August 7, 2008
IT Spending Up Even as Cuts Made Elsewhere
Retailers are continuing to invest in information technology despite all the various economic factors that are causing chains to cut back in many other operational areas. This development, according to RIS News, represents a fundamental change from how companies have reacted during past economic slowdowns.
Bill McDermott, president and CEO, global field operations and executive board member of SAP AG, is among those who have seen retailers continue to invest in IT.
“CEOs are putting technology on the short list of capital investment,” Mr. McDermott told RIS News. “They are putting their corporations in a position to build muscle mass during a down time. Certainly compliance factors are driving IT investment, but more importantly CEOs want to position themselves to win against their competitors, and technology can make this happen.”
According to Mr. McDermott, “this is the best time to invest in technology that will get your application platform strategy right and deliver strong returns when the market rebounds.”
Discussion Questions: Why do you think that companies are continuing to invest in IT while cutting back in other areas? What specific areas of IT do you think are getting those increased investment dollars? What is the payback?
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Companies are realizing that the advantage of information can make them more competitive, attract more customers and reduce cost. They are also realizing that the systems they bought 10 years ago are antiquated and cannot support them in the future for growth.
New system spends will include vendor portals to achieve vendor managed inventory VMI, transportation management system TMS to reduce logistics costs, aka rising transportation costs. Warehouse management Systems WMS to reduce costs in the distribution center. Another area of spend is CRM, customer relationship management software.
All this software has a strong ROI (Usually less than 12 month payback) and will help propel the business in the future.
The true reason that IT Budgets have become “less elastic” is that they are comprised of fewer variable costs. Between software licenses, outsourcing contracts, and hardware leases there are very few places the modern IT budget can be reduced. Companies don’t have large internal IT staffs, where reduction in new projects can lead to cutbacks in development staff until a turnaround occurs.
I believe what you will see over the next few years is more retailers turning the whole IT process over to outsiders with contracts based on sales volume or transaction rates so that IT costs can be better aligned with the volume of business they support.
While IT spending is a priority for retail CEOs as evidenced at NRF every January, it can’t overcome the fact they gave up on training customer service/sales years ago. Now it is the blind leading the blind on the floors of Macy’s, Lord & Taylor and Brooks Bros. How long will this be allowed to go on before someone “gets it”? Success isn’t in the gadgets, it’s in the people.
We are seeing evidence of this every day (in the customer marketing, CRM and loyalty space) and it’s simply a function of the opportunity for retailers to better identify, track and be more relevant to their customers. It is an increasingly easy business case to make as the soft economy makes it that much harder to attract new customers.
The discounters aside, where retailers are seeing positive numbers are from existing customers, where they can identify and measure them.
Productivity, productivity and productivity. Follow the ROI and money, and blur the lines of distinction defining IT (phones, cash registers, scanners are all part of IT now) and you have an expanding definition of a growing category.
IT offers a tremendous set of tools that can do anything from enhanced recording, reporting and communication to decreased shrink, handling and better shelf management (along with the entire retail logistics cycle). This translates into higher productivity, lower costs, improved ROI (and profits), depending on the initial IT sunk cost and how long it takes to pay-off the initial investment. Spread the sunk cost, broaden the areas that each set of tools impacts, and you have a mantra that continually grows a business without actually improving the top line (revenues).
One reason that retail spending isn’t plummeting is because it’s so low already.
Other industries marvel at retail’s ability keep the lights on with IT budgets so tiny. Given the fact that technology projects routinely generate new revenue, it would be counterproductive to shelve them.
The great peak of retailer IT spending was the late 1990s, solely based on the Y2K panic. There was the mad rush to ERP systems and POS software replacement to beat the 12/31/1999 deadline. Then it got very quiet. Yes, there’s still some activity, but it’s nothing like 1999. It’s very common to find major chains still using POS equipment that’s over 10 years old. Maybe the NRF could run a contest: oldest POS equipment still in use by a national chain.
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Companies are realizing that the advantage of information can make them more competitive, attract more customers and reduce cost. They are also realizing that the systems they bought 10 years ago are antiquated and cannot support them in the future for growth.
New system spends will include vendor portals to achieve vendor managed inventory VMI, transportation management system TMS to reduce logistics costs, aka rising transportation costs. Warehouse management Systems WMS to reduce costs in the distribution center. Another area of spend is CRM, customer relationship management software.
All this software has a strong ROI (Usually less than 12 month payback) and will help propel the business in the future.
The true reason that IT Budgets have become “less elastic” is that they are comprised of fewer variable costs. Between software licenses, outsourcing contracts, and hardware leases there are very few places the modern IT budget can be reduced. Companies don’t have large internal IT staffs, where reduction in new projects can lead to cutbacks in development staff until a turnaround occurs.
I believe what you will see over the next few years is more retailers turning the whole IT process over to outsiders with contracts based on sales volume or transaction rates so that IT costs can be better aligned with the volume of business they support.
While IT spending is a priority for retail CEOs as evidenced at NRF every January, it can’t overcome the fact they gave up on training customer service/sales years ago. Now it is the blind leading the blind on the floors of Macy’s, Lord & Taylor and Brooks Bros. How long will this be allowed to go on before someone “gets it”? Success isn’t in the gadgets, it’s in the people.
We are seeing evidence of this every day (in the customer marketing, CRM and loyalty space) and it’s simply a function of the opportunity for retailers to better identify, track and be more relevant to their customers. It is an increasingly easy business case to make as the soft economy makes it that much harder to attract new customers.
The discounters aside, where retailers are seeing positive numbers are from existing customers, where they can identify and measure them.
Productivity, productivity and productivity. Follow the ROI and money, and blur the lines of distinction defining IT (phones, cash registers, scanners are all part of IT now) and you have an expanding definition of a growing category.
IT offers a tremendous set of tools that can do anything from enhanced recording, reporting and communication to decreased shrink, handling and better shelf management (along with the entire retail logistics cycle). This translates into higher productivity, lower costs, improved ROI (and profits), depending on the initial IT sunk cost and how long it takes to pay-off the initial investment. Spread the sunk cost, broaden the areas that each set of tools impacts, and you have a mantra that continually grows a business without actually improving the top line (revenues).
One reason that retail spending isn’t plummeting is because it’s so low already.
Other industries marvel at retail’s ability keep the lights on with IT budgets so tiny. Given the fact that technology projects routinely generate new revenue, it would be counterproductive to shelve them.
The great peak of retailer IT spending was the late 1990s, solely based on the Y2K panic. There was the mad rush to ERP systems and POS software replacement to beat the 12/31/1999 deadline. Then it got very quiet. Yes, there’s still some activity, but it’s nothing like 1999. It’s very common to find major chains still using POS equipment that’s over 10 years old. Maybe the NRF could run a contest: oldest POS equipment still in use by a national chain.