How can a regional drug store chain, with just 68 stores in two states, compete with national chains like Walgreen's or CVS that seemingly have stores on every corner? By outsourcing its retail IT, that's how.
"Outsourcing gave us the capabilities to be on par with the national firms," reports Jeff Ashland, VP IT for Snyders Drug Stores, Inc., which is based in Minneapolis, Minnesota. "Now we have the same technology. If we had to do this on our own, we would be a long way behind. Outsourcing leveled the playing field for us."
Small regional chains are at a disadvantage, according to Steve Klingler, Vice President of Outsourcing at Tomax, Snyders's supplier, because "they are essentially out of business if their retail or inventory system goes down." Yet most don't have the budget to operate their IT infrastructure at a performance level of five nines or the personnel with the requisite expertise. "But they have to operate that way to stay in business," he points out.
Snyders Drug, which has been in business for 80 years, handled its IT internally. It purchased retail software from Tomax, a Salt Lake City, Utah company, in 1988. "But we didn't do it well," admits Ashland.
In 2005 Tomax decided to start a hosting service. Tomax approached Snyders Drug to outsource its retail processes--from planning to point of sale.
This was just the Rx Snyders Drug needed. "They understand their software much better than we do," says Howard Watkins, Snyders Drug's Director of Applications and Development. "And they certainly understand Oracle databases better than we do."
The retailer saw additional benefits to outsourcing. Its definition of disaster recovery was halogen fire suppression in its computer room. Watkins says Tomax's disaster recovery center has isolated lines for water and electricity and is earthquake resistant. "It has a crumple zone," he says. "We couldn't do any of that on our own."
Security has become a big issue for all retailers; it's crucial for any store that accepts credit cards. The credit card industry now requires retailers to meet high security and data retention standards if they want them to continue to work with their credit cards. "It's as strict as a Sarbanes-Oxley (SOX) audit," says Klingler.
In fact, Tomax now has its own its own SAS 70 audit. When Snyders has a SOX audit, the auditor will accept Tomax's report. "We have a lot of publicly-traded clients. Snyders Drug is a private company. But now its systems meet SOX standards. If they ever want to go public, they will be ready," says Klingler.
The supplier is able to roll out new applications to all stores simultaneously. "They load it at the host and then every store has it. We didn't have the manpower to do that," says Ashland.
Ditto for hardware. Watkins says he's relieved his staff doesn't have to keep up on the latest in hardware. "We don't have the expertise to know what hardware we need," he says.
He points out Snyders Drug had one database manager and Tomax has 18. In addition, Tomax has 10 system administrators. Klingler says Tomax has a minimum of three people in every discipline. "At Snyders Drug, they had one person who juggled all those roles. What do you do when he is asleep, sick, or on vacation?" he asks rhetorically.
Outsourcing also consolidates databases. Now there is only one. "Our buyers get just one version of the truth," says Klingler.
Outsourcing the same software it was already using improved the retailer's reporting because now the information is real time. "We like the instantaneous access," says Watkins.
The chain likes the data monitoring the outsourcing solution provides. Drug stores carry seasonal items and get really busy at Christmas and Halloween. Now they have the capacity to plan for sales peaks because they can recognize trends from years past.
Ashland says outsourcing "freed up resources to concentrate on the retail end of the business. We like not having to do hot back-ups. Now we stay current with both their software and Oracle. They do all applicable IT roles. If we have a problem, we call them!"
Handling problems is certainly easier. Before, if Snyders Drug had a problem, its database administrator called the Tomax help desk. Many times he had no idea what the problem was. Now, the retailer's IT people can look at the Tomax portal. "If the lights are all green, we know the problem is at the store. If the problem is with a server, it's Tomax's problem and we don't have to do anything locally," says Ashland.
Making the Relationship Work
"Lots of patience on both sides," is the key, according to Watkins. And unlimited support. "We have supported them through tough times. They have done the same for us," he notes.
He says the outsourcing relationship has worked well because Tomax was a long-term partner before either party considered outsourcing. "They understand our business because they have lived it with us for the past 20 years," says Ashland.
At this stage both groups are on a first-name basis. "We know who to call if there is a problem," Ashland adds.
The drug store IT executives visit Tomax's Salt Lake City headquarters once a year. The supplier sends its account executives there quarterly.
Changing the Business Model to Become an Outsourcing Supplier
Tomax began as a niche software company in 1981 serving retail chain stores across all segments. It noticed many of its retailers got "so bogged down in managing the technology they didn't fully use the technology they had," says Klingler. Outsourcing the software to the software vendor optimized usage, says Klingler and Ashland would agree.
In 2000 a retailer hired Tomax to install its software. Then it asked the software vendor to continue to manage it for them. Tomax agreed. But problems arose immediately because programmers and suppliers require different staffing. "Turnover became a problem" because no one wanted the graveyard shift. "We had to change our business model to support outsourcing," reports Klingler. The company restaffed "to match the needs of a 24/7 IT supplier."
Once Tomax transformed its operations, it has been able to double its outsourcing business every year, Klingler says. Much of that growth has come from its former software clients like Snyders Drug.
Klingler says his company's understanding of the rigors of retail has fueled this growth. It has no restrictions on what retailers can deploy in its data center. One buyer previously contracted with another outsourcing supplier that repeatedly scheduled updates on holidays, a great time for office workers because most offices are closed. But holidays are the days when retailers are not only open for business and but have their big sales. That's not a problem for Tomax customers because the supplier is in tune with retail and takes these things into account when scheduling upgrades and maintenance. "We recognize the retail calendar," says the Tomax executive.
Lessons from the Outsourcing Journal:
- Outsourcing can help a mid-sized retailer compete with the big national chains because it can now afford sophisticated IT services.
- Security improves with outsourcing. This is critical to retailers who have to meet the strict security standards of their credit-card processors.
- Suppliers dealing with retailers have to understand the intricacies of retailing. Don't schedule routine maintenance on holidays when retailers are having their big sales!