Recession drives retailers to outsourcing

Retailers will outsource more to generate savings as the recession takes its toll

IT and business process outsourcing will become an increasing trend in retail as firms in the sector struggle to survive in the downturn, according to research from analyst Datamonitor.

The rise in demand for third-party IT services is driven by the need to generate revenue by prioritising customer demands, while helping drive down costs , says the report.

According to Datamonitor retail technology analyst Christine Bardwell, retail businesses are cutting down on staff and inventory – the two key focus areas for the sector – to mitigate efficiency and cost pressures.

“Many retailers are looking to technology and services to help cut the cost of managing inventory, non-critical business processes and store operations,” said Bardwell.

“Cutting down on staff and inventory offers a twofold opportunity for outsourcers, as retailers will be looking to service providers to help cut costs across the business; and will also be short of staff, or having trouble managing correct stock levels so will look to outsourcers to provide the solution,” she said.

The report adds that retailers are also looking to change their outsourcing contracts to extract more value for money from partners.

“Large-scale infrastructure overhauls are less common. Instead, retailers are requesting a mixture of services on lower-value contracts, or transformational deals over longer periods of time,” said Bardwell.

“As capital expenditure must go a lot further than a year ago, retailers now require outsourcers to offer flexible payment structures, for instance by offering shorter-term contracts with monthly payments,” she said.

But retailers are wary about the benefits of outsourcing outweighing the issues that can arise, such as unrest caused by offshoring jobs, language barriers and access to retail sector expertise.

The analyst expects outsourcers will need to know the demands of the retail industry as well as the challenges of individual retail sectors, so suppliers will need to work in partnership with users to better understand their business.

“Retailers are looking for more than just a supplier; they need a partner. A service provider that takes strides to understand the pulse of the organisation will win over,” said Bardwell.

“The recession is pushing retailers to consider outsourcing to achieve cost saving and enhanced operational efficiencies. But competition in the services space is strong,” she said.

According to Datamonitor, IBM is the main outsourcing provider for the sector with a 14 per cent market share but that could change due to increased competition.