Wal-Mart Goes Outside for IT Help
Wal-Mart is known for going it alone when it comes to developing applications for its information technology needs. That’s what made the company’s decision to go outside and hire SAP to develop financial planning software news in IT circles.
The world’s largest retailer said it chose SAP after concluding that its own internally developed program was not scalable to Wal-Mart’s needs.
Tom Schoewe, Wal-Mart chief financial officer, told the Financial Times, “The efficiency of our home-grown system has not kept pace with the corporation’s growth.”
Mr. Schoewe said the SAP system would “be expensive to implement, but it will be far more efficient once we’re up and running and … it is scalable. As you continue to see us grow, enter new countries, it’s something that can accommodate that better than our home-grown solution.”
Wal-Mart is rolling out the SAP program in stages with the first phase expected to be completed within two years while stages two and three going live between three and five years.
While Wal-Mart went outside to tap the expertise of SAP to handle this project, the retailer has not given any real indication that it intends to change its practice of developing applications internally.
Discussion Questions: Do you see Wal-Mart’s decision to use SAP to develop financial planning applications as significant and does it suggest a shift in the company’s practice of coming up with information technology solutions internally? Is the trend within retailing moving away or towards using third-party vendors? What do you see as the pros and cons associated with an internal approach versus going outside?
Any decision Wal-Mart makes is significant in this industry. The fact that they selected SAP is especially interesting, and will probably give SAP more traction in an area that Oracle (now with Hyperion) typically excels: financial planning.
As for the pros and cons, I think internally developed systems will typically allow retailers to develop and support their own custom processes, in some cases giving them a competitive advantage, especially with key processes like payroll and merchandise planning. However, there is a higher development and maintenance cost, so we really need to ask ourselves: do we have enough unique process aspects and do they gain us enough to warrant the expense associated with a custom system? If not, we should conform our processes to the packaged application and realize the savings.
And for those of you who are reading this, saying we can customize packages, remember enough customizations end up making your package just as expensive to upgrade and maintain as your internal solution! Honestly, Wal-Mart may end up customizing, and maybe that’s okay for Wal-Mart because SAP will probably support their customizations, where for most of us we’re on our own once we customize.
My personal preference is the small, emerging group of applications that offer “building blocks”–they have standard components for things like locking and spreading and for calculation algorithms, but customizable interfaces to accommodate any business process. They have the potential to offer us the best of both worlds, and are way more cost effective than packages or custom solutions.
Very interesting and certainly out of the mold for Wal-Mart. The trend has been moving toward third party vendors for some time but you occasionally run into rebels like Wal-Mart or Walgreens that have the money to build the IT infrastructure to develop inside. Developing software inside is a risky experience, like with Dell Computers. Several years ago the IT department became unhappy and decided to quit; they lost all domain knowledge and had to patch the software first, before starting all over from scratch. A retailer in NJ has a three person IT department supporting their custom software package. That’s risky business because usually these guys are good at writing code but horrible about documentation, training and all the other tools that make the system run more efficiently.
If a true analysis is done over the long run, investing in a software partner to handle your software requirements is a smarter/better decision.
I’m not sure what the big deal is here. Wal-Mart has been using third party software and hardware for years. Their data warehouse software, which supports Retail Link, comes from a major vendor. They are testing a data appliance for certain functions. They have price optimization, forecasting and RFID technology from smaller vendors. Wal-Mart has previously reported they work with Teradata (Disclosure: Teradata is a RAM Communications client), HP and a few others supporting the RFID initiative, although they are definitely shy about announcing their technology relationships. This is a long way to say that it’s not surprising to hear about the Wal-Mart relationship with SAP, especially now that SAP has made good progress with its retail offering, which used to have some significant limitations.
Wal-Mart has long been shopping 3rd party vendors for all types of internal tools, including the infamous Retail Link. Wal-Mart is simply exercising their rightful place in the market as a “consumer” seeking best value for their needs. They are not alone in their decisions, as evidenced by the success of dunnhumby at Kroger and other emerging niche “solution” designers.
There is no question that 3rd party vendors have a solid place in the retail community. The only questions are how many are needed and at what point does having too many custom solutions lead to inefficiency?
We just published research on the wider question asked here, which is, are retailers moving away from internally developed applications, and according to our survey takers, the answer is yes. I’m not saying that it will disappear, but the maintenance burden of supporting internally developed applications and custom integration is rapidly becoming overwhelming, and crowding out the capacity for innovation. Given how quickly consumer shopping behavior is evolving, thanks to eCommerce and emerging trends in mobile commerce and social networks, retailers who can’t keep up on the technology that enables their business processes are risking a lot. From our survey data, it appears that they are realizing the risk, and starting to think about packaged apps as a way to ease the burden. The challenge is getting over the implementation hump–5 years for financials, even for a company the size of Wal-Mart, is a very long time.
I agree with Nikki: five years is an appalling length of time to implement anything. Yes, Wal-Mart is a big company, but the five year time line should ring alarm bells.