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IT Outsourcing in the Small and Medium Businesses

Every industry vertical has its own unique challenges. But the retail industry--retail stores and the growing segment of e-business catalog sales--has an entire shopping cart full of challenges. Retailers in the US may increase sales as much as 10 times during the Christmas holiday season, requiring them to double their work force during that period. Handling returns is always a costly challenge. And facilities management for retail stores consistently eats up a big chunk of store receipts.

In our experience advising many clients in the retail industry, we have seen first hand how outsourcing helps retailers' bottom lines--almost as much as a good sale.

Unique HR Challenges

A streamlined, efficient, and proactive process for hiring, training, and deploying a seasonal workforce provides a huge advantage for a retailer. One large US retailer reports it hires over 60,000 people just for the holiday selling season. Typically only 10 percent are repeats from previous years according to this big box retailer. (A big box store, according to the Centre for the Study of Commercial Activity, is a category-killer store that is several times the size of a traditional outlet in its category.) That means the retailer has to train 54,000 newbies about stock, IT systems, merchandizing and sales techniques every year. At big box stores, a well-informed salesperson can help a customer decide to purchase goods at their store instead of leaving for the competition. Outsourcing the hiring and training function is a smart move for retailers given the seasonality of their workforce.

The Headache of Returns

Handling returns is not what a retailer wants as a core business process, especially since returns are basically a "one-off" activity. Returns, especially in the e-commerce departments, are a unique headache for retailers. Consumers return as much as 10 percent of the merchandise they purchase online.

Unfortunately, electronics retailers often cannot open the returned package and sell the goods to a different buyer. For jewelry retailers, repackaging may be as simple as putting the necklace back in a new velvet box. Clothing retailers have it easy - clothing may just need to be pressed before being set back on the retail floor. With the electronics retailers, however, someone has to put items back into their original packaging before they can be resold. This activity can be very time-consuming. It is not unusual that a returned item is not working or has something wrong that needs to be repaired. Electronics manufacturers are looking for a service provider who will take on the process of fixing the items, then repacking and restocking them.

We predict the big, international shipping companies like UPS and FedEx will soon become outsourcers, leveraging their shipping prowess into outsourcing offerings. In the next 24 months, we expect they will be running their own warehouses for their outsourcing service buyers.

Retail-Specific BPO

Since retail stores occupy large chunks of space, facilities management tops the list of BPO opportunities that capitalize on outsourcing advantages. Facilities management outsourcers can leverage a portfolio better than retail companies can.

For example, one of the biggest expenses in facilities management is setting up new stores. Most retailers have a standard floor plan so that customers who shop at one store can easily find something in a store at a different location. Outsourcers can provide significant savings by having their professional crews build out and set up a new store to the standard specs.

Outsourcers can also provide lease audits for retail tenants. Since rent is the second largest cost after salaries, retailers don't want to pay a penny more than their lease contract stipulates. Outsourcers of facility management services have the tools and capabilities needed for laser-like focus on getting the most value out of a retail lease.

Security is another area we see as ripe for outsourcing, especially among high-end retailers like jewelers and haute couture fashion designers.

The Impact of New Technologies

New technology will impact retail outsourcing. For example, WalMart is requiring all its vendors to ship product to it with radio frequency ID tags (RFID). Since the nation's largest retailer has required all its vendors to use RFID tags, it creates a huge opportunity for outsourcing because vendors will not want to invest in the technology to do the monitoring and maintenance in-house. We see a huge opportunity for an outsourcer who figures out how to turn this technology, which will become ubiquitous into an advantage for retailers. Personally speaking, I don't know what that answer is right now, but I know it will come from a service provider because the desired solution requires significant investment dollars. A service provider can then spread out the cost of the investment over several retail buyers, making outsourcing the best business model for this type of innovation.

Given these unique challenges, retailing has aisles of opportunity for outsourcing, which will allow the stores to achieve their core mission: to get consumers into the stores and check-out lines. Ca-ching!

Publish Date: November 2004

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Copyright © 2004 - Everest Partners, L.P.

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