Retailers are exploring cloud computing, but should do so with eyes open.
Companies in all sectors are turning to cloud computing to access new business applications quickly, remove the burden of managing complex IT infrastructure, and provide the ability to scale as data volumes and application use grows. However, the retail industry faces some specific challenges in following this trend.
‘Cloud computing’ provides IT infrastructure and applications as a remotely managed service to businesses. It is available on demand, paid for on a per-use-basis, and is able to scale as usage increases.
Cloud infrastructure providers, such as Amazon (Amazon Web Services (AWS)) and Microsoft (Microsoft Azure), provide various server, storage and network resources that can be provisioned instantly and controlled through APIs, so that resources can be scaled, switched on and off and programmatically managed to balance demand, resource and cost. For example, Shop Direct runs its substantial ecommerce infrastructure (based on Oracle Web Commerce) on servers provisioned from AWS and can flex this as peak periods approach.
Cloud application providers, such as Salesforce.com, provide complete line-of-business applications hosted on infrastructure remote from the end user and deliver their application as a website to the end user’s browser. For example, Mothercare migrated to Salesforce Commerce Cloud (formerly known as Demandware) for its ecommerce sites when it moved away from Amazon’s ecommerce platform.
There is no doubt adoption of cloud computing services is growing (Gartner for example report this regularly) and is strongly supported by the software industry. Every major application vendor, including Adobe, IBM, Microsoft, Oracle and SAP is pursuing a cloud agenda, albeit alongside their more traditional on-premise deployment options. Other vendors, big and small, are wedded to the cloud model as their only deployment option, for example NetSuite.
Despite the significant adoption by the IT industry, retailers face some specific implementation challenges when considering the benefits of this model.
PCI compliance & security
Retailers handle sensitive payment card data every day and need to conform to strict guidelines laid down by the payment card industry. While most cloud service providers claim conformance with PCI standards, a retailer is placing trust in an infrastructure and application they do not control. This is unfamiliar territory and requires a cultural adjustment. Before adoption, issues of data sovereignty (where data is physically stored or transmitted to), compliance with regulations imposed by national or regional governments, and consumer expectations of privacy and trust must be examined.
In our experience, cloud application providers tend to be more thorough and timely with security patches than some retailers – it is, after all, their core business competence to manage applications securely. Due diligence is still required, but retailers should be optimistic of finding a strong security methodology in the high profile cloud applications they are evaluating.
Business critical legacy applications
Many retailers have a significant number of legacy applications supporting key aspects of their business, from core merchandising and supply chain processes, through to point of sale.
These are often not only critical to the business (disruptive to change) and complex (difficult to change), but also stable (operating at low cost). With the risk involving in changing these systems, creating a business case for a replacement project can be challenging. Introducing a new cloud application alongside legacy applications may also be a challenge, as legacy systems typically have limited integration options, relying on proprietary and batch processes that are poorly supported by new cloud applications.
Despite the complexity in adopting cloud applications and integrating them into a legacy application architecture, there can still be significant benefits for retailers. Accessing new function, which is constantly being refreshed and updated as the supplier develops its roadmap, is a powerful incentive for change.
Margin is king
Preserving margin when faced with a cost-conscious consumer and highly efficient competitors, such as Amazon, is paramount. Cloud applications are regularly offered through a revenue share model based on gross sales, although retail sales (especially online) suffer from high returns rates, unlike many other industries like ticketing and financial services.
Before investing time in evaluating a cloud application it is important for a retailer to know the ultimate percentage of sales it is likely to end up paying, comparing this like-for-like with an on-premise alternative and assessing the overall financial viability of the model.
We have completed these evaluations for many different retailers and consumer brands, and have found some substantial variations between high profile cloud applications, especially in the way the cost model reacts to future revenue that significantly exceeds or fails to reach business targets.
Application integration is more complex in the cloud
Most cloud applications provide APIs for integrating key data flows with other applications, but there is no doubt that in some cases these are more limited than those in traditional on-premise software. In part, this is due to the lack of maturity in some applications, and in part due to the need for a cloud application to protect itself from instability caused by invalid or unusual volumes of data.
A dedicated integration hub or Enterprise Service Hub can be of use in widening integration options, especially with legacy systems, but integration should form part of the technical evaluation of any new product.
Many retailers continue to explore and extend their use of the cloud computing model, attracted by the rapid delivery of new function and the significantly lower complexity of operations, but they should do so with eyes open and in full knowledge of the technical challenges and the commercial deal they need to strike to take full advantage of the solutions.
First published in: Essential Retail