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February 1, 2013

The decline of retail IT spending: Q&A

CBR sat down with Brian Hume, managing director of Martec International and Lee Gill, VP of retail strategy at JDA software at the London IT in Retail event. We discussed the decline of IT spending in the retail industry and its move towards ecommerce channels.

By Cbr Rolling Blog


Lee Gill and Brian Hume
(Left) Lee Gill, JDA Software and Brian Hume, Martec International

Why do you think IT spending is dropping if it provides various benefits to companies?

(Brian) I think part of the answer is that CEOs have cut budgets steadily for the last 4 years and CIOs have coped. In a sense, their professionalism has reinforced the idea that they can manage on less. Obviously, retailers are also concerned about the economy and are cutting costs wherever possible and hoarding cash for the day when they feel confident enough about the upturn that they are more relaxed about investing. That said the other trend we referred to in the study was the growth in the number of companies funding e-commerce and mobile commerce related IT spend from their own departmental budgets (marketing and e-commerce). This spend doesn’t show up in the survey currently. Also the growth of the cloud is causing some other IT spend to be "hidden", e.g. in the use of the cloud by HR departments for their own tasks and processes.

What is the difference in IT spending between U.S. and UK companies?

(Brian) I would say in general the Americans spend appreciably more. I’m not certain that they get better value but they certainly do spend more. It’s a cultural thing; Americans will try new things that come out where British businesses will test technologies after they’ve seen it’s worked for others. However, the Americans will want to get a test on a new technology now and get a competitive edge. I believe Americans are less afraid to fail although quite a lot of things they test don’t work on average.

(Lee) It is a cultural thing and this unrelenting desire to naturally improve. Americans are also early adopters. Americans tend to easily grasp the concept, see the concept and get their backs behind the concept. That’s quite different culturally to the UK and different European markets.

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How does IT spending being paid for by ecommerce and marketing departments in retail organisations affect the role of the CIO?

(Brian) You look at the heads of those functions their own decision making and strategic process that they’re not allowing it to be constrained by the fact that IT doesn’t have enough money to pay for it. The usual retailer spends 3-6% on marketing so at the worst that’s 2 or 3 times what the IT dept spends.

(Lee) We would issue a health warning wherever we see the IT investment decisions being taken by the marketing people. What the CIO does is they take a holistic view of the business requirements. If you got a silo simply investing in its own self interest in isolation from the rest of the business, that is a real danger. Business led investments should be holistically done not departmentally done.

Businesses are increasingly focusing their budgets on CRM. Your study mentioned when using CRM people have trouble getting insights from data and that’s where ecommerce steps in. Why do you think that is?

(Brian) Historically, a number of retailers invested in frequent shopper programs. These generally cost about 0.75% sales, quite a big number compared to pre-tax profits at 5% say, and the biggest part of that cost is incentives to consumers to participate in the program (discounts, points, gifts, etc.). Some retailers build CRM databases but then did not have the skills to mine the data and use the knowledge to improve various parts of their customer engagement. Consequently, some of those retailers determined that the return on the cost incurred wasn’t worth it and a number shut their schemes down.

With the development of e-commerce, the multi-channel customers (typically your biggest spending ones, though not exclusively so) have to provide name and address information to get home delivery. If you capture their card numbers and convert them to tokens via your PCI/DSS implementation you can then link store transactions on the same card to the specific customer. That way you get to build a CRM database without the cost of the incentives and it makes the whole thing a lot more affordable. And as time has gone on more service providers have emerged that started providing analytics on the web channel and can now help with the wider database.

What are you predictions for IT spending in the next 4 years? What about for 2013?

(Brian) I think spending in 2013 will be flat as far as IT departments are concerned and users will fund more from their own budgets to keep the business progressing. Over the next four years it will grow again for a couple of reasons. The first is that CIOs have stretched their budgets in part by extending the life of their EPOS and merchandise management systems, especially hardware but also software in many cases and are not incurring depreciation charges that would have been incurred if they had replaced on the normal cycle.

Secondly as users proliferate more departmental IT, concerns will increase internally about support and integration issues. Systems will become too disjointed and it will give rise to a separate set of challenges. Eventually some CEOs will say enough is enough in that respect. Also everything will have to be replaced in time and that will force costs to rise once things can be stretched no longer. Some retailers, notably the small format stores such as fashion stores, may get a lucky break. If the use of tablet devices like the iPad turns out to be successful in an EPOS role in smaller stores, this may significantly reduce the cost of EPOS replacement. So far there isn’t enough experience to know that tablets are retail hardened enough or secure enough to be viable, but some smaller chains in the US are deploying them now in that role and we will learn from their experience.

(Lee) From JDA’s perspective we have invested a lot in cloud-based services so we believe we are well positioned with respect to these trends. Also with the launch of JDA Customer Engagement Cloud we have developed a unique approach to handling customer engagement in a omni-channel world. Today’s customers are more empowered than ever before, as they have immediate access to up-to-date pricing and deep product information thanks to the latest smartphones and internet-enabled devices. For the first time, they are more knowledgeable than store sales staff and quite often, are only viewing the stores as showrooms where they can view products in the flesh but then purchase online.

If retailers are to prevent ‘showrooming’ they need to empower their sales staff through technology in the same way that consumers have been. They need to properly ‘engage’ with the shopper and that will only be achieved by empowering the sales associate by giving them access to real time information possibly through a tablet device. Armed with this, the associate can access rich customer information and better understand their shopping history with the retailer. They can also access rich product information enabling them to become real trusted advisors. Finally, the associate should be prepared to negotiate on price, having access to real-time comparative price information and business rules that define the amount of discount that can be offered, based on the customer’s ‘value’ to the retailer.

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