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Health and beauty retailer Boots is one of the most recognisable names on Britain's high streets. Faced with fierce competition in recent years from the supermarkets eating into its core toiletries and drugs market the company completed a £7bn merger with Alliance Unichem last year, which aims to slash operating costs by £100m annually. More recently the company has been the target of private equity groups circling with £10bn bids. silicon.com met with Boots' IT director Rob Fraser at the company's Nottingham headquarters to find out how technology is helping to transform the business and the customer experience…

Andy McCue: Boots is one of the UK's leading healthcare and beauty retailers, a familiar name on the high-street for all of us. How important is technology to a retail business like yours? What's beyond the cash tills?

Rob Fraser: Technology is enormously important to us, so we have to have that underlying infrastructure that allows us to take money, that allows us to get stock into the stores, but beyond that there's a huge amount we do with IT. So we've got a lot of applications around Advantage Card, which allows us to drive a lot of customer loyalty, we've got kiosks in stores that add in to that and we've got a lot of technology that enables our people to be much more effective. So it's enormously important. Retailers typically are not big spenders on IT, so the real challenge in IT is how you get all that capability and still keep it very cost effective.

Andy McCue: You mentioned loyalty cards there. Lots of retailers have loyalty cards - there's the Tesco one, the Nectar one. How is the Boots Advantage Card different, and what's the technology behind that?

Rob Fraser: I think ours, in terms of architecture, is the leading scheme in the country. So we have a chip-based card, which means our scheme is perfectly portable for customers. So you've got the card in your pocket, you've got the scheme with you wherever you go and that's unique among loyalty cards in the UK. Most of the work on mag [magnetic] stripe and quite a long mailing cycle. What that allows us to do is actually do some quite flexible and sophisticated things with all sorts of different customer groups. So we can identify is someone is over 60 and we want to give them a 10 per cent discount as part of our Health Club on health products, or if they are a young mum and we want to give them double points on nappies - all of that is done through the technology on the card.

Andy McCue: So what does Boots' IT infrastructure look like? What are your key platforms, the size of your operations, your budget etc?

Rob Fraser: We've done a large transformation over the last three or four years, so we've largely refreshed our 1980s, 1990s technology. We do still run, as most retailers do, very big mainframe operations because that's the workhorse, that's the backbone of everything we do from taking money to getting stock into the stores. But we've added onto that a new SAP-based system, which covers all our retail trading areas and finance and that's now running on large Unix machines. We also put a lot more IT-enablement into stores. We've got radio frequency connectivity in stores, handheld devices. We've got a new role-based portal in-store as well, so quite a mix of old and new technologies. I guess if there's a sort of general trend we are tending to move away from large, bespoke developments towards packages but with the odd smart web-based application in there as well. So the role-based portal is an in-house developed system that assembles, role by role, the right content for the person in the store to see.

Andy McCue: How does your level of IT spend compare to other retailers? How do you measure up against those?

Rob Fraser: I guess we're in a slightly unusual position just having come out of transformation. So we're slightly above retail sector average at the moment, and our ambition is to get back down to at or below retail sector average again, but with some leading capability. On our 'run' spend we would spend over £100m on IT every year. Our project budget, it varies depending on what we're looking to invest in each year but that would be somewhere between £20m and £40m of new capability each year.

Andy McCue: Rob, you mentioned radio frequency technology - the RFID chips we associate with retailers. How extensive is Boots' use of RFID and what are your future plans there? And what are the challenges and issues around using that particular technology?

Rob Fraser: When we talk about radio frequency its important to recognise there are two parts to that. So, the radio frequency networks that we put into our stores, into our larger stores, that allows our people to be mobile connected all the time. So we use a lot of that in our big shops, and we use that for stock operations and for management information. RFID I think is a fantastically interesting technology and its got some very interesting point applications at the moment. It works well where you have a high-value item and there's something that RFID can bring in terms of a lack of line of sight to the product. So, the application I am always hugely impressed by is the Marks & Spencer suit application. It's very difficult to count sizes of suits. Put RFID tags on them and with one wand you know what sizes of suits you've got in stock and you can re-order. And they are high-value items so it makes sense to put a tag on them. The challenge for us is, for a bottle of shampoo the economics still don't quite work. And also, barcode technology works very well for the needs of a bottle of shampoo, so that's a contactless identification mechanism for it. I think RFID will come but I think two things have to happen. One is we just need to sharpen up our thinking about what we can do with those insights and I think it will come first in the supply chain, so our ability just to roll stock into the back of the store and have it automatically received. And I think the price point will still need to shift. I still don't think we've got the right price point for mass deployment of RFID.

Andy McCue: Where are the opportunities for new technologies - both back-office and out in the high-street in the stores - and what are you doing with your online strategy?

Rob Fraser: Okay, the really exciting area for IT is where you can start creating part of the customer offer using the IT. So for us it is the exciting things we can do with Advantage Card new kiosks. Because when you're working at that end of the spectrum the return you get is fantastic. The next best return we get is where we invest in enabling our people in the shops to be more effective. So, be that through the portal which provides the focused management information or enabling operations to make them more effective. Actually we find the sort of central efficiency investments - so the ones you traditionally associate with IT - provide now the lowest value returns, so HR applications, finance applications actually provide quite a low return in terms of investment. In terms of where we are going with dot com, it is very exciting at the moment. We regularly get 30 or 40 per cent year-on-year weekly growth out of our dot com channel and that has been happening for the last five years so it's growing hugely for us. It's a fantastic opportunity to be the first health and beauty mass dot com retailer. And through our customer insight system we can also see those customers who shop with us online are also very big in-store shoppers. So we are seeing a multi-channel behaviour from our customers. What we're going to do is connect our online proposition much more tightly with our in-store proposition. So we already have capability in our shops at the tills to place Boots.com orders. So if you go into a small shop of Boots at Christmas and want to buy something from the Christmas gift guide the store can actually place that order for you through the till onto Boots.com and you can pay there and then in the store and that can then be delivered directly to your home. We'll be doing more and more of that over the coming years.

Andy McCue: But does technology still have the power to be really disruptive, to fundamentally change the course of a business, or has commoditisation merely relegated IT to the role of a support function?

Rob Fraser: I think it does. I think its all about the belief and perspective you bring to it. If I think of some of our fantastic investments that we've done over the last 20 to 25 years we were early into EPOS [electronic point of sale], we were early into sales-based forecast-based replenishment and that revolutionised Boots and Boots' supply chain, and in fact we still have a variant of that original application in use today. So that allows us to deal with our very aggressive promotional cycle in a very sophisticated way in terms of stock replenishment. As we move forward, things like the Advantage Card have transformed our customers' relationship with Boots. The Advantage Card has created a real emotional attachment for our customers to Boots and that's a real source of value to us. I think multi-channel will be the next big area for us. So I would say absolutely its about the smart use of technology.

Andy McCue: Now Boots completed a £7bn merger with Alliance Unichem last year, and the combined group is aiming for £100m a year cost savings by 2010/2011. What's the role IT in that in terms of integration and platforms, and what key decisions have you made already about that integration?

Rob Fraser: IT is central to integration, so through IT you can achieve a lot of the integration that then more naturally brings the rest of the merger integration. So, even in the early days the great news for us in IT was in the original work we did to look at bringing those two companies together, IT was absolutely at the table. Now what often happens in a merger is that IT get a briefing about five minutes before its announced to the Stock Exchange, so I worked with the folk at Alliance Unichem at the time for about nine months before merger on how we should think about bringing the two IT estates together, the work we would need to do in IT to support the rest of the merger integration. We're well on the way to the £100m. The first phase of synergy delivery was around better buying terms and about supply chain efficiencies so the real big prize came from us putting our buying power together and just buying smarter in the market. So IT had a lot of work to do but it wasn't only, or even, about trying to cut our IT costs. IT was about how do we support and enable those other work streams. So we had a lot of work to do in putting together the two sets of purchases together because of course we code them slightly differently - so how do we knit all that procurement volume together in a meaningful way so that we can then go and have a conversation with our suppliers about the much bigger volumes of business we're doing with them. Moving into the second phase of merger integration and that's where we'll think a lot more about how we'll bring the two IT estates together. The biggest overlap is between us and Alliance Pharmacy - we've got a chain of 1,400 shops, they've got a chain of 900 shops - and the real challenge there is how do we bring those into one common platform? We're all clear the end estate is a unified platform. They have some fantastic systems there and we have some fantastic systems here so the smart bit is in looking at each of those and choosing which is the right one. We've made some early decisions on those which we're now moving ahead with. We've still got some work to do to work out how do we really support that breadth of formats we now have in Boots from the high-end health and beauty department stores through to the local community chemists.

Andy McCue: Boots has outsourcing arrangements with three key partners - IBM, Xansa and India's Tata Consultancy Services (TCS). What's your future strategy around outsourcing in terms of what kinds of things can be done in-house and what kind of things you can outsource?

Rob Fraser: When we did the original outsourcing in 2002 it was absolutely a transformational outsourcing. The whole design of it was to allow us to move quickly on the catch-up work we needed to do around IT and that worked fantastically well for the three years of the transformation. So we mobilised programmes with both our partners we just could not have conceived of doing on our own. As we come out of that we have done and we have to do some work to shape that up for a more steady state environment. So over the last couple of years we've been working with both our partners to get the outsourcing fit for purpose in a steady state environment and we've also taken the opportunity, now that we understand offshore a lot better, to go offshore directly ourselves. So we actually brought in TCS over the last couple of years having understood the offshore market through IBM and Xansa. I think as we go forward we still get a lot of value out of outsourcing. We will want to take more direct control of the activities ourselves and now that we are in steady state we understand better what we need. And I think we will probably move to a second-generation multi-sourcing approach but I would still expect all our current partners to be absolutely part of that going forward.