The retail industry tends to be pretty frugal in its IT spending, thanks to the low margins it earns on sales. The margins simply won't support the kinds of IT investments made in other sectors, IHL Consulting President Greg Buzek told me when we chatted in 2007. IHL had found that retailers spend about a third less on IT as a percentage of revenue than their counterparts in the financial services and insurance industries, a figure I expect hasn't changed much since then. (Though it no doubt will, as an increasing number of financial services companies find themselves struggling simply to stay solvent.)
So it's no surprise to find retailers among the industry segments taking to software-as-a-service. I mentioned one company, 90-store fitness-equipment chain 2nd Wind, in a post last week. It sliced its IT budget from $670,900 in 2007 to a projected $259,250 this year, thanks largely to switching several key applications, including CRM and accounting, point-of-sale and human resources and payroll, from on-premise to a SaaS delivery model. Some of its biggest savings came from reducing full-time staff needed to maintain IT and avoiding costly upgrades of legacy systems. It spent 0.7 percent of its $92 million revenues on IT in 2007. In 2009, it anticipates spending just 0.3 percent of its projected $100 million in revenues on IT.
Sahir Anand, a senior retail analyst for the Aberdeen Group whom I interviewed last week, said SaaS can be "a very effective strategy" for small to mid-size retailers. He mentioned a retailer with roughly the same number of stores as 2nd Wind, which decided to switch some of its applications to SaaS after determining costs were about half those of the traditional on-premise model. While the company has increased its revenues and numbers of stores two times over in the past year and a half, the growth didn't result in increased IT costs. Anand said:
That's a clear demarcation in terms of ROI.
Like 2nd Wind, the unnamed company that he referred to in our interview found value in "operating lean." Getting applications up and-running within 12 months is another bonus experienced by retailers with their SaaS implementations. While this time frame is doable for most customer-facing applications, back-office apps present a bigger challenge. Said Anand:
Sixty-five percent of the spend on SaaS today is focused toward Web applications. It is an area where companies can start. It's more seamless. There is less intrusion into your core IT structure. So you can start from your Web applications.
If SaaS works out well with Web apps, said Anand, retailers might want to think about contact centers and other areas such as the supply chain, which can benefit from the added visibility of SaaS. Store and catalog apps likely will make up the "last mile" of SaaS for many retailers, especially large companies whose systems contain multiple business units and many, many products. In fact, SaaS may not be appropriate for such large, complex environments, Anand suggested.
Moving apps to SaaS should be done in small, incremental steps, he advised. Data conversion, which may be required by SaaS providers, is a possible "gotcha" that Anand said can take up to three months and escalate deployment costs. It might even be advisable to outsource this task, to ensure application integration is properly handled.