitally minded customers. Traditional IT architectures and practices aren’t suited to multichannel competition. Too many companies still treat online and bricks-and-mortar operations as separate sales channels. They need to merge the two into a single channel that creates the integrated shopping experience customers want. IT organizations also need to expand computing power and intelligence beyond back-end functions like finance and warehousing to customer-facing activities like a state-of-the-art online sales journey. Their habitual silo-based approach to development must give way to collaboration with counterparts across the company. And they must get over their preference for custom-built software when off-the-shelf systems will do. This transformation won’t be inexpensive, regardless of the size of the organization. To win support for the investments, they’ll need a strong business case and a realistic plan for migrating to the new operating model.
What the digital consumer wants
Until traditional retailers truly understand what people want, shoppers will continue gravitating to competitors that meet their expectations across all channels, leaving others to wither. Today’s consumers want a shopping experience that mirrors their fully digitized lifestyles. They expect individualized offerings tailored to their specific preferences. And they want choices in buying and fulfillment that suit their needs at any given time and in various shopping contexts. Customers have grown comfortable conducting transactions through multiple channels. They see no reason for retailers to separate online, mobile, and bricks-and-mortar operations. They expect a fully integrated experience that might start on a smartphone, move to a retailer’s website, and conclude with a purchase at a store. The process might just as easily work in reverse. At the core of the digitized consumer lifestyle are mobile devices. Shoppers are rapidly embracing smartphones as a primary tool for a range of transactions. They use the devices to gather information, download coupons, and make purchases on retail websites. New applications will enable customers to order merchandise simply by using a smartphone to scan the barcode in an advertisement or entering a product code on the phone’s keypad. And the bricks-and-mortar shopper who’s too time-pressed to wait in line at the cash register can now use an app called MasterPass to pay with a smartphone by snapping a picture of an item’s price tag. Consumers also are turning to social media channels such as Facebook and Twitter as sources of information and modes of communication in all areas of their lives. Retailers that learn to communicate effectively in these digital venues can establish stronger relationships with their customers and attract new ones.
New applications will enable customers to order merchandise simply by using a smartphone to scan the barcode in an advertisement.
In addition to convenience and communication, digital technologies are raising the bar for customization and choice. Customers are coming to expect pricing and product offerings designed just for them. Some retailers, for example, might generate an on-the-spot discount based on a customer’s purchasing activity over a certain period. Technology also enables retailers to give customers more choice in product design, using their websites to facilitate “mass-customization.” On Burberry’s site, shoppers can configure their own trench coats from thousands of options. Consumers want more options in shipping and delivery too. For example, Walmart, Amazon, and others are beginning to offer same-day delivery. This requires a range of technologies to predict demand, track inventory, route orders, and choreograph warehouse activity. (Interestingly, a recent Strategy& survey indicates same-day delivery isn’t as high on consumers’ wish lists as some retailers seem to believe. To read more, see “Same-Day Delivery? Not So Fast,” by Curt Mueller, Andrew Schmahl, and Andrew Tipping, strategy+business, Aug. 19, 2013.)
Today’s retail IT falls short
Many retail IT architectures were built years ago, when online and mobile commerce were little more than glimmers on the horizon. Back then, the priority was automating back-end functions at large store chains — activities such as replenishing store shelves and optimizing stock levels in warehouses. As a result, customer-centric activities such as store operations or merchandising received little technological attention. Today, this hampers retailers’ ability to create digital options for customers at multiple touch points. When traditional retailers moved online, they kept websites separate from store operations. Many still maintain a “silo” arrangement, under which stores can’t check the availability of stock online, and customer insights aren’t shared between Web and physical channels. Moreover, habits and attitudes of the pre-Internet era still hold sway in many retail IT organizations. A bias toward in-house programming leaves many dependent on outdated custom software managed by understaffed IT units. This pushes up implementation and maintenance costs, while slowing the development of new capabilities. Indeed, the preference for homegrown software has made many IT departments slow to embrace new concepts. And the silo mentality has undermined collaboration with other departments on automation projects. Often the IT group takes down specs for the project, works on it for months with little further input, and then presents a finished product that might or might not meet the business unit’s needs. Taken together, these characteristics form a significant impediment to retailers looking to build customer-focused digital capabilities.
Many traditional retailers still can’t check the availability of stock online, and customer insights aren’t shared between Web and physical channels.
Tomorrow’s retail IT organization
Retail IT organizations need to transform both their system architectures and their operating models for the digital era. The new architecture Next-generation IT architectures will be integrated, flexible, open, and customer-centric. Although specific features will vary from company to company, a few defining actions will always be present, and they represent a major paradigm shift. Prioritize the front end. Business intelligence and logic must move from back-end applications such as warehouse operations to front-end customer touch point applications like store systems and online interfaces. There, they can create the flexible interactions customers expect, such as on-the-spot discounts and personalized product design. Make it seamless. Online, mobile, and physical selling channels will converge at customer touch points, creating a seamless experience. Retailers will accomplish this either by merging existing silos into a single system or by creating the linkages necessary to allow separate systems to work in tandem. First and foremost, this requires consolidating customer data in a single repository accessible to all systems. Leverage COTS. For most applications, commercial off-the-shelf software (COTS) will be chosen over custom-designed programs created in-house. Retailers will write their own code only when it creates unique functionality that gives rise to a competitive advantage. For example, they’ll choose commercial programs for finance, warehouse management, and other basic business capabilities that confer no particular advantage. Customer analytics and sales forecasting, on the other hand, are areas where specially designed software might create a competitive edge by gathering data that yields unique customer insights.
Promote an open architecture. Unlike the closed, company-centric systems of the past, new retail IT systems will interact freely with Facebook, Twitter, and other digital sources to glean information about customer preferences and buying patterns. They will also capitalize on the potential of social media as sales channels. Key attributes of these systems are openness to outside channels via standard interfaces, and the flexibility to integrate data from various external sources. Enhanced security measures will be necessary to protect these more open systems from hackers and other external threats. Adopt real-time processing. Traditional batch-processing methods and the one-size-fits-all approach don’t give retailers enough data to create personalized offers that will turn browsers into buyers. With real-time processing, retailers can gather up-to-date information on a customer’s preferences and purchasing history, and use it to present a powerful offer at the critical moment of decision for the customer. The new operating model Retail IT organizations need to adopt an open operating model focused on achieving business objectives. Among other things, this means a new role for IT leaders as technology becomes more central to business operations. CIOs are likely to help shape corporate strategy and drive innovation across the company, with some even becoming board members. Within the IT function, some teams will orient themselves around specific opportunities, such as optimizing the mobile shopping experience. Others will take responsibility for business needs that cut across platforms, such as item control. Equally important will be a collaborative approach to projects. IT staffers will work on cross-functional teams with colleagues from store operations and other parts of the business. The groups will meet frequently to set priorities, exchange progress updates, and make adjustments based on customer feedback. IT will deliver its work in smaller chunks, as part of an iterative process that allows the company to deploy new capabilities faster. IT will build new internal capabilities, adding talent in Web design as well as in implementation of SAP, Oracle, and Microsoft software. At the same time, the organization will tap outside expertise more often for project
development work. The group will need fewer custom programmers and more staffers with experience managing outside vendors. Outsourcing opportunities will arise in areas where commercial software is available and no proprietary expertise is needed. This allows internal IT staffers to focus on strategic domains such as sales systems, and integrating the work of third-party suppliers.
Transforming your IT organization
Turning a retail IT organization into a customer-focused driver of digital innovation is an enormous challenge. It takes plenty of planning, will, and money. Some take it on as a single, overarching project that redesigns every aspect of the IT organization. Others break it down into a series of projects aimed at the same ultimate goal. In either case, IT leaders must present a compelling business case and a realistic plan for effectuating the changes. Each project is different, of course, but we have found that successful projects usually include the following essential steps. Choose a strategic value proposition and identify differentiating capabilities. Successful IT transformations begin with the company’s distinctive value proposition, or way to play in the marketplace. Determine how your company will create unique value for customers, and build its overall strategy from there. After choosing a way to play, identify the differentiating capabilities needed to deliver on that value proposition. Determine the functional requirements needed to support these capabilities. Break down the company’s differentiating capabilities into the specific functional requirements IT must meet in order to create or enhance those capabilities. Figure out which of those functional requirements you can meet and which you can’t. Then prioritize the gaps to be filled. This should be a collaborative process involving upper management, IT business stakeholders, and functional experts. Reimagine your architecture and applications. Your functional requirements will determine the IT architecture and applications needed to achieve your goals. Start with a “fit-gap” analysis to see how many functional requirements can be met with commercially available software. Where standard software falls short, decide whether to modify it, create a custom application, or fill the functional gap another way. Find your sweet spot. Your road map should zero in on the project’s “sweet spot,” in terms of scope, risk, timing, and costs. The goal is to reap the
greatest possible business benefit without going overboard on any of those dimensions. Decide whether to take an “evolutionary” approach that reduces the risk of system failures, or a less expensive “big bang” conversion. Most companies outside the banking industry choose evolutionary conversions, staging the migration by region, function, or product line. Support your recommendations with a detailed business case quantifying the financial benefits of each proposed action. A strong business case helps secure funding for the project, forces your project team to focus on capturing the value promised, and provides metrics for measuring success. Capitalize on COTS. IT requirements should determine processes in standard domains such as logistics and financial fulfillment, where commercial offthe-shelf software from outside vendors will be used. Business priorities should shape processes in areas critical to the company’s competitive differentiation, where proprietary systems are needed. Implement and manage the project. Roll out the new IT template following your road map. Aggressively manage the project to ensure that expected benefits are captured. Use financial metrics such as business value and internal rate of return to measure success. A strong program office will keep the project on track toward business objectives, balance competing priorities, and manage expectations.
Don’t let this happen to you
We have found that a few common problems crop up in many retail IT transformation projects. Here’s what to look out for. Misaligned sequencing and poor program control: When the project’s timetable doesn’t line up with business priorities, expensive course corrections often result. A lack of clarity on the roles of various project participants creates confusion and frustration. To avoid sequencing problems, we recommend doing highrisk, high-value work first, and releasing project components in smaller, usable pieces. Allocate accountability based on who’s in a position to control outcomes, not on status. Poor requirements management: We’ve seen projects overwhelmed by the wish lists of various stakeholders when scope isn’t tightly controlled. To avoid mission creep and enforce focus on primary goals, establish criteria that separate critical requirements from nice-to-haves, and don’t try to address every minute business nuance. Inappropriate technical design: IT architecture choices are often loaded onto a major project without an adequate understanding of how they affect project costs, scope, and timing. This adds complexity without contributing to the differentiating capabilities the project is intended to support. It’s important to establish control of the architecture from the outset, and guard against any inclination to use the project as a vehicle for achieving technological objectives that don’t advance business goals. Ineffective procurement controls: We’ve seen many cases where contract terms are too favorable to vendors, or don’t reflect the project’s value and risk profile. Project managers should negotiate with outside vendors based on the potential scope of the work, using contract mechanisms to match the risk and pace of the program.
In our work with IT executives developing multichannel capabilities, we have learned that success flows from five guiding principles. 1. Business objectives, not IT priorities, drive the process; an “end-to-end” perspective keeps the focus on these goals. 2. Standard software is used wherever possible, with modifications kept to a minimum. 3. Project leaders aggressively manage the capture of business benefits, as measured by clear and rigorous criteria. 4. A global template and a strong program office keep project complexity under control. 5. Project leaders invest in change management, through a robust communications effort that wins buy-in from key stakeholders. It is up to the IT organization to give the traditional retailer the tools to compete in a digitized marketplace. Getting there won’t be easy, and will involve a costly, disruptive overhaul of the IT architecture and operating model. But keeping these principles top-of-mind can help you embrace the changes we’ve outlined — enabling you to keep your current customers, and compete successfully for new ones in the digital era.
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This report was originally published by Booz & Company in 2013.
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