StorefrontBacktalk

To Survive, Retailers Need To Kill The IT Budget And Burn The Boats

Written by Todd L. Michaud
September 4th, 2012
Todd Michaud runs Power Thinking Media, which helps retailers and restaurants tackle the convergence of social, mobile and retail technologies. He spent nine years delivering technology platforms to more than 10,000 retail locations as VP of IT for Focus and Director of Retail Technology for Dunkin' Brands.

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. It's time to let go of the past and start thinking about IT as a business enabler, unleashing its full potential to the organization.

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. Smart retail organizations will give the CIO the tools necessary to solve the problems at hand, rather than trying to make sure no one runs with scissors. 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.

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. If that doesn't say it all, I don't know what does.

Never has there been a time in my career where the need for IT resources (dollars and people) was not dramatically outstripped by demand. I'm not talking about needing 10 percent more; needing 300 percent more seems to be true-to-life. Technology has become an integral part of all aspects of retail. The business, in almost all departments, is starving for more technology and yet the entire system has been set up to ensure that doesn't happen.

I firmly believe that to be successful and to truly compete with the likes of Amazon, retailers must stop thinking about IT like other "controllable expenses" and start thinking of the department as a service provider. They need to start thinking about how technology can enable other parts of the business. Unless you want to fail, the C-suite should not be creating IT strategy, budget and direction as a group. If you want to take your business to the next level, give your technology budgets back to the respective business units and give your CIO P&L responsibility and strategy accountability.

Within most retail organizations, typically arcane processes are in place that say IT needs to budget for a set number of projects and a set staffing level for each year. The team is typically led through some sort of multi-functioned steering committee that convenes on a regular basis to determine whether the focus and attention of the scarce IT resources need to be adjusted. These functional groups often battle over who is getting attention and who is not.

If the marketing chief, for example, identifies an important opportunity to take advantage of some new trend in social media, she may be stuck because the technology resources are already committed to overhauling an outdated supply chain system that should have been replaced five years ago. The CIO is left basically saying "no" to anything new that shows up between budget cycles.

Some organizations actually plan out "spare" capacity to handle "pop-up projects." But, typically, any spare capacity is almost always eaten up by over-runs in existing projects. This leaves everyone frustrated, especially the business owners and the CIO. I'm not sure about you, but that doesn't exactly strike me as nimble or competitive.These bureaucratic systems were often put in place during the dog-days of ERP implementations. It happened at the same time as many organizations were making the decision to move the CIO under the CFO in the reporting structure. CEOs were seeing dramatic increases in technology spending throughout the organization, and they were set on managing this "controllable expense." This is what you do when spending is out of control, you put a leash on it and pull very tightly. So IT was wrapped up and 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.

So what should be happening? Instead of project lists and budgets, smart retail organizations will focus on the important business rules of IT. They will define clear IT project governance that is used both internally and for externally purchased IT services. This governance focuses on things like security, availability, performance and reliability. It uses governance structures that focus on data portability and extendability. It makes sure that everyone who is involved with technology is operating within the same structure, with the same vision.

Amazon doesn't have this problem. Its entire business is technology, and the online retailer is exploiting this weakness. It doesn't let technology mature past its useful life; instead, Amazon invests in technology that is ahead of its time. The company has purchased so many servers to meet its peak capacity demands that it is able to sell the excess computing cycles in the form of cloud computing. Amazon now makes more than $2 billion a year selling cloud services.

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? Think about whether the fears of this world are real or just scary. Does that mean the business units can purchase IT services from an outside provider when the internal team can't meet the needs? If you have put the right governance in place, why not?

Every time I talk to retailers who refer to Amazon as if it's something different, or in some different retail category, I laugh. Amazon has had no more advantage in this game than any other retailer. It's not like the rules were different for the online retailer. Amazon simply made different business decisions about how to grow its business. Any retailer could have made similar (or even better) decisions 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.

What do you think? If you disagree (or even, heaven forbid, agree), please comment below or send me a private message. Or check out the Twitter discussion on @todd_michaud.