Hi Phil
With AD FS, Cred prompt with Outlook is normal. The users can save their credential in Cred manager to relieve the prompt. It is save under the AD FS site name (e.g. sts.contoso.com)
See:
community.office365.com/.../1096.aspx
Note, there is a difference in O365 between "SSO" and the "SSO experience", =p
Regards,
-Victor