Updated: No, Target Won't Be Slashing Its IT Budget By Two-Thirds Next Year. But Could It?
Is Target (NYSE:TGT) about to slash IT spending? No, it turns out, it's not. An investors' note from Citi analyst Deborah Weinswig on Friday (June 21) said Target has reached "peak spending" on IT and next year the IT budget will drop from the range of $130 million to $160 million down to between $30 million and $60 million. That would be $100 million, or about two-thirds of Target's IT spend, chopped from the budget.
But on Thursday (June 27), Citi reissued that investors' note at Target's prompting, because in reality Target's IT spending will actually rise next year. It seems there was a communication problem between Target's top executives and Citi. The new version of the note reads: "TGT is investing approx. $0.20-$0.25 per share more in technology this year than last year. Next year, the incremental spending on technology is expected to be worth $0.05-$0.10/share YOY."
No slashed IT budget. No wild swing between investing in new systems and digesting the results. In short, a much more conventional IT budget story.
But wait—what if Citi had gotten it right the first time? Could that even have worked?
Big IT budget cuts are the sort of thing investors love to hear about, because IT is widely viewed as a cost with not much benefit—a truly skewed point of view in a world of merged channel (OK, omnichannel if you truly must) retail, but that's the Wall Street mindset that retail CEOs and CFOs have to deal with. But how realistic would is it be for Target to do that kind of slashing? Maybe not as unrealistic as it seems, when the other retail-IT reality comes into play: You no longer have to staff up for big projects or lay people off to cut costs.
First, consider Target's current big projects. Weinswig said, based on briefings with Target CEO Gregg Steinhafel and CFO John Mulligan, that Target is spending 20 to 25 cents per share on IT this year. With about 640 million shares and about $3 billion in profit, that's between 4.3 and 5.3 percent for IT—a very high budget share for retail IT.
Where's that money going? One big project is rolling out buy-online-pickup-instore in time for the holiday buying period. "The company is also investing in E-commerce distribution, vendor relationships and predictive analytics/data management," Weinswig wrote.
Next year, that $100 million chopped from the IT budget would drop Target's IT spending down to between 1 and just over 2 percent. That's about half of IT's typical share for big retailers as recently as a decade ago. It's reasonable to expect that famine budget will include virtually no major projects.
How much sense does that kind of swing make? In the past it would have been crazy, if only because it would have been a staffing nightmare. Never mind bringing on real employees—even hiring and then dumping that big an army of consultants would have been a paperwork nightmare.
But Target doesn't need an army of consultants. Target needs certain well-defined capabilities: in-store pickup, predictive analytics, logistics. Building those things would make no sense. Neither would deep integration with existing systems, since that would take too long for the done-by-Holiday schedule and will probably be obsolete within a few years anyway.
But bolting on capabilities built by outsiders to work with Target's existing systems? That makes sense.But bolting on capabilities built by outsiders to work with Target's existing systems? That makes sense. It's fast and practical. The downside: It's a big outsourcing expense that makes the IT budget balloon very suddenly.
However, these are one-time expenses, or at least they can be. Once the development work is done, that balloon can deflate as fast as it blows up.
That kind of bursty IT spending sounds all wrong in terms of traditional systems development. Partly that's because traditional development happened inside an IT department, so projects were constrained by IT staff size. Hand off whole projects to outsiders (and then watch them like hawks, because their bottom-line interest is their profits, not yours) and that constraint goes away. IT projects are constrained by budgets, not internal staff.
This approach doesn't work for all IT projects—some foundational projects have to happen more slowly and aren't really done until well after they've gone into production (think Target's exceedingly bumpy first few months after it cut itself loose from Amazon in 2011—remember "Missoni Tuesday"?). But for well-defined bolt-ons, bursty IT spending is very possible.
It also may be very practical. Bringing IT development to a screeching halt after a big development push gives IT and the rest of the business a chance to absorb what's been developed. That likely will mean working the technical bugs out of the in-store pickup system, for example—as well as finding the unexpected problems with the in-store part of the process. Users will have to figure out what they still aren't getting from the predictive analytics. The E-commerce logistics product will have to be used to find out what isn't quite right.
Then, once everything is stable and business-side users have identified what they still need—and new technology has created new options—it may be time for another burst of project spending.
That bursty, feast-or-famine approach isn't the only way to develop merged channel (aka omnichannel) retail systems—Macy's (NYSE:M), for one, runs more of a slow-and-steady merged channel race. (It turns out that Target is running that way, too.) But bursty IT spending could conceivably be done without gutting the IT department, and it might have given Target a project rhythm that would let it make big leaps forward followed by pauses to consolidate.
Which way—bursty or slow-and-steady—works best? We're not likely to find out from Target. But even if some other chain chooses to go that route tomorrow, you can expect to wait at least five years for an answer. Short of a major catastrophe, that's how long it would take to see whether such big leaps—in both system capability and budgets—would be a success.