EXECUTIVE SUMMARY

The company featured in this case study is one of the leading consumer electronics retailers in Europe. Its success in the marketplace stems in part from its unique entrepreneurial strategy, which encourages each store to operate as an independent entity and gives local store managers an ownership stake. Store managers enjoy relative autonomy and are free to make key decisions on local advertising needs,

RETAIL CASE STUDYCISCO ROI CASE STUDY

CUSTOMER PROFILE

Region: Europe

Industry: Retail—Consumer Electronics

Business Issue(s): Virtual Store IT Infrastructure

Employees: Approximately 50,000 worldwide

HIGHLIGHTS

Background: ■ Leading electronics retailer with

hundreds of stores across Europe ■ Operates a chain of electronics stores

offering maximum value and service to customers

■ Known for its relentless focus on the customer and innovative retail strategies

Goal: ■ Modernize the IT infrastructure of the

company’s stores to reduce costs, enhance productivity and add flexibility to store operations

Solution: ■ Cisco’s Lean Retail Model

Results: ■ Projected 20% five-year ROI ■ Projected 32% five-year IRR ■ Estimated €6.8 million savings ■ Expected payback in 11 months ■ Simplified IT requirements for

new stores ■ Enabled rapid implementation of new

services in stores

product selection and pricing, personnel planning and the store’s IT infrastructure.

Because it harnesses the entrepreneurial spirit of each organization, the retailer claims one of the best-motivated workforces in the industry and a reputation for superior service tailored to local customer communities. The result: the company has expanded steadily across Europe, growing the number of stores it operates to well over 500.

ELECTRONICS RETAILER BOOSTS STORE PRODUCTIVITY, OPTIMIZES IT OPERATIONS WITH CISCO’S VIRTUAL RETAIL SOLUTIONS

“As a part of a corporate services team, our mission is to support store management by identifying technology solutions that can lower costs, drive productivity and enhance customer experiences. With the virtual store environment, we’ve created an IT platform that will drive all three benefits to our stores.”

Chief Information Officer

- 1 -

RETAIL CASE STUDY

CISCO ROI CASE STUDY

Working within the company’s decentralized management structure, the corporate IT services team serves as both a technology advisor and services provider to local stores. In 2007, the corporate IT team identified an opportunity with the potential to substantially reduce costs, raise employee productivity, and increase store-management flexibility. The plan involved creating an advanced networked IT architecture – called a “virtual store environment” (VSE) – that would significantly shrink the IT footprint at stores and “virtualize” key technology functions through a state-of-the-art virtual IT platform. The company leveraged Cisco’s Lean Retail Architecture (LRA) to design its VSE solution, which entailed migrating servers and applications from the stores to the data center, consolidating and virtualizing the storage devices and servers at the center and moving to a network-based, on-demand services model that would significantly boost application availability.

The team anticipated a number of benefits from the centralized VSE scheme, including:

■ Reduced total cost of ownership

■ Lower store setup costs

■ Enhanced disaster recovery and backup capabilities

■ Greater sales associate productivity

In 2008 the IT team launched a proof-of-concept pilot of the VSE system at a store close to its corporate headquarters. The pilot program allowed the team to refine its approach and build a compelling business case for store managers. With a successful prototype under its belt, the team is now focused on delivering the VSE solution to about 50 new stores.

According to a recent third-party cost analysis, the VSE approach reduces the upfront capital investment required to open a typical retail outlet by approximately 3% compared to the traditional IT model, while providing a range of operating

improvements – including lower IT maintenance and upgrade costs, more reliable and less costly data backups, improved sales staff productivity and more efficient security and communications systems. The new system’s lower upfront costs and superior performance made VSE the obvious choice for new stores; and at existing stores, individual managers will decide when to convert to VSE depending on factors such as the age and performance of its current equipment.

Based on a conservative five-year plan that calls for deploying VSE only at new stores

through 2012, the company expects to realize a 20% return on investment (ROI) and a 32% internal rate of return (IRR), generating €6.8 million in cost savings during this period.

THE OPPORTUNITY

After numerous visits to the company’s electronics stores and extensive conversations with store managers and staff, the company’s senior IT manager in charge of technology innovation identified three major areas where he believed significant operational improvements could be introduced:

■ Sales Floor. Sales associates typically share a computer workstation that does not allow a personalized desktop view. By virtualizing the desktop environment and leveraging the store’s network to run applications from a central server, sales staff could call up a personalized desktop environment at any machine, increasing productivity and improving communications with store management.

■ Detective’s Office. Tasked with managing security, store detectives typically rely on hardwired analog video cameras that are cumbersome to deploy

FINANCIAL ANALYSIS (NPV OF INVESTMENT/RETURN)

CUMULATIVE NPV CASH FLOW ANALYSIS*

-€34.1M-€40M

-€30M

-€20M

-€10M

0

€10M

Net ReturnTotal ReturnTotal Investment

€6.8M€40.9M

-€500M

0

€500M

€1,000M

€1,500M

€2,000M

Year 6Year 5Year 4Year 3Year 2Year 1Year 0

Cumulative NetBenefits

*Present value calculations using 13% WACC; Assumes 1 virtual store completed in Year 1 and 100 stores converted per year in Years 2–6.

- 2 -

RETAIL CASE STUDY

CISCO ROI CASE STUDY

and monitor. By implementing a more reliable and robust WLAN, stores can take advantage of new wireless digital surveillance cameras that are easy to reposition. The digital recordings are also easier for detectives to review and prepare for submission to law enforcement agencies.

■ Store IT Infrastructure. Most stores carry relatively high IT overhead costs – a result of the company’s decentralized operating model in which individual stores maintained a full range of IT hardware and applications. By centralizing all of the stores’ applications within a multi-threaded, redundant, high-availability Cisco WAN environment, the company will significantly streamline the store’s IT footprint, allowing it to lower maintenance and support costs while improving service levels.

Because it encourages local-store autonomy, the company’s business model presented natural barriers to the adoption of a centralized IT architecture. The IT team needed to gain approval not only from corporate management, but also from the managing directors at local stores. For many store operators, the legacy IT architecture was a known, reliable solution in no obvious need of replacement.

Compounding the challenge were the economic realities of the retail industry, a highly capital intensive, notoriously low-margin business. The corporate team had to prove that a VSE investment would not only yield a positive ROI for stores, but ultimately lower overall IT capital costs for the corporation as a whole.

THE SOLUTION: CISCO’S VIRTUAL STORE ENVIRONMENT

Given the challenges in proving the viability of the VSE solution, the corporate IT strategy team worked with experts from Cisco Systems to develop a solid business case in support of the concept. Fortunately,

the corporate technology team had a strong track record, giving it the ear of the company’s executive team – a significant advantage.

In 2007 the team finalized the virtual store architecture, which integrated the latest networking technologies from Cisco to reduce the IT footprint in retail outlets and link the stores to a corporate data center where key technology services such as business applications, databases and data backups could be maintained cost-effectively. The VSE architecture would enable stores to switch to less expensive and more functional end-user devices such as thin-client PCs, WLAN surveillance cameras and wireless IP phones. In addition, Cisco’s solution would reduce

overall IT operating costs because core services, including application upgrades and patches and hardware maintenance and support, could either be managed centrally or provided to stores at lower cost. The following sections review these efficiencies and savings in greater detail.

Sales Associate Productivity and Cost Improvements

A key advantage of the VSE solution is its ability to improve sales associate productivity. By running salespeople’s stations from a central server and delivering

personalized desktops through the network to any of the store’s thin clients, salespeople can access their accounts from any machine with the swipe of a keycard. Associates can now respond immediately to the customer’s needs regardless of where the interaction occurs.

Stores also save on hardware costs because the networked VSE solution allows stores to move to thin-client PCs that are less expensive and have a longer lifespan. The switch to thin clients alone is expected to save each store approximately €1,400 in hardware costs. Further savings are anticipated in the form of lower workstation setup costs, since networked VSE applications are managed centrally rather than at the store. A typical thick-client PC,

for example, requires a 40-minute setup process for a local technician. Setup time for a VSE-based thin client PC is negligible as technicians are not required to set up an individual image, creating a plug-and-play solution.

Maintenance costs for sales workstations are projected to fall by 50% at VSE-enabled stores, again due to the relative simplicity and durability of the thin-client machines. Currently, it takes about 1,600 hours of technical support per year to maintain thick-client PCs across the chain. That

Store

Store

StoreStore DataCenter

Store

Store

StoreStoreData

Center

LEGACY IT ARCHITECTURE VIRTUAL STORE ENVIRONMENT*

*Conceptually similar to Cisco’s Lean Retail Architecture.

- 3 -

RETAIL CASE STUDY

CISCO ROI CASE STUDY

number is expected to drop to about 800 hours when the company converts to VSE-based thin clients.

Store Detective Flexibility and Productivity

The retailer’s VSE solution provides significant new theft-prevention capabilities for stores, including more flexible and effective video surveillance equipment, more efficient review of video footage

and streamlined interactions with law enforcement agencies. In the legacy environment, store detectives relied mainly on analog video cameras to monitor store activity. The system was inefficient in several respects: the cameras were hardwired, making them hard to reposition; and editing the footage and transferring the video evidence onto cassettes was slow and cumbersome. Moreover, when a crime was recorded, store detectives were burdened with filling out numerous paper forms to go along with the video evidence they submitted to law enforcement agencies.

The VSE solution introduced several enhancements. Armed with a more reliable WLAN, stores can accommodate new wireless (WLAN) cameras, allowing detectives to easily reposition them around the store to monitor shifting areas of interest. The system is simple and requires no re-wiring, so detectives can move the

camera around the store without technical assistance.

The WLAN cameras use digital video technology, allowing detectives to quickly review and edit the footage online, then submit the edited footage electronically to law enforcement agencies. Also eliminated are the manual forms: Detectives in the VSE environment submit the forms online, along with the video evidence, through an online portal provided by the police.

Factoring in the efficiency gains and improvements in theft prevention, the company expects the digital surveillance component of the VSE solution to generate annual savings of approximately €19,000 per store.

IT Cost Advantages and Enhanced IT Services Productivity

Finally, the networked virtual store solution is expected to generate significant savings as a result of cost and performance improvements at store-based IT operations. Major cost reductions are expected to come from the VSE environment’s virtualized and networked application approach, which centralizes business applications at the corporate data center—one of the core principles of Cisco’s Lean Retail Architecture—thus simplifying and lowering the cost of software maintenance and support. Corporate IT administrators can now perform routine tasks such as upgrades and patches once, on a single instance of the application, rather than multiple times at each store. Similarly, the job of integrating new applications into the network will be simpler and easier to implement because the company will be supporting only one version of the application. End-user performance is unaffected because the stores and corporate data center are connected through a reliable and redundant WAN built with proven Cisco hardware. As it moves to the VSE platform, the company estimates that server utilization will improve by about 30% through centralization and virtualization of its hardware platform, leading to significant hardware cost savings over time.

Fat PCs Thin Clients % Improvement

Hardware & Software Costs €11,400 €10,000 14%

Maintenance Costs €32,000 €16,000 50%

Average Lifetime of Client 5 Years 8 Years 60%

Installation Time Per Client 4 Hours 1 Hour 75%

BENEFITS PER STORE OF USING THIN CLIENT VS. FAT PCS (30 CLIENT DEPLOYMENT)

STORE SECURITY COST DIFFERENCE WITH VSE

-€16,980

€17,012

€4,970

€14,836 €19,838

-€20,000

-€10,000

0

€10,000

€20,000

TotalCablingCamerasServersLabor & Software

- 4 -

RETAIL CASE STUDY

CISCO ROI CASE STUDY

Beyond better server utilization, the corporate IT team expects to improve application performance by adding load-balancing capabilities at the store level as well as at the data center. As a result, the company expects to reduce the amount of server maintenance required at stores from an average of 1,400 hours annually to only 400 hours. At the same time, it expects software maintenance to drop from 1,400 hours to only 600.

The company will garner further savings from deploying a Cisco-based inter-networking system that consolidates the Internet connections feeding music and video kiosks in the stores. Instead of maintaining six or more Internet connections to feed the kiosks, the VSE platform connects the kiosks to the Internet via a single, redundant inter-networking connection, saving service fees and reducing potential downtime.

Finally, the VSE platform will enable the retailer to virtualize its data storage operation by moving to an automated network attached storage (NAS) system. The virtualized storage approach will eliminate the current store-based tape backup process that is both time intensive and error prone, and should increase storage capacity company-wide by 70%. The move is also expected to reduce data backup-related service tickets from 1,800 per year to 100 and cut data storage-related service tickets from 1,400 per year to zero. In addition, by centralizing data storage, the company will strengthen its

disaster recovery and backup capabilities while boosting IT productivity with VSE’s network automation features.

Proving VSE’s Value

Starting in late 2007, the corporate technology innovation department developed a systematic approach designed to maximize acceptance of the virtual store environment solution. The team started with an initial concept, which it refined before moving to a detailed architecture plan. It partnered with technology leaders like Cisco to identify products best suited to create the VSE platform. Next, the team identified a pilot store where it could test the model and prove its capabilities, and in early 2008 it replaced the store’s IT infrastructure with the VSE platform.

The successful pilot gave the IT team ample evidence to build a compelling business case for corporate management as well

as store managers. Currently, the team plans to roll out the VSE solution to the next wave of new stores. Meanwhile, existing stores can migrate to the VSE system over time as their IT systems reach the end of their useful life. A key advantage of the VSE solution is its modularity, which will let existing stores switch to the full VSE solution at their own pace.

QUANTIFIED BUSINESS BENEFITS

According to a third-party cost analysis, the company is on track to capture considerable financial benefits from its VSE deployment. A five-year financial projection shows the company realizing a net profit of €6.8 million based on a total NPV investment of € 34.1 million and resulting NPV savings of €40.9 million. The estimated return on investment (ROI) over the five-year period is 20% with an internal rate of return (IRR) of 32%. The company is expected to recoup each store’s investment in only 11 months.

These estimates are based on a conservative deployment forecast that includes only new stores expected to open though 2012. Further benefits can be realized once existing store managers convert their store IT infrastructure to the VSE model.

CHAINWIDE IT PRODUCTIVITY ENHANCEMENTS (LEGACY VS. VSE)

0

1,000

2,000

3,000

4,000

Sales PCMaintenance

Server IncidentManagement

Software UpgradeAdministration

Server UpgradeAdministration

Data StorageTape Replacement

Data BackupService Tickets

1,800Tickets 1,400

Hours1,400Hours

1,400Hours

1,600Hours

3,200Hours

Legacy Solution

400Hours

600Hours

800Hours

100Hours

100Tickets

VSE Solution

“The Virtual Store Environment drives down store operating costs by reducing its IT footprint while also improving flexibility to support future business requirements.”

Senior Manager of Technical Innovation

- 5 -

RETAIL CASE STUDY

CISCO ROI CASE STUDY

KEY SUCCESS FACTORS

The company credits its successful move from concept to implementation to several factors:

■ Clear Vision and Goals. The company was firmly committed to its vision of technology innovation as a means to reduce capital and operation costs.

■ Alignment with Corporate Strategy. The company’s aggressive growth trajectory dovetailed with the need to control the IT costs of opening new stores.

■ Successful Pilot Program. Gaining upfront proof of the systems viability and cost savings helped the team gain traction for company-wide adoption.

■ Executive Sponsorship. Support from key business executives added momentum and authority to the project.

FIVE-YEAR NET PRESENT VALUE ANALYSIS

VSE FIVE-YEAR CASH FLOW ESTIMATES

-€26.5M

-€7.6M -€34.1M

€3.1M

€5.6M €6.8M

-€40M

-€30M

-€20M

-€10M

0

€10M

TotalNet Benefits

LaborProductivity

IT SavingsStore AssetSavings

TotalInvestment

IT InvestmentStore ITAssets

€32.2M

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

VSE Store IT Assets €93,406.79 €8,406,611.10 €7,472,543.20 €6,538,475.30 €7,005,509.25 €7,939,577.15

VSE Corporate Data Center IT Assets €26,540.00 €2,388,600.00 €2,123,200.00 €1,857,800.00 €1,990,500.00 €2,255,900.00

Total Investment €119,946.79 €10,795,211.10 €9,595,743.20 €8,396,275.30 €8,996,009.25 €10,195,477.15

VSE Store Asset Savings €113,269.25 €10,194,232.50 €9,061,540.00 €7,928,847.50 €8,495,193.75 €9,627,886.25

VSE Corporate IT Savings €10,750.00 €967,500.00 €860,000.00 €752,500.00 €806,250.00 €913,750.00

IT Labor Productivity Savings €11,000.00 €994,999.52 €1,332,357.14 €1,622,319.05 €2,027,285.71 €2,512,250.00

Total Benefits €135,019.25 €12,156,732.02 €11,253,897.14 €10,303,666.55 €11,328,729.46 €13,053,886.25

Summary

Total Costs €48,098,662.79

Total Benefits €58,231,930.68

Net Present Value (NPV) €6,822,584.74

ROI 20%

IRR 32%

Payback 11 months

- 6 -

RETAIL CASE STUDY

CISCO ROI CASE STUDY

ABOUT THIS CASE STUDY

Research and analysis for this study was conducted by Mainstay Partners LLC, an independent consulting firm that has performed over 300 studies for leading information technology providers including Cisco, Oracle, SAP, Microsoft, Dell, Lexmark, HP, BearingPoint, EMC, NetApp, EDS and Tidal Software. This case study was based on interviews with the retailer’s

executives, IT executives and IT planning personnel, review of project planning documents, and searches of industry literature. ROI calculations use industry standard assumptions regarding the time value of money. Information contained in the publication has been obtained from sources considered reliable, but is not warranted by Mainstay Partners LLC.

Copyright © 2009 Mainstay Partners, LLC.

- 7 -