Managing Information Technology

capability and expertise were also viewed as better than
what the company could provide on its own, because IT
infrastructure management was the vendor’s (ABC’s) core
competency.
But what worked for Reitzel did not necessarily
work for the other divisions. For example, Colbert was in
a mature industry that faced little growth, and its IT
management was focused on cost reduction and efficient
operations. Colbert had over half of its IT budget tied up
in outsourced IT infrastructure costs, which could have
been reduced if it hadn’t been bound by the corporate out-
sourcing contract:

Colbert and Reitzel are two different companies. At

Colbert, we are very focused on cost: we know what

the costs are, and we’re trying to improve those

costs. Reitzel is on the uptake: they don’t care as

much about the cost. They value the ABC services

because they’re growing.... We’re trying to figure

out how to cut the costs of this table in half. But they

need three more tables.

—Rusty Evans

The approaches to maintaining the ERP systems at
these two companies were also different. A year into the
outsourcing agreement, Reitzel set up a separate contract
with ABC for offshore workers in India to maintain their
ERP applications, which had been customized to fit
Reitzel’s specific business needs.
Colbert’s ERP maintenance needs were simpler be-
cause they had done a “vanilla” ERP implementation, and
they continued to maintain their ERP applications in-house:

We find we can be a lot more nimble and responsive

with our own team when it comes to supporting our

ERP applications. Since we don’t change code, we

just keep it up and running. When we have a problem,

the people are right there. Reitzel actually changed the

code in their ERP applications, and they have a whole

lot more internal and ABC people maintaining it.

—Rusty Evans

Divestiture of Kinzer

The first actual contractual change with ABC was due to
the divestiture of Kinzer about one year into the contract.
Operating in the financial services industry, Kinzer was the
smallest of the three divisions in both sales and IT expen-
ditures, and barely fit the corporate profile. Even though
the divestiture made good business sense, it created an
additional layer of complexity for Schaeffer with respect to

its IT activities. The issue was: Who would support

Kinzer’s IT from now on?

Schaeffer’s managers had anticipated during the con-

tract negotiation phase that such a spin-off might occur. As

per the RRC condition in the contract, Schaeffer could scale

down IT operations up to 40 percent without incurring any

penalty. This simple provision helped them avoid penalty

costs with ABC during the divestiture process for Kinzer:

What we negotiated with ABC is, when we sign the

deal we’re going to count everything—PCs, servers,

network switches, voice mail boxes—and these go

into the contract as a baseline. Then we’ll have a unit

rate where every PC costs X dollars to support, every

server costs Y; everything has a unit cost. So if we go

buy a company, and this adds 500 desktops and 50

servers, no contract renegotiation is necessary. We

just get an ARC at the unit cost that we agreed to. We

also negotiated a 40% floor on the RRCs—so we

could take volume down 40% without penalty.

—Alan Harding

Given Kinzer’s geographic proximity to Reitzel, it

was decided that Kinzer would buy its IT services from

Schaeffer, which, in effect, meant that there was no impact

on the outsourcing revenues earned by ABC:

The TSA [Transition Services Agreement]

acknowledges that Schaeffer will deliver services

to Kinzer through the ABC contract, and ABC

agrees in an amendment to the contract to support

Kinzer in that way.

—Alan Harding

Setting Up a PMO Structure

By late 2004, Schaeffer decided that they needed a better

approach to managing a large IT infrastructure outsourc-

ing arrangement as well as Reitzel’s new offshore contract

for ERP maintenance. In December 2004, ABC’s consult-

ing arm conducted a study to provide Schaeffer with

recommendations on how to improve their management

of the outsourcing relationship. They made two major

recommendations.

The first recommendation was to establish a gover-

nance model with an IT lead (a director of outsourcing)

directly accountable for managing the relationship, and for

overseeing the day-to-day activities of the contract:

Initially, we struggled with managing the ABC con-

tract, as we were inexperienced. Our governance

Case Study IV-4 • IT Infrastructure Outsourcing at Schaeffer (B): Managing the Contract 637