Autodiscover redirect problem with TargetAddress attribute when using local autodiscover XML

We are migrating from on-premises Exchange 2010 to Office 365 for email domain @ourdomain.com.

In theory: When a mailbox moves, the TargetAddress attribute in ActiveDir is set to username@ourdomain.mail.onmicrosoft.com. This redirects autodiscover to the new (Office 365) server. So when setting up a profile, Outlook goes to the on-prem server and from there redirects to Office 365:
- Outlook autodiscovers @ourdomain.com and ends up at the on-premises server
- TargetAddress attribute informs of new location @ourdomain.mail.onmicrosoft.com
- Outlook autodiscovers @ourdomain.mail.onmicrosoft.com and ends up at Office 365
- Mailbox is found and Outlook is configured

In practice: We cannot setup Outlook. Instead we receive a pop up "The action cannot be completed"

The problem is that we are using local autodiscover XML file for @ourdomain.com. If I remove the local XML, everything works fine. However I thought that the local file will only affect the first step of the process. How come subsequent steps also get thrown off? Anything ideas how to remedy this?
criskritAsked:
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Simon Butler (Sembee)ConsultantCommented:
Why are you using a local XML file?
That overrides everything else. The only remedy I am aware of would be to remove that file.

Simon.
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criskritAuthor Commented:
The local XML is per-domain. I have a local XML for @ourdomain.com but not for @ourdomain.mail.onmicrosoft.com. Shouldn't the latter autodiscover properly?
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Simon Butler (Sembee)ConsultantCommented:
Why are you using a local XML file?
The only reason for doing so is when you are sharing the domain with another unrelated Exchange server. Otherwise they just get in the way.

Simon.
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criskritAuthor Commented:
We have a multi-forest environment with two completely unrelated Windows domains sharing the same Email domain namespace. Hence we have the local XML.
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Simon Butler (Sembee)ConsultantCommented:
I think the only way you can resolve this is by removing the XML file as you have found. I cannot think of any other way of correcting the issue.
The best people to ask though are Office365 support - they will be able to confirm, but I suspect that they will say the same thing.

Simon.
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criskritAuthor Commented:
Indeed removing the local XML seems to be the only way.
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