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Information Age (IA): Sainsbury’s outsourcing deal with Accenture is arguably one of the most far-reaching in the UK. What challenges was Sainsbury’s facing when it decided to embark on the deal?
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Margaret Miller (MM): The genesis was when Sir Peter Davis [Sainsbury’s CEO] re-joined Sainsbury’s in 2000. He realised that we had under-invested horribly in three areas: the stores were looking old and tired, the supply chain infrastructure was not appropriate for today’s world, and the IT systems were far too expensive to run and were largely inhibitors to business change, rather than enablers.
IA: In what way were the IT systems holding back the company?
MM: Pre-outsourcing, more than 95% of the IT budget was spent ‘keeping the lights on’. Because there had not been a strong architectural direction behind the IT spending, a huge amount of money had been spent tactically, which is the best way of wasting money in IT. Sainsbury’s ended up with an environment that was very complex and very expensive to support. That left us with very little money to spend on building new systems and capabilities.
IA: How did Sainsbury’s come to the decision to outsource and how did Accenture emerge as the winner in the bidding process?
MM: Sir Peter Davis had worked with Accenture before and it was largely his decision that we should outsource with them. There was no formal public bidding process. There were other options considered, but it wasn’t a public tender in the traditional sense. When you look at the alternatives, there are a lot of suppliers who can do service delivery outsourcing, such as CSC, EDS and IBM. But if you look at how many can do the transformational outsourcing that we wanted, I don’t know anybody else who would be a candidate.
IA: So how does the outsourcing deal with Accenture work?
MM: We entered into a seven-year, £1.8 billion deal whereby Accenture guaranteed to reduce the cost of operations – the cost of keeping the lights on – by almost 50% over the period. That was predicated on Sainsbury’s replacing all its legacy systems with systems based on uncustomised or minimally customised packages on a standard architecture.
That meant all our systems – from the desktop to the general ledger, from the human resources system to our customer data warehouse, from the online store to all our fundamental operating systems – being replaced over a period of three to four years.
IA: How did you work out the systems and business change that you wanted to achieve?
MM: We defined the major high level business processes in the company – the top 20 processes. Then we asked, of those really top level processes, where do we want to be leading edge, where do we want to be competitive and where are we happy to be just run-of-the-mill? We decided that we wanted to be way ahead of the field in the capabilities that give us customer intimacy. Whereas, for example, in accounting, we wanted to be reasonably boring.
That drove the product selection and our appetite for risk in various areas – if we wanted to be really leading edge in an area, we had to be prepared to take more risk. If we wanted to be very boring, then we chose a package that was really mainstream. Oracle Financials is the best example. We went with Oracle because its dependable, boring and reliable, and that’s fine.
IA: So what kind of change programme did you devise?
MM: Some of the things we did first were reasonably standalone. We implemented the customer data warehouse, for example, and then the new online store.
One of the other things we did during the first year was move everybody to the new head office building. That involved nearly 3,000 people moving from nine buildings south of the river to one building in Holborn over the period of three weeks. At the same time, we migrated everybody from green screen email and very old versions of Microsoft Office.
Then we started to move into some of the most complex areas, things like refreshing our point of sale (POS) systems. We had 13 different point of sale systems. If we tried to make a change, we had to do it 13 times.
The mechanics of rolling out the new POS system meant an implementation in 450 stores, which have anything up to 55 lanes each and, at the same time we were rolling out the POS system, we were implementing the Siebel customer information system and replacing all the PCs.
We are only now moving on to the systems that are the most integrated and the most complex, because those have the longest planning time. For example, we are about to replace some of our core systems – such as supply chain forecasting, trading, planning and product maintenance.
Our new portfolio of systems is based on a standard architecture: Oracle database and Sun Solaris Unix. That’s our core platform across the estate, with the obvious exception of Microsoft Windows on the desktop.
Our application set is based around two or three major planks. The Retek product set is being used for supply chain forecasting, trading, planning, product maintenance and so on. And the Oracle product set is being used for most of the back office, such as human resources and finance. Retalix is being used for POS and we are also using some specialist software in certain areas, such as Blue Martini for the ‘Sainsbury’s to You’ online store.
IA: How was the financing of the outsourcing deal worked out (Sainsbury’s pays the same monthly amount over the life of the seven-year contract)?
MM: We wanted to invest a great deal of money over a short period of time and the ‘special purpose vehicle’ financing deal we did enables us to do that. I think the initial concept was first developed for the public finance initiative (PFI), which is generally used for building bridges and hospitals. Typically in IT investments, you invest all the money upfront, take the financial hit and then the benefits come a long way down the line. Our deal with Accenture spreads those costs out over the lifecycle of the deal. The contract was devised by us and Accenture, and then put into place by Barclays Private Equity and its Swan Infrastructure subsidiary.
IA: How adaptable is the contract to business change?
MM: There are specific provisions for dealing with that. The original deal covered a certain number of stores and a certain level of business. But we have some specific mechanics for dealing with growing the number of stores and the volume of goods sold through them.
We knew that over the course of the deal we would be re-furbishing a huge number of stores and substantially changing the physical supply chain infrastructure, so when we wrote the contract we did so knowing that it would have to deal with all this other business change as well.
IA: How do you manage the performance of such a large, all-encompassing contract?
MM: It’s split between hard and soft measures. For example, the delivery piece of the bonus is split between whether the project has delivered the benefits that were in the original business cases. Obviously, a lot of that depends on us doing not just the systems implementation, but on the business change and the people change as well.
We also do user surveys to find out how people feel the project was managed. Were they well enough informed about what was happening? Did they have the right level of engagement? All those sorts of things.
Then, on service delivery, we measure the hard metrics. Did we meet the key performance indicators in the year? We also do a service delivery survey, comprising 20 questions on different aspects of the service.
Not only do we use those surveys to drive the balanced scorecard, but we also try to find out if there are any common themes or emerging trends that we are not picking up any other way. Is there an emerging problem that we need to address?
IA: You say that there was no formal bidding process. How have you made sure that Sainsbury’s has got value for money out of Accenture?
MM: To start with, we asked, “What are our IT costs and what rate are they growing at? Where will they be at the end of the seven-year term?” If we enter into the deal, what will the total cost over the period be and what will the exit cost be? Then we asked, “Is that a good deal?”
It was done very much at a strategic level. And when you do the maths at that level, it’s a spectacularly good deal.
IA: Overall, how would you advise others to approach such outsourcing contracts?
MM: If you have got a strategic outsourcing arrangement, you need to keep your eye on the end game. Obviously, you have to manage the detail, but you have to remember what the goal is and why you did it. There is no point falling out over a point of detail if it compromises on achieving the goal.
