The worst thing that can happen to any retailer on Black Friday is your website falling over - as Lowe's Stores discovered this year. While it was an embarrassment the DIY giant could have done without, it didn’t come as that much of a surprise to CEO Marvin Ellison:
Our challenging IT infrastructure was evident on Black Friday when we experienced system outages. This system failure presented to the outside world what our associates deal with on a daily basis. It was an embarrassing moment for the company, but one that presented our current state to the world.
That’s brutally candid by any standards, but Ellison is still in ‘honeymoon’ phase at Lowe's and can legitimately pass the buck to his predecessors. He was shipped in earlier this year as a turnaround CEO, based less on his tenure at JC Penney and more on his 12 years spent at Lowe's biggest rival, Home Depot.
Since his arrival, he’s undertaken a deep dive into Lowe’s ailing fortunes and found much wanting, around technology, around customer experience and particularly around supply chain management which was once one of the firm’s biggest strengths:
So what happened? Well, simply stated, the company shifted its focus and lost its way. We undertook initiatives that did not add value to our core retail business. We exited national brands in pursuit of better margins, which dramatically hurt our Pro business. In addition, we lost expertise in store operations and in merchandising. And we failed to keep up with advancements in e-commerce, IT and supply chain.
Ouch! As for the customer experience in-store, Ellison provides a cringe-making anecdote:
While I was visiting a store recently, I posed a question to a group of associates. I said, ‘OK, I am a customer. I am buying flooring, cabinets, countertops, a suite of appliances, so that kind of equals a kitchen remodel, right’. So I said to the team, ‘How do we manage this kitchen project for the customer?’ You want to know what the associates showed me as our project management system? - a dry erase board in the back of the store.
After I got past the shock, I had a follow-up question. I said, ‘Well, the customer didn’t have a dry erase board. So how do they keep track of the project?’. Their answer - ‘Well, Marvin, we give them a binder!”. So dry erase boards and binders as a project management system, hard to believe that a retailer our size with our balance sheet is working with these systems in 2018.
So that’s the problem. What’s the answer? It is, inevitably, to rebuild as an omni-channel retailer - so far, so predictable. More interesting is Ellison’s assessment of how the chain can execute on the essential technology underpinnings of such a transformation and that involves massively ramping up in-house tech teams under a new CIO.
Getting skilled digital and IT personnel under the Lowe's roof rather than outsourcing the work or using package software is critical, he argues:
Where we are today, we have quite a bit of package software that we customize. And so we are paying license fee for a product that we can’t even get serviced on because it’s so customized. And so we have the worst of both situations and we have to work our way out of that…If you think about large companies making large scale transformations, you don’t make those buying package software. So, I wanted someone [as CIO] that had a skill set and a track record of specific design in this new age of cloud technology and open source arenas of technology.
That person is Seemantini Godbole, most recently Senior Vice President, Digital and Marketing Technology at Target. One month into her role and she observes with considerable understatement :
I have signed up for a lot.
But she’s confident that Ellison’s stated goals can be achieved, even if there’s a hell of a lot of catch-up work to be done:
Lowe’s technology is well behind leading retailers in terms of strategy, architecture, process maturity and capabilities. Our store and supply chain systems were developed in the ‘90s, while our merchandising, pricing and digital systems are rooted in early 2000s. Only our back office system really measures up to current standards and that’s obviously not ideal for a customer-facing organization. Leading retailers have modernized their technology platforms and advanced their digital capabilities through investment in software engineers and targeted acquisitions. However, at Lowe’s we have historically underinvested in talent and technology, opting instead to use off-the-shelf software packages and then heavily customising them resulting in poor integration, difficult upgrades and slow responses to business needs.
Our technology goals were focused on managing cost and headcount rather than building capabilities that serve customers in a modern omni-channel world. Misaligned goals and inconsistent execution further contributed to a growing gap in our capabilities. For example, in 2009, we launched the Services Platform initiative, which was designed to provide connectivity between our omni-channel assets and close many of the capability gaps described by the team today. Services Platform was scoped as a 4-year program, but was shut down after 7 years. In the end it delivered less than half the original business value intended.
None of this has been helped by a rotating door among tech leaders at the firm, she adds:
Inconsistent leadership, evidenced by the rotation of five CIOs in last 8 years, drew an inconsistent strategy and low accountability, which in turn delivered poor results. We have capability gaps in stores, supply chain, merchandising and digital systems and we must remedy them in order to win in today’s complex retail environment.
What’s needed now is a complete rebuild, argues Godbole:
First, we will create truly omni-channel architecture. When I say that, I don’t mean a single app or just a sleek website, but a grounding of a single view of customer orders irrespective of whether they were placed online, in the store, through the call center or on the job site. It is about creating a single view of our customers, product, prices and inventory…This information will be readily available to all our associates and customers through a flexible architecture deployed closest to the end user for optimal performance. This type of architecture will dramatically improve our speed, scale and flexibility. It will allow us to deploy a bit more frequently as we will be able to quickly change only the parts we need without affecting or changing the whole structure. We will be able to reuse components, which are literally like Lego blocks to rapidly construct new capabilities for our associates and customers to embark on a journey of continuous innovation.
In addition, as part of our new technology strategy, we are moving to cloud-enabled technologies, which will improve application availability and scalability while lowering the total cost of ownership. Today, less than 5% of our enterprise application portfolio is running in the cloud. With this critical foundational architecture in place we will be able to offer new functionality for our associates and customers and deliver the best-in-class retail experience. In addition to improving our omni-channel architecture to drive better results, we have started our journey to fundamentally change our technology operating model. We are standing up product teams, pairing engineers with product managers and business experts to co-innovate and deliver functionality faster. Gone are the days of multi-year mega-projects. Instead throughout 2019, we will be bringing new functionality to our store associates and customers on a continuous basis.
As for the internal tech skills aspect, Godbole plans to ramp up in-house headcount radically, with plans to hire 2,000 software engineers over the next two years;
We will put these engineers at the center of everything we do in technology. We will ensure that the work environment, level of environment and compelling product work will create one of the best places to hire and retain top talent. We have historically relied on software packages when we then customize, which was inefficient and created isolated platforms with isolated data and it required us to staff separate teams, each with different skill sets. We have now shifted our focus to a digital transformation strategy that relies on building customized solutions and leveraging open source technologies, which are far more nimble and cost effective. By 2021, I plan to shift the build [v buy] component of our application portfolio to over 80%, leveraging our team of software engineers, which will improve our agility, reduce maintenance expense and enhance our performance and monitoring capabilities.
Godbole supports Ellison’s rejection of package software as unsuitable for Lowe's particular needs:
My experience tells me [that] if your underlying business process is non-differentiated and if it is well-known and well-documented and if it is not changing much, those are great places to buy package software. So for example, if you want to run your company’s payroll, that’s a great place to buy package software, because every company out there is running payroll kind of similar to each other. However, if you want to run your own inventory or you want to take orders, these are the places where you are actually bringing differentiation. This is your secret sauce. Generally, packages develop software, which is lowest common denominator across all your clients and they are not able to accommodate for secret sauces.
All of this is going to cost of course. Godbole reckons she’s going to spent up to $550 million between now and 2021. But it’s money that will be well spent if she succeeds in getting Lowe's back on top of its game in a highly lucrative sector. Ellison estimates that the US home improvement industry is worth a cool $900 billion a year and there are still only two major players at the top of an otherwise localised and fragmented market:
Given the large home improvement marketplace and the fragmented nature of the space, we don’t see this as a zero-sum game. In other words, this is not a win-lose proposition. Although we have a major competitor in this space, combined we have less than 20% market share, so we have room to grow in both Pro and Do-It-Yourself.
An expensive restoration project, but an essential one. The Do-IT-Yourself approach is a bold one and will undoubtedly become the benchmark against which the success or failure of Ellison’s turnaround strategy is judged. He and Godbole will need some quick wins to prove their thesis. This is definitely a digital transformation story that we’ll be tracking very closely over the next year or two.