Risks analysis
L.M. Apelgate et al. identified three important project dimensions which determine project implementation risk: project size, technology experience and project structure . Using these dimensions, the degree of risk associated with changing from a DOS to a new OS was evaluated in the following manner.
Based on a technical estimate for the upgrade decision, including cost of hardware, software, porting, and installation and training, this is expected to total over €21 million in investments (please refer to Appendix). Considering the geographical extent of Zara’s stores, this projected scope of investments is likely to have other potential tangible costs. These estimates, for example, do not include the cost of removing old POS terminals. Installation of new POS terminals may require changes to the current store cabling and may, therefore, entail store redecorations. In addition, the IT support required may be underestimated. Other risks that have not yet been accounted for relate to a further institutionalisation of the IT department. This will be discussed in further detail, however, for now it is worth mentioning that as IT systems become more complex, they might very well increase the administration costs of the internal IT assistance when there are flaws in the system. Lack of experience with the system can have detrimental effects. Zara has no guarantee that the conversion of the OS will run smoothly and that there will be no clashes with the current system. Extra costs might be incurred to facilitate the conversion. Training costs and outside technical support are usually underestimated in such global IT implementation projects. For a smooth implementation and avoidance of any downtime in the store as a result of switching, unforeseen issues need to be addressed in a swift and professional manner. To mitigate this risk, Zara would also need to re-train the existing IT staff and most probably hire external consultants to assist in this matter. Cash reserves would have to be held in case of unforeseen costs. Furthermore, (financial) planning and budgeting with a new OS would demand a more rigorous process which could well affect other areas in the company, besides IT. Other risks that would have to be dealt with are the related to the costs which are hardest to quantify, namely the intangible costs. Since personnel are going to be the end users of the new POS terminals, the degree and speed of their acceptance of the new system would also affect the level of the project risk. Due to unfamiliarity with the new system, which would probably require a change in routine, it would not be easy to accurately estimate the time and money required for all the stores to optimally make use of the new system, that is, until external help is no longer necessary.
Another factor impacting the degree of risk is structure of the project. The nature of the project enables Zara to fully and clearly define the outputs of the project. Notwithstanding the fact that project requires organizational changes and modifications to store employee work habits (as a result of automating information exchange and streamlining inventory control) the objectives of the project are unambiguous, therefore enabling a focused approach of all the parties involved. These are characteristics that typify a highly structured project. Nonetheless, Zara should not discard dynamics in the environment since they could upset the timing of the project or even determine the success of it. The project involves technology which is relatively modern to Zara. Peculiarities of each store (for instance, availability of instant IT support, learning abilities of staff), political and cultural environment in the country of operating unit, reliability of the vendor(s) for new POS terminals, etc., could make the project vulnerable to delays and task alterations, and also challenging to manage. Furthermore, although the IT investment relative to net income not substantial, it is equivalent to Zara’s annual IT expenditure, making it a significant decision. Given this and the fact that the project would have to implemented throughout all the 531 stores with a relatively new technology for the company, the size of the project is deemed to be large. However, realistic planning of the project, a thorough understanding of store individualities and tight monitoring of project’s progress, can eliminate potential frustrations and largely contribute to a successful implementation.
To summarize the above, the dimensions have been plotted on a matrix to assess the degree of implementation risk (please refer to figure 5). Zara’s project of upgrading the POS terminal operating system with the characteristics described above falls under a medium implementation risk category. For new system testing and training purposes Zara should take advantage of its 1,500-square-meter pilot store used to test store layout and design. This opportunity would help to understand possible complications with cabling and could serve as an excellent training facility for staff. More importantly, it would be wise for Zara to have both the old and the new systems functioning simultaneously by carrying out a staged roll out which will be discussed later. This would need to be done until the store is ready to serve its customers uninterruptedly with the new system to minimize the degree of risk. Finally, Zara must have a contingency plan in place for unforeseen circumstance that may affect the success of the project, including an exit plan if circumstances do not allow Zara to complete the project as planned.
Let us assume that all of the additional costs (tangible and intangible) that have been identified, other than the costs in figure 4, amount to an extra 20%. This would increases our initial estimates of expenditure to €25.6 million (assuming we choose Unix), which still constitutes only 0.64% of Zara’s revenues, on top of the usual IT costs of 0.5%, whereas the industry average was 2% of annual revenue . This is still well below the industry average. Although the investments needed to implement this project are considerable in absolute terms, it does not seem to be a make-or-break decision for Zara. The geographical extent of the project, however, would make it a significant project. All stores in an area at the last stage of the project would have to be upgraded quasi simultaneously, which could prove to be a difficult task for management.
While there are various factors that contribute to the risk of the project these can be mediated through careful management. Taking into consideration the intangible costs discussed earlier, it can be concluded that this project has a moderate risk to Zara. In terms of costs the risk is low, but in terms of project coordination, the risks are slightly higher. There is no guarantee that if the conversion run smoothly in one place, it will do so as well in another. The project is a sizable one which affects all employees’ work. A thorough top down policy would be required here, preceded by a pilot test in stores in different areas. The costs of the change are reasonable and if a back-up plan is produced, the identified risks could be contained. As the cost and benefit analysis suggests, the project would safeguard Zara against its competitors and enable substantial operational gains, through providing shop managers with valuable information. In addition, the pending threat from the POS terminal supplier would be mitigated. An upgrade of Zara’s OS is therefore recommended.