Alan Morris says retailers need to look again at ITcost models. As turnover falls, new cost management principles are required toreduce IT spend and contribute to a leaner business.


IT spend in retail is normally between 0.9 and 1.9 percentof turnover per annum, so taking 1.6 percent as an average would mean 1.6million for a 100 million turnover business. The problem comes when sales dropand turnover falls. In a pre-credit crunch world, many retailers would haveconsidered themselves well placed against a benchmark of 'only' 1.6 percent -but now find their own costs reach or even significantly exceed that 1.6percent figure. Given this scenario, wouldnt it be ideal if your IT costsoperated like a 'tracker mortgage' - the flexibility to have IT spend rise andfall relative to turnover, as business needs and the trading environmentdictate? With that as an ideal, the first step is to take a good look at whatyou're doing and where you're spending, using the current downturn as anopportunity to change the way you run IT and so take costs out of the business.


Explore costs - look at new models


Today's recessionary environment will be forcing retailersto question how they do things in relation to their IT and its cost, tocarefully examine systems and processes. IT can no longer be seen in simpleterms of how much value it adds to a business, important though that is,but also in terms of how much its actually costing you relative to yourcompany size and level of business youre actually doing, and considering whichof your IT costs are truly fixed and areas where there may be some room formanoeuvre. Indeed, perhaps the best way to add value to a retail business rightnow is being able to maintain the status quo while controlling or evenreducing key costs. This brings us to an old point but one still worth making:technology may be essential to running your business but it is not, in fact,your business. In view of that, here are five suggestions for a plan of actionto help get things moving:


  1. Find out what you are actually spending your money on.
  2. Consider whats changed since those spending decisions were made (falling turnover).
  3. See which IT costs are truly fixed, sunk costs or variable (experience suggests IT is best seen as a 'semi-variable cost' with diverse elements ranging from hardware that depreciates year-on-year to internal help desks).
  4. Think about the business needs or operational requirements driving those costs, and if they have changed.
  5. Explore opportunities for change, and include your overall business strategy and objectives in your plans.


Let's use a help desk as an example: actually a variablecost. A reduced retail estate following store closures or, say, or a reductionto six days in trading suddenly means your requirement for a fully resourcedin-house help desk suddenly goes down. You can then explore moving to a newcost management model, which could mean changing how you run things in-house orlooking to outsource some or all of that function, maybe using the economies ofscale offered by a 'shared services' provider. The choice is yours but actionwill be required to drive lower costs. Of course, requirements can increasetoo. For example, in the face of falling high street sales you might want tofocus on online sales driven by, say, special advertising promotions orcustomer incentives. Here, you could suddenly require more help deskresources and capacity than previously. With the future uncertain, you need tobe ready.


New opportunities


Retailers should ask themselves "What am I spending mymoney on, and does that spending tie-in with our business objectives?" Ifcost cutting is your main objective, you can pursue it only after you'veproperly understood where your costs lie. Even if cost cutting isn'tyour primary focus it's still a prudent exercise: you could be performing nowbut that can change. The basic point is retailers need to focus back on corecost management principles. Do you understand how much your IT costs, and howdo those costs relate to what the business actually needs right now? How do youacquire and manage the products and services required to deliver your IT - andcould you drive those costs down and get better value from your supplier base?The fact is, exploring different cost models is a great opportunity to benefitfrom new services like SaaS (Software as a Service). This gives you instantaccess to the latest versions of software at a much lower cost than acquiring,integrating and maintaining it in-house. Buy what you need when you need it,with no overheads like software licenses or staffing.

 

For many retailers, and particularly their IT and Finance Directors, looking at costs in a far deeper way can be a revelatory experience. Only by gaining a true appreciation of what are fixed costs and what are variable can you reveal and plan for change: improving in-house practices, working with an outsourcer, or using a mix of internal and external resources can all mean you pay less. In a shrinking market, retailers have to make sure their operations in all areas are as lean as possible. To remain relevant and continue adding value, the priority in IT now is to reduce how much it costs, and to do that fast. If retailers don't take action soon, their essential and increasingly expensive IT could end up being a millstone around their neck.


About the Author:


Alan Morris is the Managing Director of Retail Assist.