Almost any IT executive at a retailer will tell you that software development is not the company's mission in life -- not its real expertise. Retailers care about selling products cheaply, conveniently and attractively, and software applications are there just to support those aims.
Thus, most turn to the wide range of third-party application providers who specialize in serving the retail arena, and some will even completely outsource IT functions to a third-party service company.
That acknowledged, there are times when retailers find it necessary to get into the business of developing their own software in-house to suit their particular needs, especially when those needs are not addressed by vanilla, off-the-shelf, third-party software, or when there is little hope that the outside software can be suitably adjusted. Typically, the retailers who take on in-house development are the big ones with the resources to invest in IT professionals and development tools. Yet some midsized retailers are delving into in-house development as well. For example, Giant Eagle, Pittsburgh, has developed and now operates a successful frequent-shopper-card program that maintains and leverages a database with the purchase history of its 3.6 million card members.
Hannaford Bros., Scarborough, Maine, is doing "a lot more of our own development," said Bill Homa, chief information officer. "We have a huge backlog of demand by users who want more applications developed." So far, all of the development has been for supply chain applications involving the flow of goods.
In SN's Ninth Annual State of the Industry Report on Supermarket Technology (SN, Feb. 10, 2003), a surprisingly high percentage of respondents -- 45% -- said that they develop more than half of their IT applications in-house, and only 9% said they develop none in-house.
To be sure, even when application development is done in-house, retailers may find it necessary to call upon outside help for certain tasks, such as programming. Hannaford has taken that tack, following the trend of recent years to outsource code-writing for in-house development to companies in India. (See story, this page.)
Thomas Murphy, president of Peak Tech Consulting, Colorado Springs, Colo., said that top-tier grocers still do much more development in-house than others. "This is partly due to precedents that are best managed by a continuation of this approach," he said. "It is also driven by the ability of the larger chains to cover the expense of in-house developed, custom code." Smaller retailers, he added, are trending more to third-party package suppliers and integration strategies: for example, a store suite integrated to a warehouse application.
Should your company consider in-house development? Here are some caveats to consider, according to Murphy:
Staffing: Availability of staff for development, and willingness to hire contractors.
Geography/environment: Can the level of talent required for in-house development realistically be found, attracted, hired and retained in your market?
Competition: Retailers must compete for skilled technology resources within their markets. Frequently, a grocer will pay less than other companies with higher gross margin or profit structures.
Grocers seldom can offer work in leading-edge technologies. Interesting and challenging work -- such as leading-edge Web services and dot-net development -- is high on the list for attracting and retaining skilled and motivated IT resources.
Equipment: Typically, one test environment is required with vendor products. In-house development requires both a development and a test environment.
If you clear those hurdles, here are some of the benefits that can be gained from in-house development, according to Murphy and Carlene Thissen, president of Retail Systems Consulting.
Perceived cost advantage: When an outside vendor proposes a system, retailers may look at the price and determine that they can build it in-house for less money.
Sense of control: As with many other businesses, supermarkets today are completely dependent on computers. There is no backup for many of their functions. The people who developed the system are on staff should problems occur.
Leveraging history: If a company's systems and business processes are particularly unique, customized or tightly integrated, the only practical approach may be to continue in-house development. Indeed, the overall cost of replacement and business distraction of change may outweigh the benefits of a purchased solution.
Uniqueness: Many retailers feel that their business operations are so unique that no package developed around "standard or common" industry practices could meet their needs or continue to provide them with a competitive advantage.
Hybrid Approach
Giant Eagle continues to rely on third-party applications for a myriad of IT functions, including warehouse management, buying, point of sale, DSD receiving, logistics, financial, HR and payroll, pharmacy and production planning.
Indeed, Russ Ross, Giant Eagle's senior vice president of information services, appreciates the technical and functional support from third-party vendors and the fast delivery of solutions. "Numerous companies have contributed their input to the features and functions," he noted.
However, Ross also pointed out the challenges to using outside applications. In no special order, he listed: searching for a package that meets specific requirements; keeping customizations to a minimum; working with vendors to implement needed features in a timely manner; minimizing the number of architectures supported; and integrating with other packages or homegrown software.
At Giant Eagle, the homegrown applications include the Advantage Card customer loyalty program, data warehouse and retail pricing. Ross said the benefits of developing these programs in-house include being able to control both system architecture and the schedule for upgrades and modifications. Plus, he said, the software was designed to meet the chain's specific needs.
Price Chopper Supermarkets, Schenectady, N.Y., a chain of 105 supermarkets in the Northeast, also benefits from several applications that were developed in-house. They include the AdvantEdge loyalty-card program, computer-assisted ordering, electronic checking and electronic shelf-labels now being tested in its Connecticut stores.
Mona Golub, Price Chopper's manager of public relations and consumer services, said the chain appreciates the benefits of having its loyalty card in-house. "The learnings help us more directly offer our customers more value," she said. "We're not just receiving an end report that summarizes. We're going through the whole process of understanding what it is that customers want, what they respond to, how they respond, and how we can best service them and exceed their expectations."
Yet maintaining a frequent-shopper program in-house, as Giant Eagle and Price Chopper do, is not without risks, noted Thissen. "The resources required are obviously greater," she said. "Specific technical skills and knowledge may require additional training or hiring, and there is an associated time factor as well."
For example, observed Thissen, if an application is needed for frequent-shopper support in time to meet a competitor bringing up a program, the time required for in-house development can hold up the whole project. "That's why many retailers buy or lease systems that they then run in-house," she said. "Often, they purchase the source code as well, so they can make changes without involving the original vendor."
Thus, Thissen concluded that in-house development should only be needed in two circumstances: if the retailer is bringing up an application that has not been used before in supermarkets, or if the retailer's other systems were developed in-house and are quite unique.
"In both those cases, there might not be a suitable product to purchase, or a suitable outsourcing alternative," she said. "Or the available systems might require more work to modify to suit your own environment than it would take to develop them on your own. Of course, there is also the issue of expense. If there is a system available, but it is too expensive, that might be another reason to develop one on your own."
Once a commitment to in-house development is made, it may be hard to undo, added Thissen. "Generally, it is very difficult to move from a strategy of in-house development to one of vendor products or outsourcing. The integration and learning curve is usually too painful from a business perspective."
GOING OUTSIDE FOR IN-HOUSE WORK
Sometimes, even when a retailer decides to develop applications in-house, some of the work can be farmed out to third-party experts, while overall control remains with the retailer.
That's the path that Hannaford Bros. has taken. For the past three and a half years, the Scarborough, Maine-based chain has been outsourcing programming for in-house development to Infosys Technologies, a company based in Bangalore, India. Nearly all of the work is related to supply chain applications. The critical industry-based knowledge and creative development remains in-house.
"We've done a lot of work on collaboration [with Infosys], and also giving [Infosys] visibility to the information it needs to do business with us," said Bill Homa, Hannaford's chief information officer.
Hannaford executives easily adjusted to the 12-hour time difference with India, and the outsourcing has worked well, according to Homa. There are no language problems and the quality of work is "superb," he said. No in-house staff reductions have resulted from outsourcing. Homa said the outsourcing company offered Hannaford a level of programming it could not have achieved internally. "Most of the outsourcing firms have the highest level of quality standards that exist for software development," he said. "There's a very rigorous set of processes they must go through to maintain that kind of certification. When you outsource, you start to take advantage of quality standards that you couldn't afford to do yourself."
There can also be cost-savings to going overseas. According to AMR Research, Boston, and Infosys, off-shore labor rates are 30% to 40% of the pay for a comparable person in the United States. Moreover, after the application development is finished, the cost of the outsourcing ends.
Convenience is also an important advantage to outsourcing in-house development, said observers. Sometimes, special skills are not needed on a full-time basis, or there is an immediate need for skills not available in-house. Most IT departments are very busy, and can't afford to wait to develop an application.
