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Sophisticated Retailers are Growing Their Dependency on Startups for Innovation

Virtually every major part of a retailer’s core software technology infrastructure is complicated and costly to implement, maintain and support. Whether you are talking point-of-sale (POS), payments, loyalty, merchandising, supply chain or enterprise resource planning (ERP), these core systems are hard to successfully implement and are even harder to change once they are installed in production.

Given the pain and expense of implementing these vital systems, it is natural for most retailers to want to depend upon sizable, proven and well-known solution providers for these core systems.   After all, who wants to be the retail CIO that takes on the risk of working with an unproven vendor for something fundamental to the business? Instead, depending on a big vendor who is used widely by peers in the industry is the safest thing for most CIOs to do. It can provide peace of mind. There are however, clear downsides to depending only on mature companies such as them being notoriously slow at innovating.

It seems that the larger that a software vendor gets, the slower that they innovate in all the areas needed by their clients. This makes sense because the more customers that commit to these core systems, the bigger, more complicated, and unruly these systems will be for the vendor to maintain.  Mature vendors must spread their investments into support, maintenance, documentation and release management, which will dilute their R&D commitments to these same products.  They also must decide on whether to invest in architectural renewal or functionality.

Mature vendors tend to have more stakeholders who dictate which way the company should be headed and what problems need to be solved first.  What may be an important issue to some may not be as important to others.  Some large vendors have settled prioritization issues based on how much customer funded R&D they can secure on a given opportunity.  Some democratize the process by developing customer forums and advisory groups who are charged with the greater good versus what a particular retailer may uniquely need for their business.

Retailers are faced with a dilemma; do they patiently wait for their core software vendors to deliver innovation within their installed platforms or do they augment these platforms with innovative technologies offered by third party early stage companies, particularly those that are leveraging simpler cloud delivery models? Waiting for existing vendors can be expensive and time consuming, while bolting on complementary technology offered by startups and other niche software providers can bring faster results with fewer disruption risks and budget pressures.

Most emerging retail software technology startups provide a specific solution to a specific problem.  They rarely try to boil the ocean.   Savvy entrepreneurs build into their architecture integration techniques designed to enable operability with the retailer’s existing core systems. Retailers certainly would love to be able to leverage their current vendors as a one-stop-shop, however, this rarely is possible. One size does not fit all. In today’s technology ecosystem, there is no longer a “one throat to choke” model. Instead, the bigger that the software vendor and their product gets, regrettably the more bogged down they will be in bringing innovation to their clients through the product roadmap driven upgrades.

If you look closely at the retail landscape, particularly with medium-sized or larger retailers, you will see that leading retailers have seen a proliferation of software solution providers in their ecosystem. Retailers are now commonly “bolting on” specific solutions and solving specific problems while trying to leverage their investments in core software platforms. Some retailers are investing in middleware and cloud-centric capabilities to enable this integration.

The pace of innovation is hastening. Every day, we hear about new solutions coming into the retail market focused on omni-commerce enablement, smart offers & personalization, safety, security & privacy, merchandising optimization, online & mobile shopping, shifting to the cloud, big data, artificial intelligence, Internet of Things, and so on. If you are a technology geek, it’s a great time to be working with retailers who are trying to transform their businesses into digitally-enabled enterprises.

Though they are witnessing the changing landscape, major vendors can sometimes be threatened by the proliferation of niche solutions connecting to their products, because they worry about losing control of their customers, or worse, seeing a reduction of retail budget wallet-share.  Because of the unprecedented sea-change in the retail technology ecosystem, increasingly major software players are choosing to either monetize these connections through customer funded development, they are acquiring similar capabilities, or they remain in denial and make it difficult for third-party integration to take place.

Instead of making integration difficult or costly, the major core software providers would be better served by cultivating an open ecosystem of trusted complementary offerings that can add value to their platforms. They should proactively try to encourage a community of third-party solution providers to leverage and build upon the capabilities of their platform software. This reduces the friction and barriers that commonly frustrate retailers and it creates a more satisfied and more sticky user community. An obvious benefit of this open ecosystem is that the major software vendors can “test drive” potential acquisition candidates that can accelerate their own internal innovation plans and growth.

Let’s confront the tough questions. Why would a conservative retailer, who utilizes several mature companies for their core software solutions, want to engage with startups or smaller niche-focused software companies? Are the time-to-market advantages or the promise of lower costs worth the risks?   An increasing number of retailers believe that it is the right path and it is worth the risks, though they are cautious about it. After all, some startups fail, others will sell to a larger company, while others may encounter funding challenges along the way.

The most practical advice for retailers is to move forward, but be cautious when deciding who to work with and develop strong mitigation plans to be prepared for unwelcome outcomes with early stage vendors.

Important considerations for retailers:

  • Who is financially backing the early stage company?
  • Do they have enough funding to accomplish their objectives?
  • How strong is the leadership? Do they have a proven track record?
  • Are there other retailers depending on the company? Are they satisfied?
  • Can they truly deliver on their promises?
  • If this company fails or if it gets acquired, how would this impact our business?

Retailers must evaluate the costs, timeliness and complexity of addressing innovation opportunities within their core platforms versus working with early-stage companies.  The driving motivations should be clear. It is about capitalizing quickly on opportunities and addressing challenges confronting the business.  More importantly, it is also about serving shoppers in new and innovative ways.

Retailers are increasingly willing to depend on early-stage companies for innovation, acceleration and delivering value to their business.  Some are engaging directly with Silicon Valley or other strong regional technology centers. They are spending time working with venture capital firms, incubators, and other forums.  These retailers understand that working with the startup community is an important tool to transform their companies into shopper-focused, digitally enabled enterprises.

About the author:

Todd P. Michaud is the President & CEO of Transformational Retail Technologies, Inc., a company that focuses on helping growth-oriented technology companies in the retail segment.  Prior to this role, Michaud was Global VP & GM of NCR’s Global Enterprise, Merchandising & Supply Chain (GEMS) business unit.  He joined NCR Corporation because of its 2013 acquisition of Retalix Limited, a global retail software company where he was the President of the Americas.  Before Retalix, Michaud was President & CEO of Revionics, a SaaS-based, provider of big data-based predictive analytics for retailers. Michaud was also the President & CMO of IDS, LLC, a successful enterprise and supply chain software company focused on the food industry, acquired by Retalix in 2005.  Michaud started his career with 16 formative years at the IBM Corporation.

© 2017 Transformational Retail Technologies, Inc.
This Post Has One Comment
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