Retail IT: Alignment Woes Plus Legacy Application Costs Equal Big Trouble Now

The majority of retailers are struggling to survive due to deep cuts in consumer spending that are unlikely to reverse course any time soon. March’s disappointing retail results evinced more of the same: Most consumers are terrified to spend any money.

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But the recession and the subsequent sea of red ink on retailers’ bottom lines are also shining a harsh light on retail IT departments—in turmoil because they are out of alignment with business peers on core strategy and governance issues and beset with legacy application maintenance costs and snowballing tech-project backlogs.

That’s according to a soon-to-be released survey report, “IT and Business Alignment in Retail Benchmark Study 2009,” authored by RSR Research managing partners Brian Kilcourse and Paula Rosenblum. (RSR conducted the online survey in February 2009 and received answers from 85 respondents representing a mix of business and IT executives and managers.)

The seriousness of the RSR data as well as the insight and analysis from Kilcourse and Rosenblum (two former retail CIOs) paint a nightmarish, paradoxical scenario: While retail executives are seemingly disinterested in technology, they know they are increasingly dependent on IT. For instance, retailers are keenly aware of the need to delight today’s customer with “wow factor” service options; but they also need to cut and manage their own operational expenses, Kilcourse and Rosenblum point out.

Which is where IT usually comes to the rescue. Right? Not so fast, according to the survey.

Kilcourse and Rosenblum argue in the report that the IT department, traditionally known as the “ugly stepchild of many retail operations,” should be in the prime position to help retailers achieve corporate objectives.

However, the business side’s perceptions of IT leaders and the department are hurting IT’s potential impact. Those perceptions: IT is a huge, uncontrolled cost center and the business side has concerns about how to accurately measure the performance and impact of IT, note Kilcourse and Rosenblum. (One piece of evidence in line with that attitude: Retailers spent just 2.9 percent of revenues on IT, according to CIO‘s 2009 “State of the CIO” survey data. Compare that with financial services, for instance, which spends 7.7 percent of revenues on IT.)

In addition, and perhaps most damning, is this detail about the business-IT relationship in the retail industry, say Kilcourse and Rosenblum: “The language of IT is foreign to the [retail] business. Businesspeople don’t understand IT, and they don’t want to.”

Retail Business Doesn’t Get IT

The RSR data shows that, today, it is largely up to IT leaders to reach out to the business side on such critical topics as setting IT’s strategic direction: 58 percent of survey respondents say that IT leadership is largely responsible for connecting to business department leaders.

According to the survey data, 71 percent of “laggard IT shops” lack any strategic direction or prioritization from the business. (The report codifies those retailers surveyed into three groups: winners, average performers and laggards.) “Their IT functions are treading water, spending money and time just keeping legacy portfolios up and running,” notes the report.

Kilcourse and Rosenblum write, however, that the business mantra of “IT just doesn’t understand our business requirements” is a dated, impractical excuse for business leaders. The RSR data showed that, in a break from the past, less than 20 percent of respondents reported that IT’s unwillingness to change and inability to keep up with the business was a top-three organizational inhibitor to retailer success.

The RSR authors contend that 21st century realities dictate that “Business leaders need to understand the value IT can bring to their departments.” And, in fact, the data shows that those winning retailers who outperform their peers “clearly depend more on these business leaders to help set the technology agenda.”

IT’s Notorious Legacy

But the perils of “legacy” thinking by retailers isn’t just reserved for the business suite. Inside IT today are the technological vestiges of the retail IT crowd’s long-held belief that packaged applications just couldn’t work for them. Many retailers are now asking themselves if proprietary processes in their operations—particularly in the non-selling functions—really creates value for the consumer, or just creates more cost, write Kilcourse and Rosenblum.

The RSR study notes that legacy application maintenance—in big and small retailing operations alike—still takes up an inordinate amount of IT human and financial resources. “IT is in a vicious endless loop,” write the authors. “For almost half our respondents [48 percent], the care and feeding of legacy portfolios consumes the operating budget, even as the capital required to integrate into those portfolios renders new solutions unaffordable.”

And any new system integration is nearly doomed from the start, the authors say. “Integrating any new application requires so much time and money it practically destroys the return on investment to be derived from new initiatives,” the authors add.

The result of all of this: The IT project backlog continues to grow and, most likely, frustrate line of business execs and users. Seventy-five percent of retailers with revenue greater than $5 billion dollars a year, for instance, report a growing backlog.

“There’s a general sense on all sides that IT could be doing better,” the authors write, “but even the best are somewhat at a loss to figure out how to work collaboratively to enhance relationships.”

Opportunities for Improvement: Beyond Slashing Prices

Retailers are now trying to ride out the storm: “They have cut costs, hoarded cash and reduced inventory by cutting orders and running sales and unprecedented promotions,” notes a recent New York Times article on the retail industry. “Now, they must wait.”

Inside IT departments, there’s no time to wait. The RSR study notes that “most retailers have abandoned the practice of internally developing their systems. Retail “winners” especially have moved more “aggressively toward commercially available solutions, particularly compared to their lesser performing peers.” (See “How Wal-Mart Lost Its Technology Edge,” for the inside story of Wal-Mart’s conversion.)

That’s a huge first step, the authors say. Ridding enterprisewide legacy is another important task: 50 percent of the survey respondents have either recently moved to replace, or are planning to replace their legacy applications with either best of breed or end-to-end apps, notes the report.

Next, Kilcourse and Rosenblum note that “the single biggest opportunity to overcome roadblocks wasn’t about technology per se,” they write. “Resoundingly, retailers across all revenue tiers agreed that the best way to overcome inhibitors and address challenges and opportunities is by empowering an executive committee to align IT priorities to corporate strategies.”

IT alone cannot drive winning performance right now, note the authors. “A consistently successful retail enterprise has business leaders who understand both the value technology brings to the table,” they write, “and the ‘pain’ of maintaining a portfolio of idiosyncratic legacy applications.”