DSG outsources to HCL: a case study

DSG Outsources to HCL: Case Study

Outsourcing as a key element of business transformation
Reference Code: BFTC2569
Publication Date: June, 2010
Authors: Christine Bardwell, Matthew Piner

SUMMARY

Catalyst

In 2006, electricals retailer DSG International Plc entered into a multi-service IT outsourcing deal with Indian service
provider HCL Technologies. Four years later, the two companies have agreed on a contract extension into 2013. In this
case study, Ovum discusses the contributing factors to making this outsourcing deal a success.

Ovum View

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The HCL and DSG outsourcing deal is the 9 largest retail sector outsourcing deal in the last 5 years, and the largest for an
Indian outsourcer. At the time of signing in 2006, it was unusual for contracts of this size to be signed with an Indian
outsourcer and the deal really put HCL on the map. Also, it was noteworthy that a retailer had signed a deal of this size as
typically, and as is the case today, retailers tend to sign smaller contracts with multiple best-of-breed suppliers rather than
one large contract because smaller deals can be easier to manage and negotiate.

HCL has been very successful in managing one of the largest ever Indian outsourcing contracts. For DSG the key factors in
building an effective relationship with HCL have been the following:

• Flexibility, transparency and responsiveness to changing circumstances

• Time invested in the business relationship

• Good skill capability across a range of technologies

• Transparency over cost models

Ovum believes the success of the partnership is the result of a combination of factors:

• HCL spent a lot of time understanding DSG’s business

• Best practices on ways of working together, demand management of resources for project activity and the
annual planning of key capital and revenue projects were jointly developed during the early stages of the
contract

DSGi Outsources to HCL: Case Study BFTC2569/Published 06/2010
© Ovum. This report is a licensed product and is not to be photocopied Page 1

• Both parties were careful to ensure the service level agreements (SLAs) were effective. This resulted in
technical SLAs being tuned to reflect business requirements


Key Messages

The run-up to this deal proved that price should never be the prime driver when choosing an
outsourcing partner

Given the current uncertain economic climate, retailers are under significant pressure to protect margins and cut costs in an
effort to offset falling sales. Although outsourcing provides a way to improve the bottom line, as DSG found, the lowest price
bidder is not necessarily in a position to deliver. The selection of an outsourcing vendor should be based on a number of
factors which take cost, service levels and business alignment into account in almost equal measure.

A flexible partnership approach is as valuable as a low cost base

Contract and pricing flexibility are also very important factors. Signing contracts which are too rigid invariably leads to
problems further down the line. Also, as has been the case with DSG and HCL, a flexible pricing model is important in
allowing the services required by the retailers to adapt to the ever changing retail environment. Staffing level requirements
may need to be scaled up or down at any given time; flexible pricing models allow for these changes. Retailers and service
providers alike should work in partnership to ensure a certain amount of flex is built into the contract.

Long-term success requires significant commitment and investment from both partners

Retailers are not just looking for a services supplier, they are looking to build long-term successful partnerships with service
providers who are able to adapt and evolve alongside the retail business. The experience for both DSG and HCL is that
circumstances change. To manage changing circumstances, long term relationships need constant communication, clear
expectations and transparency to be successful


CASE STUDY

The genesis of the outsourcing deal

In January 2006, HCL Technologies entered into a multi-year, multi-service, multi-million-dollar co-sourcing deal with DSG
International Plc, Europe's leading specialist electrical retailer. At an estimated $330 million, it is the largest deal of its kind
between a retailer and an Indian outsourcer. The areas covered by the deal, and the main expected benefits are listed in
Figure 1.

Figure 1: Characteristics of the outsourcing deal

Outsourced Operations Benefits

Application development and Cost savings across IT services
support operations

Application management Agility – the ability to flex to
demand
Infrastructure management
Improved quality through the ability
Maintenance and support to adhere to industry best practice

Offshore contracting A pool of skilled resources to draw
from when and where required

Source: Ovum OVUM

Having HCL manage IT support and development allows DSG to focus on its core business

HCL signed two five-year contracts; one focused on services, infrastructure support and maintenance; and a development
contract to separately cover system development, application delivery and support. HCL took on the IT support department
along with 200 DSG IT staff. Alongside the UK staff, a team of 50 HCL staff in India were assigned to manage services.
Under the terms of the services contract, HCL takes a strategic lead and when needed, co-sources additional vendors to
meet the requirements. This way of working gives HCL the ability to be flexible and leaves DSG to focus on core areas of
business such as the customer interface and business strategy.

Flexibility and value were the key reasons why DSG awarded the contract to HCL

HCL was awarded the development contract in November 2005, and the services contract followed in February 2006. Both
contracts are for a fixed five-year term to end in February 2011. For DSG, the key criteria in awarding the contract to HCL


were the ability of the outsourcer to flex the contract according to market or internal strategic changes, as well as
transparency in cost models. HCL’s partnership approach, particularly in terms of jointly developing best practices, was also
a large contributing factor.

HCL’s presence made the original bidding process competitive, but didn’t win the contract

The RFP process initially began in December 2004. DSG chose three forerunners for the contract; not including HCL at this
stage. Unable to achieve the required margin, one of the selected outsourcers declined to bid and HCL Technologies was
brought into the tendering process as a replacement. Bringing HCL into the process was a strategic initiative of DSG’s part.
The retailer believed that introducing a price competitive supplier in to the bidding would ensure all the outsourcers were as
price competitive as possible.

Figure 2: DSG outsourcing timeline

Source: Ovum OVUM

The original RFP process ran from February to April 2005. The contract was originally awarded to a European
headquartered outsourcer. The deal was based on a ten-year term that started with an immediate transformation of DSG’s
IT landscape, however, the detailed negotiations led to a change of preference for the retailer. Rather than investing in a
low- cost transformation, a shorter term contract aimed at taking on the services as they were and transforming parts of the


IT landscape when the timing and business case merited the investment was deemed more appropriate. This approach was
more suited to the HCL bid. DSG awarded two five year contracts to HCL, one for application delivery and one for service
delivery, both of which came into effect in February 2006.

Growing competition led DSG to outsource

Demand for consumer technology has weakened since the start of the century, and price competition has driven unrelenting
price deflation. Our colleagues in Verdict believe that with competition becoming more intense, the market leader became a
target from which others could take market share. As rivals have expanded and offered consumers more choice on price,
service and range, DSG has seen market share heavily eroded and sales growth was slowing as a result. Changes were
needed. DSG believed outsourcing non-core IT functions would free up the most skilled but busiest staff to focus on the
interface between the customer and the retail business.

• Focus on the customer is required in order to differentiate in the face of intensifying competition: DSG
achieved many years of market share growth up to 2000 but has since struggled to maintain this momentum.
The retailer has come under pressure from non-specialists such as grocers and pureplay online retailers. It had
become hardly possible to compete on price alone. Aware of the threat posed by growing competition, DSG
chose to focus on raising the bar in customer service as a way of differentiating. Outsourcing of IT and support
functions was considered the most effective route to freeing up valuable staff and operating budget to focus on
core areas such as business development.

• Cutting bottom line costs would free up budget for further investment: To obtain further budget for
customer service improvements, DSG needed to make adjustments to bottom line spend and so began a review
of all cost bases across each business areas. IT in retail is often considered a ‘necessary evil’, so cost reduction
was the first reaction when the board considered making improvements in this department. Having already
experienced outsourcing call center functions to Capita, DSG was aware of the potential cost and business
benefits of this option. Outsourcing of IT and support functions was the most effective route to providing
considerable cost savings.

For DSG, outsourcing is an extension of streamlining formats and process change

At the time the RFP was released sales were still rising, however sales growth was slowing and market share was on a
steep decline. DSG’s response to falling sales growth and declining market share was to announce a focus on its longer-
term viability; offering better service, overhauling its store portfolio, growing online sales and reducing costs. After a review
of all business areas in 2006, DSG formatted a plan designed to achieve £30 million-a-year in cost savings by streamlining
its distribution network, business process centralization and a review of internal IT support costs and service levels. An
internal focus is required for such business change, as well as a strong IT infrastructure and IT support function as the
foundations for change. Wanting to focus internal skills on the retail operations, DSG decided outsourcing the IT department
would be the most efficient and cost effective approach.

Business process centralization was the first area of focus for change and has already delivered
benefits

The DSG business operating model consisted of many different brands running entirely independently of each other. The
group needed business clarity and so before outsourcing IT, the retailer embarked on a project to centralize HR, commercial


operations and the group’s distribution network. Outsourcing IT support and infrastructure management put DSG in a
position to focus key resource on managing the centralization and management required to change the business processes.

The retailer began with overhauling its services platform, a process which will culminate over the next two years with a focus
on the commercial systems as DSG deploys a single platform, which will be SAP ERP. To date, the centralization program
has delivered the following benefits:

• Supply chain changes included reducing number of distribution centers (DC) from 17 to just 3 based in Newark,
and Bristol, thereby reducing overheads and generating cost savings from reduced inventory levels.

• A complete focus on customer service

• Increased availability of stock for the customer at the front end with reduced stock holding at the back end.

Overhauling the store portfolio and offering dual formats is possible since the systems centralization

DSG’s leadership changed in December 2008. The new CEO embarked on a transformation program formulated to steer
the company out of troubled times and regain a position from which to continue to dominate its market and ensure it is able
to take on grocers, such as Tesco and Asda as they further expand on electrical ranges, rival Comet, and Best Buy as it
enters the UK market. The group’s store restructuring program broadly has two key facets: exiting underperforming outlets
and improving those with potential for better profits. The majority of the stores which it has offloaded have been the
predominantly high street-based Currys.digital fascia. Further store closures have come where the group has merged side
by side Currys and PC World stores in a move to reduce costs and boost footfall and destination status. The IT system
centralization program has made it possible for these dual-format stores. Where the brands were operating off separate
platforms in the past, the centralization allows more than one brand to run off the same retail system. Ovum believes that
over the longer-term, this would appear to increase the likelihood of DSG combining more stores into dual PC World and
Currys megastore formats.

HCL’s flexible and adaptable approach to partnership is key

Although price had been a priority for DSG during the early stages of the bidding process, the retailer came to realize that
such a focus on cost leaves little room for maneuver. HCL offered a greater degree of flexibility, which is important in the
longer term for a contract of this scale, particularly in the ever changing retail sector. Retailers require flexible partners that
are prepared to evolve with the business.

HCL’s pricing model makes it possible to flex and also ensures that both parties are gaining value from the contract. This
adaptability has been called on a number of times during the term of the partnership, where market conditions or changes in
strategy resulted in DSG requiring changes in staffing levels. As HCL has been able to change and evolve with the retailer,
it has benefited from extended contracts and a large new implementation project win.

HCL was able to respond to DSG’s reduction in estate by scaling down services

Flexibility with HCL was vital to DSG when in 2006, it sold mobile handset retailer The Link, thereby decreasing its estate by
around 350 stores. The recession soon followed and all previous efforts made by DSG to recoup costs were made in vain
as the retail sector suffered and the group’s UK operating margins took a steep dive. As discussed earlier, the retailer’s
reaction was to cull stores and streamline its distribution network, thereby reducing IT support requirements. HCL has been
able to scale up and down according to these changes.


Changes to internal systems led to a contract renegotiation around staffing levels

Another change was needed when DSG reviewed its overall IT strategy and decided that it would embark on an SAP
implementation. The plan resulted in the need for development levels to dip, so much so, that the development agreement
was renegotiated 18 months into the contract. As the retailers’ circumstances had changed, it needed to offshore more staff
than was originally intended. As part of the deal with DSG, HCL initially managed a total of 250 staff with 65% working
offshore in India. Today, around 70% of staff are based offshore. This is possible because of flexible contracts and an
adaptable pricing model. Rather than pricing the deal according to the number of people employed on the contract, the
pricing model is deal application and transaction based. Unlike standard ‘time and material’ pricing models which charge
against units of manpower time, transaction based pricing takes the quantity of work completed into account. Today, around
70% of the contract follows this pricing model allowing for greater transparency around pricing models and better value for
money for both parties.

HCL has extended the services contract in order to support re-platforming to SAP

In early 2010, HCL AXON was chosen as the preferred partner for the SAP implementation work for two years, and DSG
extended the services contract to support the legacy environment during the implementation. HCL’s 2008 acquisition of
Axon, a SAP specialist and business change consultancy, ensures the company has the capabilities required for such an
extensive project to be kept in-house.

Ovum expects the systems replacement strategy will eventually be rolled out to the surviving European operations in Italy,
Spain, Slovakia and Czech Republic. These stores currently run on the acquired legacy information system platforms, most
of which are designed and managed in-house. A single platform will enable DSG to more tightly manage international
operations from its HQ base.

KEY TAKE-OUTS

Retailers and outsourcers alike must work hard to manage the relationship

DSG’s outsourcing deal highlights the importance of communication, partnership and strong SLAs in retail outsourcing
deals. It is the responsibility of both the retailer and the service provider to ensure the relationship is carefully managed,
from the point of designing the service level agreements, right through the full-term of the contract. Outsourcing is not a
guaranteed method for cost saving or service improvement, but with flexible services, payment schemes and contracts, both
can be achieved.

• An outsourcing contract should not be all about cost - the need for value should be balanced against service
improvement. DSG made a misstep contracting a supplier simply on the basis of cost and service suffered.
There needs to be value for money for both parties.

• Invest in the relationship; spend time with your partner. When relying heavily on a third party to manage core
operations, there is a level of dependency and maintaining the good relations is vital. Organizations determine
how much time is required to manage the relationship and form a team to manage the relationship and track that


the SLAs are being met. Managing a partner takes time and costs money, factors which should be accounted for
in the overall cost of the project.

• Retailers are not just looking for a services supplier, they are looking to build long-term successful partnerships
with service providers who are able to evolve and grow along with the retail business. This kind of relationship
depends on constant communication and clear expectations; transparency is vital. When mapping out the
project, vendors must help retailers understand the internal requirements to manage the relationship; if done
early enough it will prevent nasty surprises once the work is underway.

• Because of the ever changing requirements of the sector, retailers do not want SLAs that are so rigid that
business growth is disabled; it is important to allow for flex for the future. At the same time, retailers need to
ensure the contract is sufficiently tight to cover all business requirements. Flexible service level agreements and
payments models that can be altered along with the retailer’s changing requirements are essential. Rigid
agreements may disable growth rather than aid it. As customer expectations change over time, services should
evolve too, but any contractual changes must occur through a pre-defined renegotiation process. This can be
achieved with change control procedures and dispute resolution processes.


APPENDIX

Background information

Figure 3: Company profiles, DSG International and HCL Technologies

DSG International is the leading consum er electronics retailer in
the UK

DS G In ternation al is E urope ’s second-largest ele ct ricals ret ailer by turno ve r,
b ehind Ge rm an y’s Metro Grou p. Its mo st significa nt p re se nce is in t he U K
wh ere it ha s a bu ilt a ma rket lea din g p osition by ad opting a m ulti-fascia ,
m ultichan nel strateg y which has e nabled it to exp lo it oppo rt unities cre ated by
th e rapid growth in de man d fo r new t echno lo gie s. In t he U K, DSG is active
u nder t he C urrys, Cu rrys. dig ita l, Dixo ns, Dixo ns Tax Free, PC W o rld a nd
P ixma nia bran ds, selling e le ctron ics, pe rson al co mpu ters, dom estic applia nces
a nd e le ctron ic g oods.

HC L Technologies is a fast grow ing Indian outsource r

In dia-based IT services provid er HCL Technolog ies is the in ternat io nal arm of
te chnolog y f irm HCL. I n th e second qu arter of 201 0, t he com pa ny re porte d a
2 9% incre ase in reven ue, to $ 652 m. IT service s reven ue also grew, by 34% to
$ 594m . However, B PO se rvices de clined 9% to $58 m. G eogra phica lly, the US
a ccou nted for 5 7% o f to tal re ve nue , E urop e accoun ted for 29 .5% and A sia
P acif ic account ed f or 13 .5%. Retail acco unts f or 8% o f HCL ’s globa l reven ues
a nd jointly with consum er m ake s u p HCL ’s fa st est growing p ra ctice. HCL
claim s t hat 10 o ut o f th e wo rld’s top 50 ret ailers are cu st ome rs.
In Decem ber 200 9, HCL Techno log ies com pleted its a cq uisitio n of Axon ,
p aying arou nd £4 40 million ($71 5 m illion). Axon is co nside re d on e o f th e
lead in g glob al provide rs o f consulting a nd app lica tio n services for u se rs o f S A P
p ro ducts, and th e acquisition brin gs ind ustry expertise f ro m m ore t han 4 ,00 0
e xp erien ce d con su lta nts.

Source: Ovum OVUM


Figure 4: The top 20 retail outsourcing deals 2005 - 2010

# Primary Vendor Client Name Announcement Total Value of
Date Contract (US$m)

1 IBM Corp Gap (The) 17 Jan 2006 1100.0
2 Hewlett-Packard Co KarstadtQuelle AG 07 May 2007 1000.0
3 IBM Corp CVS Corporation 20 Jul 2006 900.0
4 IBM Corp Circuit City Stores 29 Mar 2007 775.0
5 Hewlett-Packard Co Royal Ahold NV 01 Dec 2009 560.0
6 Hewlett-Packard Co Guthy-Renker 25 Nov 2008 531.0
7 Hewlett-Packard Co 7-Eleven Inc 29 Mar 2007 500.0
8 Hewlett-Packard Co Royal Ahold NV 14 Nov 2005 500.0
9 HCL Technologies DSG International Plc 19 Jan 2006 335.0
10 IBM Corp Carrefour 06 Jul 2009 251.0

Source: Ovum IT Services Contracts Analytics OVUM

Ask the analyst

Christine Bardwell, Senior Retail Technology Analyst - Ovum

Christine.Bardwell@ovum.com

Matthew Piner, Retail Analyst – Verdict Research

mpiner@verdict.co.uk

This report was published as part of Datamonitor’s Collaborative Intelligence research process and draws on expertise from
Ovum and Verdict Research.

Definitions

• RFP – request for proposal

• SLA – service level agreement

Further reading

• UK Electricals Retailing 2010, Verdict Research, December 2009, DMVT0538

• Retailing in a Recession: The Opportunities for Outsourcing, April 2009, DMTC2295

Disclaimer

All Rights Reserved.


No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form by any means,
electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher, Ovum.

The facts of this report are believed to be correct at the time of publication but cannot be guaranteed. Please note that the
findings, conclusions and recommendations that Ovum delivers will be based on information gathered in good faith from
both primary and secondary sources, whose accuracy we are not always in a position to guarantee. As such Ovum can
accept no liability whatever for actions taken based on any information that may subsequently prove to be incorrect.


DSG outsources to HCL: a case study

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