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Family Dollar realized a few years ago that it needed to dramatically upgrade its technology management practices. Stiff competition from Wal-Mart and others in the discount food, clothing, and household products retail space placed the onus on the Charlotte, North Carolina-based chain to overhaul its IT, database, and application management processes if it were to continue growing.

"Our brand is that of a neighborhood store rather than a super center," says Eric Gordon, Vice President of Business Systems with Family Dollar. "But we still have the same challenges as everyone else in developing and managing information if we wish to remain price competitive. We didn't have the resources to massively upgrade IT etc. in-house. We had to outsource." But it took a couple of furtive attempts before finding the right outsourcing provider to produce the desired results and cost savings.

Two False Starts Before Hitting Outsourcing Paydirt

With over 6,000 stores throughout the United States today, the immediate objective at the time was to upgrade several process management areas within the stores themselves. Then it planned to apply similar management practices up the supply chain, eventually to Family Dollar's relationships with its manufacturing and product suppliers.

Its first two outsourcing efforts involved large tier-one providers and things didn't go all that well.

"We wanted to start out slowly, beginning with our retail outlets and gradually work our way up the organization," says Gordon. "But they just didn't work out in an outsourcing sense. We still have good business relationships with these companies in other areas and are pleased with the work they do as suppliers."

So Gordon and his associates went back to the drawing board and found Teaneck, New Jersey's Cognizant Technology Solutions, an IT service provider with significant operations overseas. "We wanted a firm that would support growing our account," says Gordon.

"We were both looking for the same things," says Amitava Haldar, Relationship Manager for Cognizant who underscores Gordon's view of the shared strategic vision. "We've realized a lot of success with clients that want an outsourcing relationship to grow sequentially and build on leveraged achievement. It's not all about big game."

The first step called for Cognizant to transition the IT and database management services from the former providers which Gordon says was a smooth one. From there, it transitioned to application support, maintenance, and testing, then incorporation of new IT processes into retail store point of sale (POS) systems.

"It didn't happen overnight," says Gordon. "But over an 18-month period, it involved some significant steps that worked out pretty well."

He adds that his staff and Cognizant recently completed their planning for the coming months. Some of the expanded Cognizant areas of responsibility involve inventory management, Family Dollar's Web intranets and extranets, and overall Enterprise Resource Planning (ERP) and execution.

"We hosted much of this internally. Now we've begun transitioning some of these databases to remote hosting and plan to incorporate more third-party hosting options within our overall IT database enterprise," says Gordon.

Similar Vision Cements the Partnership

Gordon cannot emphasize enough how important a shared vision with his provider is after two unsuccessful outsourcing attempts.

"For starters, we would never embed a supplier this deep in our organization that just performs tasks but leaves the decisions to us. Our rationale for outsourcing is to leverage resources. But we only consider that a success if we can do it at a lower overall cost than our internal cost. We needed help not only with the tasks, but the strategy, direction, and sequence of work performed. We wanted someone to transition from simple task provider to strategic partner/provider."

He notes if Family Dollar had problems delivering quality solutions because it chose to do the work itself or had the wrong provider, he and his staff would be frequently holding up the delivery cycle to fix bugs and errors. But with his partner Cognizant, he can count on delivering two to three new POS releases to the field each year.

Richard Peynot, Senior Analyst at Forrester Research notes, "Service-level definition causes most challenges. Companies have checklists that set out their basic service expectations, but these are generally incomplete. Both parties need to know not only what should be done, but how it's done, starting with the vision."

Cognizant's Haldar says, as providers, he and his associates must work hard to communicate this message to clients. "In this case, because Family Dollar had been less successful before coming to us, we were especially sensitive to this need. Because of its less-than-successful outsourcing experiences, the executives were more patient and open once they knew we shared their 'build it slowly' vision."

Gordon also notes the impact that Cognizant has had on his organization. "They've inspired us to be more disciplined in how we manage our work because outsourcing is really about the end game-the results-not the process."

Mike Griswold, Research Director at AMR Research, notes that outsourcing makes sense when "FMCG retailers can be more relevant to their consumers as they lower operating costs if they embrace these strategies and maintain a focus on collaboration and operational efficiency."

"Outsourcing, for us, only makes sense when it's cost-effective when compared to what we would pay to perform the work ourselves," says Gordon. "When we can get increased flexibility and higher quality at equal or lower costs, that's increasing IT value."

An Opportunity for Suppliers

Recent AMR Research underscores Family Dollar's plight. The study, released in early 2007, outlines five strategic areas of need for fast-moving consumer goods (FMCG) retailers:

• cross-channel operations
• consumer-centric merchandising
• product development
• agile supply networks
• on-shelf availability

It found that only one in three have cross-functional inventory ownership and merchandise planning processes. The remainder of FMCGs still do not have business processes functionally aligned, suggesting that this market is an area of opportunity for outsourcing providers.

"Retailers are by and large not leveraging the data derived from these investments to their full potential," says Griswald. "For example, retailers can only sustain customer loyalty by using that intelligence in marketing, merchandising, and business strategies. This in turn, provides valuable insight into consumer behavior. This information can positively impact product planning when retailers share it throughout the organization."

He adds that by embracing these strategies and maintaining a focus on collaboration and operational efficiency, FMCG retailers offer more value to their consumers and lower operating costs.

Lessons from the Outsourcing Journal:

• Outsourcing partnerships work best when both buyer and provider share the same strategic and tactical vision.
• Though the primary benefit to Family Dollar of its outsourcing relationship with Cognizant has been the leveraging of heretofore unavailable IT resources, a discrete benefit has been the way its provider has inspired it to modify, for the better, its internal work processes to match those of Cognizant.
• According to AMR Research, only one in three fast-moving consumer good (FMCG) retailers have cross-functional IT inventory ownership and merchandise planning processes; making this market is an area of opportunity for astute outsourcing providers.

Publish Date: December 2007

Copyright © 2007 - Everest Partners, L.P.

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