Company Saves Millions By Ending IT Outsourcing Deal

In the realm of IT outsourcing, disengaging from a multi-year, multi-million dollar agreement can be so difficult and costly for customers that it makes a Trump divorce seem like a tea party. But that's exactly what Kellwood did last year, despite the upheaval the company anticipated from ending its 13-year IT outsourcing arrangement with EDS.

The Chesterfield, Mo.-based apparel maker had originally signed a soup-to-nuts IT outsourcing agreement with EDS in 1996, which it renegotiated in 2002 and 2008. The most recent iteration of the deal, in which EDS would continue to manage the company's infrastructure and provide some services offshore, had an approximate value of $105 million and was supposed to save the company $2 million dollars in the first year and another $9 million over the remaining years.

The relationship between customer and vendor wasn't acrimonious, says Kellwood CIO Linda Kinder. In fact, the new outsourcing agreement was more flexible than previous contracts. It reorganized IT services around business processes instead of technology and even included a new process to foster collaborative innovation between Kellwood and EDS.

But Kellwood as a company was in dire straits. The clothing manufacturer, known for such brands as Baby Phat and Sag Harbor, had grown through acquisition over the years and standardization was lacking. At one point, Kellwood had nine separate IT systems.

In 2008, the company was purchased by Sun Capital Partners and taken private. The following year, facing a mountain of debt and possible bankruptcy, the company's COO made consolidation the number one priority. Everything was on the table including how IT services were sourced, though the thought of severing ties with EDS made Kellwood's CIO nervous. Specifically, Kinder worried that the transition from an outsourced to an in-house IT environment would cause serious disruptions to IT service levels and project deadlines if it went poorly.

"After over 13 years, the outsourcing provider was so entrenched in the day-to-day business of Kellwood, that the risk of a business impact, in a difficult economic market, was of concern," Kinder says.

Reconsidering Outsourcing

The IT group had considered insourcing before and rejected it. "We determined the disentanglement would be detrimental to Kellwood's business and would not bring significant value to merit the risk," recalls Kinder.

But by 2008, the business model had changed sufficiently that Kinder was forced to reconsider it, she says.

"We wanted to become more flexible in our services to improve responsiveness, but not give up the savings achieved with the last [outsourcing] contract," Kinder says. "We did not start by looking at insourcing, rather at restructuring our delivery mechanism."

Kinder and her team hired an external outsourcing consultant to spend six weeks assessing the state of IT services--where they were in relation to the market, what consolidation opportunities were available, and how ready the organization was to change. They then dedicated another eight weeks to analyze two potential scenarios: renegotiating with EDS based on Kellwood's consolidation plans and market pricing, or bringing it all back in-house after more than a decade.

Analysis this time around revealed that while EDS could continue to deliver cost savings in the new restructured IT environment, insourcing IT would not only streamline IT services and provide greater flexibility than outsourcing; it would also generate even more cost savings, says Kinder.

"Insourcing presented the optimum flexibility, as we would control the what and how of IT delivery, with the ability to change it as necessary without striking a new agreement," the CIO says. "It also provides the greatest savings in the shortest amount of time. It became the obvious answer."

Reaping Big Savings

Over four months, from October 2009 to January 2010, senior IT leaders designed a new IT organization, defined new standard IT processes, selected metrics for business and technical service levels, and developed a communication strategy for bringing existing Kellwood and EDS employees on board with the plan.

That last piece was perhaps most important, says Kinder. "People always want to know how this affects them personally," she says.

Ultimately, all 41 EDS professionals who were offered new roles within Kellwood's IT department accepted them. A dozen positions that existed under EDS were eliminated based on the staffing requirements of the new model. Kellwood also transferred some of the offshore application development and maintenance work that EDS was handling to Visionet, a Cranbury, N.J.-based provider of offshore IT services.

The now 60-plus person IT organization has since hired another ten professionals and has already saved $3.6 million, or about 17 percent of annual IT expenses, says Kinder. She adds that it's "three times the savings [we] originally expected and in half the time."

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