Ask retail executives about their information technology strategy and you will hear a lot about driving efficiencies, quick paybacks and cost controls. Ask what they are spending money on, though, and the panorama opens up to reveal an industry very much in transition and investing in a wide range of technologies.
Retail IT executives cite improving productivity as their top IT strategic goal, yet at the same time, point to the massive role of technology in boosting revenues and improving customer satisfaction as among the most important issues to tackle.
Similarly, executives say, IT budgets are up again in 2005, on top of increased spending in 2004. Chief information officers and senior IT executives view their prime responsibilities more and more as providing guidance to the board and demonstrating business leadership rather than managing the expectations of what benefits will come from technology. And a majority of IT executives now cite technology as one of the core competencies of their company, edging closer to merchandising and store operations as perceived keys to retail success.
Other major findings of the second annual survey of chief information officers and senior IT executives conducted by WWDExecTech and consultancy firm Gartner:
- 89 percent of respondents cited improving productivity as a major component of their current IT spending strategy.
- 75 percent said they deferred some projects planned for 2004 into 2005.
- 64 percent said their ability to command favorable pricing strategies with vendors is increasing.
- 64 percent said their IT budgets are up in 2005.
- 54 percent cited the need for a single view of the customer throughout the organization as either the most or next-to-most important business trend affecting IT, while 53 percent pointed to the need for faster innovation.
- 45 percent of respondents have either started and not yet finished or plan to start in 2005 a major technology upgrade in the areas of data security, 44 percent in demand planning and forecasting, 39 percent in pricing optimization, 36 percent in POS software, and, perhaps most striking, 36 percent global data synchronization.
- 44 percent of respondents are evaluating the feasibility of using radio frequency identification at the carton and pallet level but not launching tests, while 39 percent said they have no plans even to evaluate it.
The survey, conducted over a two-month period in late 2004, provides a sharp picture of an industry in transition, with a mind-set that sometimes seems focused on the past and carries a heavily conservative bent regarding spending views but whose actions reveal investments in technology that are anything but timid.
The state of the industry survey and resulting report on retail technology focused primarily on Tier One large retailers, with 19 percent of respondents from companies with annual revenues of more than $10 billion and 27 percent from companies with revenues between $1 billion and $10 billion. In total, 65 percent of retailers represented in the survey have revenues of $500 million or more.
In terms of survey respondents, the majority held the chief information officer title, 55 percent, or vice president of IT title, 21 percent. Thirty-four percent identified themselves as from a specialty store chain, 24 percent from apparel-footwear and 24 percent grocery. All individual responses to the survey were confidential, with the results presented here in aggregate so as to pinpoint major IT opinions, plans and spending patterns.
Business Alignment and CIO Management Priorities
In a sign of the growing importance of technology to retail success, a huge percentage of executives said their companies’ IT and business strategies were either highly aligned, 49 percent, or close to highly aligned, 34 percent. The large percentage of respondents citing such high levels of alignment between IT and business strategy speaks to the survey’s focus on the largest companies in retail and hence those that are most able to leverage IT across all areas of the company. Yet it also points to the direction of all retail.
“I don’t think this is a good representation of the entire industry, but it is a good representation of where the industry will at some point arrive,” said Jeff Roster, principal analyst, global industries-retail at Stamford, Conn.-based, Gartner. “This should be a wakeup call for any retailer who is not aligned or only somewhat aligned because your competition is. This is a big, big warning sign to the organizations that haven’t built those [IT and business] linkages.”
In terms of management priorities for chief information officer and senior IT executives, the role of providing leadership to the board and strategizing for IT-business linkage ranked at or near the top, as did demonstrating the business value of IT. Priorities that fall lower on the chart are more technical aspects of the job: tightening security and privacy safeguards and managing benefits realization.
“The finding here is that the role of the cio is to be the change agent, to be the person challenging the organization, and if they are not, they are gone. If you are a cio playing scared, you are out. You can’t provide guidance from a scared position. It is a fairly positive spin for the aggressive person. It is a dangerous spin for someone with [the mind-set of a] database manager. It is a business role and I think that is the message there,” Roster said.
“The [relatively] low importance of managing benefits realization might be an example of the fact that a lot of the projects over the last couple of years have been short-term and tactical and not as revolutionary as they were perhaps in the mid- to late-Nineties. So managing benefits realization is not quite as important as providing guidance to the board or demonstrating the business value of IT,” he said.
“It could also be that the boards are becoming a little more business-savvy about the role of technology and so it is more important to guide them than manage benefits realization,” he added.
Asked about the biggest challenges to implementing current IT initiatives, executives pointed to a lack of staffing as the biggest problem, followed closely by lack of funding. When responses citing most challenging and next-to-most challenging were added together, however, business process reengineering also came in high on the list.
“The majority of failures of technology implementations are due to poorly executed business process reengineering. It is typically a people problem more than a technology problem — a lack of staffing, which is historic, and lack of funding. The nice thing is that retailers are beginning to perceive themselves as having the IT expertise to do whatever they need to do. Also, lack of strategic direction is not all that significant. Retailers perceive their strategic direction to be more solid than it had been,” Roster said.
IT Spending: Winners & Losers
A look at what IT executives cited as top priorities with regard to current IT budget spending, increases and decreases in specific areas of spending and overall budget goals reveals more than anything else the complex nature of technology in today’s retail universe.
IT executives have a conservative mind-set — mirroring the industry — when it comes to overall goals and strategies. Yet when asked about specific areas of IT spending increases and decreases, there are few, if any, technology segments that are coming under the knife. In fact, quite the opposite is the case, in general.
Regarding budget goals, the highest percentage of retailers surveyed, almost 90 percent, cited improving productivity as a current IT spending strategy. About two-thirds said continuing with current IT projects was a spending strategy. Slightly less than 40 percent said their goals included cutting IT spending across the board. And about two-thirds said their current IT spending strategy was to extend the business (generate revenues) without adding IT staff. Almost 10 percent said their strategy was to delay new projects and 6 percent to freeze IT spending.
But asked about trends in terms of increases or decreases in specific areas of spending, the picture expanded and became more complex. Few if any areas showed up as ripe for deep budget cuts, and even those that were cited as areas for slashing by some were just as fervently cited by others as areas for more spending. Indeed, the overall picture is one of spending increases in nearly all core IT areas — with only the amount of higher spending, on average, left to be determined.
Retailers are maintaining spending or increasing it, sometimes dramatically, on hardware, software, networking equipment, database management, supply chain and logistics, merchandise planning and internal IT staff. Areas that generated strong responses in terms of the percentage of respondents indicating a slash in spending and percentage citing jumps in spending included wireless devices, external consultants and outsourcing. But even in those cases, the percentage saying they are spending more significantly outweighed the percentage making cuts.
And asked simply to prioritize current budget spending, price optimization ranked high, as did global data synchronization.
“The mind-set is still very much to control spending, but the problem is, you need to do so much because that has been the dominant mind-set for too long. You may want to cut spending but you have to spend because you have to evolve the business,” Roster said.
“When you ask executives what they want to do, you get responses about cutting costs and improving productivity. The data moves back and forth. When you get the questions about ‘hey, what are you thinking, what do you want to do,’ you get one kind of answer. But when you ask specific questions, you get this focus on driving the business forward. And I don’t know that they are mutually exclusive,” Roster said.
“‘What do you want to do?’ Well, retail is a conservative industry and we want to cut spending. ‘Well, what are you going to do?’ Well, I have to replace my POS, I have this RFID thing to worry about, I have all this business process reengineering I have to figure out, we need to do more CRM because we have to drive incremental revenue. So it is a shopping list and I think it represents where the industry is,” he added.
Optimism for 2005
When it comes to IT budgets, overall business outlook and even leverage in negotiating fees with vendors, executives were decidedly upbeat.
Regarding their own company’s business prospects for 2005, 92 percent of respondents said they were optimistic, including 58 percent who said they were very positive and 34 percent slightly positive. Only 3 percent were neutral and 5 percent slightly negative.
Regarding their own 2005 IT budgets, optimism was also clearly evident. Sixty-four percent of survey respondents said their 2005 budgets would rise, with 58 percent of survey respondents expecting a jump up to 10 percent and 6 percent expecting a jump of greater than 10 percent. Eighteen percent said budgets would stay flat, while another 18 percent said their budgets would decline. For 2004, 64 percent of respondents also said their budget rose, while 12 percent said it stayed flat and 24 percent said it decreased.
Interestingly, 64 percent of retail executives said their ability to command favorable pricing terms with IT vendors was increasing, compared with 27 percent who said there was no change, and 9 percent who said it was decreasing.
The number of IT initiatives technology executives are juggling drew a wide range of responses, from 21 percent who said they are handling up to five new projects, 31 percent six to 10 new projects, 18 percent 11 to 20, and 30 percent more than 20.
When asked to characterize their company’s attitude toward adoption of technology, 18 percent said they were leading edge and 49 percent quick adopters. Twenty-seven percent said they were late adopters and 6 percent said they adopt technology only when they must.