Alan Morris says retailers need to look again at IT
cost models. As turnover falls, new cost management principles are required to
reduce IT spend and contribute to a leaner business.
IT spend in retail is normally between 0.9 and 1.9 percent
of turnover per annum, so taking 1.6 percent as an average would mean 1.6
million for a 100 million turnover business. The problem comes when sales drop
and turnover falls. In a pre-credit crunch world, many retailers would have
considered themselves well placed against a benchmark of 'only' 1.6 percent -
but now find their own costs reach or even significantly exceed that 1.6
percent figure. Given this scenario, wouldnt it be ideal if your IT costs
operated like a 'tracker mortgage' - the flexibility to have IT spend rise and
fall relative to turnover, as business needs and the trading environment
dictate? With that as an ideal, the first step is to take a good look at what
you're doing and where you're spending, using the current downturn as an
opportunity to change the way you run IT and so take costs out of the business.
Explore costs - look at new models
Today's recessionary environment will be forcing retailers
to question how they do things in relation to their IT and its cost, to
carefully examine systems and processes. IT can no longer be seen in simple
terms of how much value it adds to a business, important though that is,
but also in terms of how much its actually costing you relative to your
company size and level of business youre actually doing, and considering which
of your IT costs are truly fixed and areas where there may be some room for
manoeuvre. Indeed, perhaps the best way to add value to a retail business right
now is being able to maintain the status quo while controlling or even
reducing key costs. This brings us to an old point but one still worth making:
technology may be essential to running your business but it is not, in fact,
your business. In view of that, here are five suggestions for a plan of action
to help get things moving:
- Find out what you are actually spending your money on.
- Consider whats changed since those spending decisions
were made (falling turnover).
- See which IT costs are truly fixed, sunk costs or
variable (experience suggests IT is best seen as a 'semi-variable cost'
with diverse elements ranging from hardware that depreciates year-on-year
to internal help desks).
- Think about the business needs or operational
requirements driving those costs, and if they have changed.
- Explore opportunities for change, and include your
overall business strategy and objectives in your plans.
Let's use a help desk as an example: actually a variable
cost. A reduced retail estate following store closures or, say, or a reduction
to six days in trading suddenly means your requirement for a fully resourced
in-house help desk suddenly goes down. You can then explore moving to a new
cost management model, which could mean changing how you run things in-house or
looking to outsource some or all of that function, maybe using the economies of
scale offered by a 'shared services' provider. The choice is yours but action
will be required to drive lower costs. Of course, requirements can increase
too. For example, in the face of falling high street sales you might want to
focus on online sales driven by, say, special advertising promotions or
customer incentives. Here, you could suddenly require more help desk
resources and capacity than previously. With the future uncertain, you need to
be ready.
New opportunities
Retailers should ask themselves "What am I spending my
money on, and does that spending tie-in with our business objectives?" If
cost cutting is your main objective, you can pursue it only after you've
properly understood where your costs lie. Even if cost cutting isn't
your primary focus it's still a prudent exercise: you could be performing now
but that can change. The basic point is retailers need to focus back on core
cost management principles. Do you understand how much your IT costs, and how
do those costs relate to what the business actually needs right now? How do you
acquire and manage the products and services required to deliver your IT - and
could you drive those costs down and get better value from your supplier base?
The fact is, exploring different cost models is a great opportunity to benefit
from new services like SaaS (Software as a Service). This gives you instant
access to the latest versions of software at a much lower cost than acquiring,
integrating and maintaining it in-house. Buy what you need when you need it,
with no overheads like software licenses or staffing.
