Why more and more retailers are outsourcing their IT
In turning to third parties, retailers can more easily experiment with a multitude of technologies to reinvent their businesses for the omnichannel era.
Outsourcing information technology (IT) has long been common practice in industry verticals like finance and healthcare. Companies in these industries sought outside help to cost-effectively mine increasingly vast amounts of data and manage complex technology assets.
For those in the retail sector, IT has historically been seen as something that's in the industry's wheelhouse, but as the digital transformation has taken hold over the last few years, a growing number of retailers are beginning to rethink the role of in-house IT. These teams have had to wrap their heads around how to effectively harness an endless stream of emerging technologies — and for many in-house IT teams, it's become too much to handle.
Faced with tough choices about what they can do well in-house — and what might be done more effectively through a variety of third party players — a growing number of retailers are outsourcing their IT operations. The market for outsourcing and managed services adoption has traditionally been pegged around 7% for retailers, Harvey Gluckman, a senior partner responsible for the retail and consumer products vertical at advisory and research firm ISG, told Retail Dive. But driven by emerging technologies and the pursuit of new digital capabilities, retailers have opened up to outsourcing more than they have before.
"[I]n the last five to seven years, [retailers] are turning to outsourcing more than they had in the previous five years," Gluckman said. "The biggest reason is these companies are trying to transform themselves as digital enablement technologies and other emerging technologies have taken hold."
Retailers' growing IT needs often exceed their capabilities
ISG tracks outsourcing trends among a Global 2,000 list of companies, 104 of which are retailers. Gluckman said that 80% of these retailers rely on some amount of outsourcing for completion of tasks and project work, while a much smaller percentage also outsource to augment staff that support mounting responsibilities.
Most retailers turning to outsourcing are looking to satisfy one or more of the following needs: Reducing IT costs, adding capacity or obtaining new capabilities. Retailers have traditionally been known to cut IT staff because they see outsourcing as a less expensive way of handling IT responsibilities, but more recently, outsourcing decisions are being made to enable a digital fabric, Gluckman said.
Staples is one company that recently swapped in-house IT duties for third-party guidance. In 2013, the office supplies retailer launched its in-house Connect system, which attempted to bring customers a unified experience across all their smart home and office devices. But following its failed merger with Office Depot this summer, the retailer earlier this month announced it would outsource the concept to a third-party smart home system using products from two companies, Z-Wave Products and Zonoff software. A spokesperson said the decision was partially made to place a greater focus on more business-oriented solutions.
In the past satisfying new technology needs was an IT department matter, but in an age when Amazon has built an empire on innovation, technology development and management are becoming more strategic business concerns for retailers. So much of what in-house IT teams do now instead touches on "the consumer-centric operating strategies many retailers now have," Gluckman explained, saying it's "that omnichannel lifecycle that everyone's embracing."
And while omnichannel strategies comprise and draw on a number of different technologies — online connectivity, mobility, social media, location-based search and analytics, and intelligent and efficient logistics — even that broad scope of capabilities doesn't complete the full picture of the emerging technologies that retail IT teams are dealing with right now. Among many things, retailers are exploring the meaning of the Internet of Things, such as wearables and sensors both for in-store and supply chain logistics applications. Retailers are also experimenting with augmented and virtual reality simulation programs, robotics and even drone delivery as one of many fast fulfillment innovations.
Some of these technologies are evolving so fast — and lie so far outside the traditional knowledge base of retail IT groups — that the natural course of action is to seek outside help.
"Most retailers just don't have broad enough skills sets on their own to bring all of these different technologies to the platform level by themselves," Gluckman said.
The many challenges of outsourcing IT
As in-house IT teams add "obtaining new capabilities" to their job descriptions, maintaining cost and time efficiency while in pursuit of these capabilities has become an issue as well, according to Oliver Marks, research vice president for digital and IoT at HfS Research.
"The huge pace of retail market change around digital and consumer experience has made it extremely difficult for traditional IT to function cost effectively, particularly in verticals with razor thin margins," Marks told Retail Dive.
Being able to pay a monthly fee to get certain capabilities "as a service" from a cloud service provider could free up dollars to spend elsewhere. Retailers might also outsource to smooth out increasingly complex workflow management involved in developing new technologies. A large number of components and processes need to align to support something as complex as the omnichannel shopping experience.
"Close IT partnering and outsourcing is rapidly becoming the norm for major chunks of business workflows," Marks said. "The benefits of data flows and analytics across multiple aspects of retail, from supply chain and product availability through near-field beacons monitoring brick-and-mortar customers in-store, browsing habits and propensities online, buying decisions and after purchase product life cycle support — all of this is collectively too much for traditional IT teams to handle internally."
That was the case for Easy Street, a shoe retailer, whose in-house IT team has struggled to increase distribution channels due to growing e-commerce sales. "We're good at designing and selling shoes," said Easy Street President Keith Gossett in a statement in March. "Our specialty is not designing and maintaining software."
The retailer decided to outsource solutions to manage operations throughout its supply chain and to improve inventory visibility from Blue Cherry, a company that specializes in enterprise resource planning and has experience with apparel solutions.
Several of the largest consulting firms, business process outsourcing companies, and managed service provider giants have units serving the retail vertical. Marks cited some of the leading candidates: Accenture, IBM, Capgemini, Genpact, Wipro, Cognizant, Tech Mahindra and NTT.
Many of these companies are experienced enough to handle all of the IT needs of even the largest retailers, according to Marks. The challenge is that most retailers want to keep internal business IT systems supporting functions like HR, legal and accounting in-house, while outsourcing more urgent, customer-centric tasks.
Retailers also can take the cloud approach — outsourcing some IT functions to an infrastructure-as-a-service or software-as-a-service provider. Such options move resources off-site to a host for a monthly fee that is typically much less expensive than paying a team of in-house employees to support the same functions, Marks explained.
But if retailers take this route they could end up outsourcing to Google or Amazon, companies that have massive cloud IT hosting businesses but are otherwise considered e-commerce competitors. If they opt to go elsewhere, they could turn to Microsoft Office 365 or specialists like Salesforce, Workday or regional cloud service providers. In many cases, analysts said retailers mix and match IT services from one or more of the larger companies mentioned above, as well as using a point solution for a technology like IoT from a much smaller startup.
Whatever path they choose to follow, the need to keep up with the next new thing in retail — whether it's mobile shopping, augmented reality or something else — is a powerful stress inducer. Outsourcing some IT projects may help ensure retailers don't miss out on an important, new innovation, but retailers should keep close tabs on whether investment in those emerging technologies makes business sense.
"The behavior varies based on the retailer, what they need to invest in and what their spending requirements are," Gluckman said. "But, in general, I don't see this trend slowing down anytime soon."