The Gap 2006 Annual Report Download - page 27

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period, starting in 2007. Although we are on track with the replacement of our systems, there can be no
assurances that we will successfully launch these new systems as planned or that they will occur without supply
chain or other disruptions. Supply chain disruptions, if not anticipated and appropriately mitigated, could have a
material adverse effect on our operations.
We are implementing certain other changes to our IT systems that may disrupt operations.
In addition to modifying and replacing our systems related to merchandise planning and inventory
management, we continue to evaluate and implement upgrades to our information technology systems for point
of sales (cash registers), real estate, finance and human resources. Upgrades involve replacing legacy systems
with current and industry-accepted successor systems, making changes to legacy systems or cost-effectively
acquiring new systems with new functionality. We are aware of inherent risks associated with replacing these
systems, including accurately capturing data and system disruptions, and believe we are taking appropriate action
to mitigate the risks through testing, training and staging implementation as well as ensuring appropriate
commercial contracts with third-party vendors supplying such replacement technologies are in place. The launch
of these successor systems will take place in a phased approach over an approximate five to six year period that
began in 2002. In 2004 we completed installation of our new point of sales system in all of our domestic stores,
implemented our global financial systems, and replaced our lease management systems. In 2005 we introduced a
new online platform, completed implementation of our perpetual and financial inventory system and
implemented a new human resources/payroll system. In late fiscal 2005, we entered into an agreement with
International Business Machines Corporation (also see the following paragraph entitled “Our IT services
agreement with IBM could cause disruptions in our operations and an adverse effect on our financial results”).
Although we are on track with replacement of our systems, there can be no assurances that we will successfully
launch the remaining systems as planned or that they will occur without disruptions to operations. Information
technology system disruptions, if not anticipated and appropriately mitigated, could have a material adverse
effect on our operations.
Our IT services agreement with IBM could cause disruptions in our operations and an adverse effect
on our financial results.
In January 2006, we entered into a non-exclusive services agreement with International Business Machines
Corporation (“IBM”) under which IBM operates certain significant aspects of our information technology
infrastructure that historically were operated by us, including technology services supporting our mainframe,
server, network and data center, and store operations, as well as help desk, end user support, and some disaster
recovery services. We started transitioning these services to IBM in March 2006 and completed the transition in
late July 2006. In the period immediately following the completion of transition we experienced some delayed
response to normal technology operation issues. As a result, process and procedural changes were made, which
resulted in stable technology operations environment and no disruption during the peak holiday period, but there
is no guarantee that we will not experience additional disruptions in the future as a result of this transition. Under
this agreement, we expect to continue to enhance the capabilities of and level of service realized from our
technology infrastructure, while reducing the costs associated with these functions over time. However, our
ability to realize the expected benefits of this arrangement is subject to various risks, some of which are not
within our complete control. These risks include the risk that IBM will not be able to provide the anticipated
levels of service on an ongoing basis or as our business changes over time, and the risk that IBM will be unable
to maintain the security and integrity of the Company’s data under the terms of the agreement. In addition,
although there are certain pricing protections built into the services agreement, there is a risk that our costs under
this arrangement, including the amounts that we are obligated to pay IBM, will exceed the costs that we would
have incurred if we had not entered into this arrangement. We are unable to provide assurances that some or all
of these risks will not occur, in particular, because we do not have experience outsourcing these aspects of our
technology infrastructure. Failure to effectively mitigate these risks if they occur could have a material adverse
effect on our operations and financial results.
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