Case Study IV-3
IT Infrastructure Outsourcing at Schaeffer (A): The Outsourcing Decision
The purpose of both Schaeffer Case A and Schaeffer Case B arc 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 round $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 centers 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.
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 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 specific to 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 RPF, 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 recommended to top management that the bid from ABC be accepted.
When this recommendation was circulated to Schaeffer’s business some managers were in favour 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 opposed. The case ends without a resolution to the controversy.
Questions for Discussion
1. ‘What benefits does Schaeffer hope to achieve from outsourcing its IT infrastructure; and what are the strategic management implications of this decision?
2. Describe the steps taken to develop the RFP and the role that an outside consultant played in this process.
3. What were the perceived disadvantages to outsourcing raised by its managers?
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?
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?
Note that each question carries a maximum mark of 20.
Notes on what the assignment content should be
At least 6000 words