Sainsbury's against the grain outsourcing deal

Last month, Sainsbury's signed one of the largest IT outsourcing contracts in British retail history. But shouldn't the...

Last month, Sainsbury's signed one of the largest IT outsourcing contracts in British retail history. But shouldn't the supermarket giant have shopped around first, asks Guy Campos It was a huge outsourcing deal. The client was one of the greatest names in British retailing that had begun to lose its way. The contractor was...

Andersen Consulting, one of the paragons of business IT consultancy. But it didn't have a happy ending.

No. Nothing bad has happened to the negotiations between Sainsbury's and Andersen over the outsourcing of the retailer's entire IT operation, announced at the end of last month.

The deal that went sour is Andersen's only previous experience of IT infrastructure management for a UK retailer: its contract with the former shoe and department store conglomerate Sears. Changes in Sears' business made the contract a costly millstone. So can Andersen and Sainsbury's profit from the lessons learned? And what are the parallels?

Centralisation

Four-and-a-half years ago, the City of London viewed Sears as a company in need of a management shake-up. Chief executive Liam Strong was under pressure to produce results or ship out.

Earlier this year, Sir Peter Davis joined Sainsbury's as chief executive from the Prudential. His task was to reverse a decline in fortune that had seen Sainsbury's drop from the top spot in grocery retailing to number two behind Tesco.

Four and a half years ago, Strong decided that a shake-up of Sears' IT was needed to transform the business. He devised a plan for Andersen to centralise the IT for all the retailing group's divisions - whose famous names included Selfridges, Dolcis, Freemans, Millets and Warehouse - to make IT savings of £14m a year, during a 10-year contract. Strong negotiated the deal personally without an open competitive bid.

Last month, Davis said the age and complexity of Sainsbury's IT systems were hampering its progress. A Sainsbury's spokeswoman later made clear to Computer Weekly that, although there was no formal competitive bidding for the outsourcing business, Sainsbury's had worked with other consultancies before choosing Andersen as its preferred bidder. But she admitted that Davis' personal knowledge of Andersen, gained while the consultancy provided IT outsourcing services to the Prudential, had been a factor.

Andersen's 10-year, £344m contract with Sears - a record for its time - ran aground, not through the consultancy's fault but due to a change of strategy by Sears. Almost two years into the deal, Sears decided to spin off its individual companies as separate businesses and these divisions then chose to bring their IT in-house. In the meantime, Andersen had laid off half the conglomerate's 900 IT staff.

For Sears, buying the consultancy out of its contract during the de-merger of its divisions proved costly.

There is no reason to suspect that Sainsbury's will be broken up similarly. However, who is to say that Sainsbury's strategy will not change over the course of the proposed seven-year contract?

If the company's financial performance does not please the stock market, it could be the subject of a takeover bid. The company could also come under pressure to hold more non-food items in its supermarkets following the lead of Tesco and Asda, calling for different systems.

For outsourcing analysts, one of the chief worries about Sainsbury's announcement is Andersen's lack of experience in IT infrastructure management with retailers. IBM, EDS and ICL all have huge experience of retailing internationally and would have been more obvious choices.

There is also the question of cultural fit between the organisations. One consultant who is familiar with Andersen's work described the company as "engineering perfectionists".

"Andersen is used to building industrial-strength infrastructure. It does not cut corners. This is the reason why it is chosen by the stock exchange and financial services companies, where risk must be minimised," he said.

He feels the market-led side of retailing requires operators that are fleet-of-foot, that can work off the back of a cigarette packet and produce solutions that cut costs to an eighth of previous levels on the fly - hardly Andersen's strengths.

Another consultant, Daryl Howe of Quantum Plus, who is a former operations director at outsourcer ITNet, also questions Andersen's suitability for infrastructure outsourcing as opposed to consultancy.

"Andersen employs some of the best brains but its strength is in being creative and innovative. It is brilliant, but the issue that Sainsbury's will have to decide is whether the competencies needed to run a consultancy are the same that you need to run a factory-type operation like a datacentre," said Howe.

"Consultancy tends to be a high-margin business where you are selling value-added services. Outsourcing tends to be about productivity, efficiency and watching the key dials and I am not sure that is the same type of business," he said.

In some ways the proposed Sainsbury's deal runs contrary to the trends in modern outsourcing.

John Ferrier, European outsourcing analyst at IDC, said, "Many contracts today begin at two years or four years. The idea is to test the outsourcer with a little bit of work and a short time-period. A seven-year deal would only tend to happen if there was a prior relationship, and the previous experience of Davis would seem to be the key here."

If it is, this is worrying because 'sweetheart deals' between chief executives and outsourcers are notorious for going wrong.

It is also more common these days for companies to selectively outsource elements of their IT operation to best-of-breed contractors in specific areas, such as applications management, networking and datacentres. In addition to the difficulty of changing strategy when IT has been outsourced as a whole, analysts feel that no one company is expert at all of the potential areas for outsourcing.

Of course, Andersen could subcontract elements of Sainsbury's IT operations to companies with specialist expertise. Sainsbury's has already said that it wants the consultancy to manage its relationships with existing suppliers. But if Andersen was to subcontract, analysts ask, why should Sainsbury's not simply manage these selective outsourcing contracts in-house itself ?

The answer may be that senior management does not have confidence in its ability to recruit and retain the best strategic brains.

For, in some ways, the proposed Sainsbury's outsourcing deal is typical of current outsourcing trends. First, it appears to be about increasing the capabilities of the company.

"We've seen a lot of outsourcing activity over recent months that is transformative rather than cost-cutting," said Alistair Henderson-Begg, outsourcing director at Technology and Business Integrators.

And cost-cutting does not seem to be the focus of the Sainsbury's-Andersen deal. It cannot be if the choice of contractor is Andersen, say analysts.

One source familiar with the company says that, like the FI Group, Andersen is expert at getting close to the business and selling additional work against the company's key business objectives. After all it is a consultancy. In this respect, it is unlike Sema or EDS which are more operations-focused.

Retailing analyst Michael Godliman, at Verdict, thinks Sainsbury's has little choice about outsourcing if it needs to invest heavily in updating its systems. For the retailer is already committed to heavy investment in its stores and marketing, at a time when its financial results are disappointing.

US competition

Others see the entry of US retailer Wal-Mart into the UK market as another potential driver for the deal. Wal-Mart is famous in America for the logistical efficiencies it has achieved by thorough integration of its systems with its suppliers. Sainsbury's has to keep up.

In its negotiations with Andersen, Sainsbury's has to consider two dilemmas. It cannot afford not to bring in outside expertise to upgrade its ageing systems. But can Sainsbury's afford the loss of control that proved so costly to Sears when it was forced to change its business strategy two years after signing its own deal with Andersen?

Analysts are not convinced that, in choosing wholesale rather than selective outsourcing, the retailer has made the best decision.

Senior Andersen staff were unavailable for comment but a spokesperson said the company had huge experience of outsourcing, including work for retailers worldwide.

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