In a Shrinking Market, IT Must Reduce Its Price Tag To Stay Relevant

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

IT spend in retail is normally between 0.9 and 1.9 percent of turnover per annum, so taking 1.6 percent as an average would mean 1.6 million for a 100 million turnover business. The problem comes when sales drop and turnover falls. In a pre-credit crunch world, many retailers would have considered themselves well placed against a benchmark of 'only' 1.6 percent - but now find their own costs reach or even significantly exceed that 1.6 percent figure. Given this scenario, wouldnt it be ideal if your IT costs operated like a 'tracker mortgage' - the flexibility to have IT spend rise and fall relative to turnover, as business needs and the trading environment dictate? With that as an ideal, the first step is to take a good look at what you're doing and where you're spending, using the current downturn as an opportunity 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 retailers to question how they do things in relation to their IT and its cost, to carefully examine systems and processes. IT can no longer be seen in simple terms 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 your company size and level of business youre actually doing, and considering which of your IT costs are truly fixed and areas where there may be some room for manoeuvre. Indeed, perhaps the best way to add value to a retail business right now is being able to maintain the status quo while controlling or even reducing 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 action to 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.

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