JCPenney IT "Is A Mess," Says COO

Now it is IT's turn to take the blame for JCPenney's woes. On Tuesday (May 15), JCPenney COO Michael Kramer told analysts that problems during the chain's terrible first few months under its new "Fair and Square" pricing approach (store traffic down 10 percent, sales down 20 percent) were compounded by out-of-control inventory management and legacy system maintenance that ate up 90 percent of the IT budget—both fundamentally IT problems.

The result: It costs JCPenney at least $600 million per year more than it should to run the chain—which explains a lot about the quarter's $55 million operating loss.

In Kramer's words, "I can think of no other thing to say about our systems and our IT infrastructure, and I have seen a lot of them: It's a mess."

How bad is that mess? About $500 million of the retailer's inventory involves products where there are enough items in the warehouse to last the chain a year or more at current sales rates. It should be more like 13 weeks—and it took Kramer's team months to discover that, a bad sign in itself.

Another bad sign: the "492 unique applications it takes to operate JCPenney. And that is not including Excel, and Excel is used a lot," Kramer said. "Out of those 492 applications, 88 percent of them were customized. Customization is not your friend. This translates to 90 percent of my IT spend both on expense and capital basis goes to maintenance. Ten percent goes to strategic initiatives. That's crazy. That's a lot of money going to maintenance."

Kramer estimates that a company of JCPenney's size should be using "around 100" major applications. He added, "This is years and years of a hundred-year-old company band-aiding and band-aiding and band-aiding. So that when you want to make a change in the business, in the strategy in the business, it takes a lot of unlayering and putting back on, unlayering and putting back on. That costs money. That's what drives headcount."

Let's be clear about this amazing recital of just how bad JCPenney's IT situation is. Kramer was hired in December 2011, so none of it is his fault. The old CIO, and the one before that, is already gone. The chain's new chief technology officer, Kristen Blum, is handling what would typically be CIO duties; she arrived in January, so it's not her fault, either. Both Kramer and Blum used to work for CEO Ron Johnson at Apple, so they have the boss' support.

Kramer also has cover from a truly awful financial quarter.Kramer also has cover from a truly awful (but not completely unexpected) financial quarter. If you're going to announce that your IT is completely worthless, that's tactically the right time to do it.

Still, Kramer's thorough shredding of his company's IT reputation is stunning—stunning enough, in fact, that it's easy to miss something important.

Replacing nearly 500 customized applications with 100 easy-to-maintain applications is going to be very, very expensive. And none of the assembled retail analysts seems to have noticed that JCPenney was essentially announcing a huge IT capital expenditure program.

There's no way to pare down that IT portfolio. Cleaning up the mess will require wholesale replacement. That will also require a radical simplification of JCPenney's business processes (which is also on Kramer's agenda) and all the training that goes along with it.

JCPenney last week halted its sales commission program, which will also require a huge investment to make it work, at the cost of a much less effective sales team until then. And creating a huge opening for Amazon and other e-tailers, as though they needed another one.

And there's a reason JCPenney was saddled with that portfolio of endlessly patched-up processes and applications: Ordinarily, CIOs simply don't have the clout to rip everything out and start over. That's a very pricey proposition, and getting the CEO and the CFO to sign off on it is very rare. And, naturally, if anything goes wrong, it's the CIO's head that will roll.

Everyone in retail IT has legacy systems. There's a reason they hang around so long, and it's not because they're much loved or the best that technology can offer. Mostly, it's because no one wants to spend all that money to get something that might go south and that, at best, will take a long time to pay for itself.

That means Kramer and Blum are in something of an enviable position: They have gotten a green light to completely strip out and replace their company's IT structure. They've gotten the budget and, late in the earnings presentation, their boss even teased when the replacement will be unveiled: At the next quarter's earnings call, "we will then talk about our new technology platform, how we're going to win with technology and become—I think—the leading retailer from a technology perspective," Johnson said.

That sounds great. Then again, everything about JCPenney's resurrection has sounded great. It'll be a little easier to believe once things actually start working according to the promises.

And when it comes to replacing a completely, thoroughly, utterly rotten IT core that happens to be what a big retail chain still depends on—heck, what could go wrong with that?