Outsourcing Conveniently Aligns Retailer’s Operations with Competitive Business Strategies | Article

PopsicleA few years ago, the typical 7-ElevenÆ store had a myriad of electronic devices that were not “connected.” For example, cash registers were not linked to the fuel pumps, which forced clerks to manually enter fuel sales into the registers, slowing the process and missing impulse sales. The situation prevented 7-Eleven from maximizing its profitability. Nor could the store managers effectively manage inventory; there was no way to know with certainty which items were moving well and which ones were simply taking up space. Shelf space in a small store is at such a premium that allowing five or 10 items to sit unsold for a week affects the bottom line.

Keith Morrow, 7-Eleven’s Chief Information Officer, says the company turned to outsourcing so it could refocus on its core business — operating stores, not data centers. Motivation for outsourcing also included an objective to shed some IT assets and gain cash flow from the value of the assets. Through a contract acquisition, Affiliated Computer Services, Inc. (ACS) became responsible for 7-Eleven’s core mainframe applications, application development, and store help desk in 1988.

Working in cooperation with 7-Eleven, ACS developed an in-store processor program called the Retail Information System, which integrates fuel pumps, money order machines, point-of-sale systems, credit card networks, payroll, cash management, and hand-held scanners into a single system that allows stores to track inventory immediately and adjust it accordingly. Manual entry of information was nearly eliminated, speeding up transaction times and improving sales volume and customer satisfaction with the retail experience.

Opening the Doors to Transformation

Their business transformation endeavors began later, Morrow explains, when 7-Eleven and ACS had some collaborative discussions about how to leverage ACS’ scale and expertise in imaging, workflow, and accounts payable.

“We then had a similar conversation around the transformation of our retail system that runs all our stores,” Morrow says. “We went at that with a collaborative approach — very win-win. We said that we wanted more modern business capabilities in our retail store system, and we didn’t know if we would be outsourcing it or not. It was a very business-centric collaboration that came out of our joint planning sessions.”

Gradually, ACS’ scope of responsibilities expanded to include not only the retail system and some accounts payable functions, but also HR, payroll, legal and property records, sales coupon auditing, and electronic data interchange (EDI) applications. “If we find a business relationship wherein both of us are going to benefit and both of us are going to get to focus on what our strengths and better capabilities are, that is an approach 7-Eleven and ACS would take,” Morrow states.” “We both think to that level.”

7-Eleven is as well known for its innovative products — such as Slurpees — as for its convenience in quick shopping. Morrow says the popular retail chain does not go into products-supplier relationships in a transactional manner. “Six million customers a day come through our stores, and we have the data about what they are buying. We partner with suppliers who invent products and want to test them at 7-Eleven,” he says. “We can get immediate feedback through our data about customer purchase decisions.”

7-Eleven approaches technology the same way. The company expects its major technology partners to innovate their products around 7-Eleven’s needs. “We develop relationships and contracts that are unique,” the company’s CIO claims. “ACS is willing to do that, and for us it’s a requirement; so this is a good cultural fit. We do this with a lot of companies, to varying levels of success; but ACS has been the most forthcoming with this approach.”

Innovation, Morrow adds, is a real key to success for business transformation. “We’re in the ‘constantly-getting-better’ mode.”

When the contract was up for renewal in 2001, 7-Eleven wanted to change the original service-level agreements (SLAs), which were no longer appropriate for the retail giant’s new transformational objectives. Together, they developed new SLA metrics for the business transformation outsourcing (BTO) contract; and they added a shared risk-reward structure with penalties and credits for missed or met service levels.

The BTO arrangement also includes several opportunities for gainsharing connected with ongoing improvement in performance and cost reduction. They have also implemented an incentive for both parties to “be on the same page” in the development of the retail store system.

At the Heart of the Matter: Trust

7-Eleven and ACS enjoy a high degree of mutual trust in their working relationship. “Neither of us is in this to turn a short-term buck or to take advantage of the other. This is a long-term deal, and ACS is a trusted advisor to us on several levels,” says Morrow.

That long-term attitude has certainly been evident in ACS’ billing for services. According to Morrow, the provider figured out that an algorithm in its storage pricing had skewed some charges. “It was only fractions of a penny, but when you magnify that across time and across a lot of transactions, it wound up to be real money,” he says. “ACS had the ethics to come to us and say they had done an audit and found this mistake; and they gave us a check for that amount. I thought that was forthcoming, and it really built trust between us.”

The strength of their mutually beneficial relationship was also demonstrated when ACS voluntarily jumped in and solved a crucial technology problem in the domain of another 7-Eleven technology. “It could have been a nightmare,” recalls Morrow. “Errors were occurring with customers at our stores’ sales counters, and the back office was getting out-of-balances and errors. It was chaotic.” The vendor servicing the network just kept telling 7-Eleven to check its own system.

ACS’ technical folks moved into the driver seat for night and weekend work to solve this problem, tracking data through the system. They created scenarios where they could visually show the other vendor what its system was doing wrong. The problem turned out to be in the other vendor’s network; a bad setting was causing it to generate two records for each response.

“I literally don’t know what we would have done if ACS had not stepped in,” says Morrow. “They took the initiative; we didn’t have to ask them to help with this problem. They just saw where they could step in and help where we were floundering and not getting anywhere. And then they didn’t charge us a penny for that work.”

The relationship has had a positive effect on the performance and results of both companies. 7-Eleven’s stores now operate more efficiently and reap greater profits. With the new business opportunities from the expanded scope, ACS’ revenue has increased, even while it decreases costs and improves operations for the stores and their customers. Their relationship is a notably successful example of creating and capturing top- and bottom-line value through outsourcing.

Lessons from the Outsourcing Journal:

  • When existing BPO deals evolve into BTO initiatives, it is wise to review existing service level requirements to ensure they are appropriately tied to the new objectives.
  • Highly successful outsourcing relationships include joint meetings to discuss future plans and collaborate on how to leverage the provider’s expertise and resources to create new value opportunities.
  • Collaboration is not present in outsourcing relationships where this is not a high degree of trust. Both parties need to know that both are in the relationship for the long term and will consider each other’s interests.

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