TGT Target Corp

By Sara Castellanos 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 23, 2020).

Michael McNamara knew Target Corp. had challenges when he was hired as chief information officer in 2015. The retailer, knocked around by public failures including a December 2013 data breach, was "lacking confidence" and "down on its heels," he recalled.

While rival Amazon.com Inc. was amassing e-commerce market share, Target's information-technology staffers -- mostly outsourced -- were focused on traditional IT tasks such as managing hardware and software vendors. Technology staff spent a lot of time on noncritical work, the CIO said.

"IT projects were always late and cost too much, and they were never right," said Mr. McNamara, who before joining Target spent about 17 years at U.K.-based grocery giant Tesco PLC.

Mr. McNamara's answer to Target's troubles with software was even more software -- but with major changes.

The CIO began an 18-month effort to bring software development in-house and focus on technology projects that add competitive advantage or drive revenue growth, such as those related to online shopping and same-day delivery or pickup.

Today, Minneapolis-based Target has about 4,000 IT employees, more than 80% of whom are full-time software engineers and developers. Before Mr. McNamara took over, the company had about 10,000 IT workers.

To slim down the IT department, the company chose not to renew outsourced staffers' contracts. At the same time, it hired more than 1,000 in-house technologists. The retailer can do more with fewer employees, Mr. McNamara said, because senior management prioritizes only technology initiatives that have a direct impact on business objectives such as revenue growth.

The strategy has helped results. Sales from stores and digital channels operating for at least 12 months rose 4.5% in the quarter ended Nov. 2 from a year earlier, marking over two years of consecutive quarterly sales growth. E-commerce sales rose 31% in the period, with most of that growth coming from same-day delivery or pickup, the company said. Since November 2015, Target shares have increased more than 50%.

However, recent holiday sales were sluggish. The company last week warned that growth for its full fiscal fourth quarter, which includes January, would likely fall short of the 3% to 4% gain it previously predicted.

To be sure, Target's financial performance isn't solely tied to its technology efforts. The company has refurbished stores over the past few years and it has debuted new brands that are attracting customers, said Neil Saunders, a managing director with GlobalData PLC. "The most important thing is to have products people want to buy," Mr. Saunders said.

But Target's technology efforts have been critical in making shopping easier and more appealing -- whether online or in store, he said. Those efforts require a degree of nimbleness and the ability to respond to changing consumer trends quickly. "Having an in-house team allows you to do that," Mr. Saunders said.

Target hasn't yet made market research firm eMarketer's list of the top 10 U.S. companies ranked by retail e-commerce sales. However, this year it will likely overtake shopping channel QVC as the nation's 10th largest e-commerce retailer based on its growth trajectory, eMarketer said. QVC's retail e-commerce sales in 2019 amounted to an estimated $7.10 billion, or 1.2% of total U.S. retail e-commerce sales, according to eMarketer. Amazon.com ranked first with an estimated $222 billion in retail e-commerce sales, or 37.6% of the total.

The in-house IT team was critical in integrating the technology systems of Target and Shipt Inc., a grocery delivery startup the company agreed to acquire in 2017 for $550 million, Mr. McNamara said. Same-day delivery options, including Shipt and "buy online pick up in store" services, accounted for 80% of Target's digital growth in the company's most recent quarter.

Other companies such as Dick's Sporting Goods Inc., Lowe's Cos. and Capital One Financial Corp. have also "insourced" IT talent.

In 2015, the prevailing sentiment on Wall Street was that Target was behind the curve in responding to the e-commerce threat and there was little it could do to fend off its loss of market share to Amazon, said John Zolidis, president and founder of investment advisory firm Quo Vadis Capital Inc.

During Mr. McNamara's first Cyber Monday at Target in November 2015, online shopping's biggest event of the year, its website crashed and the IT team had to halt some of its online traffic because its servers couldn't handle the capacity.

"Retail was being disrupted and it was clear that our business was moving faster than we were in the tech team," said Nancy King, now vice president of merchandising and marketing technology at Target.

To help reduce the chances of another online shopping outage, Mr. McNamara in his first year supervised the migration of some IT systems from physical servers to the cloud.

He also began to phase out IT contractors in favor of in-house engineers. But persuading top talent to move from places like California to Minnesota posed a challenge, especially because Target's reputation for technology was "very poor," Mr. McNamara said. "It was about selling people on the future, not the present," he added.

He described the company to potential recruits as a place where software engineers could learn new skills and tackle interesting, worthwhile problems that would translate into tangible impacts on the business.

Existing employees and new recruits were schooled on the principles of agile software development, a method of project management associated with Silicon Valley companies that is increasingly being used by corporate IT departments. Agile involves employees from different departments working together closely under short timelines, changing course often -- collaboration that speeds up product development.

In 2017, a handful of software engineers developed a prototype of a mobile app for in-store employees in six weeks, something that would have traditionally taken nine months and involved dozens of staffers. The app, called Save the Sale, allowed employees to order inventory for customers that wasn't stocked in the store.

Write to Sara Castellanos at sara.castellanos@wsj.com

(END) Dow Jones Newswires

January 23, 2020 02:47 ET (07:47 GMT)

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