Economic pressures mean retailers are increasingly looking to outsource technology and business processes to cut costs and focus on core skills. But, as Hannah Prevett discovers, those looking at outsourcing as a quick win need to take a more considered approach if they are to get the best from an outsourcing deal

When the ONS announced that the UK had officially emerged from recession in January of this year, it was to a collective sigh of relief from the UK’s retail community. Apart from the financial services sector, the retail industry was one of the hardest hit by the global downturn, with many High Street stalwarts falling by the wayside. But even as things slowly start to improve, pressure remains to cut IT costs and improve efficiency, propelling outsourcing and offshoring into the spotlight once more.

Outsourcing is still regarded by many as a way of cutting costs and gaining benefits that the economies of scale of working with an outsourcer allow. The savings that a successful outsourcing project can deliver is a compelling case in itself - Wipro Technologies estimates that IT service providers can often guarantee savings of around 10 - 20 per cent (onshore) to 40 - 70 per cent (offshore) on their current budgets. And the benefits don’t stop there: not only can an external provider often deliver superior performance because they are an expert in their chosen field, but they will also have access to a broader talent pool.

Yet the global downturn sparked what some termed ‘a hiatus in decision making’, as companies struggled with the prospect of an uncertain future. “The reality of this recession is that those industries hardest hit, like retail and financial services, didn’t even know whether or not they would be operating the following week, so certainly didn’t want to speak with outsourcers about locking into a contract,” explains Christine Bardwell, senior retail technology analyst at Ovum. But this isn’t to say that it has been a dire time for outsourcing companies.

Bardwell says that while 2008 saw a substantial drop in the value of contracts, the number signed was actually up slightly on the year before. One of the outcomes of the recession is that it has forced IT decision makers to examine the ways in which budgets are distributed and look at more economical alternatives. “The decision to outsource IT is becoming a more attractive and viable alternative in the current economic environment,” says Steve Sutton, vice president, manufacturing, retail and distribution at Capgemini.

Consider this

Naturally, some functions are better to outsource than others. There are four main areas that a retailer will typically consider handing over to an external partner, explains Andy Taylor, principle retail strategy and transformation consultant, at Fujitsu: data centre or core infrastructure; networks and telephony; distributed infrastructure support across stores, distribution centres and head office desktops and retail and corporate applications. For Roland Jones, IT director at Vue, deciding what functions to outsource and what to retain in-house, was fairly easy. “We know that what we need to do is keep the value-adding things that nobody else can do for us within the organisation, and then outsource the rest to the most sensible parties,” he says.

Vue has just completed a project with Retail Assist, a retail-only services and solutions company based in Nottingham. Due to previous contractual obligations, the cinema chain had two separate helpdesks; “one supporting the software which we use in all of our sites and internal helpdesk to support all of the other things like networks, PCs, antivirus updates and so on,” explains Jones. Vue decided that the best option was to move both helpdesks to a single place, therefore freeing him and his internal team up to do more “value-adding stuff than we used to do.”

Jones says that the strong relationship he has with Retail Assist was crucial to the project’s success - a sentiment echoed throughout the industry. “Find and forge the right relationship with the right outsource provider,” advises Huw Thomas, managing director at Paul Mason Consulting (PMC). And this relationship goes beyond signing on the bottomline.

“In the volatile consumer facing world of retailing, both parties need to mesh in a way that a contract alone cannot dictate,” asserts Capgemini’s Sutton. Danny Rappaport, vice president retail-CPG Europe, at HCL agrees. “Outsourcing is like marriage. It takes work and a positive attitude, but it can be wonderful.”

Similarly, one of the vital ingredients for a successful relationship, be it a marriage or an outsourcing contract, is a shared understanding, or common goals. “Retailers expect the companies to which they are outsourcing to have an understanding of their business needs,” explains Bardwell. Chris O’Loughlin, head of retail and logistics at Steria UK agrees. “The most effective approach is to partner with an outsourcing provider that not only understands retail, but also your business - a good ‘cultural fit’ as such.”

But even if a retailer is lucky to strike upon a harmonious relationship with their provider, this isn’t to say that they should put all their eggs in one basket. And as Fujitsu’s Taylor points out, selecting best-of-breed suppliers should be something retailers are relatively familiar with. “Retailers are experts at sourcing and managing multiple strategic suppliers for their merchandise, so why not employ a similar strategy when it comes to sourcing IT?” And Ovum’s Bardwell agrees. “Savvy retailers are choosing many best-of-breed outsourcers over one large, do-it-all outfit,” she argues.

Retailers would do well to heed this lesson - others have had to learn the hard way. One of the most high profile examples of outsourcing gone wrong is supermarket giant Sainsbury’s decision to end its 10-year outsourcing contract with Accenture three years early and bring its IT operations back in-house. The company signed the contract with Accenture in November 2000, hoping to save about £35 million per year on its previous £200 million per year IT spend. Analysts put the change of heart down to poor relationships between the company and its supplier - which further underlines how important this is.

And even successful outsourcing projects can suffer initial setbacks, as Vue’s Jones explains. For various contractual reasons, the company switched on its new helpdesk just before Christmas. “I wouldn’t recommend doing that if you have a choice,” advises Jones. “That was particularly stressful because we were effectively going live with a service going into one of our busiest periods.”

And even tiny details such as different terminology used by the service provider and the retailer can be a problem. “Retail Assist has had to learn a different set of nomenclature - we refer to branches as sites rather than shops, for example.” But despite the minor setbacks, Jones is hopeful for the future. “This is all teething stuff - it can easily be overcome,” he says brightly.

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