Retailers Will Find Beauty on the Inside

Sluggish sales receipts in 2001 and 2002 mean bad news for software companies today, but according to an IBM report released Tuesday night, the next couple years will see a resurgence in IT spending in key areas.

The “2003 Retail CIO Outlook” shows IT spending is going to continue its incremental pace in 2003, with only a .03 percent increase — from 1.8 to 2.1 percent. However, the retail industry, which has been shoring up expenditures in the past because of weak sales, will be forced to look at solutions that tie together the supply chain with customer relationship management functions.

“The key is going to be driving the cost out of the infrastructure,” said Troy Pike, co-author of the report and a retail industry leader at IBM’s Institute for Business Value. “In the past, retailers built everything themselves and we see a big trend away from proprietary systems towards packaged applications and open applications — the plug-and-play environment.”

While many retailers will be looking for a brand-new outside solution, many retailers will still be looking at technology that lets them upgrade their legacy point-of-sale (POS) systems, which IBM figures average between 10 and 20 years old. In their 2002 survey,
IBM found 59 percent of retailers were looking to extend or upgrade these POS systems; in 2003, 19 percent said they already have and another 76 percent said they plan to in the next five years.

While companies like SAP , PeopleSoft , Oracle and companies like them are going to get into the retailer marketshare, as far as IT spending goes, companies like IBM, with its business solutions/consulting stand to make out the best, according to the numbers released in the IBM-sponsored survey.

A shift towards Web services is the biggest change coming in the retail industry, a marked change from the past. Before, retailers kept a tight rein on proprietary, in-house applications running on their own servers. Now, however, machines with 30 percent server utilization for most of the year (excepting holidays) are looking like costly items to maintain.

Pike expects outsourcing and Web services, of a sort, will grow by 50 percent in the next three to five years.

“Retailers are increasingly looking to outsource, but the way in which they outsource is very different than it was in the past, with traditional outsourcing,” he said. “What companies are looking to do now is to be adaptable and flexible, while controlling costs.”

But unlike many companies with e-commerce dreams, retailers are tightly focused on the benefits of outsourcing and Web services as it applies to the infrastructure.

In terms of leveraging the Internet, all the value is coming on the supply side of the retail value chain, not the demand side,” Pike said. “I think the harsh reality that retailers are facing is that while Internet sales are growing fast, their ability to build the capabilities to profitably serve those customers and to grow that market in case they need to continue that earnings growth is very limited.

“Internet commerce is $20-30 billion dollars; the overall retail market is $6 trillion, it’s not even a blip yet,” he continued.

Some survey facts that back that assertion up:

  • 59 percent of those surveyed said the primary
    driver for IT spending was in the area of enhanced
    employee productivity.
  • 49 percent said e-commerce/Web sites were “not a
  • 39 percent of those surveyed said the drive
    behind outsourcing was to reduce operating costs.
  • 41 percent of companies spend 10 percent or less
    of their IT budget on outsourcing. In the next three
    to five years, 40 percent expect to be spending 20
    percent or more.

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