Navigating the Risks of Omnichannel Retail

by Latham & Watkins LLP
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Digital innovation is reinventing the retail experience. IT is changing the way retailers interact with customers by integrating sales and communication channels, enabling in-store digital interfaces and diversifying payment platforms.

As retailers look to fuse existing operational silos in favour of an omnichannel strategy, the role of IT is increasingly recognized as critical to achieving seamless and integrated retail experiences.

Omnichannel retailing combines the bricks and clicks aspects of retail, allowing for multiple, easily accessible retail touchpoints or channels. At the same time, it can effortlessly customize the  customer interface, based on their past purchases and preferences.

Key Considerations for Omnichannel Retail Success

  • Integration: Aspiring omnichannel retailers seeking to connect inventory, supply-chain, order management & distribution, Customer Relationship Management (CRM), marketing and Point of Sale (PoS) systems are likely to face back-office technology integration challenges as traditionally these operational functions have worked autonomously. Yet centralizing these systems is key in achieving an omnichannel strategy. Currently there exists a disconnect between internal technology and business functions. Therefore retailers must align the capabilities of its IT assets with overall business strategy.
  • Investment: Technology investment is too often evaluated from the perspective of cost-reduction. Retailers need to assess the advantages IT can bring to business operations such as service innovation, customer analytics and product development. For example, centralizing all data can enable retailers to more effectively understand customer behaviour and detect purchasing trends which may not be visible to an organization that houses data by department.
  • Innovation: Innovation is quick to outdate. The industry is just beginning to trial and implement digital technologies such as mobile PoS, virtual mirrors, interactive displays and RFID inventory. As such, retailers need to implement flexible and interoperable systems that can adapt and expand with the needs of their business.

Navigating the Risks of Omnichannel Retail

In addition to these strategic considerations, the contract for the implementation of an omnichannel retail system needs to address a number of key commercial, operational and legal risks:

  • Operational and delivery risk including running over budget or time; incompletion; failure of system to meet business requirements; over-engineering, poor quality, inefficient maintenance; and changing requirements over time.
  • Intellectual Property Risk such as ensuring that the retailer has sufficient rights to use the system; owns any bespoke developments or innovations which give it an advantage over its competitors; and is not “locked in” to a relationship with a vendor by virtue of having no rights to use the system should it terminate its relationship with the vendor.
  • Liability risk such as protecting the retailer from third-party claims related to its use of the omnichannel system; ensuring that the retailer may bring a claim to recover its actual losses in the event of a breach by the vendor; and ensuring that the retailer’s exposure to liability from the vendor is commensurate with the fees being paid by the retailer to the vendor.

Each of these risks are significant and result in material losses caused by failure. It is essential that retailers address these risks in agreements with vendors and take great care in determining the manner in which a systems implementation is priced, vendor performance is incentivised and implementation is governed and managed.

Photo: Thinkstock

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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