StorefrontBacktalk: To Survive, Retailers Need to Kill the IT Budget and Burn the Boats

Through a special arrangement, presented here for discussion is a summary of a current article from StorefrontBacktalk, a site tracking retail technology, e-commerce and mobile commerce.

If a retailer really wants to compete with Amazon and the changing realities of today’s retail environment, it needs to kill the IT budget, disband the IT Steering Committee and throw away the IT project list. It’s time for IT to be moved out from under the CFO’s reigns.

Amazon is eating the lunch of brick-and-mortar retailers for one simple reason: It invests in its business in ways that traditional retailers don’t. Some brick-and-mortar retailers are unwilling to upgrade systems that are 10 years old, and Amazon spent three-quarters of a billion dollars on a robot company to further refine its warehouse efficiencies.

Never has there been a time in my career when the need for IT resources (dollars and people) was not dramatically outstripped by demand. Almost all departments are starving for more technology and yet the entire system has been set up to ensure that doesn’t happen.

The bureaucratic systems were often put in place during the dog-days of ERP implementations. Seeing dramatic increases in technology spending throughout the organization, many organizations made the decision to move the CIO under the CFO in the reporting structure to better manage it as a "controllable expense." Consequently, IT was put under the person least likely to say "yes" to a budget increase.

But times have changed. More of the way retail operates is dependent on technology. It’s less about big, costly year-long (or longer) projects and more about small projects that require quick turnarounds. Although big problems with big answers still exist, most problems have been broken down into smaller pieces with vendors attacking much smaller "chunks." With many applications being offered via the cloud or as a service from providers, companies can enable business improvements without the hassle, aggravation or expense of the past.

It’s time to stop trying to plan out IT needs for an entire year at budget time and let IT scale and shrink to meet changing business demands. I think I speak for almost every CIO out there when I say that they want to be given the responsibility and accountability to fix things, without having the "we don’t trust you" strings attached.

What’s the worse that happens if you decentralize IT budgets and let the CIO run IT like a business unit? What happens if the supply chain unit decides to spend 30 percent of its operating budget on technology improvements? Is that really a bad thing? What if IT has to triple its staff size to meet the demands? If IT meets its financial performance targets, does it really matter?

Any retailer could have made similar (or even better) decisions as Amazon and achieved similar results. I keep coming back to the notion of retailers being afraid of technology. They have been burned too many times in the past. Too many failed projects, too many missed budgets. Too much dated technology weighing them down. But if retailers don’t come to grips with the fact that technology will also be their salvation, then they might not ever be saved.

Todd Michaud runs Power Thinking Media, which helps retailers and restaurants tackle the convergence of social, mobile and retail technologies. Formerly, he was VP of IT for Focus and Director of Retail Technology for Dunkin’ Brands.

BrainTrust

Discussion Questions

Is retail past the point of budgeting IT on an annual projects basis? Are the benefits of more flexible IT spending strongly outweighing the risks of overspending seen in the past? Are there ways for retailers to better manage the risks of failed projects and rollouts?

Poll

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Paula Rosenblum
Paula Rosenblum
11 years ago

The only part of this article I agree with is the notion of moving the CIO out from under the CFO. But that’s not a new story. Both my partner Brian Kilcourse and I had personal policies of not taking jobs that report to the CFO when we were CIOs and we both left the ranks 11+ years ago.

As for disbanding the IT steering committee, that’s just wrong. We cannot moan about IT/business misalignment on one day and then suggest not having a forum in which they meet on the next.

Sorry but this point of view just doesn’t resonate with me, nor does it have much to do with Amazon’s success.

Mark Heckman
Mark Heckman
11 years ago

Very interesting precept that annual budgeting and rigidity to that budget is detrimental to the business. Most have always believed that structure and discipline is a virtue in the business process. But I concur that IT departments must be flexible and adaptive to the ever-changing needs of the business. Technology is so fluid these days and often, by the time a budget is written based upon a plan that involves specific technology, but the time the initiative is undertaken, it may no longer be the best solution available.

I also agree that retailers need to look at their technology development and support systems much differently than in the past. Now solutions revolve around the development of database platforms receptive to (SDKs) Development Kits and (APIs) Application Programming Interfaces, rather than rigid, expensive and often inflexible systems.

CFOs will always want to know how much IT plans to spend and why, but the budgeting process must be done with reasonable flexibility and the ability to adjust to today’s changing environment.

David Slavick
David Slavick
11 years ago

A roadmap that applies a long-term vision is needed. Too often consumer directed initiatives have to compete with other capital projects and lose out because “you can only get one or two approved this fiscal year, have to be fair to everyone.” Projecting ROI or EBITDA results with a solid business case should prevail, not the number of initiatives one discipline gets vs. others.

Amazon has the advantage of what I would simply call less scope — thus they can invest in acquisitions that have significant advantage in technology plus improve/expand capabilities with newer/better tools/platforms/applications.

Gordon Arnold
Gordon Arnold
11 years ago

Scrapping any budget and scaling it to needs vs. affordability is simply madness. As for the role of a CIO there should be a reevaluation of the position in terms of scope and responsibilities. The job of a CIO is to provide system security, business continuity and disaster recover for all internal and external aspects of the company’s IT system. The CIO should be available to review and provide feasibility feed back and supporting information as well as additional needs to the sales and marketing departments planned and budgeted electronic expansions without veto rights. If plans to make needed improvements surpass the funding available by budget then the office of the CEO needs to confer with the office of the CIO to find a means to make it available without diluting the plan’s effectiveness or over taxing the companies financial resources.

The reason this has not worked well in the past is simply a pure lack of understanding within the company of the capabilities of the IT products and services desired. There is a lot of software that is not able to scale (up or down) to the need of a prospective user/company. Another problem is compatibility. Many companies have purchased software that will not work effectively within the IT environment that exists. Most of these problems would be eliminated if the offices of the CEO and sales and marketing departments were equipped with IT savvy executives. In short, much of the bad investments of the past and present were simply cockpit errors. A simple look at successful IT marketing companies is not enough. To understand how they work you need to look at the credentials of their executives and key players.

Camille P. Schuster, Ph.D.
Camille P. Schuster, Ph.D.
11 years ago

IT is no longer an annual projects budget item. IT is an enabler for competing successfully in the market. However, IT needs to be part of a team representing every area of business to facilitate the implementation of programs that are essential for achieving company strategy. A collaborative IT department is essential for success.

Zel Bianco
Zel Bianco
11 years ago

I don’t think it’s time to wave the white flag entirely, but retailers do need to step up and get with the program if they are going to have any chance of competing with the likes of Amazon. Manufacturers can continue to innovate and some do a much better job than others, but it will not do any good if these innovations stop at the loading dock in the back of the store because the retailer is not prepared to execute in store. Out-of-stocks being just one of the thousand other issues that need to be addressed in a much more pro-active vs. re-active manner. Kicking the can down the street in terms of budgets and plans because it seems too hard to deal with legacy systems, etc. will not get the job done.

Yes, retailers have been burned by so called experts in retail technology. One thing that would be an improvement is not to award contracts to the vendors that have not delivered real value to the retailer and the collaboration process that must be a focus on a daily basis, not just once or twice a year.

Cathy Hotka
Cathy Hotka
11 years ago

One problem retail has is its insistence on spending 1% of revenue on IT. And you’ll recall that a huge book chain that didn’t survive decided not once, but twice, that it didn’t need a CIO. Underinvest in IT at your peril….

Phil Wells
Phil Wells
11 years ago

The problem with upgrading IT systems for a tier 1 retailer is that in practice, it’s hellishly complicated. Add into the mix that a good number of retailers have ‘saved’ costs by getting rid of their more skilled support staff and their problems multiply.

In many ways it doesn’t matter what the internal management structure is — what matters is that the retailer has one or more individuals with the vision and flair to take IT forward.

Without vision, everything else is meaningless.

Mark Price
Mark Price
11 years ago

When you ask if retail is past the point of budgeting IT annually with the goal of cost containment, then I would say not. If you ask, “Does retail need to be treating technology as a key business driver and investing aggressively to compete with online and improve customer experience?” then the answer is a resounding YES.

More flexible IT spending is not an option; it is a requirement. Just look: how many retailers have yet piloted an online program to address showrooming? No one. How much longer will retailers put up negative comp numbers before they can move the supertanker to get a project going to address this need? Some never will.

To limit the risk, retailers need to be comfortable with “down and dirty” pilot programs that evaluate consumer interest and value without spending big bucks. Then, when the consumer value is determined, that is when investment should take place.

Doug Stephens
Doug Stephens
11 years ago

I agree with Todd’s assessment and would add that companies also need to clearly distinguish between the resources needed to maintain the companies’ back end information systems and those for customer-facing applications.

IT and marketing have traditionally had a tough time speaking the same language and prioritizing initiatives the same way. Therefore, in my opinion, most retailers need to create a new position of Chief Marketing Technologist, who possesses an equal and balanced skill set and oversees all marketing activity including the development and implementation of all customer-facing technologies.

Lee Kent
Lee Kent
11 years ago

I will agree that many Retail IT Departments are hindered rather than helped by outdated policies, procedures and structures. It is time that IT looks for new structures that will allow more flexible adaptation of new technology. These projects are by and large smaller and faster to implement not to mention much more affordable.

Bill Bittner
Bill Bittner
11 years ago

This was my comment on this article when it first appeared:

The only thing unique about Amazon is that they started a retail business in the Internet Age. All their competitors carry the baggage (and consumers) of a bygone era. Remember when PCs were going to kill the paper industry? It takes a long time for people to change their habits. Traditional retailers did not have the same options as Amazon. They had an infrastructure and a customer base in place that depended on it. That is why they had to make different decisions.

The challenge now is that the pace of change to a virtual world is quickening. We still sell buggy whips, but no one would want to start a new buggy whip business. But many companies are simply not ready for the virtual shopping environment. Just the simple realization of how difficult it is to get retailer participation in standards committees is a tribute to how little they appreciate the need. It is the standards that provide the foundation so that retail department requests can be developed as extensions o a core without losing the integration of the company.

The irony is that we likely all end up in the same place. Traditional retailers will continue to reduce the size of their retail store footprint and expand their online services through the use of cloud-based service providers. Amazon will continue to build distribution centers and strive for same day delivery while offering its excess IT capacity as a service in the cloud.

Ryan Mathews
Ryan Mathews
11 years ago

I’m with Paula. Move the CIO out from under the CFO.

As for the rest? Well, not ready to sign up for much else the author says with the exception of the idea that immediate need ought not to be the slave of annualized budgeting.

Paul R. Schottmiller
Paul R. Schottmiller
11 years ago

The role of technology in retail competitiveness continues to increase at a non-linear rate and there is plenty that will keep the pedal to the metal in coming years (Big Data, social, mobile, etc).

Look around and you already see it happening at more than just Amazon. Look how fast Nordstrom got mobile checkout in place and scaled, or consider the $$$ invested to create @WalmartLabs.

While the changes may not seem as radical as “killing” and “burning,” and there is more in front of us than behind us, retailers that will be around competing with Amazon in 5 and 10 years are moving to transform “traditional retail IT.”

W. Frank Dell II, CMC
W. Frank Dell II, CMC
11 years ago

There is no question today, IT is too important to report to the CFO. The problem is, the majority of CIOs are not sufficient business managers to report to the COO. The two best CIOs I have ever worked with could not code and did not use techspeak.

The “C” level is about the business, not the department. Retailers tend to budget IT like logistics, when there is a problem they will open one less store. The CIO should forget the technology and look at the business. Things like replacing POS with iPads or daily supplier communication to eliminate inventory.

Every department needs a budget and I am sure Amazon has an IT budget. The difference is, IT should earn its budget. If they can affect cost savings in quarter 1, their available spending should increase by some percentage of these savings for the rest of the year.

Gene Detroyer
Gene Detroyer
11 years ago

All companies must recognize that the IT (technology) needs of companies today are twofold. There is the backroom, the processing, the controlling, payroll, etc. That is essentially what IT departments were originally designed for.

But today, there is an entirely new need. It is the interface with the customer. The problem rests not only in the objectives of the department, but in the people in place to execute those objectives. The needs and talent are almost diametrically opposed. It is the difference between accounting and marketing.

Several of my colleagues explain this well. You really need two IT departments. The new non-traditional one must approach its business in the very same way that the retailer approaches their merchandising and store operations. It is all about marketing and customer connection. It is every bit as important as any interaction with the customer.

Ralph Jacobson
Ralph Jacobson
11 years ago

My company has done intense CMO/CIO Studies in the past year with literally thousands of face-to-face interviews with these executives across the globe. I believe the vast majority of technology decisions will migrate to the CMO by 2015. Also, typically, the average Retail or CPG company spends over 70% of their IT budgets on administration and maintenance, NOT innovation or investment.

I believe this article encourages reckless IT spending, however. The author asks, “What happens if the supply chain unit decides to spend 30 percent of its operating budget on technology improvements? Is that really a bad thing?” The answer is, “It depends.” It could be a really bad thing if revenue models and ROI tools are not rock solid.

Get the CIO and CMO to interlock on the business strategy for the next 18 months. Define investments versus business needs. Get back to me then and let me know how much IT spend is actually flowing through the CIO at that point.

Bill Hanifin
Bill Hanifin
11 years ago

There is an obvious need to deliver on fiduciary responsibility as an executive of any big retail brand. That caveat should quiet critics who will rail at Todd’s article as irresponsible.

Having been involved in many of these conversations, it does seem that the approach of annual planning with a 2 month freeze every year guaranties that innovation will be stifled and progress muted.

There needs to be an element of dynamicism injected into the technology area of business and at some point, marketers need be given a bigger voice in identifying and selecting technology to support strategy executions.

Adrian Weidmann
Adrian Weidmann
11 years ago

Retailers no longer have the luxury of time on their side. Today, digitally empowered consumers have technology and capabilities literally at their fingertips that far surpass the old infrastructure that most retailers currently have. In order to remain viable, retailers need to architect an omni-channel solution and all of the associated workflows and then select and implement outsourced managed services partners to quickly and efficiently activate the solutions. Trying to build all of these solutions will simply take too much time and political collateral. Things are progressing at the ‘speed of digital natives’ and there simply isn’t the time.

At the end of the day, retailers should focus on ‘selling stuff’ and not building IT empires. Technology enables the solution. Design the solution and put the weight of keeping up with the appropriate technology on technology partners that are rewarded for their expertise and ‘making it happen’.

Doug Garnett
Doug Garnett
11 years ago

Agree with the tone and tension in this discussion. But I don’t think he’s identified the right fix. Because the problem is that he keeps the CIO.

Perhaps the real truth is that to compete with Amazon, online activity has to become merely one more angle from merchandising. It has to be driven fully and consistently with store activity. And that means getting rid of the IT silo (as much as can be done) so that there’s fluid movement across the entire front that’s in contact with the consumer.

In that way, retailers can leverage online work in a way that makes the most of their true advantage over Amazon: Stores and online together.

Ed Dunn
Ed Dunn
11 years ago

I believe what is discussed is really the R&D budget. I do not know if retail IT even have a line item called R&D in their budget, but it is obvious Amazon does as well as Walmart.

Publix appears to have an R&D budget, testing out concepts such as their pick up and go service. Also Tesco and Peapod with virtual wall shopping. But these ventures appear to be more marketing/IT ventures with marketing providing the funding and buzz and IT coming up with the solution.

I agree with the author that retailers are going to have to start focusing on a R&D budget and assign their talent to create solutions in order to remain competitive.

Amazon.com cannot be ignored as a competitor in terms of disruption and innovation to sit on the sidelines. KIVA robots, logistics, showrooming, etc.

Warren Thayer
Warren Thayer
11 years ago

I agree with Paula and Ryan. I generally hate “warfare” analogies, but if the Taliban is coming at you with guns blazing, and you’re out of ammunition, it’s not time to hear that “more bullets aren’t in the budget this year.” Historically, CFOs seem to believe it is “their” money and they want to be heroes by keeping “the budget” sacrosanct. Get IT out from under them! But you do need input from all sides, and all parts of the business, for checks and balances. Too often, IT can get a superior attitude and feel like it’s their way or the highway, and they don’t really have to answer to anyone.

Todd Michaud
Todd Michaud
11 years ago

I feel the need to jump in and comment.

First, let me state by saying that my comments are driven by close to 9 years of direct experience. Not from research I’ve done, or talking to clients or my general knowledge of the industry. This is not driven from speculation. This is from living the soap-opera life that is retail IT.

I completely disagree with those who believe dropping budgets for IT staff is a bad idea/madness/irresponsible/reckless. I believe that it is old-school thinking and a huge burden to retailers that companies like Amazon don’t have. Amazon recently invested 92% of their quarterly profit in efficiencies largely based upon technology. As Cathy points out that is much different than the 1% of revenue (if you are lucky). The technology needs to be released from its arcane wrappings.

I think that we are rapidly approaching a time where the CMO has a large IT budget, but I don’t believe that they will taking on this technology alone. We will start to see technology team members, and leadership, become part of the marketing team. Much like how technology companies split the roles into CIO (internal) and CTO (external), retailers will find themselves with a marketing technology team. While there is some overlap between the organizations there are significant differences. Example: the scalability of a back-office system is likely different than that of the email system. The security of payment transactions is different than the ERP security framework.

Retailers need two different IT organizations. They need a core team that make sure that the mission critical systems are available and secure, while working hard to reduce costs. They also need an IT organization that can help evaluate leading edge technology solutions that are flexible with time and resources to help them be competitive.

The days of a financial system upgrade getting in the way of a new loyalty program are becoming numbered. The days of consensus building across business units about what IT priorities should be pursued are also going to be short lived. Technology cannot be a scarce resource that is doled out in small quantities, it needs exploited as a competitive advantage (or in this case, putting up a fight with the Amazon).

Most importantly, the days of not trusting the CIO to do the right thing and spend the right money without 4 layers of oversight and politics are nearing the end. It’s time to move to the grown-up table at Thanksgiving.

my 2 cents. =)

Kris Neelamraju
Kris Neelamraju
11 years ago

The retail industry can catch up with the fast-changing consumer habits only with flexible SaaS offerings on the cloud. “… small projects with quick turnarounds…’? Make that, ‘… small projects to migrate to cloud…’.

Rigid (bureaucratic) technologies of the twentieth century are no answer to the rapid pace of innovation brought in by the likes of Amazon. Resistance, as the Vogons would say, is useless! Retail businesses have to adapt or get left behind, because the next generation of wage earners were born with an inbuilt Google plugin and an Amazon voucher in hand. To meet their expectations, retailers have to combine in-store shopping experience with e-commerce style search capabilities, real time stock updates and rewards.

The biggest challenge is migrating the users to the new technologies with least pain. The big ERP systems have heavy exit barriers for their customers. Systems that can manage the change with least disturbance to the store workers will succeed in convincing the retailers to move.

Pain or not, it is the retailers who are facing the turbulence, so they need to take a call on new technologies sooner than later.