Company Saves Millions By Ending IT Outsourcing Deal
Kellwood's multi-million dollar IT outsourcing deal with EDS served it well for many years. But after significant organizational changes and intense investigation of the 13-year deal, it became clear that insourcing was the best way for the apparel maker to save money moving forward. Here's an inside look at Kellwood's decision-making--and dramatic cost savings.
Thu, February 18, 2010
CIO — 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.
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."