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Retailers Not Quite Ready for the Cloud

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Posted February 24, 2016 By Phil Britt     Feedback

Retailers are dragging their feet in moving key retail applications to the cloud.

Retailers have a love/I'm not sure yet relationship with the cloud, according to retail industry observers. While companies are moving at least some retail applications to the cloud, others aren't ready to break up their longstanding relationships with legacy technologies.

For retailers the cloud question is determined by economics, technology issues and the boardroom, with security concerns factoring in as well.

"Retail is moving slower than many other industries, because much of the technology is still inside the store," said Ken Morris, principal at consulting firm Boston Retail Partners. Because decades ago technology failures tended to happen in centralized locations, retailers decentralized their hardware and software in an effort to contain tech problems. Retailers still run many of those technologies, like point-of-sale (POS) systems, at the store level.

Retail's Cloud Reluctance

Experts say many retailers have an attitude of "if it's not broke, don't fix it," not wanting to bear the expense of moving technologies to the cloud when in-house systems are fully depreciated.

"A lot of the [legacy] technologies are embedded in their DNA, in the way that they do business that they're not going to change unless something breaks," said Kevin Steneckert, executive vice president of Predictix, a provider of retail technology solutions and a former Gartner analyst. "Some of the POS systems are 15 to 20 years old. Some of the decisioning systems are at least 20 years old."

Some retail executives may not understand what the cloud offers or the differences between cloud and on-premise solutions, Steneckert added. "It's a new way of acquiring the software. The subscriber model is different than what they are used to. The software doesn't sit behind their firewall."

Cloud Security Concerns

The last point touches on a security issue that concerns many executives in retail -- and in other industries as well. They are unsure about cloud security.

"From a security standpoint, when we think of high-profile breaches, every CIO's first question is how can you show you can secure our data -- financial and PII data. Does that provider have the appropriate security in place to protect data as it crosses the wire?," said Jeff Warren, vice president of retail strategy and solutions management for Oracle.

Yet the Target, Home Depot and other largely publicized retail data breaches were the result of security flaws of in-house systems, not cloud systems, several cloud proponents point out.

"There are more breaches of these systems every year," said Bill Lewis, vice president, consumer products, retail and distribution for Capgemini Consulting. "There is a concern among retailers about cloud security; it's a concern that more often than not is unwarranted. The types of information stored on the cloud and who has access to it has to be thought through."

A cloud provider can better protect retailers and their data than internal IT departments due to having more dedicated security resources, Warren said. "The industry is hyper sensitive to it; we believe the ability to protect and secure data is a differentiator for the cloud services provider."

Cloud migration is happening more quickly with applications that support a retailer's business, such as employee acquisition, catalog list management and marketing, said Jeff Neville, Boston Retail Partners vice president. Merchandising, human resources management and in-store applications such as POS are moving to the cloud more slowly, if at all.

Cost Control, Capacity in the Cloud

Though there is an initial cost in moving retail applications to the cloud, there are economic arguments in favor of absorbing the cost for future monetary benefits, according to several experts.

Users of cloud technologies pay for them on an as-needed basis. So rather than buying servers, software and other technologies at a large capital expense, retailers can buy and use technologies in the cloud on an as-needed basis, ramping up when busy and cutting back when business is slow.

In retail, the most striking example of this difference is during the holiday shopping season, particularly around Black Friday/CyberMonday, when retailers tend to do far more business than any other time of the year, meaning more need for hardware and software services. It makes no economic sense to pay for such capabilities all year in order to gain the capacity to deal with holiday demand spikes.

Chief financial officers like cloud technologies because they better match revenues with expenses, several experts agree.

"The notion that it's an operating expense rather than a capital expense is very precious," Capgemini Consulting's Lewis said. "The first thing that analysts ask about on earnings calls are capital expenses."

However, others in the C-suite are not as sold on the cloud. "They have significant investment in their existing functionality," Morris said, explaining that many retailers still rely on older technologies like POT (plain old telephone) and PBX phone systems that many other businesses replaced years ago. "They don't want to invest the money [for conversion] because of the way the budgetary process works. They have to cost-justify the finances of moving the infrastructure to this. There are costs for middleware to share information and data across networks in real time," Lewis said.

Cloud Migration Considerations for Retailers

There is a learning curve involved in moving to cloud technologies as well, according to Bob Brodie, partner and chief technology officer of SUMO Heavy, a consulting firm specializing in digital commerce. Retail executives need to examine and choose wisely among several choices in moving retail applications to the cloud.

While Ansible, Chef, Puppet Labs and others provide script applications enabling retailers to work with any cloud server, a retailer needs to decide which of these options is best or if it wants to migrate to the cloud in a different manner.

Which Web services provider is best? Some of the larger, older cloud infrastructure providers, such as Rackspace, have older, less flexible pricing models, according to Brodie. Amazon Web Services and some others offer sharply discounted pricing if the user buys a certain amount of cloud capacity on an annual contract. While that might seem like too much of a risk for some because the retailer might not use all of the capacity, there is a secondary market for excess cloud capacity.

"You need to have access to the functionality inside and outside the walls of the retailer to facilitate the APIs and the Web services," Neville said.

Even with the challenges and reluctance by some retailers to move some of their retail applications to the cloud, 2016 will see a pickup in the pace, with additional cloud converts in the following two years.

By the end of 2018, most of the top 1,000 retailers will operate much of their business largely in the cloud, Morris said.

Phillip J. Britt's work has appeared on technology, financial services and business websites and publications including BAI, Telephony, Connected Planet, Independent Banker, insideARM.com, Bank Systems & Technology, Mobile Marketing & Technology, Loyalty 360, CRM Magazine, KM World and Information Today.

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