Crafting and executing an offshore IT sourcing strategy: GlobShop's

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<ul><li><p>Teaching case</p><p>Crafting and executing an offshore IT</p><p>sourcing strategy: GlobShops experienceC Ranganathan1, Poornima Krishnan1, Ron Glickman2</p><p>1Department of Information and Decision Sciences, University of Illinois at Chicago, Chicago, IL, USA;2The Glickman Group LLC, California, USA</p><p>Correspondence:C Ranganathan, Department of Information and Decision Sciences, University of Illinois at Chicago, 2402 University Hall,601 South Morgan Street, Chicago, IL 60607-7124, USA.Tel: 312 996 2847;Fax: 312 413 0385;E-mail:</p><p>AbstractThis teaching case discusses the decisions facing GlobShop, a global travel-retailcompany, in its efforts to offshore a significant portion of its information technology (IT)work. In response to the business challenges that arose due to the September 11, 2001terrorist attacks, the company decided to outsource many of its IT activities to an Indianvendor. This case traces the key decisions made by the CIO and the challenges that wereencountered during the planning and execution of the companys offshore sourcingstrategy. These decisions pertain to the choice of tasks to be offshored, decisions aboutthe vendor and the nature of sourcing arrangement, managing the vendor relationship andchange management issues induced by offshoring. As GlobShop nears the completion ofits 3-year agreement with the offshore vendor, the CIO is faced with decisions regardingcontinuing offshore outsourcing, extending the contract and related implications for thefuture of IT organization at GlobShop.Journal of Information Technology (2007) 22, 440450. doi:10.1057/palgrave.jit.2000113Keywords: offshore outsourcing; sourcing strategy; retail industry; IT outsourcing; vendor relation-ship; outsourcing governance; offshoring decisions; change management</p><p>Introduction</p><p>In November 2005, Roger Deen, the CIO of GlobShop, andhis team of information technology (IT) Directors sat in aconference room at the companys headquarters in Boston</p><p>to discuss the imperatives facing them. GlobShop was a fivebillion dollar firm that operated over 200 duty-free andgeneral merchandise shops in airports, hotel lobbies anddowntown locations across Asia, Australia, North Americaand Europe.1 Being a niche player in the travel-retailindustry, the companys performance swayed with changesin air travel, tourist traffic and related economic events.Since the events of September 11, 2001, GlobShop has beenengaged in a series of cost-reduction efforts, includingoffshoring a significant portion of its IT work.</p><p>Roger was contemplating moving more IT work offshore.GlobShop has been working with an Indian vendor,Indo-Systems Solutions (ISS), to take care of applicationdevelopment, support and maintenance of merchandisingand retail systems, and technical support for the companysIT infrastructure. These initiatives have helped reduceIT expenses by over 35%. The business leadershiphas demanded additional cost reductions and has suggested</p><p>that Roger examine the possibility of pushing moreprojects offshore.</p><p>Within the next few weeks, Roger will have to decidewhether GlobShop should extend and renew its outsourcingagreement with ISS. To reduce the risk of becoming over-dependent on ISS, the company has been mulling overusing multiple offshore vendors rather than exclusivelyrelying on ISS.</p><p>Another issue that needed Rogers attention was thefuture role of the internal IT function at GlobShop. If thecompany decides to move more IT activities offshore, itshould carefully assess its implications for the internal ITgroup. GlobShop had reduced its IT workforce by over 50%and additional cuts could simply decimate the IT function.With over 60% of the IT spending concentrated on offshoreactivities, Roger wondered about the future steps.</p><p>BackgroundDuty is a generic term used to describe a variety of taxesimposed on goods. Duty-free shopping enables international</p><p>Journal of Information Technology (2007) 22, 440450&amp; 2007 JIT Palgrave Macmillan Ltd. All rights reserved 0268-3962/07 $30.00</p><p></p></li><li><p>travelers to purchase foreign goods at lower prices.Merchandise such as liquor, perfume, tobacco productsthat are subject to high taxes and duties are hot products induty-free stores. Duty-free shops are typically located ininternational airports, selected hotels, tourist attractionsand other areas that are designated as foreign trade zones.</p><p>Founded in the 1950s, GlobShop sold foreign cars andliquor in US military bases abroad. As the idea of duty-freeshopping picked up in Europe, the company opened storesin selected European and Asian airports in the 1960s.Spurred by the growth in international travel in the 1970sand 1980s, GlobShop expanded its presence to airports inAustralia, New Zealand, USA and UK. Soon, the companybecame a profitable player in the small but growing travel-retail market. Despite the entry of several global competi-tors, GlobShop remained one of the leading players in thisniche segment. The company expanded into severalcountries by acquiring smaller players. In the late 1980s,the company opened large, duty-free specialty stores in afew major cities in USA and Europe. These stores weremulti-department luxury retail outlets that carried a rangeof items including tobacco products, wines, liquor, confec-tionary, perfumes, jewelry, silverware, gift items, souvenirs,memorabilia, travel goods and other products.</p><p>The Gulf War in 1991 severely affected internationaltourism. Since airport retail formed a major portion ofGlobShops revenues, its sales slumped by over 15%. Tocompensate for the losses, GlobShop closed a few specialtystores and halted its expansion plans. As the businesspicked up, GlobShop acquired some smaller players as ameans to enter additional countries. Soon, the companywas organized into 10 regional business units as adecentralized set-up. However, acquisitions and expansionleft considerable diversity in business processes, managerialpractices, supply chain structures and systems across thecompany. Dan Cwik, Vice President of Retail Operations,elaborated:</p><p>Our organization was very diverse in terms of businessprocesses and practices. Different countries had differentways to handle duty-free shopping. In some nations, acustomer could take duty-free products straight outof the store. In some other countries, they had to buy itin-store and get it delivered on the flight or at theirdestination. Some countries supported the conceptof duty-free as well as duty-paid products. We had todeal with different supply chain structures and retailprocesses.</p><p>In the 1990s, Asian tourists, who had been targeted as thefocused customer segment by the company, represented ahigh potential market. GlobShop was successful in attract-ing and establishing its name among Asian travelers. Whilethis worked well initially, the changes in the globaleconomy in the late 1990s caused considerable hurdles toGlobShop. In particular, the East-Asian economic crisis in1997 created ripple effects in several Asian nations affectingstock markets, currencies and exchange rates, subsequentlyleading to economic recession. Triggered by these events,international travel and tourist spending declined, creatinga snowball effect on GlobShops revenues.</p><p>Corporate restructuringIn 2000, a leading luxury retailer (Lux) bought a majoritystake in GlobShop. Lux owned several brands in winesand spirits, perfumes, cosmetics, watches, jewelry, fashionand leather goods. Through this acquisition, GlobShopgained access to famous brands and premier luxury items.GlobShop also had a new executive team. A troika of CEO,CFO and CIO took over the management of GlobShop.Their immediate task was to address the decline in corpo-rate performance. An obvious challenge was to reduce costsdrastically as well as improve profitability.</p><p>Instead of relying solely on airport stores, the manage-ment sought to actively expand into sea-travel retail.GlobShop acquired a cruiseline firm that operated portstores as well as on-board ferry shops. However, revenuesfrom sea-travel retail formed only a small proportion ofoverall revenues. Therefore, the executive team began toaggressively pursue cost-reduction efforts. Proliferation ofretail operations at different regions highlighted thegrowing need for more effective coordination of diverseoperations. The senior leadership at GlobShop heavilydebated on the merits and demerits of a centralized vsdecentralized business set-up. Roger explained:</p><p>Our airport retail is essentially a concession-drivenbusiness. In such a business, one must re-win thebusiness every five years or whenever Government (oran airport authority) commences a RFP process for retailspace. Decentralized operations allow all costs to beadded or eliminated with each win or loss. A centralizedstructure has fixed costs associated with operations thatcannot be reduced 100% when business is lost. Therefore,in a volatile environment, decentralized organizationgives us the flexibility to add or reduce our operationsand scale it according to business fluctuations.</p><p>A decentralized set-up also implied duplication of effortsand lack of standard processes that ultimately increase theoperational costs. The leadership sensed significant savingsby centralizing a number of activities. As a result, the manage-ment announced a reorganization by which GlobShopwould streamline its business processes and reduceredundancies by adopting a major restructuring. Thismeant redefining a number of operational and managementprocesses and centralizing them at the corporate level. DanCwik, Vice President of Retail Operations, noted: We hadduplication of systems, people and processes throughout.We figured that we could consolidate a number of these anddo them in a common way. So, we decided to take the costsout by standardizing and centralizing a number of ourprocesses. And it was clear that information technology wasthe best route to achieve this.</p><p>IT organization at GlobShopIT operation at GlobShop was highly decentralized(Figure 1). Each region had its own IT division that cateredto the local needs. A corporate IT group served the needs ofthe global headquarters in USA, in addition to providingshared IT services like email. Each of the 10 regional ITdivisions functioned independent of each other and was</p><p>Crafting and executing an offshore IT sourcing strategy C Ranganathan et al441</p></li><li><p>headed by a regional IT Director who reported to thePresident of the regional business unit, with a dottedrelationship to the corporate CIO. Each regional unitfunded local IT projects and operated under a distinct ITbudget. A natural outcome of such a decentralized set-upwas duplication of applications, services and technologyresources. Neal Parker, Director of IT, observed: We hadseveral legacy applications that ran in different regions thatwere expensive to maintain and couldnt communicate witheach other. We had multiple versions of the sameapplication. Despite a corporate IT, the regional IT unitsfunctioned independently. This resulted in many redundantresources infrastructure, software, hardware and people.All these added to our IT overhead costs.</p><p>GlobShop had several legacy merchandising systems inthe 10 regions. Each region also had a data center storingunit-level sales information. Further, GlobShop had SAPfinancials and Peoplesoft HR systems. For retail processes,the company had two different point-of-sales applicationsacross the stores worldwide. GlobShop had a resource poolof over 300 IT employees across the 10 regions.</p><p>Centralizing IT managementIn 2000, in order to facilitate the corporate restructuringeffort, Roger was entrusted with the responsibility ofconsolidating the IT organization. Rogers mandate was tospearhead the realignment of GlobShops regional IT set-upinto a global unit, along with associated changes in businessprocesses. A major IT reorganization would not onlyfacilitate streamlining diverse business processes andsystems worldwide, but also pave the way for significantcost savings. Rogers background was also particularlysuited for the reorganization initiative: he knew thecompanys retail business well and had seen how anintegrated operation could achieve efficiencies; he also hadan international background with significant work experi-ence in Asia-Pacific and North American regions.</p><p>Roger and his team embarked on an extensive study ofregional IT units. Detailed information on the IT resources,applications and spending was gathered. Neal elaborated,It was an eye-opener for us. We had over 250 internallydeveloped applications across the ten regions. These</p><p>applications had over 15000 objects such as programs,databases etc and had over 5 million lines of code. Wedissected our IT dollars and precisely knew how much eachof the IT services cost us. We were spending much morethan what we ought to be. The analysis revealed thatGlobShop was spending over 60 million dollars annually onIT. Reorganization would help them save more than one-third of these costs.</p><p>Roger had extensive discussions with IT Directors andbusiness unit leaders at each of the 10 regions. Further,Roger convened planning retreats and brainstormingworkshops that helped discover a number of issues. Thepresidents of the business units were concerned thatthe consolidation would distance the regional users from theIT group. Moreover, centralization also implied a signi-ficant loss of control over IT. Neal remarked: There was alot of reluctance and resistance to give up local ITresources to a global pool. They felt they wont be anylonger able to walk to a programmers desk, make a requestand get it fulfilled on-demand. There was concern thatthis was going to impede their ability to do what theyhave been doing and also take away their control. There wasa tremendous amount of resistance. Roger highlightedanother issue: We were largely running our IT departmentssimply by managing-by-wandering-around model. Adopt-ing a global delivery model with a centralized set-uprequired a very different set of competencies. However, thehigh pressure to prune costs and the clear mandate fromthe top helped GlobShop move forward with its ITreorganization.</p><p>After studying the problems and issues, Roger proposeda three-pronged approach for the reorganization. Thecentral idea was to consolidate the 10 regional IT unitsinto one global IT unit, with all of the IT operationsdispersed in two centers, one in Asia and another one inUSA. The new IT vision was to have one global teamwithout boundaries, delivering acknowledged value andexceeding customer expectations. The highlights of thenew reorganization were:</p><p> Centralized global IT budget: Under the new arrange-ment, the funding for IT would be centralized. Theregional IT units would no longer pay for the IT services</p><p>Corporate IT</p><p>Development Analysts</p><p>Project Management Finance</p><p>Shared Services </p><p>Operations</p><p>Help Desk &amp; Support</p><p>Infrastructure</p><p>Regional IT </p><p>(IT Directors)</p><p>Development Finance Help Desk &amp; Support</p><p>Operations</p><p>Regional BusinessUnit (Presidents) </p><p>Retail Oper...</p></li></ul>


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