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Understanding Total Cost of Ownership in Building an Advanced Store Systems Business Case WHITE PAPER Sponsored by: IBM Sc ot t La n gd oc J an u ar y 2 00 8 GLOBAL RETAIL INSIGHTS OPINION Retailers are working overtime to firmly establish their competitive place in an industry where hypercompetition reigns and macroeconomic challenges such as higher energy and housing costs increasingly impact the consumer's wallet. Many merchants see the opportunity to create a new shopping experience — suppo
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    January 2008, Global Retail Insights #GRI210287 Understanding Total Cost of Ownership inBuilding an Advanced Store SystemsBusiness Case WHITE PAPERSponsored by: IBMScott LangdocJanuary 2008 GLOBAL RETAIL INSIGHTS OPINION Retailers are working overtime to firmly establish their competitive place in an industry where hypercompetition reigns andmacroeconomic challenges such as higher energy and housing costsincreasingly impact the consumer's wallet. Many merchants see theopportunity to create a new shopping experience — supported byadvanced store systems technology — as the best path to improving business performance on all levels, including higher sales, improved profits, and increased customer satisfaction. But the approaches andmodels used to assess point-of-sale (POS) technology platforms have broadened far beyond just capital investment, and new Global RetailInsights research has shown that retailers across different segmentsoften view their investment priorities differently. Global RetailInsights has identified a number of important criteria for evaluating both the true costs and the key business value of a new store systemsstrategy. IN THIS WHITE PAPER This white paper provides a detailed view of the considerationsrequired to evaluate advanced store systems platforms and how toensure that the retailer's business priorities are fully addressed in the business value analysis. It examines the importance of using a totalcost of ownership (TCO) model as a more accurate reflection of investment cost and benefit than mere asset purchase. It analyzesresearch results that show the different store systems evaluation priorities used by different retail industry segments and providessample retailer models and financial metrics to use as guides,concluding with a review of the full value proposition that can resultfrom a broad, strategic investment in new retail POS technologies.    G   l  o   b  a   l   H  e  a   d  q  u  a  r   t  e  r  s  :   5   S  p  e  e  n   S   t  r  e  e   t   F  r  a  m   i  n  g   h  a  m ,   M   A   0   1   7   0   1   U   S   A   P .   5   0   8 .   9   3   5 .   4   4   0   0   F .   5   0   8 .   9   8   8 .   7   8   8   1  Page 2 #GRI210287 ©2008 Global Retail Insights, an IDC Company SITUATION OVERVIEW Predictive Insight and Effective StoreExecution Define Merchant Leaders To say that retail is highly competitive seems a gross understatement. Not only do global megamerchants continue to dominate the low-price battle based on their sheer economies of scale, but new market entrants(e.g., Tesco in the United States, Best Buy in China), along with a blurring of traditional market segments, are making a complexindustry even rougher to navigate. This ubercompetitive battle will behard to win on price alone, so retailers that want better brand value andimproved performance are aligning technology changes at store levelto ensure delivery of a consumer experience that results in bigger transactions, higher trip frequency, and higher shopper satisfaction.To deliver the levels of service, personalization, and efficiency thatsavvy consumers demand, more retailers are ramping up long-delayedPOS replacement projects as they realize that their legacy systems donot have the capabilities to support the required new store-centricstrategy. IDC's 2007 Worldwide Retail IT Spending Guide forecaststhat worldwide POS hardware and software spending in 2008 will be$9.58 billion, increasing to $11.8 billion by 2010. Assessing POS Total Cost of Ownership:Thinking Beyond Just the Purchase Given the capital requirements necessary to complete a chainwidestore systems replacement project, it is understandable why manyretailers become transfixed by only equipment acquisition costs.However, a focus on initial POS capital spend leaves out most of thecost and benefit elements realized during the entire operational life of the equipment. Store systems projects that orient their financialassessment around the TCO are more likely to get an accuratereflection of the value proposition of store technology investments.Stated more directly, retailers can expect that only 20–45% of the TCOof a given store systems investment will be initial purchase price (seeFigure 1). Therefore, retailers would benefit from expanding their selection criteria to consider factors that optimize the life-cycle costsof their POS solution.  Acquisition costs aretrending downward —toward 20% of thetotal cost of ownership.— Scott Langdoc,Research VP, Global Retail Insights  ©2008 Global Retail Insights, an IDC Company #GRI210287 Page 3 FIGURE 1 Store Systems Investment: Acquisition Costs Are aSmall Part of TCO Reliability,serviceability,manageability, andenvironmentalcosts (67.5%)Initial acquisitioncosts (32.5%)   Source: Global Retail Insights, 2008 TCO Across the Store Systems Life Cycle While actual technology purchase is an obvious, early element of anystore systems transformation project, four major store systems TCOcomponents (or life-cycle steps ) impact the overall value propositionand the retailer's ability to reduce TCO (see Figure 2). The four stepsare highlighted in the following sections. Evaluation and Procurement  The most traditional step of a POS project involves the direct andindirect costs of solution assessment, vendor management, and capital purchase. Often included in the initial buy are direct infrastructureneeds such as store wiring and network platforms. Staging and Deployment  Almost any major retailer planning a chainwide POS rollout requires aformal process by which delivered technology is centrally andformally configured, tested, and prepared for distribution to a chain'sindividual stores. This leaves only physical installation, connectivity,operational testing, and training to be done at each store location.  Page 4 #GRI210287 ©2008 Global Retail Insights, an IDC Company Store Operations and Systems Management  This is the iterative component of a store systems TCO model. Allcosts, including power consumption, field support, as well as systemand field service management, seen over the course of the asset'soperational life are captured at this step. The impact of centralizedsystems management on store operational performance is also assessed,including resulting business value surrounding transaction efficiency,automated updates, asset tracking, system uptime performance,training investment, and labor costs. Removal and Disposal  At the end of the POS equipment's operational life, the financialimpact of asset disposition must be analyzed, including related costsand business value surrounding any store deinstallation, recyclingoptions, potential asset resale, as well as outright disposition — whichis increasingly a subject of regulation. FIGURE 2 Life-Cycle Costs Determine the REAL Bottom Line transformto: POS HardwareCapitalCosts ãTesting costsãConfiguration costsãIntegration costsãLogistics costsãInstallation costsãCashier costsãTraining costsãMaintenance costsãEnergy costsãRecycling costsãDisposal costsãDowntime costsãField service costsãHelp desk costsãAsset mgmt costsãIT support costs Total POS Life-Cycle CostsEvaluation Focus OperationsandManagementRemovalandDisposalEvaluationandProcurementStagingandDeployment Store Systems TCO Component Model   transformto: POS HardwareCapitalCosts ãTesting costsãConfiguration costsãIntegration costsãLogistics costsãInstallation costsãCashier costsãTraining costsãMaintenance costsãEnergy costsãRecycling costsãDisposal costsãDowntime costsãField service costsãHelp desk costsãAsset mgmt costsãIT support costs Total POS Life-Cycle CostsEvaluation Focus OperationsandManagementRemovalandDisposalEvaluationandProcurementStagingandDeployment Store Systems TCO Component Model   Source: Global Retail Insights, 2008
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