IT infrastructure outsourcing: Group CTO-CFO synergy at Shoppers Stop

A look at how Shoppers Stop’s CFO and group CTO went about crafting the strategy that led to its IT infrastructure outsourcing deal spread over 10 years.

If the CIO has to bring about progressive change on the technology front, an effective working relationship with the CFO is critical. This is all the more required when you are at the helm of India’s leading retail group. We caught up with Arun Gupta, the group CTO of Shoppers Stop and Chandrashekhar B Navalkar, the group chief financial officer of Shoppers Stop and CEO of Crossword Bookstores, to learn how the duo worked together on Shoppers Stop’s long term IT infrastructure outsourcing deal for its retail organization (which includes Shoppers Stop, HyperCITY and Crossword).

What were the business objectives that led to Shoppers Stop’s recent IT infrastructure management outsourcing deal?

Chandrashekhar B Navalkar: Our new service provider will manage the entire IT infrastructure of Shoppers Stop’s retail organization. This IT infrastructure outsourcing service provider will take over this responsibility over a period of 10 years. The idea with IT infrastructure outsourcing is that an expert manages this specialized area so that the company can concentrate on its core business of retail and the IT team on software development.

Arun Gupta: Over the last 12-18 months, our growth has been very fast. We expect this to continue over the next two to five years. The growth in number of stores will be much higher than the past.

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What exactly is the level of growth?

CBN: In October 2009, we had 32 Shoppers Stop departmental stores. By the end of last year, this had grown to 38 stores. Between April and October 2011, we added nine stores. With our large store format, HyperCITY, we added five stores during the same period. We also have a number of specialty stores, including our arrangement with the Estee Lauder group, as well as HomeStop, which opened four stores over the last eight months.

AG: Rapid expansion puts pressure on IT to rapidly scale up the entire operation. We cannot afford situations wherein a store cannot open because of lack of capacity with IT or the current service provider.

When did you realize that you needed a new IT infrastructure management partner?

AG: We started this discussion in July 2010. Our scale-up had begun, with 20 stores set to come up in the next 18 months, adding customers and transactions. This called for an expansion of capacity on fronts such as the data center and networks. It was essential to optimally manage customer loyalty systems and transaction systems. That’s why we decided to look at partners to help us scale up, without adding to IT head count.

We were clear that it should not be more than what we currently spent, in terms of percentage of revenue. It was also imperative to ensure efficiency in addition to scale. We deliberated on whether the IT infrastructure model should be linked to square footage or revenue or number of stores or other parameters, and finally came up with a hybrid formula.

What were the parameters set for the IT infrastructure outsourcing service provider evaluation?

AG: Parameters included the organization’s size, reach, expertise on the technologies we use, and ability to scale with us on specified processes. There was serious focus on the tools and technologies needed to create higher efficiency levels. Certain processes required optimization, which were already on our roadmap. This deal had to provide us with an opportunity to fast-track those processes.
For example, when we started our IT infrastructure initiatives, we planned to deploy certain tools over a three-year period. Since we have a three-year rolling plan that we present every year, we phased specific aspects for rollout in 2010-11, 2012 and 2013, based on our ability to invest and change. A lot of these initiatives had to get fast-tracked. The service provider had to break that up as an investment into the entire initiative, factoring in efficiency from day one.

The final consideration was operating efficiency. If we were currently achieving 95% SLA, the IT infrastructure outsourcing partner had to do better than that in a scale-up scenario.

How long did the evaluation take?

AG: We started the evaluation in October 2010 and closed it in August 2011. The deal was signed in September 2011. Rollout will be complete by January 2012.

Was this factored into your annual budgets?

CBN: There’s a switch from capex to opex. This was another area where the finance team went through parameters such as operating manuals, which are looked upon by the investors of publicly listed companies.

This new IT infrastructure outsourcing management model also makes Shoppers Stop’s assets light, as we progress through the expansion. As a company we have been following the policy of keeping assets light, since none of our stores are owned. So when Arun sent this proposal across, it appealed to us. The only thing was to determine how to manage the various pieces in terms of stakeholder expectations and operating margins.

AG: The entire deal is cost neutral. No one in retail has done such a deal in the APAC region. So it is novel, and has provided a global benchmark for the service provider as well.

What due diligence did you conduct from your respective areas?

CBN: In Finance we usually want a deep discount in everything [laughs]. Since Arun and team perform a pretty good job at controlling costs, it initially appeared as if bringing in an expert would actually increase the cost.

The service provider had first presented a different IT infrastructure outsourcing model. We felt that the model did not justify efforts that we had already made. Their commitments did not provide significant cost reduction over a period of 10 years either. From the IT side, I relied on Arun’s expert interpretation of their offerings, but we felt that the service provider did not commit enough from the finance side.
AG: The service provider was looking at total outsourcing as a concept. I made it clear that we were not ready for total outsourcing. Many aspects of our business require substantial domain expertise – it’s not just about the technology. So we zeroed in on the components to be outsourced, and those to be retained in-house.

We have set high benchmarks in terms of IT opex costs. We are at least 40 basis points over the rest of the industry, so the IT infrastructure outsourcing service provider’s challenge was to improve an already optimized model. Finally with a lot of help from the vendor, we were able to achieve this using a hybrid model.

Considering the project’s scale, did both of you have any major conflicts?

AG: There were disagreements over the numbers on a day-to-day basis, but in the end everything went fine. Once we created a cost-neutral deal, then it was a question of the value and efficiency it creates for the organization.

CBN: Since we sit in the same office, I sort out issues with Arun over a cup of coffee, and vice versa. It’s the DNA of our organization. Friction is generally resolved over straight communication, without email wars.

Apart from the opex cost perspective, what are the other benefits of IT infrastructure outsourcing?

CBN: From the organizational point of view, it’s now important to consider Shoppers Stop’s robustness for handling future expansion. That’s why I refer to this initiative as optimal cost, not reduction of costs. With leading retail organizations worldwide, one of the common key factors is the ability to efficiently handle the backend and transaction processes. This ensures stress free operations at the front end.

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