Best Practices in Outsourcing: The Case of Sears Holdings Corporation

1. Best Practices in Outsourcing:
The Case of Sears Holdings
Corporation
Case Study
Prepared by Dr. Olayele Adelakun, Ph.D,
Associate Professor of Information Systems at
DePaul University, Chicago IL, USA
GEO
IAOP’s Global Excellence in Outsourcing Award
www.IAOP.org

2. Best Practices in Outsourcing: The Case of Sears Holdings Corporation
1. Introduction
Sears Holdings Corporation
Sears Holdings Corporation is a U.S. based company headquartered in the Chicago suburb of
Hoffman Estates, IL. With over 2600 retail stores in the U.S. and Canada, Sears is one of the
major brands and leading retail stores in the U.S. Sears Holdings brands include Kenmore,
Craftsman and DieHard, with a broad apparel offering, including well-known labels such as
Lands' End, Jaclyn Smith, Joe Boxer, Sofia by Sofia Vergara, and The Country Living Home
Collection. Sears Holdings is also known as a leader in the area of tools, lawn and garden, fitness
equipment and automotive repair and maintenance. Sears has been recognized for numerous
achievements including 2011 Mobile Retailer of the Year. Sears Holdings Corporation operates
through its subsidiaries, including Sears, Roebuck and Co., and Kmart Corporation.
The retail industry in the U.S. has changed significantly since the mid 2000s. Sears, along with
other ‘brick-and-mortar’ retailers, experienced a dramatic shift in the competitive landscape with
the rise of online retailing and changes in consumer retailing practices and behaviors. As a result
of this and other macroeconomic factors, Sears faced declining sales and profitability over the
last two decades.. To address this fundamental shift in the marketplace, Sears implemented
several strategies to take advantage of the shift in consumer behavior and the rise of online
retailing. A core focus of their new strategy would be to harness the power of technology to
strengthen customer relationships and improve the overall Sears retail experience. This led
Sears’s executives to turn to the information technology division of Sears Holdings to lead the
way with speed and innovation to take Sears to the next level.
Sears’ Information & Technology Group (I&TG) and its Outsourcing
Challenge
The Information & Technology Group (I&TG) of Sears Holdings Corporation provides software
development, support, and maintenance services to Sears’ business units. They are leading the
technology-based reinvention of Sears. The I&TG organization is responsible and accountable for
delivery of IT services to Sears Holdings’ business units whether via internal I&TG resources or
external vendors. Traditionally, I&TG collects business requirements from the business units and
then partners with them to plan, design, and deliver the technology solution to the business. Over
the past decade, Sears increasingly outsourced the technology development to third party
technology outsourcing vendors and independent contractors, with limited coordination or
strategic focus to how they were deployed. Over time, the number of vendors and contractors
grew to the point that it began to deteriorate in-house technology capabilities and resulted in the
loss of intellectual property. In addition to loss of intellectual property, development costs
increased significantly as vendor and contractor rates continued to rise.
To address this challenge in 2010 Sears launched a captive offshore IT center in India called
Sears Holdings India (SHI). Sears Holdings established SHI as a collaborative partner and focal
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3. Best Practices in Outsourcing: The Case of Sears Holdings Corporation
point for offshore technology design and development. The launching of SHI is part of the overall
information technology transformation process at Sears Holdings. Using information technology
as a driver, SHI has been one of the key elements of the long-term strategy to help Sears
Holdings rise to the challenges of the new retailing landscape. Since its inception, SHI has been
delivering high quality software development and support services which are driving innovation
and value at Sears Holdings. This has enabled Sears Holdings to create and launch new
business ventures like MetaScale, a wholly owned subsidiary that offers innovative internallydeveloped technology products and services to enterprises.
In parallel to launching SHI, I&TG implemented a new framework for the sourcing of technology
development that led to additional productivity and value being delivered by the outsourcing
vendors as they collaborated and, in some cases, competed with SHI to win contracts. To
accelerate SHI’s maturity and ability to collaborate and compete with external vendors, Sears
Holdings embedded technology and process best practices with SHI from inception.
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4. Best Practices in Outsourcing: The Case of Sears Holdings Corporation
2. Sears Holdings India (SHI)
Strategically located in Pune, India, SHI is a stand-alone subsidiary of Sears Holdings, and is led
by Alok Kumar, a seasoned IT executive with experience in establishing new India-based
technology service organizations. During the early stages of building the organization, Alok
worked with his Sears Holdings US counterpart and IT Director, Justin Sheppard, who led the
US-based program management office within I&TG.
Developing an internal captive IT center in Sears Holdings was a challenge for many reasons.
First, the I&TG organization had been accustomed to using a mix of third party vendors and
contractors for many years, many of whom had become entrenched and possessed deep
knowledge and understanding of Sears Holdings’ underlying systems and technologies. Second,
as a new organization, SHI had to prove their capability and earn the trust of Sears Holdings’
management across the organization. Third, the executive team at Sears Holdings set aggressive
business case objectives to see tangible measurable results in the first year of launching SHI.
Fourth, in transitioning to SHI, there was a natural resistance from some of the existing vendors
and contractors who were trying to keep their business with Sears Holdings. Lastly, SHI needed
to develop a talent acquisition and retention strategy for the long-term considering the high level
of competition and attrition of talent in India.
The SHI management team and the US program office understood they needed to overcome
these challenges and still meet their goals. To do so, they implemented a number of best
practices and principles that guided the formation, structure, and processes of the new
technology service delivery arm within Sears Holdings. By the end of 2010, Justin Sheppard and
his team successfully achieved the growth and financial objective for that year and thereafter; the
numbers of independent IT consultants in Sears Holdings were reduced by a significant amount;
and the breadth and level of services provided by SHI Pune were higher than previously
predicted. Below are some of these best practices, put in place by the I&TG organization, which
helped SHI overcome the mentioned challenges and made them into a successful organization
and vital part of Sears Holdings’ IT service delivery capabilities .
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5. Best Practices in Outsourcing: The Case of Sears Holdings Corporation
3. Best practices put in place – What makes it work
I.
Governance Model & Leadership Commitment
From the outset, the CIO of Sears Holdings was a leading proponent and lent his full executive
support to launching Sears Holdings India (SHI). Within Sears Holdings, the CIO is accountable
and responsible for the success and failure of the initiatives and performance of the I&TG
organization. To ensure the success and visibility of SHI’s progress, the following three
management and governance structures were put in place: Sears Holdings Program
Management Team, SHI Board, and SHI Management Team. These three senior leadership
teams at Sears were committed to the success of SHI. They ensured that SHI received the
required support and guidance needed to be successful.
Sears Management Team
The Sears Holdings Program Management Team is comprised of the Managing Director of SHI
(Alok Kumar), the US-based Program Director of SHI ( Justin Sheppard), and some other key
members within the I&TG and Sears Holdings business units. This group is responsible for
building SHI from the ground up, establishing all program structures and processes, working with
key support teams within HR, Finance, and Legal, and ensuring smooth transition of IT services
from I&TG to SHI, as well as reporting progress to the SHI Board. The group also ensures that all
the resources required to make SHI a success are acquired both in India and the US. In addition
the group is also responsible for change management and cultural cohesion for both
organizations.
SHI Board
The SHI Board was comprised of the SHI Managing Director (statutory requirement), Sears
Holdings Chief Financial Officer (CFO), Sears Holdings Legal counsel, as well as a few other key
executives from the finance organization. The Program Director provided regular progress
updates to the board, and was accountable to them for the success of the overall effort. The
inclusion of the CFO played a critical role in SHI’s success. Not only did he ensure that the
financial objectives and benefits of SHI were achieved and clearly understood by the leadership
of Sears Holdings, by being engaged at this level of the program, he also became an advocate
for SHI within the organization.
SHI Management Team
The SHI Managing Director heads the SHI management team. This team is fully responsible for
all local activities and operations in India. One of their primary responsibilities is to source and
retain premium local talent. The team identifies personnel in need of development and or training,
and focuses on building the right team structures to deliver top-quality IT services. The team also
assists US staff better understand their India counterparts.
II.
Metrics: Measuring the right things
Responsibility for defined objectives and goals, and in turn measuring and tracking performance
against those objectives, are a core principal and part of the Sears Holdings’ management
process. The four key dimensions against which the SHI performance is measured are: customer
satisfaction, innovation and the protection of intellectual property, cost effectiveness and savings,
and internal business process/quality. These clear objectives and metrics gave clarity to the SHI
team on what to focus on and deliver.
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6. Best Practices in Outsourcing: The Case of Sears Holdings Corporation
The financial objective was relatively easy to measure, whereas some of the other goals were
more challenging. The Sears Holdings program management team put in additional effort to
ensure that each objective was measured and data was collected to support the metric. For
example, they were able to demonstrate how many third party vendors were replaced by SHI.
The number of vendors and contractors that were retired from Sears Holdings’ were identified on
the contractor rolls, including the date and time they turn in their badge (signifying they were
replaced). It was important for SHI to achieve customer satisfaction not only for their ultimate
business customers but also for their I&TG counterparts which were also seen as customers.
Data was collected from business units about their experience with SHI and how satisfied they
were. Internally, there were cross functional reviews after every project transition to see how SHI
could improve for their next project. SHI from the beginning embarked on obtaining CMM
certification to ensure process quality.
III.
Standardization of processes within the India context
Under the guidance of the Sears Holdings team, SHI internal business processes were
implemented with required tailoring for local requirements: a. HR policies at Sears Holdings were
extended with India specific modifications b. Policy of the Internet and asset usage was extended
without any change to SHI c. Code of Conduct policy was extended with modifications to include
India specific changes d. Training and appraisal policies were tailor made for SHI e. Hiring and
induction plans were tailor made for SHI. It was important to identify those processes and policies
that would work globally, and those that needed to be tailored to the local context. Without these
tailored processes it will be very difficult to operate SHI while meeting all the target goals set by
the board.
IV.
PMO (Program Management Office)
The program office is made up of nine personnel, made up of team members from both the US
and India, headed by Justin Sheppard. The primary goal of the PMO is to ensure that both the US
and India organizations had the right implementation structure and operational support to make
the program a success. The program office is also responsible for making sure that SHI’s delivery
maturity developed relatively quickly, while achieving the established goals. In addition the PMO
serves as the liaison between the US and India teams , by being neutral ground for the review
and adjudication of any program issues that arose. SHI success was made possible largely due
to the honest, open, and transparent communication, facilitated by the PMO, between VPs,
directors, and executives in both organizations. The PMO is also responsible for leading change
management initiatives in addition to working with business unit and I&TG managers.
V.
Internal Change Management
The PMO understands the importance of change management in the successful implementation
of the SHI program. Sears Holdings management initiated an internal change management
process to help employees and stakeholders understand the objectives and guiding principles for
the SHI initiative and allay fears of job security and changing roles and responsibilities. SHI
enables Sears Holdings to tap into the global talent pool at lower costs, which in turn allows the
entire organization to serve the Sears Holdings business units more effectively. The savings
generated would ultimately be invested back in developing new technology platforms and
solutions, which would generate new and exciting job opportunities. If the SHI initiative was not
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7. Best Practices in Outsourcing: The Case of Sears Holdings Corporation
successful, Sears Holdings would have no option but to depend more and more on 3rd party
vendors; a practice everyone knew to be more costly. This transparent communication led to
enhanced collaboration between the US and India employees. Teams that excelled in
collaboration were used as an example for those that struggled with this new way of business.
These teams would help others who were still struggling, to understand and implement the plans
that were known to be a success. That helped to move the change process along in the right
direction.
VI.
Relationship Management (Partnership)
Sears Holdings and SHI modeled their relationship as a partnership. Making SHI successful was
the responsibility of both Sears Holdings and the SHI management teams. They used a “2-in-abox” peer relationship to keep both sides accountable for the combined team’s performance and
incentivize maximum communication. This helped to minimize the ‘finger-pointing’ that can often
result when two separate organizations are trying to jointly accomplish a challenging task. The
message to the Sears Holdings teams was to provide SHI with support and guidance as they
would provide any new colleague. At the same time SHI’s performance was compared with the
performance of 3rd party vendors on cost effectiveness and quality parameters. SHI had to prove
its value by competing with external vendors.
VII.
Organization and Communication Structure
An important part of Sears Holdings communication model is regular reviews and feedback to
both parties. The Sears Holdings management team developed a lateral communication structure
between the US side and India side. While communication on each side could be vertical, they
discourage vertical communications between US side and the India side. This model fosters good
relationship and understanding among peers. Figure 1 illustrates this ‘2 in a box’ approach which
structured the organization and communication between the two sides.
Figure 1: 2-in-a-Box Communication and Coordination Model
This model contributed significantly to quick success of SHI in reaching an operational
maturity level quickly. Despite travel restrictions that were in place for the US organization,
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8. Best Practices in Outsourcing: The Case of Sears Holdings Corporation
which limited the amount of face-to-face interaction between India and the US, they were
able to have relatively reliable communication, including exchange of documents and ideas.
Issues that were escalated up to the next management level were also discussed and
resolved at that level. Decisions were then passed down and implemented on each side.
VIII.
Tools, Method, and Standard Processes
The Sears Holdings team ensured that standard development practices and appropriate tools
were inculcated at SHI from its inception. While the work transition to SHI was happening,
Sears Holdings helped SHI to adopt best development practices – open source adoption,
architecture standards, tool standards, knowledge management, scorecards and a
continuous improvement philosophy. To train some of the new SHI employees, the shadow
and reverse shadow approaches were used. So 3-4 people from India were brought to the
U.S or other vendor sites to observe work being done by the position they would be working
for at SHI. Then the roles were reversed allowing the vendor to coach the SHI employee. The
PMO didn’t use complicated tools for documentation and communication, but they made sure
standard communicating and documentation tools were available for virtual global work. A
team room for video conferencing was established on both ends allowing for a more personal
meeting. It was also vital, especially during the initial stages, to showcase success from SHI.
This was achieved through a newsletter approach to let everyone know the accomplishments
made by SHI and reassuring trust in SHI. Process standardization was highly emphasized in
India. SHI was able to win more contracts over because they demonstrated superior ability to
follow standard development processes.
IX.
Transition and Operation
The combined team (SHI and Sears Holdings) faced a number of challenges with respect to
transitioning and operation. One, Sears Holdings has no brand recognition in India so hiring
quality human resources in time was a key challenge. Two, there were clear aggressive goals
to be met in the first year that required quick transition and operation. Lastly, as the SHI
organization grew, managing associate expectations about career progression,
compensation and benefits was a key challenge. Below is a brief description of how the
combined team) addressed these challenges.
Transition and Operation Process
The Sears Holdings’ management team identified four major areas for executing successful
offshore transitions (Skill level, Team Mix, Development method, and Entry/Exit Strategy).
Figure 2, illustrates the four focus areas for successful transition.
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9. Best Practices in Outsourcing: The Case of Sears Holdings Corporation
Figure 2: Focus area for successful transition.
The combined Sears Holdings and SHI teams collaborated to define and follow the transition
process. Before transitioning any program portfolio, analysis was performed. Portfolio
Analysis can be defined as the structured process to understand the clients’ portfolio of
products & solutions and associated complexity. The transition team identified key
applications for transitioning and defined order for migrating projects to offshore on the basis
of the discussion with the business team. The transition team created exhaustive checklists
to support transitions. The applications, which could be easily transitioned, were defined first
for quick wins. This helped in building initial confidence and trust between Sears Holdings
and SHI teams. The detailed & process oriented approach ensured that most transitions were
successful.
To address the human resources challenge, the HR team institutionalized key career
development processes including a career path framework to provide a choice of career
paths to associates. As part of this framework, SHI associates are assessed across
functional and behavioral competencies. The competency measurement is completed by a
3rd party to avoid any internal biases. The results of an employee’s assessment will be used
to create an individualized career development plan. The Sears Holdings and SHI team
believe that providing a clear development path to all India employees will build employee
loyalty, trust, and productivity.
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10. Best Practices in Outsourcing: The Case of Sears Holdings Corporation
4. Lesson Learned and Conclusion
Overall, Sears Holdings management was satisfied with the outcome of Sears Holdings India
(SHI). Here are some of the major results of implementing SHI. One, SHI has met the their
financial objectives, which generated multi-million dollar annual cost savings. What is more
impressive is that break-even on SHI investment occurred in the first year of its operations.
Two, Sears Holdings successfully transitioned development and support of many of their
current systems to SHI. Sears is able to send software development and maintenance work
to SHI at rates which are substantially less than 3rd party outsourcing rates.
Finally, Sears Holdings now has a better global presence. The knowledge of developing a
global presence is something that Sears is planning to leverage internally and externally. For
instance, Sears Holdings and SHI are collaborating on a new technology services company,
called MetaScale LLC, that will provide planning and operational execution services to
companies that seek to launch their own captive center operations.
However, this success also comes with some key lessons. One, travel restrictions early in the
program slowed the overall teams’ speed and collaboration. Even with the rise of many virtual
collaboration tools, relationships are best developed, at least initially, with in-person face-toface interaction. The travel challenge added another level of difficulty to the program, a
situation that could be avoided. Two, place experienced people in key positions. Justin’s prior
experiences living in India helped Sears Holdings avert many of the cultural challenges that
could have derailed the program. Three, employ a local general manager instead of an
expatriate in the foreign division. While expatriates have been successful in the past, it is
obvious in this case that having an experienced local general manager helps to overcome
many of the local operational issues at Sears Holdings India. Lastly, an open, honest, and
regular line of communication, including ‘2-in-a-box’ accountability, is essential on all levels in
order to ensure the program’s success on both sides.
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