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04/01/2012

Payback Time

When purchasing technology, the decision isn't just about the service that new systems or applications provide. Increasingly, retailers want to know how long it will take the technology to pay for itself.

In an era when technology changes quickly, companies don't want to get stuck paying for a system that has become obsolete. Couple that with the retail industry's thin margins due to higher costs and a trying economy, and retailers are scrutinizing return on investment like never before. As a result, technology suppliers are pointing to intangible benefits, such as customer service and brand image, as well as hard numbers to demonstrate short paybacks.

The number of players weighing in on the decision to invest in technology also has increased. IT used to be the final word on tech projects, but no more. "Retailers have changed from an industry where IT made the final decision to one where the head of merchandising or maybe the head of marketing in collaboration with IT defines what needs to be done and how it will be done," says Gerry Yeo, a retail industry principal at SAP in New York.

TEAM APPROACH

Many companies use a team approach to evaluate new technology, with the chief financial officer often having the final word. "Increasingly we are seeing that these decisions are not isolated to the IT department. Most decisions are not a simple CIO sign-off," says Tadd Wilson, a senior managing consultant with IBM Retail Store Solutions. Armonk, N.Y.-based IBM, which provides servers, point-of-sale devices and web commerce, supply chain and point-of-sale software to retailers such as Safeway, Wegmans Food Markets and Kroger, estimates that 60 percent to 70 percent of the $5.5 trillion spent on groceries in the United States annually goes across its software applications.

"As capital budgets get tightened and technology investments have to compete with a lot of other investments for fixed or declining capital, the level of scrutiny that's getting put on is much higher," Wilson says.


"My questions are very simple: Is it going to drive revenue? Is it going to cut costs? Is it going to free up cash flow or reduce risk?"

–Tadd Wilson,

IBM Retail Store Solutions

Technology purchases should be strategically tied to business goals, he says. A core system upgrade is a major investment that calls for justification. Instead of focusing only on the price, retailers should consider the larger picture. "My questions are very simple: Is this going to drive revenue? Is it going to cut costs? Is it going to free up cash flow or reduce risk?" Wilson says. "If we can't tie back the technology to one of those four things, it's very hard for a CFO to say, ‘Yes, I feel comfortable signing a check.'"

Three or four years ago, large software deals often were loosely linked with a company's broad vision, but that's less common now, says Brendan Lowe, president of USA Business at Aldata Solution, an Atlanta-based supply-chain technology firm. "With the recession, really what you saw was a fundamental shift in the software industry in terms of the types of deals that were tendered," he says.

During the height of the recession in 2008-2009, many investments that couldn't be recouped in less than a year were postponed because of capital rationing and concerns about cash flow. Now ROI expectations vary from less than six months for mobile apps and other narrow-use cases to 12 to 24 months for platform investments, such as supply chain or point-of-sale systems, Wilson says.

"In general, there is a willingness to invest for the longer term if it's really and truly a platform investment," Wilson says. Historically, grocers have kept the same point-of-sale applications for a decade or more, so they are willing to tolerate a longer payback time for platform technology. "But all things being equal, the faster payback is better," he says.

As retailers change the way they do business in the age of the Internet, many are adopting hybrid models where consumers click their orders online, prompting staffers to pick and pack the items for in-store pickup or home delivery.

"The world is different. So the whole ROI question is being turned on its head," says Albert Silver, partner at Kurt Salmon, a New York-based consultancy whose clients include many of North America's and Europe's premier food retailers.

The core justification for a technology project should come down to a tactical ROI: benefits minus direct and indirect costs, says Lowe of Aldata.

He recommends asking hard questions, such as:

  • How much inventory can I strip out of my supply chain?
  • How much do I have in terms of lost sales that I can potentially regain?
  • Can I reduce my IT costs by cutting headcount because the new technology is more efficient?
  • Can I reduce maintenance on old applications currently supported?
  • What other direct and indirect costs should be considered?

SAP takes a structured approach to value management, says Aditi Chhaya, senior principal in SAP's value engineering practice, which works with retail clients to optimize investments. "We guide them to think about ROI as a combination of people, process and technology. Oftentimes business process change enabled by technology is what truly delivers the ROI, the IRR [internal rate of return] and the payback," Chhaya says.


"We guide them to think about ROI as a combination of people, process and technology."

– Aditi Chhaya,

SAP

Direct costs are easy to determine. But intangibles, such as customer satisfaction and the effect of technology change on the brand, can be more difficult to define and assess. "They're tougher to calculate, but they have value," Chhaya says.

Worth Asking

SAP helps retailers look at "more than just the hard dollar benefits, soft dollar efficiency gains or the total cost of ownership," Chhaya says. "The value proposition should include the holistic rationale as to why the decision-makers should move forward."

Chhaya says questions that need to be addressed include:

  • Does the technology initiative tie back to the customer's business strategy or address an innovation focus for the company?
  • What are the pain points prohibiting the retailer from executing on that strategy or innovation focus?
  • What solution needs to be implemented to address this?
  • What business value is associated with the solution?
  • What are the investments required to achieve business value?
  • What is the road map to achieve this?

"This is the end-to-end value proposition that needs to be communicated in making these decisions," Chhaya says. Once a project goes live, training and change management are important to drive the most value from a technology project, she adds.

Managing Change

When making a technology investment, consider the cost of training, implementing and operating, says Yeo of SAP. The process starts with buy-in from executives who act as sponsors of the new technology, providing support as needed to the managers implementing the new system.

Back in the 1990s, retailers needed to get off mainframes and onto client-server systems. But many companies didn't make the transition easily. "Change was forced upon the business, and a lot of projects failed because people weren't ready. Existing business processes were inefficient, or they were not properly defined. And change management and training weren't considered," Yeo says.

The industry is smarter now about understanding and leveraging best practices than it was a decade or two ago, Yeo says. Most companies understand the importance of executive sponsorship, change management and strategic partnership when enabling technology.


"You have to translate whatever the intangibles are to something tactical: Here's what you're going to get."

–Brendan Lowe,

Aldata Solution

Other intangibles, such as the impact of cutting-edge technology on the brand and improved customer service, also can determine the value of a technology project and should be considered when calculating return on investment. To get the project approved by the finance department often requires coming up with a dollar amount for the various intangibles."You have to translate whatever the intangibles are to something tactical: Here's what you're going to get," Lowe says.

Howard Wolinsky is a Chicago-based business/technology writer and an adjunct professor at Northwestern University. His work has appeared in BusinessWeek, the Chicago Tribune, Crain's Chicago Business and the Chicago Sun-Times.