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Perspectives

Funding Change: How Retail Gets SMAC with SG&A

2015-05-21


For retailers, investing in social, mobile, analytics and cloud technologies have gone from “nice to have” to “survival of the fittest.” Amid stalled growth, low margins and aggressive online competition, here's how traditional retailers can do just that, without getting in over their heads.

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Perhaps more than any other industry, retailers are acutely aware of how the social, mobile, analytics and cloud technologies—what we call the SMAC Stack—affect their health and survival. Just ask Blockbuster, Borders or one of these companies.

For traditional retailers, the problem isn't accepting the reality and benefits of SMAC—it's funding initiatives amid stalled revenue growth, single digit margins, waning market share and aggressive online competition. But it can be done. Just ask Home Depot, Tesco, Macy's and other forward‑thinking retailers investing heavily in SMAC right now, despite the challenging climate.

The key is knowing where to look. In early 2014, Cognizant analyzed and studied the books of the top 30 retailers including merchandisers, grocers, supermarkets, clothiers and specialty stores. What we found were significant savings in selling, general and other non‑production administrative expenses for reinvestment in SMAC applications. While excluding sourcing beyond SG&A (such as private label manufacturing), we discovered particular gains in IT, HR, finance, call centers and procurement.

In short, SG&A savings free up more corporate dollars for SMAC investment than anywhere else for an industry facing tall odds.

Business Process Service: How It's Done

According to our analysis, SG&A expense accounts for 24% of top retailers' revenues. Given the industry's razor sharp margins, each dollar of new revenue brings only pennies of incremental profit. We found one dollar in SG&A cost reduction brings a full incremental dollar increase in pre‑tax profit. To reduce SG&A, retailers must offset the cost burden of their stores' front offices with aggressive cost‑cutting and virtualization of the back office. Additional savings can come through automation and third‑party partnerships that allow retailers to focus on the front office.

For example, we reduced a large retailer's labor costs by 50% recently, deployed a global workforce in seven weeks (much faster than the four month average) and re‑engineered many of their processes—including vendor onboarding—to achieve 25% in productivity gains. This provided significant savings in SG&A expenses, while affording them the opportunity to reinvest in SMAC technologies to further boost profitability.

How can other retailers similarly reduce SG&A expenses? It starts with assessing and benchmarking all SG&A functions. For instance:

  • How many resources are performing each process, and how does this compare with industry competitors? Are resources centralized or decentralized?

  • Are the processes manual or automated and are they documented? To what degree has sourcing been used? Are best practices utilized?

  • What systems are used? Are there any redundant systems or waste to remove? Are the systems well integrated to reduce manual labor?

  • Are the current systems meeting business needs? Are they exceeding executive and worker demands?

Once these functions are assessed and benchmarked, determining plans to reduce costs and virtualize the back office come next. In our experience, that's commonly achieved through standardization, systems rationalization, increased automation and shared services.

But while 50% of the retailers we evaluated have embraced business process services, most limit their lean techniques and accelerated offshoring to single process areas such as human resources and finance only. As such, increased adoption of business process services represents an important opportunity for traditional retailers to reduce their SG&A costs and help fund their SMAC investments.

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Figure 1

As for low hanging fruit, finance and accounting is a key target. Since 60% of finance and accounting headcount is related to transaction processing, retailers can generate significant savings by wringing inefficiencies from accounts payables, accounts receivables, fixed assets, general accounting and payroll with little impact to customers. In addition to transaction processing, financial planning and analysis can be sourced and performed globally, including monthly variance analysis, standard reporting and ad hoc need.

Many support functions beyond finance can also be sourced. For example, centralizing store support and facilities maintenance often lead to reduced costs and improved effectiveness. It frees associates to spend more time with customers, provides better analytics and trend analysis (e.g., any deviations on average spend per incident for electrician/plumber) and eases the maintenance of vendor scorecards and chargebacks.

Lastly, vendor onboarding and compliance checks are other areas ripe for SG&A offshoring. Because noncompliance by a single vendor can result in negative publicity, these two functions are an important part of risk mitigation that can sourced to focused, dedicated teams.

Inspiring Examples

This change is challenging. We get it. We empathize with our clients. Not only are retailers being asked to work consistently across omni‑channels—while holding down costs—they're expected to somehow match if not compete with the 800 pound gorilla in the room: Amazon.com and its formidable understanding of SMAC.

But as evidenced by the aforementioned research, our reputation as a proven provider and a leading retailers' example, back office cost‑cutting and stepped up process services result in significant savings to offset the investment in front‑office SMAC technologies.

When that happens, retailers can innovate like Tesco, the world's third‑largest retailer, which recently boosted online sales by 130% through the use of virtual stores at Korean subway stations and bus stops. Or follow the footsteps of Home Depot, which plans to invest an additional $300 million in SMAC this year, on top of an already impressive omni‑channel and mobile presence. Or mimic Macy's and Walmart, which have both grown online sales thanks to new‑found digital focus.

You, too, can make the needed adjustments to reduce and virtualize back‑office costs to emerge as a stronger and smarter retailer. To drive sales and customer satisfaction in the future, there's no better place to offset SMAC investments than with SG&A savings.

 

For more information, read the full white paper, To Fund SMAC, Examine SG&A or visit our retail practice.

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Funding Change: How Retail Gets SMAC with SG&A