Retailers ready for great outsourcing thaw

Despite a degree of reluctance to outsource, retailers are likely to increasingly warm to handing over their technology to third parties as the economy continues to struggle.

According to a new report from analyst house Datamonitor, pressure on margins from spending-shy shoppers and the resulting need for cost-cutting will prompt retailers to embrace outsourcing.

According to Christine Bardwell, retail technology analyst with Datamonitor and the report's author, retailers are looking to outsourcing to slash the costs of managing inventory, non-critical business processes and store operations.

"Cutting down on staff and inventory, the two biggest costs for a retailer, will be the principal areas of focus. Cuts in these areas offer a two-fold 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," the report said.

For the retail outsourcing boom to happen, the retailers will first need to overcome their historical reluctance to outsource.

"Previous experience with service contracts has caused retailers to doubt whether the benefits of outsourcing outweigh the challenges that can arise. Barriers to outsourcing include the unrest caused by offshoring jobs, language barriers, and retail sector expertise requirements," the report said.

Outsourcing will also have to contend with falling IT services budgets, according to a recent report by analysts Pierre Audoin Consultants and TechMarketView, which found spending on IT software and services will fall 5.9 per cent year on year in 2009 to £2.77bn. The average fall across all industries, however, will be one per cent.

As a result of falling capital expenditure, retailers will be on the hunt for outsourcing deals with more flexibility built in, the report by Datamonitor found.

"One of the biggest current hurdles to outsourcing is the industry-wide reduction of capex in retail. Because capex 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. This frees up capex for more pressing issues," it said.