Time to invest?

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Looking at the current list of “IT investment priorities” for major retailers, highlighted in the annual IT in Retail* report from Martec International published a few weeks ago, I was intrigued to find – nestling between PCI-DSS compliance and ERP – that cost-cutting was on the shopping list. Some clever new IT tool, perhaps, that helped identify areas of waste or magically improved efficiency? No, explained the researchers, nothing really to do with “investment” per se, just the usual meaning of cost cutting. So perhaps more of a “non-investment” priority? Not really that either, it appears, but something rather more along the lines of the traditional retail approach to negotiation aka “screw your suppliers”.

“Retailers are pushing for tougher deals with IT suppliers over maintenance costs, for example,” says Martec managing director Brian Hume, “and they are negotiating hard to get the best deals when it comes to buying new IT. Suppliers are having to be more realistic about pricing and many are willing to discount . . . so now is probably a good time to buy.”

  “More realistic” is a telling phrase. For years IT companies have charged significant sums for additional user licences, additional maintenance cover, additional consultancy or upgrade costs that continue to eat into the IT budget for years after the application or hardware was initially purchased. All too often the list price of the new system bears little relation to the final implemented price needed to be up and running.

Over the years, a few have bucked the trend. Store systems suppliers have offered rental models with a monthly fee rather than up-front capital investment in tills and software, while managed services, hosted systems and software-as-a-service have all helped shift IT costs from capital to operational budgets. Newer entrants, especially when trying to break into the market with novel applications, have occasionally taken a “shared risk/shared reward” approach with fees based on a percentage of the cost savings and benefits the product delivers: a charging system which must surely require a significant level of trust between buyer and seller. “Payment by results can work,” Suppliers are having to be more realistic about pricing and many are willing to discount.says Melissa Cupis, of inventory software specialists AGR, “especially with systems that really can demonstrate quantifiable benefits from day one.”

While retailers may be putting pressure on their suppliers, IT departments are also having to think the unthinkable. UK programmers and contractors are among the many unemployment casualties of the current recession as companies move development work off-shore, often to India, to save money. Others are looking to collaborate.

John Bovill, group IT director at Aurora Fashions, is already working with what he terms “like-minded individuals” in non-competing retail organisations on both supply chain and IT development projects. “We’re working with Thomas Pink on developing multi-channel applications for customer facing activities such as order online and collect from stores,” he says, “and with others on mobile point-of-sale projects. Mainly it is in areas where we have a common IT supplier so that we can spread the costs of specific new applications: both Thomas Pink and Aurora use BT Expedite platforms.”

While cost cutting comes in at number seven on Martec’s IT investment priority list, supply chain is at number three with 17 per cent of the retailers surveyed planning to replace logistics applications in the next year. Typical age of such tools currently installed is just under eight years – the second highest of all application areas examined in the study – although the report also suggests that those currently being replaced have generally been in use for almost eleven years. Given the rate of technological change in the past decade it suggests that many retailers are using very limited logistics tools indeed. As such there should be plenty of opportunity for efficiency savings, since a raft of optimisation applications have appeared in the past decade.

Almost a quarter (23 per cent) of the 100 or so leading retailers questioned use logistics software which has been developed in-house. Given the costs of maintaining in-house software and the current tendency to shift development work off-shore, then it seems likely that some of these retailers might just have put replacement logistic systems on their current shopping lists.

Talk to many of the IT vendors active in this space and the message tends to be the same: retailers are looking for quick wins and add-on efficiency tools. The days of expensive infrastructure replacement projects may not be over, but are still on hold as the rate of economic recovery remains uncertain. With retailing among the most pessimistic of business sectors, judging by recent surveys, one suspects that cost-cutting, tough negotiation and collaborative developments may remain the order of the day for some time to come.

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