Relieving the IT Pinch

A recent Info-Tech Research Group study indicates that there are two particularly low-hanging and ripe IT projects for small retailers. Business Intelligence (BI) and Information Lifecycle Management (ILM) demonstrate high value for retailers and are relatively unexploited by the smallest retailers.
IT Hurdles for Retailers
Small retailers suffer an onerous IT burden. The smallest retailers (earning less than $25 million in annual revenue) spend an average of almost seven percent of their revenue on IT expenses. Larger retailers typically spend between one percent and two percent. Senior management at SMBs often looks at the high expense ratios and pressures IT to cut costs.

To overcome the expense hurdle, IT managers for small retailers must focus their resources on both the core strategic priorities of the enterprise and the projects that will drive the most benefit. They must make informed decisions about which IT investments to pursue. A small retailer faces extreme limitations on the number of IT projects it can pursue and there is no room for making wrong choices. Small retailers must learn from the patterns of success of their larger cousins. Recent Info-Tech research indicates that the most successful IT projects for retail companies are BI and ILM.

Untapped Potential of BI
Info-Tech recently conducted a study including more than 200 retailers. The study asked respondents to identify their top technology priorities and to rate the level of success of these initiatives. The most important question explored the perceived business benefits for a variety of different technologies.

BI emerged as the technology with the greatest perceived business benefit. BI is technology for gathering and analyzing data generated by an enterprise. It enables retailers to aggregate data stored in different data silos, conduct various types of analyses on this data, and to generate reports. Retailers use BI for a variety of tasks, including:
  • Identifying the most valuable SKUs in terms of margin, turnover and revenue
  • Assessing overall impact of various SKU cost components such as promotional allowances, rebates, listing fees and slotting fees
  • Determining minimum profitable order sizes
  • Evaluating order lead time variability for various SKUs
  • Exploring demand patterns for the most profitable SKUs
  • Identifying cross-sell opportunities
  • Assessing the profitability of various floor locations and fronting arrangements
  • Creating demographic profiles for buyers of the most profitable SKUs

Other highly rated technologies include: Voice over Internet Protocol (VoIP) and human resource software, primarily for its workforce management benefits. These two technologies provide opportunities for cost savings but they may not be appropriate for smaller retailers. VoIP, for example, has demonstrated its effectiveness for distributed enterprises that include a centralized office and a number of remote sites, all connected by data lines. This infrastructure arrangement describes many larger retailers but not smaller enterprises with a limited number of remote sites. Human resource and workforce management products suffer from similar issues of scale -- the benefits of these tools are limited for enterprises with fewer employees. BI, however, is effective for retailers of all sizes.

BI has not been adopted by small retailers to nearly the same extent as it has by larger enterprises. More than 50 percent of retailers with 10 or fewer full-time IT employees, for example, have no interest in BI. In contrast, all retailers with more than 500 full-time IT employees are at least evaluating the technology. Similarly, almost 60 percent of retailers with more than 500 IT employees already have deployed BI, while another 30 percent have deployment plans. The situation is far different in retailers with fewer than 10 IT employees, where less than 35 percent have either already deployed or have plans for deployment.

BI clearly presents a technology opportunity for small retailers. Given the demonstrated business benefits of BI and its low rate of deployment, most small retailers could benefit from it. There is, however, one common complaint about BI for small firms: the ongoing perception of high cost.

The general process and discipline of BI, however, is not. The key to successful BI projects, regardless of size, is attention to the desired business metrics and integrating these metrics into actual business processes.

ILM: Key Growth Enabler
The Info-Tech study explored a number of other issues in addition to perceived business benefits. One of the other important questions involved contributions to overall competitiveness. Surprisingly, the most important technology among retailers for competitiveness is ILM. ILM describes
the policies and procedures required for managing information and administering storage systems. ILM policies are driven by business goals and address various concerns:
  • IT governance and management
  • Objectives for system availability and recovery times
  • Service level agreements with providers and business units
  • Change control processes
  • Procedures that can address a wide variety of concerns for managing and operating information management systems and storage infrastructures
  • Storage management tools and practices
  • System performance and monitoring
  • System configuration
  • Storage capacity planning
  • Business controls for chargeback and costing
  • Data protection and backup
  • Disaster recovery
  • Archiving and long-term retention
  • Data replication

ILM drives competitiveness by enabling retailers to grow. Enterprises in all industries eventually experience an information growth crunch that limits their ability to grow. The crunch manifests in different ways. For some firms, it may appear when the overnight backup window is no longer sufficient due to the ever-growing store of data in e-mail systems and network shares. Other firms may experience acute distress due to compliance and litigation uncertainty. Publicly traded enterprises, for example, may not be able to pass the onerous technology audits mandated by Sarbanes-Oxley. Other firms may live in fear of the extreme costs for e-discovery if they are sued. E-discovery refers to any process in which electronic data is collected to use as evidence in a civil or criminal legal case.

Other leading technologies for competitive advantage include Customer Relationship Management (CRM), solutions for human resource and workforce management and RFID. While ILM is appropriate for retailers of all sizes, these other technologies are not necessarily appropriate for small retailers. Retail CRM, for example, often involves loyalty card programs while RFID is overly complicated for small retailers.

As with BI, there is a distinct difference between small and large retailers in terms of ILM adoption. While 40 percent of retailers with more than 500 full-time IT staff have deployed some sort of ILM, only 27 percent of those with 10 or fewer IT staff have pursued this technology. What is most telling, however, is the indication of overall interest. There is little ongoing interest in ILM among small retailers outside of the early adopters that have already deployed. More than 50 percent of small retailers express no interest in ILM (as compared to 10 percent of the largest retailers) and very few have future deployment plans.

The lack of ILM interest among small retailers is a distinct competitive threat. The ability to scale data management and IT infrastructure is an absolute requirement in an industry as scale-driven as retail. Many enterprises feel that they can ignore ILM because they are experiencing stagnant revenue or headcount growth. This argument is absolutely false. The growth rate of information in all organizations is far outstripping other types of growth. The average retailer, for example, is growing storage by approximately 40 percent per year. Expressed another way, the $50-million (revenue) retailer of today must manage the same amount of information that a $1-billion (revenue) retailer did 10 years ago. From a data management perspective, even small enterprises rapidly become large enterprises. And ILM is a means of controlling this growth.

ILM does not have to be an expensive project. The focus of ILM is process management. Without attention to process, vendor-provided ILM solutions and technologies will inevitably fail. As a first step retailers should focus on the basics and address issues such as recovery objectives, long term storage and disaster recovery. Processes and policies also should focus on email and unmanaged network shares, the two primary culprits contributing to the information growth crunch.

Keep it Simple

Small retailers must commit far more resources to IT than large retailers. They don't have the luxury of pursuing a wide variety of IT projects. Since they spend so much of their budget just keeping the lights on, small retailers must focus their projects on technology areas with demonstrated value. BI and ILM are two such initiatives that most small retailers have yet to implement.

Many small retailers have avoided both BI and ILM due to a perception of high cost. Both of these technologies, however, are as much about process as they are about technology. Focusing on process enables small retailers to develop the skills and resources they will require to compete with larger companies.

George Goodall is a research analyst with Info-Tech Research Group.