Cisco boosts store productivity and optimizes IT operations with Virtual Retail Solutions

1. EXECUTIVE SUMMARY
The company featured in this case study
is one of the leading consumer electronics
retailers in Europe. Its success in the
marketplace stems in part from its unique
entrepreneurial strategy, which encourages
each store to operate as an independent
entity and gives local store managers an
ownership stake. Store managers enjoy
relative autonomy and are free to make key
decisions on local advertising needs,
RETAIL CASE STUDY
CISCO ROI CASE STUDY
CUSTOMER PROFILE
Region: Europe
Industry: Retail—Consumer
Electronics
Business Issue(s): Virtual Store IT
Infrastructure
Employees: Approximately
50,000 worldwide
HIGHLIGHTS
Background:
■■ Leading electronics retailer with
hundreds of stores across Europe
■■ Operates a chain of electronics stores
offering maximum value and service
to customers
■■ Known for its relentless focus
on the customer and innovative
retail strategies
Goal:
■■ Modernize the IT infrastructure of the
company’s stores to reduce costs,
enhance productivity and add flexibility
to store operations
Solution:
■■ Cisco’s Lean Retail Model
Results:
■■ Projected 20% five-year ROI
■■ Projected 32% five-year IRR
■■ Estimated €6.8 million savings
■■ Expected payback in 11 months
■■ Simplified IT requirements for
new stores
■■ Enabled rapid implementation of new
services in stores
product selection and pricing, personnel
planning and the store’s IT infrastructure.
Because it harnesses the entrepreneurial
spirit of each organization, the retailer
claims one of the best-motivated
workforces in the industry and a reputation
for superior service tailored to local
customer communities. The result: the
company has expanded steadily across
Europe, growing the number of stores it
operates to well over 500.
ELECTRONICS RETAILER BOOSTS STORE PRODUCTIVITY, OPTIMIZES IT
OPERATIONS WITH CISCO’S VIRTUAL RETAIL SOLUTIONS
“As a part of a corporate services team, our mission is
to support store management by identifying technology
solutions that can lower costs, drive productivity and
enhance customer experiences. With the virtual store
environment, we’ve created an IT platform that will drive
all three benefits to our stores.”
Chief Information Officer
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2. RETAIL CASE STUDY
CISCO ROI CASE STUDY
Working within the company’s
decentralized management structure,
the corporate IT services team serves as
both a technology advisor and services
provider to local stores. In 2007, the
corporate IT team identified an opportunity
with the potential to substantially reduce
costs, raise employee productivity, and
increase store-management flexibility.
The plan involved creating an advanced
networked IT architecture – called a “virtual
store environment” (VSE) – that would
significantly shrink the IT footprint at stores
and “virtualize” key technology functions
through a state-of-the-art virtual IT platform.
The company leveraged Cisco’s Lean
Retail Architecture (LRA) to design its VSE
solution, which entailed migrating servers
and applications from the stores to the
data center, consolidating and virtualizing
the storage devices and servers at the
center and moving to a network-based,
on-demand services model that would
significantly boost application availability.
The team anticipated a number of benefits
from the centralized VSE scheme, including:
■■ Reduced total cost of ownership
■■ Lower store setup costs
■■ Enhanced disaster recovery and
backup capabilities
■■ Greater sales associate productivity
In 2008 the IT team launched a proof-of-
concept pilot of the VSE system at a store
close to its corporate headquarters. The
pilot program allowed the team to refine its
approach and build a compelling business
case for store managers. With a successful
prototype under its belt, the team is now
focused on delivering the VSE solution to
about 50 new stores.
According to a recent third-party cost
analysis, the VSE approach reduces the
upfront capital investment required to open
a typical retail outlet by approximately
3% compared to the traditional IT model,
while providing a range of operating
improvements – including lower IT
maintenance and upgrade costs, more
reliable and less costly data backups,
improved sales staff productivity and more
efficient security and communications
systems. The new system’s lower upfront
costs and superior performance made
VSE the obvious choice for new stores;
and at existing stores, individual managers
will decide when to convert to VSE
depending on factors such as the age and
performance of its current equipment.
Based on a conservative five-year plan that
calls for deploying VSE only at new stores
through 2012, the company expects to
realize a 20% return on investment (ROI)
and a 32% internal rate of return (IRR),
generating €6.8 million in cost savings
during this period.
THE OPPORTUNITY
After numerous visits to the company’s
electronics stores and extensive
conversations with store managers and
staff, the company’s senior IT manager in
charge of technology innovation identified
three major areas where he believed
significant operational improvements could
be introduced:
■■ Sales Floor. Sales associates typically
share a computer workstation that does
not allow a personalized desktop view.
By virtualizing the desktop environment
and leveraging the store’s network to
run applications from a central server,
sales staff could call up a personalized
desktop environment at any machine,
increasing productivity and improving
communications with store management.
■■ Detective’s Office. Tasked with
managing security, store detectives
typically rely on hardwired analog video
cameras that are cumbersome to deploy
FINANCIAL ANALYSIS
(NPV OF INVESTMENT/RETURN)
CUMULATIVE NPV CASH FLOW ANALYSIS*
-€34.1M
-€40M
-€30M
-€20M
-€10M
0
€10M
Net ReturnTotal ReturnTotal Investment
€6.8M€40.9M
-€500M
0
€500M
€1,000M
€1,500M
€2,000M
Year 6Year 5Year 4Year 3Year 2Year 1Year 0
Cumulative Net
Benefits
*Present value calculations using 13% WACC; Assumes 1 virtual store completed in Year 1 and 100 stores converted per
year in Years 2–6.
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3. RETAIL CASE STUDY
CISCO ROI CASE STUDY
and monitor. By implementing a more
reliable and robust WLAN, stores can
take advantage of new wireless digital
surveillance cameras that are easy to
reposition. The digital recordings are
also easier for detectives to review
and prepare for submission to law
enforcement agencies.
■■ Store IT Infrastructure. Most stores
carry relatively high IT overhead
costs – a result of the company’s
decentralized operating model in which
individual stores maintained a full range
of IT hardware and applications. By
centralizing all of the stores’ applications
within a multi-threaded, redundant, high-
availability Cisco WAN environment, the
company will significantly streamline the
store’s IT footprint, allowing it to lower
maintenance and support costs while
improving service levels.
Because it encourages local-store
autonomy, the company’s business model
presented natural barriers to the adoption
of a centralized IT architecture. The IT team
needed to gain approval not only from
corporate management, but also from
the managing directors at local stores.
For many store operators, the legacy IT
architecture was a known, reliable solution
in no obvious need of replacement.
Compounding the challenge were the
economic realities of the retail industry, a
highly capital intensive, notoriously low-
margin business. The corporate team had
to prove that a VSE investment would not
only yield a positive ROI for stores, but
ultimately lower overall IT capital costs for
the corporation as a whole.
THE SOLUTION: CISCO’S VIRTUAL
STORE ENVIRONMENT
Given the challenges in proving the viability
of the VSE solution, the corporate IT
strategy team worked with experts from
Cisco Systems to develop a solid business
case in support of the concept. Fortunately,
the corporate technology team had a
strong track record, giving it the ear of the
company’s executive team – a significant
advantage.
In 2007 the team finalized the virtual store
architecture, which integrated the latest
networking technologies from Cisco to
reduce the IT footprint in retail outlets and
link the stores to a corporate data center
where key technology services such as
business applications, databases and
data backups could be maintained cost-
effectively. The VSE architecture would
enable stores to switch to less expensive
and more functional end-user devices
such as thin-client PCs, WLAN surveillance
cameras and wireless IP phones. In
addition, Cisco’s solution would reduce
overall IT operating costs because core
services, including application upgrades
and patches and hardware maintenance
and support, could either be managed
centrally or provided to stores at lower
cost. The following sections review these
efficiencies and savings in greater detail.
Sales Associate Productivity and
Cost Improvements
A key advantage of the VSE solution
is its ability to improve sales associate
productivity. By running salespeople’s
stations from a central server and delivering
personalized desktops through the
network to any of the store’s thin clients,
salespeople can access their accounts
from any machine with the swipe of a
keycard. Associates can now respond
immediately to the customer’s needs
regardless of where the interaction occurs.
Stores also save on hardware costs
because the networked VSE solution allows
stores to move to thin-client PCs that are
less expensive and have a longer lifespan.
The switch to thin clients alone is expected
to save each store approximately €1,400
in hardware costs. Further savings are
anticipated in the form of lower workstation
setup costs, since networked VSE
applications are managed centrally rather
than at the store. A typical thick-client PC,
for example, requires a 40-minute setup
process for a local technician. Setup time
for a VSE-based thin client PC is negligible
as technicians are not required to set up an
individual image, creating a plug-and-play
solution.
Maintenance costs for sales workstations
are projected to fall by 50% at VSE-enabled
stores, again due to the relative simplicity
and durability of the thin-client machines.
Currently, it takes about 1,600 hours of
technical support per year to maintain
thick-client PCs across the chain. That
Store
Store
StoreStore Data
Center
Store
Store
StoreStore
Data
Center
LEGACY IT ARCHITECTURE VIRTUAL STORE ENVIRONMENT*
*Conceptually similar to Cisco’s Lean Retail Architecture.
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4. RETAIL CASE STUDY
CISCO ROI CASE STUDY
number is expected to drop to about 800
hours when the company converts to VSE-
based thin clients.
Store Detective Flexibility
and Productivity
The retailer’s VSE solution provides
significant new theft-prevention capabilities
for stores, including more flexible and
effective video surveillance equipment,
more efficient review of video footage
and streamlined interactions with law
enforcement agencies. In the legacy
environment, store detectives relied mainly
on analog video cameras to monitor
store activity. The system was inefficient
in several respects: the cameras were
hardwired, making them hard to reposition;
and editing the footage and transferring
the video evidence onto cassettes was
slow and cumbersome. Moreover, when a
crime was recorded, store detectives were
burdened with filling out numerous paper
forms to go along with the video evidence
they submitted to law enforcement
agencies.
The VSE solution introduced several
enhancements. Armed with a more
reliable WLAN, stores can accommodate
new wireless (WLAN) cameras, allowing
detectives to easily reposition them around
the store to monitor shifting areas of
interest. The system is simple and requires
no re-wiring, so detectives can move the
camera around the store without technical
assistance.
The WLAN cameras use digital video
technology, allowing detectives to quickly
review and edit the footage online, then
submit the edited footage electronically to
law enforcement agencies. Also eliminated
are the manual forms: Detectives in the VSE
environment submit the forms online, along
with the video evidence, through an online
portal provided by the police.
Factoring in the efficiency gains and
improvements in theft prevention, the
company expects the digital surveillance
component of the VSE solution to generate
annual savings of approximately €19,000
per store.
IT Cost Advantages and Enhanced IT
Services Productivity
Finally, the networked virtual store solution
is expected to generate significant savings
as a result of cost and performance
improvements at store-based IT operations.
Major cost reductions are expected
to come from the VSE environment’s
virtualized and networked application
approach, which centralizes business
applications at the corporate data center—
one of the core principles of Cisco’s Lean
Retail Architecture—thus simplifying and
lowering the cost of software maintenance
and support. Corporate IT administrators
can now perform routine tasks such as
upgrades and patches once, on a single
instance of the application, rather than
multiple times at each store. Similarly, the
job of integrating new applications into
the network will be simpler and easier
to implement because the company
will be supporting only one version of
the application. End-user performance
is unaffected because the stores and
corporate data center are connected
through a reliable and redundant WAN built
with proven Cisco hardware. As it moves to
the VSE platform, the company estimates
that server utilization will improve by about
30% through centralization and virtualization
of its hardware platform, leading to
significant hardware cost savings over time.
Fat PCs Thin Clients % Improvement
Hardware & Software Costs €11,400 €10,000 14%
Maintenance Costs €32,000 €16,000 50%
Average Lifetime of Client 5 Years 8 Years 60%
Installation Time Per Client 4 Hours 1 Hour 75%
BENEFITS PER STORE OF USING THIN CLIENT VS. FAT PCS
(30 CLIENT DEPLOYMENT)
STORE SECURITY COST DIFFERENCE WITH VSE
-€16,980
€17,012
€4,970
€14,836 €19,838
-€20,000
-€10,000
0
€10,000
€20,000
TotalCablingCamerasServersLabor & Software
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5. RETAIL CASE STUDY
CISCO ROI CASE STUDY
Beyond better server utilization, the
corporate IT team expects to improve
application performance by adding load-
balancing capabilities at the store level as
well as at the data center. As a result, the
company expects to reduce the amount of
server maintenance required at stores from
an average of 1,400 hours annually to only
400 hours. At the same time, it expects
software maintenance to drop from 1,400
hours to only 600.
The company will garner further savings
from deploying a Cisco-based inter-
networking system that consolidates
the Internet connections feeding music
and video kiosks in the stores. Instead
of maintaining six or more Internet
connections to feed the kiosks, the VSE
platform connects the kiosks to the Internet
via a single, redundant inter-networking
connection, saving service fees and
reducing potential downtime.
Finally, the VSE platform will enable
the retailer to virtualize its data storage
operation by moving to an automated
network attached storage (NAS) system.
The virtualized storage approach will
eliminate the current store-based tape
backup process that is both time intensive
and error prone, and should increase
storage capacity company-wide by 70%.
The move is also expected to reduce data
backup-related service tickets from 1,800
per year to 100 and cut data storage-
related service tickets from 1,400 per year
to zero. In addition, by centralizing data
storage, the company will strengthen its
disaster recovery and backup capabilities
while boosting IT productivity with VSE’s
network automation features.
Proving VSE’s Value
Starting in late 2007, the corporate
technology innovation department
developed a systematic approach designed
to maximize acceptance of the virtual store
environment solution. The team started
with an initial concept, which it refined
before moving to a detailed architecture
plan. It partnered with technology leaders
like Cisco to identify products best suited
to create the VSE platform. Next, the team
identified a pilot store where it could test
the model and prove its capabilities, and
in early 2008 it replaced the store’s IT
infrastructure with the VSE platform.
The successful pilot gave the IT team ample
evidence to build a compelling business
case for corporate management as well
as store managers. Currently, the team
plans to roll out the VSE solution to the next
wave of new stores. Meanwhile, existing
stores can migrate to the VSE system over
time as their IT systems reach the end of
their useful life. A key advantage of the
VSE solution is its modularity, which will
let existing stores switch to the full VSE
solution at their own pace.
QUANTIFIED BUSINESS BENEFITS
According to a third-party cost analysis,
the company is on track to capture
considerable financial benefits from its VSE
deployment. A five-year financial projection
shows the company realizing a net profit
of €6.8 million based on a total NPV
investment of € 34.1 million and resulting
NPV savings of €40.9 million. The estimated
return on investment (ROI) over the five-year
period is 20% with an internal rate of return
(IRR) of 32%. The company is expected
to recoup each store’s investment in only
11 months.
These estimates are based on a
conservative deployment forecast that
includes only new stores expected to
open though 2012. Further benefits can
be realized once existing store managers
convert their store IT infrastructure to the
VSE model.
CHAINWIDE IT PRODUCTIVITY ENHANCEMENTS (LEGACY VS. VSE)
0
1,000
2,000
3,000
4,000
Sales PC
Maintenance
Server Incident
Management
Software Upgrade
Administration
Server Upgrade
Administration
Data Storage
Tape Replacement
Data Backup
Service Tickets
1,800
Tickets 1,400
Hours
1,400
Hours
1,400
Hours
1,600
Hours
3,200
Hours
Legacy Solution
400
Hours
600
Hours
800
Hours
100
Hours
100
Tickets
VSE Solution
“The Virtual Store Environment drives down store operating
costs by reducing its IT footprint while also improving
flexibility to support future business requirements.”
Senior Manager of Technical Innovation
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6. RETAIL CASE STUDY
CISCO ROI CASE STUDY
KEY SUCCESS FACTORS
The company credits its successful move
from concept to implementation to several
factors:
■■ Clear Vision and Goals. The company
was firmly committed to its vision of
technology innovation as a means to
reduce capital and operation costs.
■■ Alignment with Corporate Strategy.
The company’s aggressive growth
trajectory dovetailed with the need to
control the IT costs of opening new
stores.
■■ Successful Pilot Program. Gaining
upfront proof of the systems viability
and cost savings helped the team gain
traction for company-wide adoption.
■■ Executive Sponsorship. Support
from key business executives added
momentum and authority to the project.
FIVE-YEAR NET PRESENT VALUE ANALYSIS
VSE FIVE-YEAR CASH FLOW ESTIMATES
-€26.5M
-€7.6M -€34.1M
€3.1M
€5.6M €6.8M
-€40M
-€30M
-€20M
-€10M
0
€10M
Total
Net Benefits
Labor
Productivity
IT SavingsStore Asset
Savings
Total
Investment
IT InvestmentStore IT
Assets
€32.2M
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
VSE Store IT Assets €93,406.79 €8,406,611.10 €7,472,543.20 €6,538,475.30 €7,005,509.25 €7,939,577.15
VSE Corporate Data Center IT Assets €26,540.00 €2,388,600.00 €2,123,200.00 €1,857,800.00 €1,990,500.00 €2,255,900.00
Total Investment €119,946.79 €10,795,211.10 €9,595,743.20 €8,396,275.30 €8,996,009.25 €10,195,477.15
VSE Store Asset Savings €113,269.25 €10,194,232.50 €9,061,540.00 €7,928,847.50 €8,495,193.75 €9,627,886.25
VSE Corporate IT Savings €10,750.00 €967,500.00 €860,000.00 €752,500.00 €806,250.00 €913,750.00
IT Labor Productivity Savings €11,000.00 €994,999.52 €1,332,357.14 €1,622,319.05 €2,027,285.71 €2,512,250.00
Total Benefits €135,019.25 €12,156,732.02 €11,253,897.14 €10,303,666.55 €11,328,729.46 €13,053,886.25
Summary
Total Costs €48,098,662.79
Total Benefits €58,231,930.68
Net Present Value (NPV) €6,822,584.74
ROI 20%
IRR 32%
Payback 11 months
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7. RETAIL CASE STUDY
CISCO ROI CASE STUDY
ABOUT THIS CASE STUDY
Research and analysis for this study was
conducted by Mainstay Partners LLC,
an independent consulting firm that has
performed over 300 studies for leading
information technology providers including
Cisco, Oracle, SAP, Microsoft, Dell,
Lexmark, HP, BearingPoint, EMC, NetApp,
EDS and Tidal Software. This case study
was based on interviews with the retailer’s
executives, IT executives and IT planning
personnel, review of project planning
documents, and searches of industry
literature. ROI calculations use industry
standard assumptions regarding the time
value of money. Information contained in
the publication has been obtained from
sources considered reliable, but is not
warranted by Mainstay Partners LLC.
Copyright © 2009 Mainstay Partners, LLC.
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