JCPenney IT “Is A Mess,” Says COO

Written by Frank Hayes
May 17th, 2012

Now it is IT’s turn to take the blame for JCPenney’s woes. On Tuesday (May 15), JCPenney COO Michael Kramer told analysts that problems during the chain’s terrible first few months under its new “Fair and Square” pricing approach (store traffic down 10 percent, sales down 20 percent) were compounded by out-of-control inventory management and legacy system maintenance that ate up 90 percent of the IT budget—both fundamentally IT problems.

The result: It costs JCPenney at least $600 million per year more than it should to run the chain—which explains a lot about the quarter’s $55 million operating loss.

In Kramer’s words, “I can think of no other thing to say about our systems and our IT infrastructure, and I have seen a lot of them: It’s a mess.”

How bad is that mess? About $500 million of the retailer’s inventory involves products where there are enough items in the warehouse to last the chain a year or more at current sales rates. It should be more like 13 weeks—and it took Kramer’s team months to discover that, a bad sign in itself.

Another bad sign: the “492 unique applications it takes to operate JCPenney. And that is not including Excel, and Excel is used a lot,” Kramer said. “Out of those 492 applications, 88 percent of them were customized. Customization is not your friend. This translates to 90 percent of my IT spend both on expense and capital basis goes to maintenance. Ten percent goes to strategic initiatives. That’s crazy. That’s a lot of money going to maintenance.”

Kramer estimates that a company of JCPenney’s size should be using “around 100” major applications. He added, “This is years and years of a hundred-year-old company band-aiding and band-aiding and band-aiding. So that when you want to make a change in the business, in the strategy in the business, it takes a lot of unlayering and putting back on, unlayering and putting back on. That costs money. That’s what drives headcount.”

Let’s be clear about this amazing recital of just how bad JCPenney’s IT situation is. Kramer was hired in December 2011, so none of it is his fault. The old CIO, and the one before that, is already gone. The chain’s new chief technology officer, Kristen Blum, is handling what would typically be CIO duties; she arrived in January, so it’s not her fault, either. Both Kramer and Blum used to work for CEO Ron Johnson at Apple, so they have the boss’ support.

Kramer also has cover from a truly awful financial quarter.


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