RSR Research: IT Spending – In Spite or Because of Economic Uncertainty?

Discussion
Mar 13, 2008

By Brian Kilcourse, Managing Partner, Retail Systems Research

Through a special arrangement, what follows is an excerpt of a current article from Retail Paradox, RSR Research’s weekly analysis on emerging issues facing retailers, presented here for discussion.

Last week, a well-known analyst firm warned companies to start now to cut back on IT spending in the face of what looks like rocky economic times. While it’s certainly understandable that companies might respond in that fashion, recent RSR research suggests that a more measured approach might be in order, for these reasons:

First, capital is cheap at the moment.

Second, our recent research, for example in a soon-to-be released analysis on multi-channel retailing, suggests that retailers are at a point where the appropriate use of new technologies to enable their business processes actually lowers their operational costs, not raises them (and, the cost of money helps this!).

Third, technology is not the solution, but the enabler. If the business redesigns a process to eliminate handoffs and streamline the path between start and finish, then the thoughtful application of information technology makes that process go much faster and enables the business to scale it up and accelerate value delivery.

A fourth reason is that the IT organizations in many companies, and in retail companies particularly, have spent the last several years in deep “cost control” mode, which was the result of overspending in the “dot-com” era. In an earlier Retail Paradox weekly article, Restoration Hardware CIO Jim Brownell stated, “In the Y2K and dot-com period, we more-or-less drove the bus, and the truth is, we spent way too much money. So our penance for that was to be pushed back into the organization, and be a cost management organization reporting to CFO’s – IT took a back seat.” The above mentioned analyst firm’s advice presupposes a certain lack of fiscal discipline – which shouldn’t be the case after so many years of “penance.”

In a RSR survey of over 100 retailers concerning their multi-channel efforts, responses indicated that while most have improved the cost structure that supports multi-channel operations and have turned those efficiencies into delivering more profitable customers in the last two years, improving operational efficiencies remains a high priority for all retailers. When we asked retailers, “What are the top organizational inhibitors that currently present a barrier to your company becoming an efficient multi-channel retailer?,” their responses make it clear that their legacy technologies are a stubborn inhibitor to progress, and one that they seek to address in order to meet consumers’ expectations that all channels work together to enable a seamless experience.

The multi-channel example is indicative of the bigger issue, and that is that winners accelerate business value delivery during times of economic uncertainty while laggards hunker down. If the past is prologue, winners will focus on pragmatic “today” technology
decisions that:

  • Are able to be implemented in less than a year
  • Consider lease/finance options
  • Deliver a quick return.

RSR research shows that specific “Quick Hit Choices” include:

  • Task Management
  • BI Everywhere
  • Price Optimization
  • Recruiting/On-Boarding

Discussion Question: Should retailers be decreasing, maintaining or increasing IT budgets during more uncertain economic times? Should the IT investment strategy change where certain areas are stressed over others? Is there something different about where we are in technology adoption that makes investment strategies different for this economic downturn?

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10 Comments on "RSR Research: IT Spending – In Spite or Because of Economic Uncertainty?"


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M. Jericho Banks PhD
Guest
M. Jericho Banks PhD
14 years 2 months ago
While some might demur, realists tend to agree that IT remains a voodoo department. Most folks don’t understand exactly how “it” works, and IT departments like it that way. In fact, they perpetuate their mystical mysterious image every chance they get. And that’s why it is also a the most political of departments in every retail company. We’re all familiar with how politics works inside corporate America. Some departments have clout and some don’t, and the reasons and departments vary from company to company. However, IT departments always, always, always have significant clout disproportionate to their earnings (none) and their scarcely understood systems expenditures (huge). Their power and influence emanate from the unspoken fact that they can bring any other department to its knees and get away with it. (The proverbial elephant in the room.) Recipe For Fiscal Incongruity: Measure out a huge chunk of IT political clout and blend with their systemic defensiveness about the Legacy systems they convinced management to buy. Allow this mixture to intimidate on low heat for a number of… Read more »
Cathy Hotka
Guest
14 years 2 months ago

I’ve asked 100 retail CIOs so far this year whether their IT spending will rise, fall, or stay flat. The answer provided by the overwhelming majority is that their spending will stay flat, or rise. And the better performing companies say it’s rising.

It isn’t falling because every dollar spent on IT brings in many more dollars in revenue. Companies that think they can save their way through a recession have missed the point — and will lose the game. At a recent meeting of the Retail IT Network, CIOs pointed out that retail is at a precipice, threatened by dramatically shifting shopping patterns, over-storing, commoditization, and other factors that IT can help address.

This is no time to shave a few thousand dollars; and it’s certainly no time to cut vital IT spending.

J. Peter Deeb
Guest
14 years 2 months ago

Now is the time to review your IT initiatives and insure that they are delivering the objectives that have been set. In tough times, projects must be productive. A comprehensive review will turn up resources that can be better used to cut costs, gain efficiencies or better communicate with customers to build business. Unless there is incredible waste uncovered, dollars should be reinvested so that when the economy recovers, retailers are positioned to make even better gains.

Susan Rider
Guest
Susan Rider
14 years 2 months ago
It depends. Usually an IT project is evaluated on the return on investment–both tangible and intangible–that it will achieve. If a retailer has fallen behind on technology and doesn’t invest, the rocky times will be extended past economic downturns. Technology today is very important for garnering and knowing your customers, security, promotion, customer service, etc. If there is a good argument for the expenditure, then the retailer should invest. Example: last year after a client audit of efficiency, I suggested a small IT change in a report that would save the client millions in the next year. The IT department said, “no way” we will not be taking on any new projects for two years. I argued on the defense of the supply chain that this change should take a programmer no more than one day, to no avail. This is an example of a company not seeing the forest for the trees. This kind of leadership and structure will eventually put this company in the dark ages as far as technology is concerned. To… Read more »
Jerry Tutunjian
Guest
Jerry Tutunjian
14 years 2 months ago

While I would generally maintain that it’s a good idea for retailers to stick to their original IT investment plans, I would add the following considerations:

How big is your operation? How sophisticated is your current IT investment? How healthy is your bottom line? What’s competition like in your trading area? What are the demographics in your area: in other words, would your customers be seriously hurt by the economic downturn?

Wise IT investment could put you ahead of the curve as the economy picks up.

Jeffery M. Joyner
Guest
Jeffery M. Joyner
14 years 2 months ago
This is a retailer specific issue. Some retailers are obviously more advanced than others. Also the size of their IT investment differ. This is true even when measured as a percent to their total business revenue. Thus a blanket statement that covers all would be unreasonable. It is true, however, that to varying degrees, retailers have invested in solutions that don’t really give them what’s needed at the “point of battle.” Particularly, those solutions that enable internal teams to make accurate decisions with speed. Once again, this differs by retailer. A plausible argument would be to consider re-investment of some percentage of funds from more global BIG PICTURE IT spending to solutions that are more tactical in nature. Users in the battle need solutions at their disposal when decisions are being made. They should be able to access information without the need to consult with IT every time. With more tactical solutions, retailers can actually create a point of difference for themselves. I offer that retailers are greatly served when their lowest level of competency… Read more »
Gene Hoffman
Guest
Gene Hoffman
14 years 2 months ago

With a less money to spend, what a company does and what it can do in the present is more valuable than to what IT demands new.

James Tenser
Guest
14 years 2 months ago

With the RSR results in mind, a couple of common assumptions about IT are worthy of a fresh look:

First, not all retail IT projects are about cost reduction. Some also help to increase revenue, by enhancing service levels, improving customer experience, increasing margins. Cost-effective solutions that strengthen core equities position the retailer to be a stronger long-term competitor.

Second, not all retail IT projects need to be capital intensive. A number of solutions are delivered on a software as a service (SaaS) basis, which means upfront costs are low and fees are paid per-seat. Where the applications enable improved business process performance, they pay for themselves month after month.

I believe present circumstances call for IT leadership to have a seat at the corporate strategy roundtable. We must step back from the IT-as-finance mindset and consider IT as an enabler for strategic initiatives and superior everyday business process. Winners will invest to improve the top line. You can’t cost-save your way to long-term success.

Keshav Shivdasani
Guest
Keshav Shivdasani
14 years 2 months ago

Retailers should focus their IT efforts on solutions that ensure their merchandising, stores, and vendors execute corporate strategy in the intended fashion to provide a consistently positive customer experience. What good is a brilliant merchandising strategy if stores cannot execute?

Several analyst firms, including RSR Research (above), have released reports in the past month recommending retailers take a close look at task management applications, which retailers can implement quickly to coordinate merchandising planning, streamline communication, and monitor compliance levels in real time. And when task management (TM) is integrated with workforce management (WFM) solutions such as labor scheduling, retailers can ensure they have the proper labor in stores to complete activities that drive increased sales–promotions, new product roll-outs, etc.–while delivering target customer service levels. TM combined with WFM also helps retailers reduce overtime costs and avoid worker lawsuits by staying in compliance with national/regional labor rules.

Mark Lilien
Guest
14 years 2 months ago

Most retailers see IT as a cost, not a cost-saver. And they certainly don’t see IT as a sales generator. Of course, most retailers have mediocre financial results, in good times and bad. They’re the same executives who excuse 100% staff turnover and copycat marketing. Generally it takes folks with the superior vision of breakthrough standards, who love profitable innovation, and have the self-confidence to be leaders, to enjoy superior returns on investment, year after year. If you’re afraid to be different, then your results will be similar to the average Joe. And the average Joe Retailer doesn’t have financials he can brag about.

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