WHEN Sir Peter Davis announced that he was handing over to Andersen Consulting Sainsbury’s IT systems and the 800 people who worked on them, rivals were astounded. They saw their systems as a pivotal part of the business, the information the tills provided as something they wanted at their fingertips.
Sir Peter, then recently installed as chief executive, said when he announced the deal in 2000 that it would “help us deliver competitive advantage to our customers and cost-savings to our shareholders”.
But outsourcing cannot be effective unless the outsourcer is also on top of the job. Sir Peter’s tenure at Sainsbury’s came to an expensive end, doubly so for shareholders, who saw the value of their company plummet but were forced to write a hefty farewell cheque to the departing boss. Now his successor, Justin King, is reclaiming full control of the systems, calling a halt to the outsourcing contract five years ahead of schedule. Andersen Consulting, now renamed Accenture as a result of its serendipitous split from the late Arthur Andersen accounting firm, is to receive a small payoff. Even allowing for that, Mr King reckons that the move will be earnings-enhancing within two years.
As more and more companies consider outsourcing as a possible way of bringing down costs, the Sainsbury’s example is one that should make them at least re-examine the arguments. Cost savings at one level may end up simply being costs at another. Companies, and perhaps those public-sector organisations that are increasingly looking to outsource, may find that they need to take a second opinion before plunging into a multimillion-pound deal which is crucial to the success of their organisation.
The crucial part played by systems in any retail operation was brought home to Richard Baker when he arrived at Boots. The new chief executive discovered tills so out of date that he could not extract from them details of what had been sold that day. This went some way to explaining why so many gaps existed on the company’s shelves.
He has been working hard to put right such basics in the business but the numbers he unveiled yesterday showed just how steep a hill he still has to climb. Although he can point to an increase in sales in the health and beauty areas, a near 10 per cent fall in trading profits is not a flattering result. Part of that tumble is due to increased spending in trying to bring the stores up to date, but a fall of 2.9 per cent in the number of customers visiting the average store over the year is a nasty sign. To brighten the picture, there is a 3.1 per cent increase in the average transaction size but generous discounts and efforts to get closer to the supermarkets on prices have cut gross margins again.
Against that background, Mr Baker is going along with the merger with Alliance UniChem, admitting that his chairman, Sir Nigel Rudd, introduced him to Stefano Pessina in his first week at Boots. Mr Baker warmed to the Alliance UniChem deputy chairman but the City still seems dubious about this deal. If, as seems likely, it is referred to the Competition Commission, then the Boots price will take a hammering. It might even fall back far enough to entice those cash-rich private equity groups to take another look.
Activism can have a good name
MARK ANSON will not be seeking the quiet life when he swaps the top job at America’s biggest pension fund for the lead role at Hermes Investment Management, which is half the size. Mr Anson, 46, boasted to a London conference this summer that CalPERS’s interventionist approach to hundreds of companies it invests in could be shown to improve returns. “It is something we would like to see across the globe,” he added.
Hermes is the obvious vehicle to turn that thought into action in Europe. It has a long tradition of calling boards to account rather than trading their shares — a common sense practice turned into commercial philosophy under Alistair Ross Goobey. Fifty years ago, George Ross Goobey, manager of the Imperial Tobacco pension fund, pioneered funds investing their assets in a semi-permanent portfolio of large shareholdings in a wide array of companies. At the time Anson was appointed, Ross Goobey Jr was bringing that thinking up to date in a memorial lecture for the new Cass Business School pension archive.
A train of logic links the two. Big funds cannot easily trade. The money-saving alternative is to be “passive” long-term investors, roughly tracking an index. To be passive in trading, however, it makes sense to be active in corporate governance, to be share owners rather than shareholders as Mr Anson puts it. Perversely, activism has earned a bad reputation recently. It will be part of Mr Anson’s job to distinguish between the selfish short-term arm-twisting of some hedge funds and efforts to raise long-term returns for all of a company’s owners.
Sara's debut
SARA is due to be introduced to the House of Commons today. Sir Malcolm Rifkind is much enamoured of her, as is Labour’s Frank Field. Both believe that she could encourage people to save more.
Sara, a savings and retirement account, would be the pension equivalent of an Isa — flexible, friendly and understanding enough to know that, in a crisis, savers need to know that they would be able to take some of the capital out. Sara could succeed where the stakeholder pension has failed.
This afternoon Sir Malcolm, the Shadow Work and Pensions Secretary, will ask the Commons to support Sara, and some other sensible reforms he wants to see for savers. They include an alternative to the enforced purchase of an annuity at 75. His sensible proposals deserve all-party backing. The Government has said it is seeking consensus on pensions: now is a chance to provide it.
No oil shock
POLITICIANS’ fiscal reactions to record oil use and record prices are depressingly predictable. In America, President Bush will not tax all fossil fuel products to curb demand and CO2 emissions, as the OECD now recommends. In Britain, Gordon Brown will have his eye on North Sea oil as a source of the £11 billion extra tax he now needs, even if the West wants more investment to boost the flow. As Derek Leith of Ernst & Young notes, tax on some fields is already so high that any more will actually cut future output.
