Retailers Seek an Edge With Sourcing

By Bob Mathers

Large retail organizations today face an increasingly competitive economic climate characterized by declining sales and tighter margins, lack of credit, and potential mergers. What sourcing strategies are retailers adopting to address these challenges?

According to Harvey Gluckman, partner and managing director for the retail sector at sourcing advisory firm TPI, retailers are turning to service providers for help with a wide range of issues—including how to learn more about their customers.

In terms of the big picture, retailers are keeping an eye on transformational considerations as the industry matures and additional consolidation takes place. As for the details, they’re looking to gain a competitive edge through tools including social networking.

Some observations:

Retailers are responding to revenue pressure by challenging service providers to help them become more efficient and scalable. According to TPI, the total size of the North American outsourcing market for retailers has tripled since 2001 to $1.5B, and 37% of retailers do outsourcing of some kind. In 2010, the total contract value of agreements in the sector increased by 62% year-to-year, to its highest level in five years, despite the same number of contracts as in 2009. Gluckman attributes this growth in contract size to an increased focus on using managed services to reduce costs.

Retailers’ focus on cost containment has contributed to a relative lack of maturity in terms of service delivery and vendor management processes. Retailers typically lack the experience to effectively manage increasingly complex outsourcing arrangements, often leading to inefficiencies, duplication of effort, and value leakage that erodes the business case for outsourcing over time.

Retailers must resist the urge to dive into outsourcing as a way to achieve short-term goals and first develop a holistic strategy that maps out, in detail, the specific functions that should be outsourced. Using this roadmap, they can then consider what internal capabilities are needed to effectively deliver on the expected benefits.

The social software market will continue responding to retailer demands for flexible environments in which to connect, create, find, and share relevant information. In 2011, TPI expects up to 25% of capital budgets will be targeted to social networking, including investments in business intelligence and analytics to combine social networking with more traditional data sources. Service integration will be a strong focus for CIOs weaving mobile, tablet and social network platforms into existing customer centricity strategies of “clicks, bricks, rings & knocks.”

Most retailers are focused on rationalizing their application portfolios, including the upgrading of aging legacy applications. Many organizations are looking to effectively transition and optimize their staff augmentation contracts to managed service agreements. TPI says that can reduce costs by up to 25% while improving quality and shortening cycle times. Another priority is to increase and diversify the mix of offshore resources.

Outsourcers are responding to the need for cost savings and rationalization with creative service delivery models that enable greater flexibility and, according to Compass data, identify savings opportunities of 20 to 40% through service standardization, transparency, and embedded demand management.

Bob Mathers is a Principal Consultant at Compass Management Consulting. Harvey Gluckman is Partner & Managing Director for the Retail, CPG, Travel, Transportation, and Hospitality Industries at TPI. Both companies are owned by ISG, Inc.