In 2005, retail chief information officers will spend their days irked and amused, inspired and confused, held accountable for the unpredictable and measuring the intangible.
No win? No way.
Though technology simplifies tasks and communications for everyone except those charged with juggling it all, cio’s embrace this Gordian knot. When centrally managed systems gave way to today’s decentralized computing, the knot’s threads became finer, tighter and more numerous to enfold an intricate network of older workhorse technology and newer analytical tools. Achieving harmony in so diverse an environment is getting increasingly tough.
That’s only the technology part. Inject ever-changing processes and people issues into the mix and it guarantees to add up to a year filled with promises, challenges, surprises and opportunities like no other, according to six retail technology executives who spoke with WWD.
Managing customer data properly is crucial, they said. Radio frequency identification can wait, but must be watched, they agreed. Demystifying the rapidly shifting technology marketplace cannot wait. A robust systems infrastructure is no longer a nice-to-have; it’s a must. Sarbanes-Oxley instills angst, but has an upside. Projects must deliver a return on investment if cio’s are to regain credibility lost in the dot-com craze. New technology, such as customer relationship management and wireless communications, promise great benefits, but can easily backfire, alienating shoppers and breaching security.
The six executives who dissected the issues, in separate interviews, included Phillip Maxwell, senior vice president, cio, Neiman Marcus Group; Ron Ehlers, vice president, information services, Pacific Sunwear of California; Peter Burrows, senior vice president, cio, Reebok International; Paul McFarren, senior vice president, cio, United Retail Group; Jeffrey Orton, cio and vice president of logistics, Wilsons The Leather Experts, and Michael Stanek, chief financial officer, Northern Group Retail.
Cio’s Adapt to Regain Credibility
The cio’s role is evolving so rapidly that the only absolute consensus is that it is no longer what it used to be. Retail’s technology czars once occupied an ivory tower from which they dictated certain technologies should be adopted. Unsophisticated users of technology were in no position to challenge their decisions.
However, as technology has made its way from office desktops to schools, homes, purses and backpacks, almost everyone from cashiers to chief executives has become technology-savvy. And more demanding. Cio’s were catapulted from their comfy isolation to the hot seat, where technology decisions are more closely scrutinized from a strategic, and not just tactical, standpoint. Many traditional technologists got out. The versatile stayed and seem to revel in the absurdity that comes with the job, as evidenced by the sudden laughs that punctuate their vernacular.
To launch new technology initiatives, many of which can be disruptive to the business, cio’s need full confidence of senior management. Happily, cio’s are gaining ground here.
“You are seeing a stronger relationship between the cio and the ceo, as far as using technology to support strategies of the company,” said Ehlers of the $1 billion Pacific Sunwear. “This has been building for some time, but I am seeing more and more of that.”
McFarren of United Retail Group said companies are willing to grant the cio a seat at strategy sessions, but cio’s must first prove they are qualified to perform as business people, accountable for results. Not all are. “Many cio’s almost purposely limit their exposure to that seat simply because they limit their willingness to accept responsibility on those issues that are technology-related,” he said.
For example, said Wilsons’ Orton, if stores fail to poll — that is, transmit sales data to corporate systems — old-school cio’s might blame the telecom provider, whose communication lines were down, or the stores, for not following procedure. But to build credibility, cio’s must take responsibility. “Business people are accountable for things they don’t have 100 percent control over, and they figure out how to manage it,” Orton said. Cio’s must do likewise.
Cio’s credibility suffered during the Internet frenzy in the late Nineties when exuberant ones insisted they lead their companies’ online business models without fully understanding business drivers. “We were demanding that more than earning that,” said Orton. “I think we were a little brash.” Now, he said, cio’s are sharpening their business skills to deliver systems that align with business objectives.
“That is on the upswing,” Orton said. “There are more and more cio’s who would say they have got to be business people first, and not technologists.” Business people value ROI, and cio’s who deliver on that expectation raise their stature and their ability to bring positive change. “I don’t think you can do anything without being ROI-focused in this world,” said Stanek of Northern Group Retail, a 275-store apparel retailer in Canada.
“This morning, our president, myself and our cio had a two-hour meeting going through priorities for [this year] and it’s all value- and ROI-prioritized,” he said. As cfo for the company, Stanek is leading a turnaround effort and an expansive technology systems rollout made necessary by Northern’s 2001 spin-off from Footlocker.
Ehlers is ROI-focused and that’s why he is watching developments in RFID, rather than investing in the technology. Cio’s told WWD they are still in a wait-and-see mode on the technology. (See related story, page 8.)
“We are certainly watching what is going on at Target and Wal-Mart, of course. It is just not something that we have the time or the dollars to invest for really no return,” Ehlers said.
A recent project that delivered a rapid ROI at Pacific Sunwear of California was a “no-brainer,” Ehlers said. When the 990-store retailer discovered last year that half its card-based payments were debit cards, it spent $350,000 for PIN-pad devices. Now that it’s equipped to accept shoppers’ personal identification numbers for debit transactions, which carry lower processing fees than signature-based transactions, the retailer estimates it will save $1 million a year in fees.
“We put it in for back-to-school and the project was paid for by the time we got out of back-to-school,” he said. “It was a huge win.”
For many important technology projects, an ROI is difficult to calculate. It is here that cio’s are asked to measure the unmeasurable and cost-justify investments that deliver soft benefits. Articulating an ROI is no easy matter for investments in systems infrastructure, the underlying foundation supporting all technology. However, it’s as essential to running a business as electricity.
Sarbanes-Oxley No Easy Trick
Developing an ROI for technology investments made necessary by new financial reporting requirements, such as the Sarbanes-Oxley Act, is also difficult. Putting new controls in place is not optional and its benefit may be keeping the ceo out of jail. Though they generally agree with Sarbanes-Oxley’s aim to impose better reporting discipline and financial controls, complying with the new law is one of cio’s most vexing challenges today.
“It is just wearing us out now. It is so frustrating,” said Burrows of Reebok, the $3.5 billon footwear and apparel company. “It started as a law of good intent, but it probably is not going to get the kind of benefit anybody envisioned it would get.” He said companies’ audit fees have doubled as a result and that will become evident in fourth-quarter earnings reports.
At $396 million United Retail Group, McFarren is responsible for Sarbanes-Oxley compliance. “It is a huge opportunity for cio’s,” he said. “What better way to improve your understanding of the business than to write the control processes for the business? For all the legislative garbage around Sarbanes-Oxley, when you get by all that and you understand the real intent — that it has as its basis a very sound business objective — that takes a little of the pain away.”
Investments in customer relationship management systems also are hard to cost-justify in concrete terms because the technology’s tentacles touch nearly every aspect of the business. If CRM enhances a shopper’s experience and builds loyalty, how can that benefit be quantified?
It’s these conundrums that torment, and amuse, retail cio’s.
Management of customer data has never been so critical, or complex, given the multiple channels where retailers operate. Retailers put CRM high on their list of priorities. (See related story, page 9.)
Maxwell of the $3.5 billion Neiman Marcus is skeptical about the proven value of CRM technology today, but said ensuring that customer data is synchronized across all channels is crucial. Companies should confront the question of are they truly multichannel, or merely operating in multiple channels, he said. The former will ensure that data is properly integrated across the enterprise so that, if customers call to update a mailing address, for example, they need to provide that information only once and it is fed into all the retailer’s databases, from credit to marketing and sales.
“Customer data is clearly key because that is your interface with people buying product,” he said. A customer loyal to a retailer’s store expects to be welcomed as such when visiting that retailer’s Web site. Without data synchronized across all channels, that customer will be treated as a stranger when placing an online order.
Maxwell is optimistic that the technology needed to handle data and extract intelligence from it is becoming available.
“We are getting tools now that are better at managing data, mining the data. Whether it be in product control, or pricing or markdowns or in customers, people are able to do things now, instead of just having a lot of data and not being able to work with it much.” With precise knowledge of what people are buying and not buying, he said, retailers can better focus their marketing efforts.
Optimization software of all flavors — price, planning, markdown, assortment — is gaining fans from all over. Such systems are loaded with great volumes of historical sales data and other information. Then, mathematical algorithms are applied to produce recommendations such as an optimum price point that will maximize sell-through of a particular garment.
“I think the industry is very focused on assortment planning — you know, if I buy the right stuff, and put it at the right price, in the right color and size, in the right store, I will sell as many as I can at full price,” said Stanek. Optimization software is not plug-and-play, he warned. “You can’t just turn on the switch because it is so complicated.”
Wireless Entices, Raises Security Concerns
New opportunities for deploying wireless technology fires the imagination of Ehlers. “Wireless plays a big role in everything we are looking at now, and how we can incorporate wireless securely,” he said. The retailer already is using wireless to support internal operations, but also is investigating how it might use wireless to communicate with its customers via their own cell phones and PDAs.
“Those are exciting possibilities,” he said, “especially when you are dealing with a teenage customer who tends to be an early adopter of those types of things.”
One hang-up to deploying wireless technology is security. It is here where cio’s must play gatekeeper to protect the company’s assets.
“Anybody can buy a wireless card for their PC. But, depending on how you deploy that wireless, you could be exposing corporate data to hackers,” said Burrows. He said one of Reebok’s remote sites experimented with wireless, “and within five minutes, we demonstrated we could hack that network” — and outsiders could, too. “You have to stay on top of that stuff,” Burrows said. “People don’t always understand why you are not letting them do certain things.”
Said Maxwell: “Security is going to continue to be a big issue. There is the ongoing virus and outside intrusion protection. You also have to look at security from a regulatory point of view, things driven by Sarbanes-Oxley.”
Security becomes a more complicated issue for retailers not only because of Sarbanes-Oxley’s requirements, but because of new opportunities to link more closely with their technology partners. Orton calls this evolving relationship the “extended enterprise.” It goes beyond a vendor selling software to a retailer; it calls for the vendor to devote time, talent, expertise and other resources to help the retailer achieve specific business objectives.
“As you enter this more connected world, you are complicating security and you are complicating Sarbanes-Oxley compliance,” Orton said. Still, it is a challenge worth tackling in exchange for the benefits of the extended enterprise.
Exploitation at Its Best
With all the tantalizing new technologies to consider, cio’s as businesspeople are stopping and taking a breath to ask: Are we fully leveraging the technology investments we’ve already made?
“A lot of us have gone through some major implementations and I am not convinced that we are squeezing out all the juice we have,” said Stanek.
“I would agree with that statement 100 percent,” said Ehlers. “The fact is, there is a lot of functionality in most packaged applications, and unless you have a power user who’s willing to dig deep and figure out how things work — exploit the full capacity of the software — you are always on to the next thing, and you don’t have time to fully exploit everything that you delivered.”
To address this opportunity, Pacific Sunwear is considering bringing in trainers who would work with new hires and retrain existing staff to eke out more value from software. Pacific Sunwear’s go-go growth, from about 100 stores and $100 million in sales 10 years ago to today’s nearly 1,000 stores and a billion dollars in sales did not afford the luxury of learning all facets of every application.
Neiman Marcus is looking at how it can fully leverage an enterprise resource planning system installed a couple of years ago. ERP is an all-encompassing set of applications that automate and integrate key business functions such as finance, human resources, sales, manufacturing and customer service.
Maxwell said: “I have challenged my ERP support group [and said], ‘OK, guys. We put it in. It runs smoothly. It does the job. But it has a whole lot more horsepower than our old system. How can we better use it?’”
Whether it’s exploring new technology or reviewing existing technology, cio’s are keenly aware that what matters is the impact of technology on shoppers.
“Every day, people are forming judgments in their minds about what is a good experience and what is a bad experience with technology,” said Burrows.
“When you are deploying technology, you are being measured against this standard. We are not sure what that standard is, but people are forming it.” The Google search engine, for instance, is so user-friendly that consumers incorporate it into their daily lives.
Burrows said if Google is consumers’ point of reference, the standard with which other technology is compared, it’s a pretty tall order. To satisfy shoppers’ expectations on what makes a good experience, retailers must gain a deeper understanding of how consumers use technology.
“Am I worried about this? Yeah, I’m worried because I don’t think we understand how people are using technology. I’m not losing sleep over it, though. I think it’s kind of exciting.”