Schaeffer Corporation: Outsourcing IT Infrastructure For Aggressive Growth

About Schaeffer Corporation

Discuss about the Outsourcing at Schaeffer for Applications and Implications.

Schaeffer Corporation was founded by Fredrick Schaeffer in 1877 and is the parent company of three division namely Reitzel, Colbert, and Kinzer. As of 2002 the company had annual sales of about $2billion.The Colbert and Reitzel divisions manufacture farm machines and do the distribution while the third division would provide financial services such as agribusiness loans, estates, and equipment loans. Each division was run as a different business unit out of a small town called Vilonia which is their headquarter. Coberly and Kinzer had operations in the United stated while Reitzel had operations in10 countries in Europe and South America.

Outsourcing was brought about because the company felt that it need aggressive growth yet their IT Infrastructure and employees could not take them to that great height. Reitzel had grown tremendously through its new products and acquisitions and continued to expand globally thereby contributing to two-thirds of the whole Schaeffer Corporation and that’s 80% of its total growth. The other reason was to centralize all its IT systems

Outsourcing is an agreement where a company allows another company to take control of an activity or department in its company. It involves contracting out business processes like payroll processing, hiring, and firing, call center, manufacturing etc. The term outsourcing came from the American Glossary ‘outside resourcing’. It may involve transferring employees and assets from one company to another depending on the contract between the two companies (Elizabeth, 2003). Outsourcing is meant to bring a certain type of relief to a company either because of risks, expertise or to make the company focus on other processes or activities that are core to the company.

Most outsourcing decisions are brought about by the fact that a company would like to save costs and also get better services (Patrick, 2005). In this case, the cost would have been the same ($200Million) had the company chose to manage it internally. The primary goal was to give Schaeffer greater IT flexibility to be able to achieve the aggressive growth goals set by the board. Another reason was to retain systems developing in-house in order to provide agility. Allan Harding who is the vice at Schaeffer said they wanted the capability to execute on the business strategy with aggressiveness through acquisition and they did not think that the IT organization would support the strategy by itself.

The Need for Outsourcing

Schaefer will definitely shift its focus from IT infrastructures as another company will be focusing on its roles and making sure the strategies put in place are fulfilled. With this in mind, Colbert and Kinzer will be more focused on to and thus better chances of growth as they are deemed mature and slow to growth.

Gartner was the name of the consulting company handling the Request for proposals (RFP) for developing, creating and documenting internal processes and creating metrics. This consulting company’s major work was to solicit bids and announce that a specific company can place bids for a particular project to completion as they had funds (Lacity, Hirschheim & Willcocks, 1994). The process of bidding starts with a draft or a request for proposal. Bidders review the solicitation and submit opinions and views for making them better. After the opinions and views have been put in place, then the final request for proposal is then issued. Bidders submit their proposals (Ian 2012). The customer who is Schaeffer selects a small group of bidders and enters the negotiating pricing and other details. The contract is then awarded to the best bidder with a fair price and can also meet the customer's needs and provide the best solution. Meetings were held, proposals drawn and finally, the. Two companies signed the contract between Schaeffer and ABC as the outsourcer. There was a thorough dig up of information on the infrastructure that includes locks, barrels, and stock. They agreed that the Schaeffer would have a few employees managing ABC but everything else would be managed by ABC (Halvey & Melby, 2007)

The role of Gartner was to make sure the needs of Schaeffer were met as they needed a favorable contract that will be flexible as it’s been growing in related and unrelated acquisitions. Schaffer had been growing and they knew in the future they anticipated restructuring and if such was to occur no costs would be incurred. .This meant that they would make sure that the aggressive goals of Reitzel one of the divisions were considered.Alan Harding says they structured the deal with a concept called Additional Resource Charges (ARCs) and Reduced Resource Charges (RRCs) as they certainly expected to buy a few companies and sell one. The other requirement in the contract was to make sure that the data center would be run out in Vilonia, a town where the divisions headquartered. Also agreed that the transferred employees (half of Schaeffer IT infrastructure employee) would manage ABC. Another aspect of the agreement was the Service Level Agreements (SLAs) were created in detail. The majority of the SLA focused on technology measures.

Understanding Outsourcing

Schaeffer is a multidivisional firm and therefore posed its own problems when it came to outsourcing decision. The management believed that Reitzel was the only division that would benefit from outsourcing a service that was already running efficiently in-house. Reitzel was supposed to pursue aggressive series of acquisitions and global expansion if the outsourcing was taken up. .Reitzel, on the other hand, kept growing, Colbert and Kinzer were divisions that were mature and faced very little growth with its IT management focusing on cost reduction and efficient operation. With half its IT budget put in outsourced IT costs which would be money used to improve other things (Schniederjans, Schniederjans & Schniederjans, 2015).

The divestiture is when a firm disposes of part of all of its business unit through sale or exchange. This mostly happens when management feels that the business unit is not part of a core competency. Kinzer went through divestiture and thus brought about major challenges as to whom will run its IT department after the outsourcing (Hirschheim & Lacity, 2000).

I think outsourcing IT infrastructure for Reitzel division only was the best alternative. It’s important to note that the IT infrastructure that is the data centers, computer operations, and systems development specialist and even the help desk staff for the three divisions was consolidated in the late 1990s.This decision saved the company saved a lot of money.Further, every department ERP department all the other data was centralized in a shared unit.

Selective outsourcing is the best outsourcing and this is based on the belief that total outsourcing is a poor strategy for a company because it doesn’t capitalize on the inherent cast advantages posed by the internal IT departments.Further total outsourcing fails to take advantage of the cost advantages brought by other vendors for a particular IT function.If they focused on Reitzel the only concerns were going to be narrowed to only that specific company and thus efficiency as no other divisions are being looked into during the contract agreements, thus flexibility would be achieved(Hirschheim & Lacity, 2000).

Burkholder,2006 states that the major reason for outsourcing is to improve the overall performance of a company. Kirk, 2010 says that lower operation and labor cost are among the primary reasons why a company would outsource to another outside company. Schaeffer was not reducing any of its costs but instead was using the same amount of money they would spend if they did the job themselves ( $200 Million). Further, Reitzel had to come up with a new agreement with ABC as their ERP systems were different. ABC had employees in India and therefore needed ERP applications which would be customized to fit Reitzel’s specific business needs (Halvey & Melby, 2007). Colbert’s, on the other hand, had a simpler ERP system and maintained their ERP applications in-house. Rusty Evans IT Director at Colbert division commented on how they are more nimble and responsive to their own team when it came to supporting ERP applications. The employees at Colbert’s were all in the same place, unlike Reitzel and ABC. Kinzer was the other division at Schaeffer and it was much smaller than the other two divisions Colbert and Reitzel, in both sales and IT expenditures. This outsourcing barely fitted its corporate profile. Divestiture had a lot of advantages but on the other hand, created a lot of complexities for Schaeffer regarding its It activities as no knew who would take it up.

Why Schaeffer Chose Outsourcing

Companies choose to outsource in order to continue to focus on other core business activities while having the other company focus on the time-consuming processes. It also enables a company to get more knowledge base and have access to worldwide capabilities especially if it has divisions in different countries. Outsourcing should free up resources that can be put up to other uses. Unlike Schaeffer half of the IT infrastructure went to ABC, these employees would have been put into other departments and make aggressive growth there ("Top 10 Reasons to Outsource - Flatworld Solutions", 2018). Suppose a company is stranded with an internal resource crunch they would outsource for them to get expertise that’s not available within the company. Schaeffer had this kind of expertise that were working on the overall goals and objectives of Reitzel and Schaeffer as a whole. Outsourcing can be taken up to mitigate risks that are being foreseen in the future. Lastly, outsourcing can help with expansion and gain access to new market areas, by taking the service to the new areas.

Both Kinzer and Colbert did not need this as they were not growing rapidly as Reitzel was.The fact that they used up all the funds allocated to them for IT Infrastructure development to outsourcing for Reitzel was a challenge.They need It development in other departments, this did not affect them positively as they did not have the cash to grow themselves (Lacity, Hirschheim & Willcocks, 1994)

Managing a large IT infrastructure outsourcing arrangement is quite challenging and Schaeffer was experiencing this and therefore decided to look for a better approach for themselves and Reitzel's new offshore contract for ERP maintenance.In December 2014 ABC Consulting arm came up with a study to improve the management of their outsourcing relationship.Several recommendations were established;

• A director for outsourcing, an IT lead who would be the governance model and would be overseeing all the day to day activities of the contract.Although inexperienced at first it eventually brought better and clearer relationship.
• The second recommendation was to come up with a Project Mangement Office (PMO) with an IT lead and several enterprise architects.The major reason for this was to approve all IT Investments and coordinating in-house systems development initiatives with the IT infrastructure at ABC.
• Last recommendation was to implement a portfolio review board for large projects.

The reason why so many challenges still came up even after the Schaeffer adhering to the recommendations was because the European computer center for Reitzel was being run in Vilonia data center on the ERP as the domestic operations.The difference of the physical location or geography of the same systems could have elevated the spiraling costs.Also, the several management costs as none of their country managers would talk to one another due to multi-culture (Schniederjans, Schniederjans & Schniederjans, 2015).Another reason for the disadvantages was that Schaeffer employees showed frustrations about the efficiency and effectiveness of the services offered by ABC Corporation. The desktop support problems would take too long before being addressed.If an employee would have an issue a ticket had to be raised through a support system, problem tickets were then issued the prioritized depending on the urgency and later assigned to the ABC technician. This was not the case at Schaeffer as they would call the technician directly and be assisted at first hand.This contributed to a lot of performance gaps with the user expectations especially for the employees at the help desk.Though Schaeffer renegotiated ABC Corporation regarding this it took them a while before the agreements were made.

Benefits and Drawbacks of Outsourcing

Schniederjans, Schniederjans & Schniederjans, 2015 thought that if they outsourced the journey would be smoother towards the aggressive growth strategies they had for Reitzel.In fact,  Having had the company’s IT infrastructure in-house would have been better as its easier to monitor and keep tabs on all the parameters pertaining that department  (Lacity, Hirschheim & Willcocks, 1994). Expenses through data centers consolidations, resource optimization, chargeback implementation and other expenses can be reduced.With economies of scales in mind, its very hard to determine if outsourcing will properly work thus may be questioned.The larger the firm the higher the costs to maintain the IT infrastructure.Not forgetting the changes and upgrading of software and licenses diminish with time and that costs a fee.Labor expertise is really a myth as at the end of the day clients will get the service and support they need from the same staff that transitioned the vendor.

Last but not least, outsourcing hinders how an organization will respond to a changing business environment such as the European countries as it constrains any flexibility on the delivery of IT.

Conclusion

Organizations should outsource for one reason only, to minimize its cost. Though this may sound simple, well, it’s not. The main focus should have been financial such cuts should include costs, improving costs controls and even restructuring the IT department. The other focus should have been on the business – facilitating mergers and acquisitions, returning to core competence and devolutionalise the organization and its. Better service levels, procedures for growth, penalties for nonperformance and other provisions should be agreed upon before the agreement to balance the power.

References

Burkholder, N. (2006). Outsourcing: The Definitive View, Applications, and Implications. New Jersey: John Wiley & Sons, inc.

Elizabeth, S.(2003)  SUCCSSFUL IT OUTSOURCING : from choosing a provider to managing the Project.London: Springer Verlog.

Hirschheim, R., & Lacity, M. (2000). The myths and realities of information technology insourcing. Communications Of The ACM, 43(2), 99-107.

https://dx.doi.org/10.1145/328236.328112

Halvey, J., & Melby, B. (2007). Business process outsourcing. Chichester: Wiley. 

Ian, T.(2012).The Risks of IT Outsourcing. Oxford: Elsevier Butterworth – Heinemann.

Kirk, S. (2010). IT outsourcing. Hershey, PA: Business Science Reference.

Lacity, M., Hirschheim, R., & Willcocks, L. (1994). REALIZING OUTSOURCING

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Partrick, L.(2005).Global Outsourcing : Key Issues & Trends.Singapore: B & J Enterprise Pte Limited. 

Roman, M. (2010). Global Services Outsourcing.Cambridge: Cambridge University Press.                       

Schniederjans, M., Schniederjans, A., & Schniederjans, D. (2015). Outsourcing and insourcing in an international context. London: Routledge.

Top 10 Reasons to Outsource - Flatworld Solutions. (2018). Flatworldsolutions.com. Retrieved 28 April 2018, from https://www.flatworldsolutions.com/articles/top-ten-reasons-to- outsource.php