Do Restaurant and Retail Back Office Go the Way of the Dodo?

24 Jun

Anyone fortune enough to sit through a third grade geography class knows that the continents were once fused together as Pangea. 175 million years ago the tectonic plates shifted and the continents went their own way.

In restaurant and retail verticals, back office* providers have been the Pangeal cohesion over the past 20 years: they provided streamlined and consolidated data to merchants across their many POS systems.

*I’m taking an aside to offer a definition of back office. A back office provider started with one core technology: it might have been accounting, business intelligence reporting, food costing and inventory control, labor management, or general logbook management. Today, as customers have demanded working with only one service provider for all the above solutions, back office providers have cloned each other to offer the same value. Thus, at least in my book, “back office” has become a catch-all for any of these legacy services that integrate to the POS to provide their value.

However, back office providers don’t thrive: they exist. By that I mean a very small percentage of merchants use their services. Given that there are 900,000 food establishments in the US, and many of the back office providers have international accounts or simply share customers with other back office competitors (long story), as few as single digit percentages of US food service establishments capitalize on the value back office providers create. On the left is a list of installations by independent provider – we’ve removed those that were acquired and those that serve fewer than 1,000 locations.

That’s not an indictment on the value of back office services; it’s an indictment of the sophistication of potential merchants. But to be fair to merchants, it’s entirely possible that back office pricing is beyond the reach of anyone who isn’t a large franchise group or public company. (Prices are inflated becausebrick and mortar distribution costs are outrageously high - i.e. long sales cycles, low contract value).

Traditionally, the value of back office providers has been two-fold:

1) Up until the last three years, the only POS options were legacy systems. These companies loved their walled gardens: by restricting outsiders from accessing a merchant’s data, a POS company would create an effective monopoly around any product or service on top of said POS data. And as it is with most monopolies, the products legacy POS companies produced were subpar and overpriced. Back office providers pierced the walled garden and liberated a merchant’s data, delivering higher quality – and cheaper – merchant solutions. Because legacy POS systems are so hard to deal with, there is a considerable amount of IP (intellectual property) in integrating to such systems.

2) Franchise groups, and even corporate stores, often find themselves owning multiple brands of POS software across their properties; it’s really hard to grasp a consolidated view of your operations because legacy POS companies make accessing your own data really, really difficult or really, really expensive. Back office providers developed the IP to integrate across disparate POS systems and could provide merchants with a consolidated view for finance, operations etc..

However, as it is with all things in life, times change.

The value that back office providers wrought from the antiquated world of legacy POS is being upended with the shift to cloud - a world that will be prevalent on API communication.

For very defensible (and logical) reasons, POS companies are migrating to cloud. All merchant data will be available from one entry point, or API (application programmable interface) in development-speak. As POS companies navigate this natural evolution, the IP of integrating to legacy systems goes away. Poof.

With walled gardens disappearing**,  back office providers must compete on the merit of their solutions without their integration IP. Unfortunately for them, I read this as a massive unbundling, or death by 1,000 cuts.

For instance, none of the back office providers are especially strong on technology unless they are private labeling solutions from a market leader. Sure, relative to merchants, they’re more advanced. But back office companies are using very slow software and database structures, and virtually no data science. Thus a small startup that just focuses on using better analytical models for one solution – maybe forecasting inventory needs – will have much higher savings and ROI than a back office provider can demonstrate with their inventory solution.

To further this thought, POS companies have recognized (as have back office providers) that merchants prefer to buy solutions from one provider. Accordingly, POS companies are adding competitive features to become that one-stop shop, occasionally providing features for free – and most assuredly with faster, more flexible, and more pleasant user interfaces than back office providers.

Look at the differences (i.e.: usability and value) between the user interface of Avero, a current back office provider, and that of Square, a Cloud POS company. Can you guess which is which, even without looking at the logos?

To get a head start at becoming that one-stop shop, some POS companies have even started buying back office providers, as elicited with Vivonet’s acquisition of Syrus, andPanasonic’s majority purchase of Quick Service Software last year. Directionally-speaking, it would be foolish to believe smart POS companies do not cobble together enough of an ecosystem to compete with back office providers, especially as third parties are letting POS companies private label their wares, thus arming POS companies with superior solutions to any back office provider.

The silver lining for back office providers is that the best product, or highest ROI solutions, do not typically win in a short amount of time… at least not in brick and mortar verticals. That’s why merchants here are still 40 years behind other industries at adopting common-practice methods.

But, eventually, merchants’ shareholders will catch on and demand change. When that happens back office providers might find themselves stranded in the Arctic while POS companies have built better, faster and cheaper routes to merchants. Suffice it to say this Pangeal separation will bring an unpleasant change for those back office providers without the foresight to start rowing now.

**There is, of course, no reason to believe many legacy POS systems will open up their cloud APIs based on their past actions. So while Micros (Oracle) moves to Simphony, and Aloha (NCR) moves to CloudConnect, it’s doubtful that their merchants will be able to benefit from third party solutions and larger data platforms for many, many years. Good luck to merchants using those products!