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Retail Strategy: How to Effectively Manage IT Costs

The Retail industry is under constant pressure by low margins and ever-increasing rivalry.  Weak consumer spending; saturated markets; increased consumers demands for service and lower prices; and intense competition has put significant strain on retail bottom lines and growth avenues.  Thus, Retail Strategy must evolve to accommodate these market changes.

Such low margins force the retailers to save costs across the operations, including IT, which is vital for the success of every strategic endeavor—be it enhancing customer experience, customer loyalty, or cross-channel integration.  Resultantly, IT budgets are also shrinking.  Thus sustaining a cost-effective, efficient, and customer-centric IT function is a priority for every retail leader.

The Retail industry faces quite a few IT challenges—e.g., hundreds of discrete locations, numerous applications, and diverse technology infrastructure and systems.  The IT function needs to integrate various disjointed applications, including store-based point-of-sale, supply chain, and human resource management with their core systems.  Rational utilization of technology is important to achieve customer loyalty with clusters of customers across the store, online, and catalog channels.  It is equally important for the retailers to become more cost-centric in their operations, particularly IT.

Most retailers count on cumbersome bespoke ERP systems to deal with merchandising systems and price management, which further add to costs and complexity.  The apprehensions for customer privacy and data security, and dependence on traditional ERP systems limit the retail sector to take full advantage of offshore IT infrastructure and solutions delivery services.

Regardless of the ever-increasing rivalry and the challenges associated with technology, retail CIOs should prioritize IT Cost Management and improved IT capabilities.  They can utilize the 4 efficiency and effectiveness levers to improve IT capabilities, drive IT efficiency, achieve cost reduction, and secure differential advantage. The levers are:

  1. Strategic Sourcing
  2. Application & Infrastructure Simplification
  3. Demand Management
  4. Lean IT Organization

Let’s discuss the first 2 levers in detail.

Strategic Sourcing

Strategic Sourcing of IT services is an effective cost cutting method.  The selection of services to be outsourced depends on how strategic or transactional the service is.  Many retail organizations outsource their infrastructure, software systems, and business processes to partners, since they offer focused, tailored solutions (at appropriate, need-based service levels) to assist in core retail operations, financial reporting, merchandizing, and much more.  An ideal sourcing strategy should entail carefully considering what to outsource, meticulously selecting the appropriate partner(s), outsourcing specific application development phases to unlock savings, blending in-house talent with service provider’s competencies, and nurturing relationships to drive profits.  Service providers offer significant cost benefits to the retailers.

Application & Infrastructure Simplification

Retailers typically have excessively complex operations and rely on custom-built applications.  In the past, commercial off-the-shelf programs, specifically for the retail sector, were quite limited, which pushed the retailers to develop large custom-built legacy systems.  Some even created Microsoft Access / Excel–based programs, to fulfill their mission-critical functions.  With growing business, the functionality of these systems was simply extended to manage additional product lines.  All of this resulted in makeshift, fragmented IT ecosystem, lack of standardization, increased application support costs, redundancies, and limited scaling opportunities.

Even today, IT ecosystem at most retailers consists of fragmented applications—running on varied platforms—and unorganized data.  Latest retail applications are costly but valuable for portfolio consolidation and simplification.  A variety of advanced retail ERP products are available today that offer portfolio simplification and are able to consolidate the fragmented legacy systems on a common platform.  These systems provide integrated retail functionalities including merchandising, warehouse management, POS systems, workforce and financial management.

Interested in learning more about the 4 efficiency and effectiveness levers to improve IT capabilities in detail?  You can download an editable PowerPoint on Retail Strategy: IT Cost Management here on the Flevy documents marketplace.

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About Mark Bridges

Mark Bridges is a Senior Director of Strategy at Flevy. Flevy is your go-to resource for best practices in business management, covering management topics from Strategic Planning to Operational Excellence to Digital Transformation (view full list here). Learn how the Fortune 100 and global consulting firms do it. Improve the growth and efficiency of your organization by leveraging Flevy's library of best practice methodologies and templates. Prior to Flevy, Mark worked as an Associate at McKinsey & Co. and holds an MBA from the Booth School of Business at the University of Chicago. You can connect with Mark on LinkedIn here.

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