IT And Business Alignment In Retail

More than ever, retailers that strategically use information technology have the opportunity to turn technological advantage into real long-term market gains. We find most retailers have abandoned the practice of internally developing their systems. Retail Winners especially have moved more aggressively towards commercially available solutions, particularly compared to their lesser performing peers. Nearly 1/4 of Winners also seem determined to overcome the initial and ongoing costs associated with integrating point solutions within their application portfolios, by pushing that responsibility on the solution provider rather than internal IT. Evaluating IT's ability to drive value to the business seems an elusive goal for retailers. The largest retailers in particular have lost their ability to regularly and consistently score IT's value delivery.

Business Challenges And Opportunities
By a wide margin, Winners cite conflicting demands from different business departments as their top challenge. Winners still want more from the IT organization. Line of business (LOB) leaders want their issues addressed. What stands in the way, according to our Winners, is first of all, maintaining the legacy portfolio of production applications (48%).

Laggards, in comparison, are plagued by a lack of strategic direction (71%). Their business leaders are far less engaged.

In short, their IT functions are treading water, spending money and time just keeping legacy portfolios up and running.

Increasing the portfolio of packaged applications, along with renewed interest in a single integration bus, are the best opportunities for improved IT value delivery. Unlike years gone by, when business users complained IT leaders lacked an understanding of the business, we see a shift. Savvy business leaders MUST have an understanding of what IT can do for them. Those retailers who outperform their peers clearly depend more on these business leaders to help set the technology agenda.

Organizational Inhibitors
Legacy application maintenance still takes up an inordinate amount of IT human and financial resources. IT is in a vicious endless loop. For almost half our respondents, the care and feeding of legacy portfolios consumes the operating budget, even as the capital required to integrate into those portfolios renders new solutions unaffordable. A pervasive lack of consistent IT governance creates additional challenges. One would expect the largest retailers, those with revenue in excess of $5 billion per year, to be the most sophisticated. Yet we find IT governance and measurements to be weaker among these retailers than even their smallest counterparts. The solution again, is more business involvement with IT. That includes more frequent and specific measurement tools and KPIs.

Technology Enablers
IT seems to still be like the cobbler's child, automating all departments but its own. No doubt the drive for demonstrable business ROI acts as a gating factor in purchasing IT-specific tools. We can appreciate that the move to packaged applications should allow retailers to forgo sophisticated development tools…after all we expect to see internal systems development decline over time. But project and activity monitoring are central to evaluating how well IT is doing in delivering business value.

BOOTstrap Recommendations
RSR has a five-point set of recommendations to help retailers improve business/IT alignment: 1) Ensure all line-of-business demands for IT services are considered within the context of the total corporate strategy. 2) Establish organizational accountability for IT at the top of the company, usually by having the CIO report directly to the CEO. 3) Insure the Executive Committee regularly reviews IT priorities and project status, moving beyond simply overseeing the IT spend.

Rigorous ROI disciplines and successful investment in enabling technologies aren't mutually exclusive — they go hand in hand. 4) IT leadership must develop a systematic program to simplify the portfolio and to reduce development rework and production errors. 5) Align line-of-business specific processes to the corporate strategy; then map IT to business processes. It's in the company's best interests that IT be regarded as a pan-enterprise resource. The CIO has to encourage that point-of-view by saying "no" to provincial or "rogue" projects.

Defining Retail Winners And Why They Win
Our definition of Retail Winners is straightforward. Wall Street judges retailers by year-over-year comparable store sales improvements, and we do the same. Assuming industry average comparable store sales growth of 3%, we define retailers with sales above this hurdle as "Winners," those at this sales growth rate as "average," and those below this sales growth rate as "laggards" or "also-rans." It is consistent throughout much of RSR's research findings that Winners don't merely do the same things better, they tend to do different things. They think differently. They plan differently. They respond differently. It may be hard to talk about superior sales performance in an economic environment like we have today. Nonetheless, we believe past Retail Winners remain best poised to recover as the consumer finds her footing again.

For example, in the chart at right we see that even though virtually all our respondents have abandoned the practice of internally developing all of their systems, Retail Winners have moved more aggressively towards commercially available solutions, particularly compared to their lesser performing peers in the adoption of single-source package solutions.

Nearly 1/4 of Winners seem determined to overcome the initial and ongoing costs associated with integrating point solutions within their application portfolios, by pushing that responsibility on the solution provider rather than internal IT.

Responses to this year's survey uncover a relationship between IT reporting relationships and how the IT function is perceived. The chart at right shows that Retail Winners' CIOs more typically report directly to the CEO rather than a functional head such as the CFO or COO. Laggard retailers favor having the top IT executive report to the CFO. With the IT executive organizationally aligned to the CEO, IT resources can be better aligned to strategic, rather than tactical, initiatives. With active CEO support, the CIO has a better opportunity to overcome line-of-business issues that could inhibit adoption of enterprise-wide solutions. So it should come as no surprise that more Retail Winners indicate their company's IT function exceeds expectations, more so than either average or under-performers (see the chart below).

This begs the question: Does the way the IT function is governed create differences in performance, or are there other germane business issues driving business success? The answer is yes, Winners do a better job of ensuring that the IT function is delivering value through successful execution of business strategies.

The Business Is Dependent On The IT Function But…
The pace of business change in retail continues to accelerate. The entire value chain, from the manufacturers' outbound docks all the way to the point of purchase is experiencing pressure from two seemingly opposing forces: increased customer demand for specific goods and better service, vs. increasing pressure to shake every extraneous expense out of corporate operations.

Resolving this seeming paradox — delighting the customer vs. reducing expenses — demands information. Delivering information assets in a way that informs decision-making processes is critical to winning in retail. But unlike days past, the consumers of this information also exist outside the boundaries of merchandising and finance. In the past, "merchant princes" alone dictated what the manufacturer would make, what the retailer would sell, and what the customer would buy. Finance executives would do their best to rein the merchants in. Times have changed. Today's decision makers also work at the point of interaction between retailer and the customer. This means the information asset has to be delivered in whole new ways to a much larger group of people than ever before. The IT department, traditionally the ugly stepchild of many retail operations, is right at the heart of the matter. The IT executive in retail, as in most other businesses, is faced with many perception challenges, among them:

• IT spends a lot of money — often more than the profit of the company. This can make for very difficult P&L discussions;
• IT is often seen as not credible — many line-of-business leaders think CIOs are less than effective in managing and controlling IT expenses;
• None of the CIO's peers or stakeholders understand how much time and money it takes to keep IT operations running (maintaining a complex IT shop takes a bit more work than maintaining a home network);
• The language of IT is foreign to the business. Business people don't understand IT and they don't want to;
• It is difficult to measure the performance and cost of IT from a business perspective.

Notwithstanding these negative perceptions, expectations are high for the IT organization as a whole, and the CIO in particular. Over the past decade, Wall Street analysts and successful retail executives alike have touted the value of technology in supporting retail success. Retailers recognize the enabling nature of the information asset, if not the company's dependence on information to achieve its strategic goals (see chart above).

Although more than 6 out of 10 respondents indicate that reaching their corporate objectives is aided by effective IT value delivery, a somewhat surprising 38% say that the company is dependent on it. This result is swayed by average performers; more of both Retail Winners and Laggards indicate that they are dependent on effective IT value delivery (42% and 43% respectively). As we will see, however, Laggards consistently hamstring the IT function with poor governance practices that result in poor value delivery.

The Value Of Information To Improve Performance
To improve corporate performance, retailers typically exercise four basic strategies: First and foremost on most retailers' minds is the relentless need to increase sales. As RSR has noted in recent research, the focus of Winning Retailers in our current economic climate has been to keep the customers they have, not necessarily to look for new ones.

Acquisition costs are high. Particularly, retailers are looking at price, assortment, and promotion optimization systems to keep the customers they have, and perhaps win new customers who abandon other retailers in their search for better value. Another strategy is to keep more of every revenue dollar. This is typically described as the "operational excellence" agenda, and it's where retailers focus a lot of effort. Since the widespread adoption of POS scanning in the 1980s (which provided the opportunity to review specific information about demand by SKU), retailers have made huge investments in technology in an effort to optimize the "buy" side of their businesses. They've standardized assortments and smoothed the flow of goods through the supply chain in an attempt to ensure adequate service, while at the same time trying to minimize both out-of-stocks and excess paid-for inventories.

Although this work on the "buy" side of the business is ongoing (as we move from standardized to localized assortments), retailers have recently turned their focus to the "sell" side of their business. The goal is to ensure that the labor dollars spent in the stores are more focused on customer-facing activities. To that end, retailers are deploying workforce and task management systems and operational metrics "dashboards" to closely and effectively manage the use of every labor dollar. A third strategy has to do with tying up less working capital, and retailers are trying to address that issue by striving for a much faster-moving inventory pipeline. To support that objective, retailers and their trading partners are learning to collaborate digitally across an extended value chain, all the way from product design through product consumption. Finally, retailers seek to introduce new and compelling value-creating offers for the consumer. Traditionally, this has meant entering new markets or commanding more market share from existing ones. But today it also means entering new selling channels. Consumers in greater numbers are engaging in cross-channel shopping, sometimes beginning and ending transactions in more than one channel.

Retailing isn't bound by the four walls of the store. In today's world, all of these strategies require the effective deployment of information technologies and optimized business processes that make the most effective use of the information that technology provides. Neither IT nor optimized business processes alone are enough to compete: they must work together.

Opportunity #1: Finally, Acceptance Of Packaged Apps Longtime retail watchers have railed against retail chains' propensity to "roll their own" software. Stories are legend. Some retailers had homegrown payroll applications with dedicated staff on hand to update the software whenever a new form came out or in response to tax changes by county, city or state. One multibillion dollar chain drugstore even built its own proprietary in-store network that persisted late into the 1990's.

The causes of the legacy of homegrown technology have been well documented. Up through the early 1990s, only "glass house" computers could scale adequately to handle retail transaction volumes, and packaged software for any department beyond finance and administration was hard to find for those computer systems. For their part, retailers had a hard time distinguishing between critical business differentiators and cultural traditions, and would insist on heavily customizing any packaged application they did buy, eliminating the possibility of following vendor upgrade paths. But times have certainly changed. Not only are there commercially available software solutions available today with rich capabilities that can be flexibly deployed without heavy modification, but those solutions are often designed in such a way as to facilitate integration with other software. Perhaps more importantly, retailers have come to understand that it's the combination of people, process, and technology that drives performance, and not just technology. This realization has caused retailers to ask themselves if proprietary processes in their operations, particularly in the nonselling functions, really create value for the consumer — or just create more cost.

Opportunity #2: Getting On The Integration Bus Retailers are hard-pressed to justify any project that doesn't drive immediate and obvious ROI. However, the somewhat mind-boggling development costs associated with continued reliance on point-to-point integration between applications (packaged or otherwise) can drive an IT-savvy business executive to distraction. Retail Winner business leaders, who seem to "feel IT's pain" are clearly helping drive a move to standardized integration buses (see chart at right).

BOOTstrap Recommendations For Business Executives
Align the IT agenda based on corporate strategies. Ensure all line-of-business (LOB) demands for IT services are considered within the context of the total corporate strategy. Establish organizational accountability for IT at the top of the company, usually by having the CIO report directly to the CEO.

Retail Winners clearly understand the value of establishing such a clear line of authority and accountability. It is not enough for the Executive Committee to approve and monitor the IT expense budget and capital plan — it also needs to understand what the money is being used for and monitor progress towards the desired results. According to virtually all our survey respondents, attainment of corporate objectives is at least aided by, and sometimes dependent on, an effective IT organization. Therefore, the executive team cannot afford to be passive when it comes to information technology.

The Executive Committee should regularly review IT priorities and project status. "You get what you pay for." IT's effectiveness is your responsibility too. RSR's research consistently shows Laggards habitually shortchange investments in enabling technologies. Winners aren't afraid of spending to get what they want. Continuing to view IT only as a cost center is dangerous in today's hyper-competitive environment.

Winners are using the information asset to win. But it isn't an act of faith to invest in IT; Winners place much more emphasis on strong business cases for IT investment than do either average or laggard performers. Rigorous ROI disciplines and successful investment in enabling technologies aren't mutually exclusive — in fact, based on our survey results, they go hand in hand. "Own" the automation that makes your business processes work. Align line-of-business specific processes to the corporate strategy; then map IT to business processes. IT is an important enabler, but no amount of IT can fix a poorly designed business.

BOOTstrap Recommendations For IT Executives
Systemize the whole life cycle — just like you preach to LOB leaders. IT organizations only have themselves to blame for failing to optimize the value delivery process from requirements through postproduction operations. Despite vast improvements in the tools available to IT organizations to manage value delivery, and despite more technical complexity crying out for a more proactive stance, most IT organizations only manage the "back side" of value delivery — tracking problems and changes once they've been introduced. Only about one in four IT organizations track value delivery from the "front end" of the process. The rest ask the business to trust them to deliver what they promise. Why should businesses believe that? Simplify the portfolio. There is simply no reason, given today's tools, to continue to use point-to-point integration between applications. Companies that avoid investments in middleware don't understand the ongoing costs (both direct and indirect) of continuing to maintain custom integration points.

Beyond integration technologies, retailers should seek out commercial solutions that offer integration capabilities, not only between their own products, but also to facilitate integration in a heterogeneous portfolio. Choose a strategic partner that will help you achieve your goals. The CIO is uniquely positioned to bring outside ideas into the company, either by learning what other retailers are doing with technology or how other industries utilize the information asset. The best opportunity to find out how others are using information technology for strategic advantage is by seeking out strategic partners. Whether a software provider, network or database company, systems integrator, or management consultant, it's important to get that outside perspective, to help you achieve your objectives. Systematically refocus a greater percentage on value-creation, and less on value-maintenance. The IT organization spends the largest part of the total budget running the existing solution set, rather than creating new value. A big part of that spend is in human assets, and specifically developers.

The CIO should develop a systematic program to simplify the portfolio and to reduce development rework and production errors. Such a program should be multifaceted, including demand and portfolio management and robust QA and problem tracking. One important way to reduce the internal maintenance load is to choose solutions vendors who deliver a preintegrated portfolio of solutions. Use metrics that matter to the business. IT organizations are usually rich in technical metrics that help manage the technology. However, those metrics are esoteric and don't mean anything to business users. The IT organization needs to report the quality of the business services it delivers. Don't undertake projects that aren't aligned to the whole corporate agenda.

The most important and hardest word to use in a CIO's lexicon is "no." But that's exactly the right response when the IT organization is under pressure for any LOB or IT-internal project that hasn't been vetted by the Executive Committee and prioritized in the context of the corporate strategy. "Doing favors" for LOBs only creates problems. Business leaders often forget to count the opportunity cost of any one-off effort; what isn't getting done while that's getting done? It's in the company's best interests that IT be regarded as a pan-enterprise resource. The CIO has to encourage that point-of-view by saying "no" to provincial or "rogue" projects. It's not art. Despite its history, IT is not an artistic endeavor.

Neither is it a scientific project. It is the thoughtful application of digital assets to solve business problems and to enable business processes. For the full report, go to retailsystemsresearch.com.