In the most testing economic climate that our sector has experienced in a long time, the majority of retailers continue to 'go it alone' and try to fully fund the technology infrastructure and skills that their company needs.
Alan Morris argues that this is folly and urges them to wake up to the cost and efficiency benefits that come from using shared services and applications.
As retailers come to terms with a number of grim realities, including in some cases a question mark over their continued place on the high street, they need to absorb one more, possibly unpalatable fact: it is cheaper to outsource certain areas of their IT to specialist companies who can offer economies of scale than it is to employ staff to manage them in-house.
With turnover and profits down and volume increases not an option, all eyes are focused on protecting margins. Finance Directors are walking the corridors, looking for functions to trim, and will moot the idea of cutting IT if they have not already done so. A sensible benchmark for IT spends within the retail sector is between 0.9% and 1.9% of turnover, but the problem comes when turnover dips and IT costs remain static and therefore disproportionate.
At the same time, the IT Director is struggling to keep the wheels on the car in terms of day-to-day, mission-critical processing whilst being under the cosh to deliver new projects which may help the business to survive hard times. The company may even be in the middle of a large implementation that is haemorrhaging cash and which it can't afford to finish.
Having held senior IT roles in retail businesses, I can relate to these pressures all too well. I know that, if I was still an IT Director, I would not run my own Help Desk, host and manage my servers and systems, and employ code-cutters in-house. It simply isn't cost-effective and it isn't necessary.
So, whilst this may seem counter-intuitive, now could be the right time to make a further investment in IT, by outsourcing certain services and opting for a 'Software as a Service' (SaaS) model for certain applications.
Let's look at services such as Help Desk. When managed in-house, this can be one of the least cost-effective areas. The Desk has to be fully-resourced all the time, 'just in case', but the reality is that skills are needed only for a percentage of the working week. Although the outsourced, shared service cost-per-person may be higher, you only pay for a small element of staff time as specialist skills (and costs) are split across a number of retailers.
The same rules apply to the Data Centre, where you need a number of full-time staff to manage operations to required service levels. The reality is that you could have a service that matches, or most likely exceeds, what you currently achieve by hosting your hardware and software within a shared Data Centre. Retailers not familiar with this concept often cite loss of security and competitive advantage as obstacles. In fact, they have nothing to fear, as their machines and operations will be completely ring-fenced.
IT needs to be constantly reviewed, in hard times as in good and, as I have suggested, a recession may be the best time to invest in outsourced IT. Many businesses will now find themselves with an infrastructure or systems that are past their sell-by date yet they have no capital to invest in renewal. At the same time, any development plans may be constrained by in-house skill sets.
In fact, what retailers need is an IT gene pool that can expand and retract to match trading ebbs and flows and, unlike contractors hired for a project, provides individuals that will be available after the project is finished. The shared services model does this.
In the case of applications, the SaaS approach is ideal. Interestingly enough, research conducted recently by Prologic highlighted that more than half the fashion retailers they interviewed had not heard of SaaS but, when the concept was explained to them, agreed that it was a good way to buy software. With SaaS, you tap immediately into the latest versions of software products for less than the cost of acquiring, integrating and maintaining them in-house, and they will be kept constantly up to date. SaaS enables you to buy just what you need, when you need it, without carrying unnecessary overheads in terms of software licensing or staff costs.
In all this, you need to view outsourcing as a critical relationship and not a 'one size fits all' solution. Cultural fit is more important than anything else, so it's critical to select a partner with whom you feel very comfortable, preferably one who has specialist retail knowledge and who can work to the structures and timetables imposed by retail.
Taking the example of Adams Kids, they describe the benefits of outsourcing as "immediate, measurable and sustained". They have quantified a 25% increase in warehouse throughout through systems re-engineering, an average increase to 99% of stores polling successfully each night, and a massive one-third reduction in annual IT operating costs right from the first year.
Be in no doubt, using shared services or SaaS applications, you will get more functionality for less cost and more service for less cost. It really is a case of share the pain: share the gain.
Alan Morris is Managing Director of retail solutions and services provider, Retail Assist.