Economic Pressure Makes Retailers Look to Off-the-Shelf Software to Speed Application Delivery

Retailers have a long history of believing that their processes and businesses are so special that commercial software packages just can’t synch or scale to their needs, says Brian Kilcourse, a managing partner at market researcher Retail Systems Research. Wal-Mart, for instance, had forever developed software in-house because it maintained that packaged software couldn’t scale to meet its enormous requirements. (See “How Wal-Mart Lost Its Technology Edge.”)

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“Retailers are notorious for feeling that their internal business processes are too unique and have to be supported by building their own code,” says Kilcourse, who was a retail CIO for 10 years. In addition, retailers are also known for treating IT like the red-haired stepchild, creating a stifling “just keep the lights on” environment for IT departments. “Retail technologists are not stupid people,” Kilcourse notes, “they just have no money.”

So with an “IT on the cheap” and “no off-the-shelf package can help us” mindset, retail IT departments have, over the years, struggled to deliver applications on time and on budget. Recent RSR survey data of 73 respondents, predominately from IT departments, found that IT is plagued by two basic challenges: managing the application portfolio (and resultant backlog) and aligning business and IT priorities. (See “How IT Systems Can Help Starbucks Fix Itself” for more on Starbucks transformation.)

In addition, 36 percent of retail IT organizations surveyed said they were spending between 25 percent to 49 percent of their application development resources on maintenance of existing applications rather than on developing new and high-value IT capabilities. Remarkably, 34 percent were putting more than half of their resources toward “keeping the lights on,” writes Kilcourse in “The Future of Application Delivery in Retail: Benchmark Study 2008” report.

All of these critical trends have, in turn, created a challenging IT environment. (See “Did IT Help Wal-Mart’s Quarterly Financial Results?” for an inside look at Wal-Mart’s recent IT strategies.)

“Across the board,” Kilcourse says, “retailers are looking at ways to speed up the value delivery.”

Retailers Dispel the ‘Software Not Developed Here Is No Good’ Myth

The answer that many retailers have recently discovered is that off-the-shelf software alternatives for ERP, CRM, business intelligence and supply chain management are plenty robust for their environments. In late 2007, for example, Wal-Mart announced that it had purchased SAP’s ERP Financials product to “support the retailer’s global expansion and its need to efficiently respond to changes in the business and regulatory landscape.” (For more, see “Wal-Mart Buys SAP Financials.”)

The RSR survey results bear that out: Just 2 percent of the respondents said that proprietary software development will be the method to replace old applications; 42 percent said opportunities to improve IT development processes included SaaS delivery models, a huge shift from a 2007 RSR survey which found that 70 percent of respondents expressed either “low” or “no” expectations for SaaS as an option; and 32 percent said that replacing legacy applications with new best-of-breed application was another important IT opportunity.

“Retailers no longer see proprietary systems as positive differentiators from their competitors,” Kilcourse writes in the report.

What’s interesting to note, however, is that retailers still appear reluctant to completely buy into packaged software. In spite of the fact that more retailers are implementing commercial and SaaS options than in previous years, when asked in the RSR survey if they thought the functionality inside the packages was better than what they could have come up with, “by and large they said no,” Kilcourse says.

“What that says to me is: They’re in a hurry,” he adds. “They’re willing to sacrifice some proprietary feeling that they could do it better if they had time to get it done.”

Process Change Will Be Difficult for Retailers

Despite the complexity of their legacy back-office environments, many retailers’ toughest challenge may be getting everyone to change entrenched business processes.

“Retail winners” in the survey, defined by RSR as those that satisfy Wall Street and have year-over-year comparable store sales improvements, expressed concern that the business side “would not re-engineer their process to take advantage of the full features and functionality in the commercial applications,” Kilcourse says.

But it appears to those surveyed that change is absolutely necessary. Retailer CEOs and CFOs are “genuinely aware that technology is bubbling to the top as a potential inhibitor for them to compete, and that’s new for them,” Kilcourse says. “Traditionally, IT was just a back-office function, but now they’re seeing more clearly than ever before that the lack of technology enablements is preventing them from being winners.”

At the end of the day, retailers “have to be careful in determining what’s important and what’s really interesting,” Kilcourse adds. “Most business processes are not strategic simply by being different.”

If retailers don’t conform their business practices to the implied “best practices” inherent in many commercial applications, Kilcourse writes in the report, “then the alternative is to modify the vendor’s code to suit existing business practices.” This is not smart, however, since it drives down the potential for business value realization and drives up the IT cost of ownership of the resulting application, Kilcourse contends.

The overall message from the survey results, however, is encouraging for retailers. “There’s much more willingness than I’ve seen in the past,” Kilcourse says. “They’re willing to consider different delivery options and they’re willing to consider commercial packages that get them most of what they need—so long as they can do it fast and the ongoing cost of supporting that is lower than the current model.”