Retailers and tech vendors look for co-development opportunities
Through a special arrangement, what follows is a summary of an article from Retail Paradox, RSR Research’s weekly analysis on emerging issues facing retailers, presented here for discussion.
Recently we’ve received a fair number of inquiries from both retailers and technology vendors on the value of co-development. In plain English, co-development is a retailer and tech vendor working together to create a new version of a product, or even an entirely new product. Both have the understanding and expectation that the technology will ultimately be available to all retailers, while the co-developer retail partner gets first crack at specifications, roll-out and early value in exchange for reduced costs.
Co-development may not always make sense, but there are times when it works to both parties’ advantage.
Focusing just on retailers, here are some questions to ask:
- Are you lagging in the market partly due to a big gap in your technology portfolio? Do you realize that while filling that gap may help you leapfrog your competition, it won’t be the magic bullet that solves your problems? If the answer to both these questions is yes, you may start the journey.
- Are you short of capital but long on big ideas? If so, the opportunity for cost reduction in exchange for your participation will have a lot of value.
- Have you been approached by a vendor with a similar vision and resources to back them up along the way? Do you trust the people involved? Many people and companies with spectacular vision fail miserably at execution.
- What’s the opportunity cost of not going ahead with the project? Back when I was CIO of a home furnishing chain, our ERP provider co-developed with us a drop shipping receiving process as part of the application. It became a core part of the product. We got the solution when we needed it and saved a boatload of money.
- Are you contemplating an entirely new technology solution that will give you a competitive advantage? Even an 18-month head start is nothing to sneeze at. Eighteen months hence, you might be looking at the next big thing, while your competitors are absorbing your last big thing.
- Are you married to a suite provider who is missing certain functionality, but willing to implement it with your help? This is the ideal scenario. You have experience with the vendor and know they have market staying power. You also avoid integration costs in bringing in someone else’s platform.
What’s interesting here is that the same retailer may come up with different answers in different situations. In my own career, my rule of thumb was for non-essential, non-differentiating processes, I’d let someone else blaze the trail. But if the ROI was obvious (as was the case for the drop ship PO’s) or the opportunity huge (early price optimization adopters reaped rapid rewards from their efforts), you’ve got to go for it.
Discussion Questions
When do you think co-development of a new technology makes sense for a retailer and when does it represent a risk? What suggestions would add to those in the article?
I think co-development, with eyes wide open on both sides is a wonderful way for a retailer to get functionality they need into a package, and for a vendor to get a great reality check on the practical requirements for enhancements.
Paula covered a lot of the dos and don’ts in her article. I would add that generally speaking, the effort should not be for a mission critical capability on a specific and challenging timeline. Sometimes for good and valid reasons (like any development project) the vendor may or may not be able to hit a specific, narrow time frame.
When it goes well and both the developer and retailer have equal benefit opportunities and equal skin in the game, it can be a win win. However, the equality aspect is the tricky one, especially the “skin in the game” part.
In Paula’s case with a new feature/module added to an existing product, there was an easy path to mutual success. Often though, a retailer will ask a vendor to develop a custom solution for their needs and have little more commitment to a joint project than trying it in a few stores (oh the stories I can tell…).
So it really takes a true alignment of objectives and a well written and detailed definition of roles/responsibilities, expected outcomes, and anticipated benefits to create a happy marriage between the parties.
I would say that if it is in an area that a retailer has very little experience, it makes total sense. Just as in category management or shopper insights, a retailer cannot possibly know as much as the vendor when it comes to a particular category, so the retailer relies on the vendor’s expertise. In technology, the retailer has to be the one that recognizes the problem to be solved and working with the technology vendor closely may be the way to get from concept to working prototype fairly quickly.
As to worrying about how someone else may adopt the technology or that the new best thing will already be out is not realistic. If we all did that, innovation would stop. I completely disagree that if you are married to a “Suite Provider” that’s missing certain functionality, it may be the perfect scenario. The suite vendor may not do everything well and it is sometimes best to go with a vendor that has been successful in the particular niche you are looking to enter.
Co-development can provide some compelling benefits to retailers and their partners. I use the word partners, rather than vendors, because the approach to succeeding in co-developing solutions requires both parties to work consciously to focus on the objectives and the success criteria for the project.
There are plenty of tactical challenges to some technology co-development projects, including project management and communications. The project should result in a competitive strength or tangible operational efficiency for the retailer. And the technology solution provider should benefit by furthering a strong partner-centric position with the retailer, while also getting a jump on their own competition with new solutions that are addressing real market needs.
Personally, I think all retailers should be looking to innovate from a technology perspective and if they lag, then they will pay a heavy price in terms of ceding advantages (e.g. Amazon online).
If a measurable benefit can be derived and a technology provider is open to negotiating some form of exclusivity, then its worth having the conversation. Without being able to get and protect a benefit, I would advise retailers to wait and find technology providers who are more open to this which is usually an earlier stage company. From my perspective, hard to imagine doing this with an IBM, Oracle, SAP, etc.
Brilliant article Paula. The “loner” mentality is alive and well in this country. It may be because so many of us are control freaks or maybe just greedy and want the whole pie to ourselves.
While it’s not focused on retail particularly, I’m right in the middle of developing a collaborative alliances in regard to a very disruptive technology. I’m finding that these “alliances” would come easier if we weren’t making such a huge leap. This is “differentiation” on steroids. In my case we’re talking about the very real possibility of fault-free software. That’s an audacious claim I know – and my guess is many if not most readers would have a reaction something like: “I’ll wait to see if they can actually do that.” Not many organizations have the courage to “boldly go where no one has gone before.” Sadly, we lose out on a lot of game-changing innovations that way.
Product co-development can make a lot of sense. Whenever a technology company undertakes a major product initiative, there is a large cost and large risk. The cost is in resourcing and diversion of priorities, and the risk is that there will not be the anticipated market for the new product.
Co-development shares the cost, and ensures that the product is created with continual input as to requirements for, and applicability to, the intended clientele. The co-development partner benefits because it gets to greatly influence the product, and, typically, gets a window of first-use.
Two cautions are also in order. First, in order that the arrangement makes sense for the technology company, it should be ensured that the product functionality will have future applicability beyond the development partner. Secondly, the IP ownership arrangements must be clearly stated and adhered to. The partners must understand clearly when, and in what forms, the created product can be made available to other clients.
Paula’s article describes well how a vendor and retailer can become engaged to mutually work on an improvement that will ultimately benefit both parties. It is this synergy that brings about many of the win/win’s we have seen over the years. Both parties need each other for the mutual benefit of both down the road.
I have seen this work successfully on the maintenance side of the business where a vendor partner will team up with the retailer to work on programs for improvement. The retailer gets as much savings over time as the vendor does when the program is available to show others.
I have been involved in “First-of-a-kind” projects that target untapped opportunity in the marketplace in the past. As with most innovative projects, there is always inherent risk involved. That shouldn’t scare any of us away from engaging in these efforts. However, the more important the project to the company and/or industry, the more risk there will be. That’s most often the challenge with making significant change.
I think co-development of new capabilities is the best way to move the industry forward. We shouldn’t be too shy to address age-old industry problems, like out-of-stock items, new product introduction, and labor expense. Working with the CPG partners is always a plus.
With customer experience so important these days, I think this is a great opportunity for co-development. There are many start-up vendors with some great ideas looking for a retailer. And retailers looking for that something special that just might take their in-store experience up a notch.
Both sides just need to be cautious and Paula provides excellent advice on that part.
I say, just go for it!
Disclaimer: I am not a lawyer, business development or alliances person, but I have worked with many of those types so thinking about this is not foreign.
The thing that keeps folks honest in Silicon Valley is the back channel that exists when players act badly. As an industry we are into value capture, collaboration is a euphemism (sometimes). The first suggestion I would make is be real cool, be a great partner, you may not succeed at the first venture, but the reputation will get the attention of better partners.
Everyone developing apps these days know that there is a pivot in the future – the moment when one realizes that the real opportunity lies somewhere other than the original direction – make sure you account for that.
Some apps are really into the value created by the data, 90% of you will get that, that’s a warning for the other 10%.
Front office (including mobile) vs. back office have their own risks and rewards. If it’s on the front office side, obviously you’ll care about customer lock-in; look at how profiles will evolve.
Co-developing with Oracle, SAP, JDA, or other platform companies is a well worn path – enhancing the eco-system may also mean helping folks you might not want to help.
To what degree do you need to support the sales process? An endorsement? References? Visits? Marketing support is a big deal, it can also get complicated. It can also give you (the CTO/CIO) a great escape route into the vendor side – that’s a well worn path as well.
There are many things for the user side of any cooperative development to consider. System and software comparability are imperatives if retailers wish to minimize the impact of the unforeseen integration issues that are almost an inevitability when expanding capabilities with new “stuff.” An additional concern would be to make sure this is a limited cooperative venture and not a marriage that costs a fortune to separate from. So in reality there isn’t all that much to worry about while getting in a cooperative agreement. But there can be an awful lot to lose when trying to move forward with newer latest and greatest technologies if we are too much married or buried in what was a mistake from the get go.
This is a great perspective, certainly some big positives here. As long as the motivations on both sides are well understood and aligned, I believe co-development can truly create a win-win proposition. Gives the retailers some nimbleness in areas that they deem a high priority, and allows the vendors to refine their offering, demonstrate their value proposition and find a repeatable go-to-market model. Seeing a few initiatives spring up along these lines that are startup-focused (Target, Unilever etc.), and I expect we’ll see more of that in the days ahead.