Managing Information Technology

Case Study IV-4 • IT Infrastructure Outsourcing at Schaeffer (B): Managing the Contract 635

instances of the ERP package to accommodate their own
business needs. The result of this consolidation was a sin-
gle data center for all three divisions, with centralized
computer and telecommunications operations staff in a
“shared services” unit.
Even though significant cost savings were achieved
through this IT consolidation, Schaeffer still felt the need to
improve its IT services. In particular, there was a growing
need to provide IT support for Schaeffer’s aggressive growth
strategy for its Reitzel division. As the internal IT capability
was deemed insufficient, Schaeffer began the process to
choose an outsourcer for its IT infrastructure in early 2002.

The Outsourcing Contract

We wanted the capability to execute on the business

strategy, which was aggressive growth through

acquisition. And we didn’t think our IT organization

could support that strategy by ourselves.

—Alan Harding, vice president of IT at Schaeffer

Unlike most companies choosing to outsource IT infra-
structure, cost savings from outsourcing was the least of
Schaeffer’s priorities. In fact, the outsourcing deal would
cost Schaeffer as much as it had cost to manage it inter-
nally (about $200 million). Rather, the primary goal was to
give Schaeffer greater IT flexibility to achieve the aggres-
sive growth goals set by its board. The “selective outsourc-
ing” strategy adopted by Schaeffer was in line with this
overall strategy. While outsourcing the infrastructure com-
ponents promoted the global growth strategy, retaining
systems development in-house would provide the agility to
respond to rapid business changes.
With help from Gartner consulting group, and after a
thorough process of documenting internal processes and
creating metrics for service levels, an RFP was created for
the IT infrastructure activities. Proposals from two large
vendor firms were considered, and after several months of
negotiations, the contract was signed with ABC
Corporation in June 2003:

We basically decided to look at the entire infrastruc-

ture—lock, stock, and barrel. We’d keep a few peo-

ple back to manage the outsourcer [ABC]. But for

the most part, everything was going to ABC.

—Alan Harding

The outsourcing contract with ABC included data
center operations for over 300 servers, help desk support
for all computer users in the three divisions, local and wide
area network support for voice and data communications,

and technical support for over 6,000 PCs at domestic loca-

tions. Separate agreements were signed for each of the 10

European countries where Reitzel operated:

There were ten country agreements. ABC proposed,

and our legal department agreed, that we set up

country agreements with ABC. Each country had

different laws and you want to make sure that all

those different local requirements are contemplated.

So we have a country agreement for every place we

do business.

—Alan Harding

Schaeffer also needed a contract that would be favor-

able to their aggressive growth goals for Reitzel. This

meant that the contract needed to be structured in a flexible

enough way to allow Schaeffer to add newly acquired

companies and/or spin off divisions under the existing out-

sourcing contract without penalties or additional charges.

Schaeffer had been growing for years through related and

unrelated acquisitions, and had also spun off several

divisions in the prior decade. It was therefore anticipated

that both types of restructuring would need to be accom-

modated in the contract:

We structured the deal with a concept called

Additional Resource Charges (ARCs—called

“Arcs”) and Reduced Resource Charges (RRCs—

called “Rooks”). We certainly expected to buy a

bunch of companies, but we might sell one.

—Alan Harding

Other stipulations in the contract were that the data

center would continue to be run out of Vilonia, the small

Midwestern town where all of the divisions were head-

quartered. In addition, it was agreed that about half of

Schaeffer’s current IT infrastructure employees would be

transferred to ABC. The transferred employees would

maintain the same seniority at ABC as they had at

Schaeffer at the time of the transition. These employees

were also protected from any potential layoffs by ABC for

the first year.

A critical aspect of the contract negotiations was the

creation of detailed Service Level Agreements (SLAs) to

which the vendor would be held accountable. The majority

of the SLAs were focused on technology measures. For

example, SLAs were used to establish the acceptable server

and networking uptimes, help desk response times, and

resolution times for other operational problems. Severity

levels for different types of problems were established, and