With the economy sputtering, consumers are watching their wallets. That is forcing America's retailers to focus on their core competencies as the only way to compete for the shrinking discretionary spending of the fickle consumer.
Outsourcing is one way for retailers to compete. "Retailers would rather refurbish an old store or open a new one than install a new IT system," says Matt Shocklee, vice president, outsourcing for the Americas at Cap Gemini Ernst & Young, an outsourcing service provider with its North American headquarters in New York City. Cap Gemini has retail customers with annual revenues of $800 million or greater. "Outsourcing takes the onerous business of technology - which is constantly changing and very expensive - out of their hands."
Shocklee says Cap Gemini saw a "heightened interest in outsourcing" among retail buyers in 2002. Many were interested in the IT that powers many of the BPO processes, he reports.
According to Christopher Boone, a senior analyst, U.S. vertical industry research for IDC, a research company based in Framingham, Massachusetts, retail IT budgets tightened last year. IDC's preliminary estimates predict U.S. retail IT spending declined 1.5 percent in 2002 compared to 2001. Since salaries and benefits take up a large portion of these budgets, he says "IT outsourcing looked more attractive last year." However, the increasing desire to outsource IT may not necessarily lead to robust growth for IT outsourcing revenues this year because of the overall decline in IT spending, in his opinion.
Six Major Trends in 2002
Six trends dominated retail outsourcing in 2002.
1. Buyers wanted service providers to simplify their lives.
"The customers want an integrated process for services delivery. They don't want multiple vendors in their stores," says Patrick Daniels, vice president, sales, for the retail industry for Getronics, a worldwide IT services provider with its North American headquarters in Billerica, Massachusetts. Getronics specializes in providing support, maintenance and outsourcing to the retail industry.
Daniels says Getronics' customers want to deal with only one service provider because "it makes their life less complicated as well as less costly."
2. Buyers wanted service providers to prolong the life of their infrastructure and integrate new technology where needed.
Boone says a major trend in outsourcing among retailers has been to farm out non-store systems components--customer call centers, eCommerce sites, network management--to outsourcers so retailers can focus their IT resources on improving store systems to enhance customer service.
Last year customers also sought to improve infrastructure performance and add new technology to the mix, adds Jim Kipp, director of retail program management for Getronics. "Strategic decisions around the infrastructure and technology refresh are based on business requirements and return of investment measurements. Service providers need to link their real time systems to their clients' own IT systems to manage the store infrastructure today and plan proactively for tomorrow," he says.
In the current economic environment, retailers want to consolidate and standardize their back offices to get more meaningful information, notes Jorge Salgueiro, managing partner, Latin America, for Deloitte & Touche, a service provider based in New York City. "They are choosing to outsource because we can implement with greater speed," he says.
3. Buyers moved to packaged software and let the service provider run it.
Shocklee says retailers wanted back office software to run their finance and accounting and human resources processes. "Last year they hired us to implement and run ERP programs like SAP or PeopleSoft. They're now looking to us to run these systems for them," he says.
Increasingly, retailers are relying on packaged software to run their businesses. Historically, retailers preferred to develop their software internally. "Last year outsourcing new systems moved to the people who built them," says Shocklee, who managed IBM's relations with Wal-Mart before joining Cap Gemini.
4. Buyers wanted service providers to produce the same service levels but lower the cost.
Like most other outsourcing buyers in 2002, retailers wanted to secure more value at a better cost, reports Daniels. "Our customers said to us, 'We like what you do. Here's what we're spending. How can you collaborate with us to continue your wonderful service but take the cost down?'" he continues.
5. Delivery from shared service centers gained greater acceptance.
Scott Wilson, managing director of Deloitte & Touche's outsourcing division, says he noticed greater market acceptance for service delivery from a multi-client shared services center. "Acceptance is much greater than it was a year ago. People are now believing in the shared service model," he says. Past successes and the tough economy contributed to this acceptance. "We now have clients who can explain the benefits," he continues.
6. Professional employee organizations (PEOs) helped retailers improve employee benefits and address worker's compensation issues.
Small to mid-sized retailers were able to offer Wal-Mart-style benefits to their employees through PEOs. "These types of benefits were unattainable before," says Greg Arend, managing partner of Deloitte & Touche's BPO practice. Companies had to offer these benefits to stay competitive, but didn't have the funds to provide them. Outsourcing benefits to a PEO solved the problem. In addition, PEOs helped these smaller retailers achieve the scale they needed to bargain with workers' compensation insurers.
Predicting Trends in 2003
Retailers are one of the last industries to outsource their helpdesk operations. Kipp thinks helpdesk will see a lot of outsourcing initiatives in 2003. "Running their own helpdesks is becoming very expensive," he says. That is backed by the simplicity trend; retailers' lives become even simpler when their primary infrastructure provider now handles helpdesk as well.
Adding helpdesk to the mix also increases efficiency. The service provider gets the call directly and can dispatch its own field engineer, who is trained on the equipment in the entire store. Outsourcing the help desk to the same service provider that performs support and maintenance improves governance of the outsourcing relationship, points out Rick Fogerty, president of field integrated management services for Getronics. "The data collected in our field service system can determine the highest failure rates of the equipment and identify actions to reduce the number of support calls. The linked help desk and field service system lowers support costs and increases systems availability in the stores."
Shocklee says retailers will continue to rely on service providers to implement and run new IT systems. "Buyers are looking to us for the total cost of ownership," he says. Boone agrees. Retail interest in outsourcing will increase since they will continue to be asked to do more with less. Because investing in store systems remains at the top of retailers' IT priorities for 2003, IDC predicts continued interest in outsourcing services for eCommerce sites and customer call centers.
Shocklee predicts "BPO will be big in 2003." In addition to human resources and finance and accounting, he thinks retailers will increase their collaboration through supply chain outsourcing with the manufacturers, their product partners.
Mike Stipa, managing partner of application outsourcing for Deloitte & Touche, predicts new types of service providers will enter the retail fray. He mentions FSC, which provides back office services to Pizza Hut. Companies like this will try to leverage their investment and sell their services to other retail buyers.
Boone believes Amazon.com will become "the Mall of the Internet." With gross margins of 86 percent on services and $100 million in sales from services in the first half of 2002, he expects Amazon.com to forge ahead to become the eCommerce outsourcer for retailers.
Retail Outsourcing Trends in 2003:
- BPO will be big. Helpdesk will be another growth area.
- New service providers will enter the market. Amazon.com will become a major player.
- Retail interest in outsourcing will increase as retailers will be asked to do more with less.