By Brian Kilcourse, Managing Partner
4/15/2008
Before fifteen years ago, retailers with less than $1B in annual sales were challenged to do much of anything with information technology beyond basic backoffice functions. Assuming that a retailer had about 1% of sales to devote to the IT function, a $1B retailer could support a $10M P&L load from running the IT shop. To put that into perspective, an air-cooled IBM Mainframe installation would probably use up something in the area of $500,000 in maintenance and depreciation alone, or 5% of the total IT budget, and that’s not counting all the peripherals that were probably attached to it or the cost of the physical environment, with its coolers, power backup systems, etc. etc. The mid-tier was the world where AS400’s roamed, and along with that, the packages that ran on them, since that platform offered a cost effective alternative to “big iron.” At one time, IBM even marketed the AS400’s predecessor technology, the System 38, as a “programmer-less” computer.
Sometime in the early ‘90’s, the dynamic changed with market acceptance of “open” UNIX computers, desktop technologies, and IP based networks, and all the solutions that ran on them. Nonetheless, the perception persists to this day that mid-tiered retailers (by RSR’s definition, those retailers whose annual revenue ranges from $250M to $999M) favor off-the shelf packages and vendor support, a la the AS400.
Responses to a survey that RSR has gathered as part of a study on the state of Business Application Development in Retail paint quite a different picture. In fact, mid-tiered retailers show that they are dealing with many of the same challenges that their bigger counterparts have in supporting application portfolios full of proprietary applications with custom integrations to either commercial “point” solutions or other proprietary applications. We on occasion have opined that this type of portfolio can be described as a “hairball” architecture, since every time a new application is added, or an old one changed or de-installed, the integration points have to be carefully disentangled, then re-attached.
Untangling the “Hairball”
It turns out that mid-tiered retailers are much more prone than their larger counterparts to be supporting point-to-point integrations between proprietary and “best of breed” applications, according to our analysis of the responses. In fact, 47% of mid-tiered retailers that responded to the survey say that that this how they have integrated applications (compared to only 10% of “large” retailers over $1B in annual revenue). Given this fact alone, it shouldn’t be a surprise that mid-tiered retailers would devote more of their application developers to maintenance rather than the deliver of new functionality, and that appears to be the case. Forty-six percent of our mid-tiered respondents say that more than 50% of the development people (FTE’s) do “maintenance” compared to 33% of the “big” retailers, and 13% of them say that more than 75% of their development FTE’s are focused on maintenance (compared to only 3% of large retailers). This is a stunning amount of time, energy, and money to be focused on “keeping the lights on,” but there is an upside, and that is that the user community feels the love – they’re getting their day-to-day problems addressed. Eighty percent of mid-tiered survey respondents indicate that the business is “somewhat satisfied” with IT’s responsiveness, vs. 55% of large retailers. But no mid-tiered survey respondents said that business users are “very satisfied” (compared to 10% of large retailers), and that probably speaks to the fact that the backlog for “new development” work is growing. Although almost all of our survey respondents said that their backlog of new function development has grown in the last 12 months, mid-tiered retailers are feeling the pressure more.
Technology vs. Process: It’s an Issue in IT too!
A difficult scenario, to be sure. In fact, both mid-tiered and large retailers say that they are having difficulty delivering projects on-time, within budget, and with the promised functionality. So the obvious question is, what to do about it? And this is where mid-tired and large retailers start to take divergent paths. According to the survey responses, mid-tiered retailers tend to look for technology answers, whereas larger retailers look to process. Mid-tiered practitioners are much more focused on “best of breed” packages to replace their legacy applications than large retailers (47% vs. 24%), and are looking at software-as-a-service (SaaS) to deliver the functionality to the business (47% vs. 34%). Large retailers on the other hand are more focused on the IT governance process itself, to ensure that the scarce development resource is doing exactly what the business needs done. Seventy-nine percent of “big” operators want a better alignment of IT priorities via an executive steering committee (vs. 53% of mid-tiered retailers) and 48% want more accountability from line-of-business leaders for IT projects (vs. 40% of mid-tiered players).
The Mid-Tier: Ready to Change
Very few retailers who responded to our survey to-date indicate that “more of the same” is acceptable, especially given that the business wants more IT attention on new functionality. However, mid-tiered retailers seem particularly interested in changing the dynamic of their current IT function. Forty-seven percent of these retailers say that their application portfolio will go toward “best of breed” solutions in the next two years, and 53% say that ERP’s or “suites” will find their way into the company. And, 40% just want to outsource the IT portfolio (compared to only 18% of large retailers).
What Goes ‘Round comes ‘Round
It’s easy to conjecture that with the lowering of the price/performance barrier of information technology and the tools that went along with it, that mid-tiered retailers decided to do what their bigger brothers and sisters had done, and start banging out proprietary applications. Fifteen years later, they have ended up with the same problems as “the big guys” but with a lot less money to support those problems (after all, the human resource expense on an FTE basis is the same for both). And so it appears that those mid-tiered retailers are ready to “king’s ex” the situation and go back to commercially available pre-integrated solutions. This represents a golden opportunity for solutions providers – if they’re ready. And oddly, the mid-tiered could end upon the front-edge of a new way of delivering IT value, by acquiring software services in addition to software licenses. But one thing seems clear: mid-tiered retailers are tired of the issues associated with proprietary code and custom integrations. They are (once again) willing to let their bigger cousins have that field all to themselves.
|
