Critical Thinking: Consultant Case Study

The purpose of both Schaeffer Case A and Schaeffer Case B are to illustrate some of the potential advantages and disadvantages of IS outsourcing in general and outsourcing IT infrastructure activities (data center, network operations, help desk and desktop support) in particular. Case A focuses on the decision-making process for a company that previously had performed these IS activities with in-house personnel. It also illustrates complexities involved in making such a decision in a company that has business units that have different growth goals.

Schaeffer Corporation is a diversified manufacturer with three autonomous business divisions and annual sales of around $2 billion. Headquartered in a small Midwestern town, Schaeffer as a whole has had slow but steady growth over the years. However, in 2001 its board of directors set very ambitious growth goals.

The Reitzel division currently contributes about 80% of Schaeffer’s total profits. This division has the best potential for significant growth, and corporate executive management has set “stretch” goals that will require this division to expand its product lines, expand its international operations, and acquire other companies. The division currently has operations in many European countries and a smaller presence in South America.

Previously each division had its own IT organization, but a few years ago IT was centralized into a “shared services” IT unit for the entire corporation. The IT VP’s for each division remained in key liaison positions, but now reported to the corporate CIO as well as their business managers. In 2002 the data center had 300 servers and a staff of 100—including desktop support, help desk people, and voice and data communications. Seventy other staff members work in a centralized system development group. The same ERP system was used across the company, but each division had installed their own “instance” of the package. The business units generally regarded the IT organization as providing good levels of service in the past—although WAN management and help desk support were less satisfactory than other types of support. More importantly, some executives are concerned that the explosive growth anticipated by the Reitzel division in the future cannot be supported by the current IT group.

P.A. Moreno, Reitzel’s vice president of human resources, has proposed that Schaeffer outsource its IT resources, with the exception of systems development. A. Harding, the vice president of IT, established an internal task force that included Moreno to investigate the feasibility of the proposal. Consultants from Gartner Consulting Group were brought in to help the firm with the decision process.

Case Study IV-3—IT Infrastructure Outsourcing at Schaeffer (A)

The task force spent 12 months determining in detail what IT assets the company had, the services being provided, and the unit costs to provide those services. This documentation was then used to prepare a 200-page request for proposal (RFP) to solicit proposals from two Tier 1 service providers that Gartner thought could supply the international support that would be needed. The RFP specified that the vendors would need to continue to operate the company’s data center out of Vilonia.

When the bids from the two vendors came back in, ABC Corporation was the lowest bidder ($220 million). However, the projected cost of outsourcing over seven years was $20 million more than the projected cost of keeping IT in-house, which would be unacceptable to top management. By removing some optional items that had been included in the RFP, the task force was able to negotiate the price down to where the bid was no more than the projected cost of staying in-house. The task force then recommended to top management that the bid from ABC be accepted.

When this recommendation was circulated to Schaeffer’s business divisions, some managers were in favor of it. From the quotations provided in the case it can be inferred that Schaeffer’s corporate managers and Reitzel management supported outsourcing, but key managers from the other two divisions were opposed. The case ends without a resolution to the controversy.

1. What benefits does Schaeffer hope to achieve from outsourcing its IT infrastructure?

The major perceived benefits were vastly improved flexibility, improved management, and superior technical capabilities. The proponents of outsourcing felt strongly that their in-house IT organization simply could not support Reitzel’s strategy of expanding into new product lines, acquiring companies, and expanding into new parts of the world.

The proponents originally hoped to save money, but that didn’t pan out.

2. Describe the steps taken to develop the RFP and the role that an outside consultant played in this process.

It is difficult to prepare an RFP for infrastructure services because it requires knowing in detail what your IS organization does for different units and describing these specific activities clearly in the RFP. You must also define and specify performance measures for everything you want to contract out. What the outsourcing company will do will be described in the proposed contract, and anything not included will either not be done or will cost extra.

The services provided are priced in terms of cost per unit of activity, so you must determine the current (and perhaps future) level of activity for everything, multiply each by its price, and add it up to determine what you will be paying. Then you have to figure out what you are currently paying (or expecting to pay) for performing these services in-house to enable comparison with.

Schaeffer took about a year to collect the service data and a few more months to prepare the RFP. The bidders were given two months to respond to the RFP with their cost bids, and then the negotiations with ABC Corporation began.

Gartner worked with the firm to develop a process for collecting service and unit cost data and then advised them as to what group of outsourcing firms had the international capabilities needed to respond to the RFP.

3. What were the perceived disadvantages to outsourcing raised by its managers?

There were a number of concerns that were expressed:

1) Concerns about losing control over a critical resource such as IT, and what would result if the relationship with ABC Corporation did not work out.

2) Concerns about what would happen to Schaeffer’s current IT people and the impact that this might have on morale throughout the company.

3) Concerns that the costs might be significantly understated.

4) Concerns that all the benefits from outsourcing would go to the Reitzel division, which was the only division with an international scope. This might mean that Reitzel would get good service from ABC, but the other divisions might be a lower priority for the vendor. The other divisions were also concerned that they would bear a disproportionate share of the cost.

5) Concerns that the help desk would be in a remote location and thus less responsive to the needs of Schaeffer personnel.

4. Some managers have suggested a third alternative: outsource the IT infrastructure for the Reitzel division only. Which alternative do you think Schaeffer should choose, and why?

It is pretty clear that the flexibility, management and technical expertise, and worldwide scope of ABC Corporation will provide far better IT capabilities for Reitzel’s needs than the in-house IT organization. Assuming that Schaeffer management intends to pursue its aggressive growth strategy, it appears that it should accept ABC’s bid.

The suggestion that Schaeffer Corporation outsource Reitzel’s IT and leave the other divisions alone might be examined further, but it is not likely to prove to be a viable alternative due to the loss of economies of scale.

5. Why do you think so many disadvantages were raised after the task force recommendation had been developed? How could this controversy have been avoided?

Those who favored outsourcing were corporate managers or Reitzel managers. They believed that the ambitious growth goals could not be achieved without drastically improved IT capabilities that could best be provided through outsourcing, and if success were not achieved it would reflect on their units.