Ending an Outsourcing Early

John Crary, the CIO and vice president of IT for Lear, an automotive parts manufacturer that’s number 131 on the Fortune 500 list, uses outsourcing to save money and free up his IT budget for other purposes. He holds contracts with three different IT outsourcing vendors for a range of activities, including Lear’s help desk, basic data processing and high-end ERP support. Crary is very practical about his outsourcing deals, judging the success of each relationship primarily by the savings he accrues.

So when his arrangement with Hewlett-Packard turned out to be costing Lear more money than it was saving, Crary wanted out. But the 1999 contract contained no clause for exiting the deal early. Crary needed a plan for cutting his outsourcing costs without raising his legal fees.

Shotgun Wedding

Lear is the fifth-largest company in the intensely competitive auto parts industry. The company recorded $14.4 billion in revenue in 2002. It employs 115,000 people at 283 facilities in 33 countries. Lear grew to its current size through acquisitions. Starting in the late 1980s, Lear went on a massive shopping spree, making 17 major purchases. One of its last acquisitions was the automotive division of conglomerate United Technologies Corp. (UTC) for $2.3 billion in 1999.

As part of the UTC deal, Crary inherited a contract with a large Hewlett-Packard data center in Atlanta. Negotiations for the purchase of UT Automotive were handled by Lear’s mergers and acquisitions team, with minimal input from Crary. Although the arrangement with HP was presented to Crary as a contractual obligation, he could have pushed for a change of terms had he chosen to do so. But at the time, the outsourcing deal seemed in his interest, and he had many other, more pressing integration issues to deal with. “I had a lot of fish to fry at first, and nothing was broken, so I left it there,” he says.

The data center had formerly handled multiple UTC functions?from HR to finance to ERP?across the entire enterprise. After the acquisition, HP transferred the data of the Lear subsidiary into a separate set of servers that handled only Lear data. At a stroke of the pen, Crary became an HP customer for plant ERP, corporate finance and EDI to its auto manufacturing customers. (Lear was already a big HP customer for PCs, mainframe processors, network monitoring, information security monitoring and other services, all of which amounted to several million dollars in sales each year.)

The annual cost to Lear of the inherited contract was high?about $3 million a year. The HP data center was a high-end, highly secure facility, built underground with air locks and multiple generators. “It’s built into the side of the mountain. In a nuclear war, we’d all be dead, but that thing would still be running,” Crary says.

He soon decided that was more security than his data needed?certainly more than he wanted to pay for. What’s more, because most Lear plants are in the Midwest, and the data center was in Atlanta, the data transfer costs were excessively high?$12,000 a month.

Marriage on the Rocks

Nine months after the UTC acquisition, Crary had dealt with the transition details sufficiently so that he was ready to address the high costs of the HP deal. He had his IT managers begin informal, information-gathering discussions with HP representatives about how to bring the cost down. The IT managers reported back to him that there was no way for the Atlanta data center to change the configuration of the servers that handled Lear’s data to a lower-cost setup. “We were one of their smallest customers, even at a few million [dollars],” Crary says. The Atlanta data center was built to process huge amounts of data in high-end applications; there were no economies of scale for small customers. HP representatives raised the option of transferring Lear’s data to a smaller data center in Toronto. But when communications costs were figured in, the cost was not far off from that of the Atlanta center.

Crary realized that he had a third alternative: Bring the data center in-house.

A building in Dearborn, Mich., acquired in the UT Automotive deal, contained a relatively empty data center room. It had false floors that would facilitate rewiring and proper ventilation. With a new generator and a few partitions, it would suit Lear’s needs perfectly.

What’s more, Lear’s IT staffers had the technical capability to run a data center because of the Unix-based work they already did with two SAP and PeopleSoft ERP systems. “I had the facilities in place and the expertise on board,” Crary says. No new staff would be needed. He calculated that the money he would save by bringing the data center in-house would come to $900,000 a year. Included in that figure were the fees to HP, the telecommunications costs and added costs such as the new generator. The payback would come in only 22 days (the first-month savings from not paying HP).

Amicable Split

All this sounded good to Crary, but there was that little matter of the inherited contract. Crary asked Lear’s general counsel to review it to see if there was any wiggle room. The general counsel said no way. There was no provision for an early exit. Lear was obligated to pay the full annual fee of $3 million for the two years remaining on the contract.

Crary then pulled together a brainstorming team, consisting of all his IT staff that had had any dealings with HP, including Lear’s data center director, people who purchased HP PCs and those who worked with HP services. The legal department was not invited. The purpose of this team was to try to predict how HP would react to Lear’s request to end the contract early.

“Me and my team played the what-if game for a few days and agonized over how to get HP to do what we wanted it to do. We went through about 10 what-if scenarios,” Crary recalls. These ranged from moving to HP’s Toronto data center to just sucking it up and finishing out the contract. To Crary’s frustration, the brainstorming team members were all over the map in predicting reactions from HP. Each person was working from the narrow viewpoint of his personal experience with a particular HP division.

Eventually, Crary says, “it got to the point where I said, ’Why don’t I just ask them.’” He reasoned that the direct approach?explaining why he wanted out of the contract?had the highest likelihood of working. But before he picked up the phone, he strategized.

First, there was the matter of whom to call. With the parochialism of the internal brainstorming team still fresh in his mind, Crary decided he should go up the decision ladder at HP. He wanted someone who held a big portfolio and therefore a broad view. Reasoning that Lear was a good-sized account for HP in the auto industry (all those PCs), Crary sought a manager with P&L responsibility for the entire auto industry. A manager whose P&L ended with the Atlanta data center, or with Lear, might not see the big picture. After asking around, Crary’s direct reports soon learned that a regional vice president for solutions, based in Chicago, fit the bill.

Crary wanted to deal with this vice president in person. “I knew it was going to be very touchy. By doing it face-to-face, I’d be able to read the situation and react very quickly,” he says. Rather than flying to Chicago, however, Crary asked to meet the regional VP at the Atlanta data center. “I wanted to get in front of the [HP] people who had done the work,” Crary says. “I didn’t want them to get defensive, to think they’d ’lost’ Lear. I wanted to get across the point that it wasn’t a matter of their work. It was excellent service. It just wasn’t for me.”

Crary played it straight at the meeting, simply explaining that he was losing money and wanted out of the contract early. The response from HP’s regional vice president was gratifying. “That makes all the sense in the world,” he told Crary. “We don’t want to lose money, but we don’t want an unhappy customer.” Crary happily paid HP the $125,000 that it cost to move Lear’s data out, and the outsourcing deal was ended.

Four months later, Lear’s new Dearborn data center was up and running. Crary had to spend another $200,000 in preparation costs (most of it for the generator), which left him with $575,000 in savings for the year.

Lear’s Lessons

Lear IT staffers were delighted with the change. “It gave them control. They got their data center back. It was an unexpected morale boost,” Crary says. The in-house data center also made trouble-shooting easier. But the primary benefit was the lower cost. “It was all about saving money,” Crary says. Because of the recession, “the environment is more strenuous today.”

For his part, Crary was delighted with HP. “The way [the negotiation] turned out was extremely positive,” he says. “Had it not been, would I have had a negative thought about [HP]? In all honesty, probably.” Instead, Crary continued sending the bulk of his hardware and services needs to HP, including all of Lear’s data center gear. “I came away thinking that these are first-class people. It probably caused them some pain [to break the contract], but they truly had the right focus: on the customer,” Crary says.

Crary took away two lessons from the experience. The first is to scrutinize outsourcing contracts. “You have to be careful what you get into,” he says. Although HP obliged Crary’s request to break the contract, there was no guarantee that it would do so. The success of the negotiation leads to Crary’s second lesson: the importance of personal dealings. By appealing to an individual rather than to the letter of the contract, Crary was able to arrive at a resolution that was a good deal for both parties.