Kerberos is an open authentication protocol based on UDP that allows users to securely do Single Sign-On (SSO). Kerberos is enabled by default on the Windows Servers when Active Directory (AD) is used. All the Blue Coat ProxySG are Kerberos capable when correctly configured with an IWA realm. The Kerberos error message "KRB5KDC_ERR_S_PRINCIPAL_UNKNOWN" occurs on the client side when it is trying to retrieve a Kerberos ticket-granting ticket (TGT) from the Active Directory Domain Controller when authenticating against the proxy. The consequence of this error message is that the SSO fails and the users are requested to enter manually the credentials in the web browser.
A common reason of this error message is when the Domain Controllers have DNS resolution issues. "S_PRINCIPAL_UNKNOWN" means that the Kerberos Service Principal is unknown or cannot be resolved. All the DNS servers of the network must have proper DNS records of the Blue Coat ProxySG. Meaning that all must have the Fully Qualified Domain Name (FQDN) of the Blue Coat ProxySG pointing to an IP address and the reverse DNS records as well.
Another reason to get this message is when the Active Directory forest functional level is quite old (2003 and lower) and not very compatible with the recent Kerberos clients. The UDP packets sent by the Windows Server can be misformed and unreadable by the Kerberos client. In this situation, the error message "KRB5KDC_ERR_S_PRINCIPAL_UNKNOWN" comes after another error message: "KRB5KRB_ERR_RESPONSE_TOO_BIG".
Verify that the Blue Coat ProxySG is correctly populated in the DNS Servers of all the Domain Controllers in the network. DNS name resolution and reverse IP resolution must be tested on each and every Domain Controller. In the same vein, all of the Domain Controllers must have an FQDN that can be resolvable by the Blue Coat ProxySG to prevent additional issues.
If facing the error "KRB5KRB_ERR_RESPONSE_TOO_BIG" as shown in the picture above, the solution recommended by Microsoft is to force Kerberos over TCP in place of the default protocol UDP. Please refer to the official Microsoft documentation.
Upgrading the AD to a higher functional level of can be helpful as this Kerberos server/client compatibility problem should be fixed with the forest functional level 2008 and higher.