Rescuing a Failing Outsourcing Relationship

Situation - Deterioration of IT Outsourcing Relationship:

A global service provider based in California outsourced its mission critical global data centers, network infrastructure and operations to one of the largest IT services firms. However, after two years, the vendor was unable to meet the business needs of the company in terms of responsiveness to change and increasing service level demands of the business.

Furthermore, the economics of the relationship, which were very favorable for the customer at the outset of the outsourcing relationship, rapidly eroded. Having gained full control of the environment, the vendor insisted expensive change orders were necessary to be able to respond to business drivers. In addition, additional services outside the scope of the original agreement were priced by the vendor above market leaving the customer with little option but to overspend – further deteriorating the economic benefits and the overall relationship.

It was clear that due to the vendor’s lack of agility and prohibitive cost structure, other options needed to be investigated. 

Solution – Assessment and In-Sourcing:

Members of Capto were tasked by the company’s CEO to evaluate the situation and present solutions to restore the customer’s control over the situation, improve service levels, improve the economics and ensure IT operations were responsive to the business demands. First Capto sought to mend the current relationship. However, after working closely with the company and the vendor, it became clear to all parties that the vendor would be unable to provide the services required by the business with favorable economics and with the agility required by the business. Capto helped negotiate a mutual separation agreement that was beneficial to both parties.

Capto developed alternative solutions including transition to an alternate provider or going the in-sourcing route. Both options included budget, transition and on-going operational plans.

The company ended up selecting in-sourcing. Capto members led the effort which included establishing and staffing a network and systems management center in Canada, two data centers in the US, one in the UK, and call centers in Ireland and Canada which provided first line end user support. These operational elements were closely linked with application development in Ireland and Vietnam and testing services in India. As part of the in-sourcing transition, the customer was able to take advantage of technology improvements in servers, storage, telecommunications, systems management tools and lower personnel costs in Canada and Ireland to dramatically reduce operating costs compared to the prior outsourcing relationship.

The transition to an in-sourced operation was completed in six months and resulted in 28% annual savings in addition to dramatic improvements in service levels and flexibility.