J-TRADING: Full Circle Outsourcing Case Study

Teaching Case

J-TRADING: full circle outsourcing Valerie Jaiswal1, Natalia Levina2

1Regeneron Pharmaceutical, Tarrytown, NY, USA; 2Stern School of Business, New York University, New York, USA

Correspondence: N Levina, Stern School of Business, IOMS Department, New York University, 44 West 4th Street, KMEC 8-78, NY 10012, New York, USA. Tel: þ 1-212-998-0850 ; Fax: þ 1-212-995-4228

Abstract J-TRADING is a US-based arm of a Japanese keiretsu that is focused on commodity trading between the East and North America counting about 350 employees in the US. It has experienced problems with its information technology (IT) infrastructure and help-desk functions. IT employees were not motivated to work on these rather mundane tasks leading to quality and cost issues. J-TRADING CIO decided to solve the problem by outsourcing both functions. The case relays J-TRADING’s outsourcing journey through its ups and downs discussing the process of vendor evaluation and selection, task transition, relationship management, and business outcomes. The case provides full financial details necessary for financial analysis and asks students to evaluate the sourcing decision itself as well as vendor selection and governance processes. It also asks students to elaborate on alternative sourcing approaches such as offshoring and cloud-based solutions. Journal of Information Technology Teaching Cases (2012) 2, 61–70. doi:10.1057/jittc.2012.11; published online 13 November 2012 Keywords: cost benefit analysis; Data center; Help desk; outsourcing; vendor selection

Part A

J ohn Smith, Director of Information Technology (IT), looked out of the window of his corner office on the 43rd floor of the New York City high rise. It was 8:30 PM and

most people on Madison Avenue were just tourists strolling and gazing at the store window displays. He had to have his presentation for the Japanese Management ready by 9:00 AM tomorrow and he was still struggling with answers to the numerous questions that were running through his mind.

A year ago he had presented to the same management group the benefits of outsourcing. He had been very excited about his new strategic direction for the IT department. There had been unanimous approval for his proposed plan. After that it had been a tumultuous year of highs and lows. Now he had to justify his new proposal, especially those parts that were the complete opposite from his prior proposed plan.

JICO – a keiretsu Zaibatsus were large capitalist enterprises of Japan devel- oped between Meiji Restoration (1868) and World War II, similar to cartels or trusts but usually organized around a single family. They operated companies in all-important areas of economic and industrial activity and owned banks for mobilizing capital. The war in the Pacific ended on 2nd September 1945, with the signing of the peace treaty on board the USS Missouri in Tokyo Bay. The American

occupation of Japan lasted until 1952. During this occupa- tion, the Anti-monopoly Law was passed whereby the zaibatsu’s were to be divided into new smaller companies. By the mid-1950s, the zaibatsu’s had reconstituted them- selves into ‘groups’ with many of the characteristics of their pre-war predecessors. These semiformal groupings are today called keiretsus.

JICO is one such keiretsu. It has an extensive business background, experience in acquiring foreign raw materials and in importing technology, association with foreign banks and investors, and comprehensive manufacturing skills. During the post-war period, JICO grew 15–17% annually with its price/earnings ratio reaching 14.1.

During the latter part of 1989 inflation in Japan began to rise. The consumer price index was increasing at more than 3% per annum.1 This was the first sign of an economic slowdown. The next couple of years saw a 76% plunge in the Japanese stock market, real estate crashes, soaring bank- ruptcies, acute recession, and a growing unemployed popula- tion. JICO suffered huge losses in Japan and began focusing attention on its wholly owned subsidiary in the United States, J-TRADING. J-TRADING became JICO’s flagship company. It tried to fuel growth by encouraging J-TRADING to expand and invest more in US markets. In 2000 J-TRADING reported a record $40 million profit after tax.

The dot com crash, followed by 9/11/2001, severely affected J-TRADING’s revenues. In 2002, J-TRADING

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began trimming down its work force and cutting down expenses. New capital investments greater than $350,000 required approval from JICO. The business and adminis- trative divisions were forced to cut their annual budgets by at least 10%. J-TRADING’s IT department was greatly affected by this. Being a cost center left it with few options. Personnel expense was the only way to reduce expenses by 10%. Table 1 shows J-TRADING’s IT budget in 2001.

J-TRADING

The company J-TRADING had five trading divisions each involved in trading commodities between the East and North America. In addition it had a portfolio of 50 subsidiaries and affiliates spread out all over North America. These subsidiaries and affiliates operated independently and were only responsible for rolling up their financial numbers to J-TRADING at the end of each quarter.

J-TRADING had 350 employees. Fifty percent of the employees were Japanese, who were originally employees of JICO, but now on a 2–5-year international assignment in the United States. At the end of their assignment they would either be rotated back to JICO or to another of its subsidiaries anywhere in the world. This helped them develop a broad range of experience and skills. The rotational staff primarily mingled with their counterparts at J-TRADING or with other rotational employees at other keiretsus in the United States. The common keiretsu culture tended to be bonding a force not only in their private and personal lives but also in their business dealings and relationships. They were two very distinct cultures at J-TRADING – the Japanese culture and the local culture.

The IT department Sharad Patel and Amy White were the managers of the Infrastructure Section and the Application Section, respec- tively. Each section consisted of five team members. Figure 1 shows the organizational structure of IT and each member’s job responsibilities. The Application Section maintained and configured the various business applica- tions. In addition they also worked closely with the business divisions gathering requirements for existing application enhancements and new application development. The Infrastructure Section was responsible for maintaining J-TRADING’s LAN/WAN infrastructure and supporting the PC Helpdesk. In order to support the rotational staff, at any point in time at least one person manning the PC Helpdesk had to be bilingual, speaking Japanese and English. The LAN consisted of 40 servers comprising the email server, file servers, print servers and the servers running the various business applications. All the servers were housed in the Datacenter located in J-TRADING’s corporate headquarters.

All the members of the IT department were well qualified: They were degree holders with an average of 5–7 years of industry experience. They were passionate about IT and were always looking to learn new technology. Members of the Infrastructure Section often disliked working on the PC Helpdesk. They considered it a mundane and thankless job. Most people called the PC Helpdesk only when they had a problem and almost always needed immediate assistance. John Smith con- stantly received complaints from dissatisfied customers about the performance of the PC Helpdesk. Sometimes people came up to him at the water fountain or coffee machine and complained about their bad experience with the PC Helpdesk. A recent survey conducted by the Corporate Communications Department (Table 2) re- vealed that the average experience of J-TRADING’s employees with the PC Helpdesk was unsatisfactory. This was a big problem for John Smith. He had been thinking of ways to improve the quality of the PC Helpdesk. The IT department charged each user $180/PC/month (through the company’s internal allocation system) to support and maintain a PC. Since users were charged for services it was John Smith’s responsibility to provide quality services. At the same time Sharad was struggling with employee retention in his section. The Infrastructure Section often got so tied up with day-to-day maintenance and operation

Table 1 J-TRADING’s IT Budget in 2001 (in thousands)

2001

Administrative expenses Salaries $1452 Benefits $160 Travel $40 Employee relocation $5 Office maintenance $17 Insurance $32 Book/Subscription $3 Stationery/Supply $26 Postage $4 Business entertainment $9 Training and education $73

Total administrative expenses $1821

Operational expenses

Datacenter and IT infrastructure Office rent $287 Telephone $163 Computer maintenance $438 Computer Parts $28

Total Datacenter and IT infrastructure $916

Consultants $100 Depreciation $867

Total operational expenses $1883

Total expenses $3704

Income Charge per PC (400 PCs) pre-outsourcing @ $180/PC post-outsourcing @ $200/PC

Total income ($864)

Total JIT operating result $2840

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that they almost never had the time to spend on infrastructure upgrade/enhancement projects. This de- motivated them and resulted in a high turnover. This also affected J-TRADING’s infrastructure causing it to be

several versions behind the latest releases and in dire need of upgrades. The recent expense reduction mandate made things worse for the Infrastructure Section and the IT department as a whole.

(Part B follows)

Table 2 Summary of the Results of the PC Helpdesk Survey – 2001

Please rate the following Unsatisfactory Satisfactory Excellent

Our response time 10 100 15 Time to fix problem 100 20 5 Knowledge of technician 10 90 25 Overall experience 10 85 30

Please lets us know Yes No Did your problem get resolved? 100 25 Did your problem get resolved in a timely manner? 10 115 Was the technician respectful of your time constraints/ 100 25 Did your problem need a follow-up call after being fixed? 50 75

Director John Smith

Web Applications Specialist

Applications Engineer

Accounting Application Specialist

Production Engineer

IT Services Administrator

APPLICATION SECTION

Amy White Applications Manager

Infrastructure Specialist/PC Helpdesk

Network Specialist/PC Helpdesk

IT Operations Administrator/PC Helpdesk

Network Administrator/PC Helpdesk

LAN/WAN Coordinator/PC Helpdesk

INFRASTRUCTURE SECTION

Sharad Patel Infrastructure Manager

Figure 1 Organizational structure of IT and each members’ job responsibilities.

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Part B

IT outsourcing

J-TRADING’s first experience with IT outsourcing J-TRADING had only one outsourced application, the Corporate Intranet. In 2000 hoping to foster a cohesive culture, senior management at J-TRADING decided to introduce a Corporate Intranet. This was highly essential because of the 50% spilt between rotational and national staff. Management made the decision that all news articles and items on the Intranet would be in English. This would force the rotational staff to communicate in English. As opposed to building the Intranet from scratch, a package called Quik Intra was purchased from a company called Web Communicator. This package provided core function- ality like news and announcements, job boards, employee directory, bulletin boards, forms bin etc. Its design and layout could be customized and configured. The Applica- tion Section worked closely with the Intranet task force team (consisting of a member from each business and administrative division in J-TRADING) to come up with a suitable and appealing design. The Quik Intra package was then configured to incorporate the design. The Human Resources department was responsible for content creation and upload. For a monthly fee of $3150, Web Commu- nicator hosted the Intranet providing maintenance and data backups. They could also be contracted for system enhancements or functional upgrades that were based on requirements from the business divisions. The contract was structured on a retainer basis where J-TRADING purchased a block of hours upfront for $10,000 and could use the hours during the course of a year. Table 3 shows the initial and recurring costs for the Intranet. The outsourced Corporate Intranet was a success. All parties were pleased and satisfied; management, business and administrative divisional employees, and IT employees.

Future outsourcing strategy John Smith felt that IT outsourcing might be the key solution to his dilemma. While he decided not to involve consultants specifically in his decision, he did ask Michael Cunningham (of Ask IT professional IT Advisory Services Company) for his insight on IT outsourcing. John Smith received an email from Michael Cunningham saying:

The term outsourcing refers to letting a third-party run the IT operation. Selective outsourcing has become a dominant model. Many IT organizations will outsource the entire infrastructure or send applications offshore but others outsource specific functions such as storage, helpdesk or security. IT outsourcing is significantly less mature than other outsourcing sectors, (e.g. manufactur- ing), lacking well-defined products, consistent market definitions, and standard pricing. Effective outsourcing depends on the current capabilities of the IT organization (e.g. an effective IT shop might save nothing by outsourc- ing). IT outsourcing decisions must consider internal skills and competencies and target a specific objective (e.g. save money, overcome obstacles, improve quality, increase time to market). Attempts to simultaneously achieve these objectives will result in severe disappointment.

Given the success of the Corporate Intranet, John Smith began to design his outsourcing strategy with the aim to steer the IT department towards lower costs, improved quality, and a challenging professional life. Working together with Amy White and Sharad Patel, John decided that the IT department would:

1. move the Datacenter to a third-party location. The third party would maintain the servers and be responsible for day-to-day backup;

2. outsource the PC Helpdesk to a third party, thereby improving quality and increasing the internal allocation charge to $200/PC/month.

In doing so the Infrastructure Section could be down- sized from five members to two members who would be responsible for maintaining the infrastructure (upgrading to the latest service pack releases, virus control programs, etc.) as well as for special projects like software upgrades, new technology research etc. Table 4 shows the positions that would be eliminated with the downsizing. Dedicated PC Helpdesk people could possibly improve the quality of service. The IT department now had to find appropriate outsourcing vendors and select based on cost, quality of service, and experience.

Move the Datacenter The scope of the move involved relocating 40 servers to a hardened, disaster proof Datacenter. The outsourced vendor would be responsible for doing nightly tape backups on each server and performing basic ping services on the servers (checking to see if the servers were alive). If any of the servers were found to be inoperative, a predefined list of J-TRADING Infrastructure Section employees would be paged. Application maintenance would continue to be under the responsibility of Amy’s team. From five

Table 3 Initial and Recurring Costs for the Intranet

Capital costs

Hardware Linux Servers (Located at host-$5000� 2+tax) $10,862.50

Software Quik Intra Basic Modules $123,012.50 Quik Intra Customized Modules (Workflow; File Room)

$20,000.00

Staff Activity Report Application $5000.00

Annual maintenance expense SSL Certificate (https) $1500.00 Quik Intra License maintenance $10,000.00 Quik Intra Software maintenance (retainer) $10,000.00

Annual hosting costs Fully redundant hosting ($3150/mo) $37,989.00 CD backup ($216.67/mo) $2600.00

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prospective vendors, the search was narrowed down to two, DR Solutions and Yoshiko Hosting. Table 5 shows the cost- benefit analysis between the two vendors and compares them to current costs. Table 6 shows details on the pro- posed service levels.

DR solutions They were leaders in the IT Datacenter hosting industry with revenue of $2.7 billion. They provided a wide range of hosting services. The minimum service would involve just renting a ‘live’ cage with redundant power supply and network connectivity. The services could get as sophisti- cated as application maintenance. A number of the Fortune 500 companies had their Datacenters at DR Solutions. After 9/11/2001 DR Solutions had seen its business grow by 30%. J-TRADING was a small company not counting the size of JICO and not many people had heard of it. The DR Solutions sales representative assigned to the J-TRADING account was responsible for small- to medium-sized companies. This did not give J-TRADING the recognition and special service it was used to from Japanese vendors. However, the DR Solutions sales team was very professional and it soon became evident why they were the leaders in the market. They had a standard basic template with cost and services that they provided. On the basis of your require- ments you could add and remove services. They had worked with so many different types of clients across varied industries that it was easy for them to recommend what services would be required and what you could do without. At each meeting DR Solutions was always able to answer outstanding questions or connect J-TRADING to the appropriate channel to have the questions answered.

Yoshiko hosting This company was the wholly owned subsidiary of Sumimato, another Japanese keiretsu. Sumimato was the second largest keiretsu in Japan. JICO and Sumimato had close business relations; in fact over the past 2 years these two keiretsus had together launched 10 joint ventures. The Japanese executives at these two keiretsus socialized and played golf. In the United States, their rotational staff

socialized and played golf. Therefore it was only natural that Yoshiko Hosting came forward with a proposal to host J-TRADING’s Datacenter.

In 2000 Yoshiko was established in the United States to primarily host the web sites of small Japanese B-to-C companies. Over the next 2 years it had grown by the acquisition of Verify, a US-based Datacenter hosting company with $30 million in revenues. Yoshiko seemed confident that its business relationship with J-TRADING was enough to get the business. Their proposal was a rough draft. They almost always sent only Japanese employees for meetings to discuss the proposal. Whenever questions came up at the meetings that could not be answered, Verify employees were connected via teleconference. It was very evident during these phone conversations that there were huge communication gaps between Verify and Yoshiko. Even though it was 6 months since the acquisition, the two companies did not appear to have been merged together into one cohesive company. Also, back in Japan, Sumimato was putting a lot of pressure on JICO to give the business to Yoshiko. A few times they even threatened to severe business relationships going forward.

The decision The proposed costs of both companies were nearly the same. DR Solutions was a reputed firm in the Datacenter outsourcing industry. Yoshiko was closely tied to JICO and choosing it would further cement the relationship. John Smith and his team did a number of presentations to senior management at J-TRADING. At these presentations they went through the pros and cons of each vendor. The IT recommendation to J-TRADING was to go with DR Solutions. Quality and past performance is critical in the IT service business. At the quarterly board meeting in Japan, J-TRADING’s Chief Administrative Officer presented the two proposed plans and IT’s recommendation. John Smith was highly respected in the company so management at both, J-TRADING and JICO, were willing to accept his recommendation. Ultimately John Smith himself would be responsible for dealing with the outsourced vendor and providing quality service to the company. J-TRADING

Table 4 Positions eliminated with downsizing

Salaries Salary+Bonus Benefits Total

Director 200 22 222 Applications manager 135 15 150 Infrastructure manager 128 14 142 Accounting application specialist 115 13 128 Applications engineer 102 11 113 Web applications 105 12 117 Production engineer 100 11 111 Network specialist/PC Helpdesk 100 11 111 Infrastructure specialist/PC Helpdeska 99 11 110 Network administrator/PC Helpdeska 99 11 110 LAN/WAN coordinator/PC Helpdeska 99 11 110 IT operations 85 9 94 IT services administrator 85 9 94

1452 160 1612

aTo be outsourced.

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signed a 3-year contract with DR Solutions. Every year DR Solutions would be permitted to increase the cost by up to a maximum of 8%. Renewal notice was required 90 days prior to the 3-year expiration date.

Outsource the PC Helpdesk To support employees on the east coast and west coast, J-TRADING’s PC Helpdesk required coverage from 8 AM to

8 PM, Monday through Friday. The long hours enabled it to support its west coast employees. On average the PC Helpdesk received 500 calls per month. Sixty percent of the calls were quick fixes related to printing problems, email access problems, network share drive mapping problems etc. Twenty percent required more troubleshooting and often took time to fix. The remaining 20% were application- specific and pertained to the business applications at J-TRADING. Due to the bilingual requirement, finding

Table 5 Cost-benefit analysis between DR Solutions and Yoshiko Hosting

Current DR Solutions Yoshiko Hosting

Costs

One time Project management $80,000.00 $43,000.00 Move/Migration Cabinets/Shelves $0.00 $2600.00 Remote monitoring $0.00 $5000.00 Leased lines $0.00 $4951.00 LAN hardware $0.00 $15,000.00 DS3 Router $0.00 $3300.00 Travel to Datacenter $1000.00 $12,000.00

Total NA $81,000.00 $85,851.00

Monthly recurring (not including personnel costs) Datacenter

Rent – Space/Cabinets $10,000.00 $6720.00 Maintenance $800.00 $15,860.00 NA AC/Power $1263.33 $3798.00

Disaster recovery $11,000.00 NA NA

Management Monitoring $2200.00 $960.00 Remote hands NA $0.00 $960.00 Tape backup $1000.00

Network Current internet service provider $2100.00 $0.00 $0.00 Datacenter – Internet NA $7610.00 $664.00 Datacenter -–- NYC NA $8852.00 Cross-connects $345.00 Rental router NA $1068.00

TOTAL $28,363.33 $23,470.00 $23,367.00

Services

Cabinets 8 13 Tape backup support In-house 62 h/month 10 h/month Remote hands (24� 7) NA 40 h/month 6 h/month Internet 1.5 Mbps 1–5 Mbps 2 Mbps Network connectivity NA Private point to point Private point to point

Table 6 Service levels proposed by DR Solutions and Yoshiko Hosting

Internet (%) Packet delivery (%) Latency (ms) Notification (min)

DR Solutions 99.99 99 15 15 Yoshiko Hosting 100 99 85 30

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vendors to outsource the PC Helpdesk was challenging. A search in the industry came up with only two vendors, CMPI and Outsourcing Solutions.

CMPI CMPI was a small company providing PC Helpdesk services to 20 companies in New York City. Its office housed a call center of highly skilled IT technicians. CMPI’s business model involved staffing the PC Helpdesk in the ratio of one PC Helpdesk technician per 8 calls per day. The on-site staff was qualified as Level 1 or Level 2. Calls would be resolved within 4ëh. If they were not resolved within 4ëh they were escalated to the CMPI call center. All calls would be tracked in a database. Monthly reports would be generated and handed over to John Smith and Sharad Patel. Figure 2 shows sample reports and charts. CMPI charged a fixed cost per month. Any hours worked outside the range of 8:00 AM

– 8:00 PM were to be billed at $125/hour. Only 45% of the calls could be escalated without penalty. CMPI was not willing to give an upper limit on the amount of time it would take to resolve an escalated call. Table 7 shows details on the services proposed.

Outsourcing Solutions Outsourcing Solutions was a leading IT service provider company. It boasted a client roster of Fortune 500 companies in the United States. PC Helpdesk service was just one of the services it provided among various others like IT software and hardware consultants, programmer analysts etc. Outsourcing Solutions proposed a business model to provide J-TRADING with four PC Helpdesk technicians (two Level 1, one Level 2, and one Level 3). One of the Level 1s would be a Japanese national fluent in Japanese and English. The Level 1 technicians would also be

Figure 2 Sample reports and charts from CMPI’s call tracking system.

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responsible to track calls, monitor open calls, and prepare monthly performance statistics. The Level 3 technician would manage the team. The technicians came with excellent resumes and a very good list of references. Since J-TRADING did not have any formal call tracking system prior to the outsourcing initiative, Outsourcing Solutions had no point of reference to base service levels and was not willing to put down service levels in the contract for the first year. They said that the resumes and client references were an attestation of their level of service and experience. Table 8 shows details on the services proposed by Outsourcing Solutions.

The decision There was a huge cost difference between CMPI and Outsourcing Solutions. The risk with CMPI was that J-TRADING was its biggest customer. Would it be able to handle the volume of calls that J-TRADING received per day? The reference companies that CMPI provided had good things to say about the company; however, none were handling as many calls as J-TRADING received per day. John Smith thought it was worth taking a risk since cutting costs was the key driver of the outsourcing initiative. He went ahead and signed a 1-year contract with CMPI. With 90 days of notice, the contract could be extended for another term after the expiration of the 1-year contract. Table 9 shows J-TRADING’s proposed IT budget post- outsourcing.

Table 7 Service proposed by CMPI

Current situation

Call volume 500 calls/month (25 calls/day) Call breakup 60% quick fixes

20% Level 2 calls 20% application-related

Proposed service

No of Level 1 staff @ $60/h 2 No of Level 2 staff @ $78/h 1

Annual charge (@ 2000 h/staff) $396,000 Hours of operation 8 AM – 8 PM (EST) Outside hours of operation $125/h (in 1/2 h incrementals) On-site calls resolved within 4 h Calls escalated to downtown call center 45% Fee for escalation beyond 45% $200/h Contract term 1 year Termination Would require 90 days notice

Table 8 Service proposed by outsourcing solutions

Two Level 1 staff @ $90/h $180 One Level 2 staff @ $110/h $110 One Level 3 staff @ $125/h $125

Total hourly cost $415

Table 9 J-TRADING’s proposed IT budget post-outsourcing

Post-outsourcing

Administrative expenses Salaries $1155 Benefits $127 Travel $31 Employee relocation $4 Office maintenance $13 Insurance $25 Book/Subscription $2 Stationery/Supply $20 Postage $3 Business entertainment $7 Training and education $56

Total administrative expenses $1443

Operational expenses Datacenter and IT infrastructure Office rent Telephone Computer maintenance Computer parts

Total Datacenter and IT infrastructure $857

Consultants $396 Depreciation $867

Total operational expenses $2120

Total expenses $3563

Income Charge per PC (400 PCs) Pre-outsourcing @ $180/PC Post-outsourcing @ $200/PC

Total income ($960)

Total J-TRADING operating result $2603

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Moving the Datacenter At the initial planning meetings the idea of doing the move in two phases was discussed. Phase one would be a pilot: move test servers and set up a pilot network. On the basis of the lessons learned from the pilot, the production servers would be moved in phase two. However, only two applications had test servers. Procuring and creating test servers for other applications would require a significant investment of time and resources. John Smith could not afford to devote the time and resources to do the move in two phases. Hence the idea was shelved and it was decided to move the Datacenter in one phase.

The Datacenter was moved to DR Solutions during the Labor Day weekend of 2003. DR Solutions deployed a team of five specialists for the move, a move specialist, a Windows hardware specialist, a SUN hardware specialist, a network technician, and an overall project manager. A detailed plan was laid out outlining each step of the move. The move specialist was responsible for coordinating the logistics of the move; how many special conditioned trucks would be needed, how would the servers be loaded/stacked into the truck, how would they be unloaded on arrival, how would the data be backed up prior to the move etc. The Windows and SUN specialists were responsible for shutting down each server, unplugging them, and packing them as per standard Windows and SUN operating procedures. The network technician was responsible to connect the servers and bring up the network at DR Solutions. J-TRADING had also put together a team with members from the Infra- structure and Application Sections to work closely with the DR Solutions team.

The move went flawlessly and as per schedule. All data were backed to tapes, the servers were shut down, unplugged, packed, and loaded onto the trucks. They arrived at DR Solutions on time and were unloaded. The unpacking and plugging in of the servers was uneventful. Only when the power was turned on things began running haywire. The network would not come up. Servers could not be pinged from outside DR Solutions. At this point a lot of issues began to arise, the firewall had to be reconfigured, some routers had to be reconfigured. The whole process of bringing up the network took the entire weekend. By Monday night, tempers were rising and the atmosphere was tense. Employees would come in on Tuesday to dead PCs. John Smith was called. He called the head of DR Solutions. After a lot of debating, DR Solutions flew in a network specialist from Los Angeles. With his help and guidance the network was finally brought up at 12:00 PM EST on Tuesday. This cost J-TRADING four productive business hours. The loss of revenue for these 4ëh was around $1 million, especially since it was the Tuesday after a long weekend. J-TRADING’s management was very upset. John Smith apologized profusely but this could not bring back lost revenue. The rough uphill start of the Datacenter move took a few months to stabilize. After 60 days of initial growing pains things began to fall into place and stabilized.

Outsourcing the PC Helpdesk Manuals were written for different troubleshooting proce- dures. CMPI employees were trained on the PC Helpdesk

operation for 3 months after which time three J-TRADING employees were let go. For the first 2 weeks the CMPI staff shadowed the Infrastructure members when they went about fixing PCs. The Level 2 CMPI employee was res- ponsible for managing the two Level 1 employees. In the first few weeks’ just six calls were escalated to the PC Helpdesk. It was too early to receive any feedback but so far things were moving along rather smoothly.

The Infrastructure Section members now had more time to focus on long-term projects. They all seemed challenged and motivated. The first sign of problems began showing up after 6 months. John Smith was at the coffee machine getting a cup of coffee when suddenly an angered J-TRADING employee, Bob, walked up to him and started complaining. ‘Why did you get a bunch of consultants to run our PC Helpdesk? They do not care about us and have no concern whether our problems are fixed long-term.’ It took John Smith a while to calm him down and get the entire story. Bob’s PC used to hang up each time he ran a big Excel macro. He called the PC Helpdesk. They first told him it was a memory problem and recommended he purchase 128 MB of additional memory. This did not fix the problem. Next they suggested that they would upgrade Microsoft Office from version 97 to version 2000 as well as install the latest Microsoft Office service pack. This did not fix the problem. They then asked Bob to send his PC over to the PC Helpdesk for a few hours so they could research the macro. The PC was brought back within 3 h. The PC Helpdesk said they had optimized the Excel macro. This time the macro ran quickly but the results seemed off. On further investigation, Bob found that while optimizing his macro they had accidentally deleted some steps in the macro! Bob’s predecessor had created this macro several years ago. It was crucial to running financial consolidation at month-end. ‘And now I have to re-write the damn macro within two days!’ Bob ended in a disgusted and unhappy tone.

Occurrence of problems Bob’s complain slowly became a common occurrence. It had taken 6 months for the problems to surface. The PC Helpdesk did not seem to have the appropriate trouble- shooting skills. They did quick fixes without finding the root cause of the problem. These acted like band-aids and hence took so long to surface. The CMPI employees did not seem to care or empathize with J-TRADING employees. They had no understanding at all of the Japanese protocol of behavior. If a senior Japanese executive called while they were fixing another problem, they put the executive on hold! There was no sense of accountability. It was basically a ‘who cares’ attitude.

John Smith was very disappointed. He immediately called the senior partner at CMPI and requested that they have an urgent meeting. The partner and John Smith went through the service level agreements. CMPI was not in violation of any agreement clauses. In the spirit of good faith and to foster a long-term relationship it was agreed that two of the CMPI technicians would be replaced. This time John Smith and Sharad did face-to-face interviews with the prospec- tive on-site technicians. Once they came on board there was a 2-week learning period. Within 4 weeks the same problems began to appear. Frustrations with the PC

J-TRADING V Jaiswal and N Levina 69

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Helpdesk were a frequent topic of discussion among J-TRADING employees.

Remedial action The Datacenter Outsourcing could now be deemed a success. But the PC Helpdesk Outsourcing was proving to be more difficult than anticipated. Word of the PC Helpdesk performance had spread. Employees were complaining that by saving IT cost management was hampering productivity. It was 8 months since the signing of the PC Helpdesk contract with CMPI. John Smith had to make a decision soon. Should he sign-up for another year? Should he re-negotiate and amend the contract to incorporate better service level agreements? If so what kinds of service level should be incorporated? Should he bring the PC Helpdesk back in- house? If so how would they manage resource allocation for the Infrastructure Section? He needed to present his strategy to the Japanese Management.

Note

1 Comeback by Roy Smith, Chapter 8; p. 238.

About the authors Dr. Natalia Levina is an associate professor at the Stern School of Business, New York University. Her research

interests focus on understanding how people produce and span organizational, professional, cultural, and other bound- aries in the process of developing and using technology. Her research has been published in ISR, MIS Quarterly, Academy of Management Journal, Journal of MIS, Decision Sciences, and Organization Science among others. Dr. Levina serves on the editorial boards of ISR and Organization Science. She was awarded fellowships from Alfred P. Sloan Industry Studies Foundation and IBM for studying global sourcing. She also serves on the board of the Academy of Management’s OCIS division and a vice-chair of AIS Special Interest Group on Grounded Theory Method. She received her Ph.D. from Massachusetts Institute of Technology, and Bachelor’s and Master’s degrees from Boston University.

Valerie Jaiswal is the Associate Director, Financial Planning & Analysis at Regeneron Pharmaceuticals, Inc., where she is responsible for leading the development of the annual budget and rolling forecasts for the Company. Prior to joining Regeneron in 2008, Ms. Jaiswal was in the FP&A group at a reinsurance company, a position she held since 2005. Ms. Jaiswal has an MBA in Finance from Stern School of Business, New York University and a Master’s of Science from Miami University, OH.

J-TRADING V Jaiswal and N Levina 70

For the exclusive use of F. Brown, 2019.

This document is authorized for use only by Fresa Brown in SCM 824-Strategic Procurement - Fall 2019 taught by EVELYN THOMCHICK, The Pennsylvania State University from Aug 2019 to Feb 2020.