App outsourcing in low gear

Application outsourcing may be the next wave in contracting vehicles, but few agencies have shown serious interest to date.

As its name suggests, application outsourcing involves farming out responsibility for running and maintaining a particular software application. In contrast to data center outsourcing, which often takes a lock-stock-and-barrel approach to a customer's information technology assets, application outsourcing focuses on a specific IT component.

A data center outsourcing contract may span servers, network components and applications, and run five to 10 years. An application outsourcing pact may target a single piece of software and run just a few months.

The trend in application outsourcing is to "keep contracts as short and as flexible as possible," said Jeff Kaplan, managing director of Thinkstrategies, a Wellesley, Mass.-based IT consulting firm. "The offerings are becoming much more bite-sized as opposed to enterprisewide in nature."

Vendors offer an assortment of application outsourcing services, ranging from on-site support staff to off-site hosting services. Regardless of the contracting method, the objectives are generally the same: boost efficiency, introduce commercial best practices and access hard-to-obtain technical resources.

Despite those lures, application outsourcing has been rare in the federal sector. Some government IT managers are reluctant to let go of their applications. And the dismal financial performance of many Web- and application-hosting companies hasn't been encouraging. Overall, the concept doesn't appear to be too popular among federal chief information officers.

Application outsourcing "is in a fairly early stage and somewhat incremental in how it is progressing," said Mike Dow, vice president of the public-sector group at American Management Systems Inc. "You don't have federal CIOs waking up in the morning and saying, 'I think I need to outsource today.'"

But Dow and other observers believe business issues may induce more federal agencies to outsource. Indeed, budget pressures and human resource constraints may help application outsourcing catch on in the federal sector. Vendors say they are actively discussing application outsourcing with federal customers and floating proposals.

Outsourcing Drivers

Concern about workforce limitations was a particularly important consideration in the Marine Corps Materiel Command's decision to outsource its Decision Support System, a supply chain analysis application housed at the Marine Corps Logistics Base in Albany, Ga.

Melvin Leonard, the Marine Corps Materiel Command's chief information officer, said the need for experts to maintain internal resources and the stability of those resources were the main factors behind the decision to outsource. Marine Corps programmers, he said, rotate to other assignments, making it more difficult to maintain a large application. Outsourcing offered stability and a level of expertise the Marines couldn't have obtained otherwise. The Marines selected Keane Federal Systems Inc. for the application outsourcing task, following a competitive procurement.

Human resource concerns also influenced the American Battle Monuments Commission's outsourcing decision. When it came time to install an integrated accounting system, officials at the small agency realized they would have difficulty hiring personnel to maintain the application, said retired Col. Anthony Corea, director of finance at the commission.

In addition, the agency needed the ability to support regional offices in Rome, Paris and Manila, Philippines. The commission subsequently selected USinternetworking Inc. to host PeopleSoft Inc.'s financial system. The application went live last October.

Personnel issues may well drive additional outsourcing initiatives. After all, a sizable chunk of the federal government's IT workforce is eligible to retire during the next few years.

"They aren't going to have the skills and manpower to do a lot of the business they are doing today, plus they have new initiatives to staff for," said Harvey Braswell, group president of IT vendor Affiliated Computer Systems Inc.'s (ACS) Government Services.

Market research firm Input cites staffing challenges as a key factor propelling the growth of federal outsourcing. The company predicts that IT outsourcing — a broad category that includes application outsourcing — will expand from $6.3 billion in 2001 to $13.2 billion in 2006. This is because in addition to easing the workforce crunch, outsourcing also has the potential to trim IT expenses.

Charlie Lippman, director of application outsourcing at Keane Federal, said application outsourcing could reduce costs by 15 percent to 20 percent. What's more, the task of maintaining complex applications may be beyond what some agencies are willing or able to do, given priorities such as homeland security.

"It's not part of their strategic mission to make sure [software product upgrades] are up to speed," said Greg Myers, vice president of outsourcing and partners for Oracle Corp.'s public-sector unit. Outsourcing, he said, lets agencies redeploy resources to "core competencies."

Pricing Trends

In the commercial sector, a customer outsourcing an application pays a flat fee — usually monthly or quarterly — based on a service-level agreement. The agreement specifies the outcomes to be measured and the performance thresholds to be met. The agreement might cover such areas as user support and software maintenance. This method, however, runs counter to a federal procurement process historically focused on unit cost.

Lippman said outsourcing applications calls for a shift toward performance-based contracting, in which the emphasis is on "business results." The paths of performance-based contracting and outsourcing have converged at the Education Department's federal student aid program. Candace Hardesty, director of acquisition and contract performance at the Office of Student Financial Assistance Programs, said her organization had to transform its contracting environment to pave the way for outsourcing projects. In past years, the program "measured success on whether a piece of equipment did the necessary bits and bytes."

The program's emphasis has evolved to focus on "the outcomes of our business," she said. ACS and Accenture are among the outsourcing vendors working on the program.

Hardesty said the transition to performance-based contracting was "heavy lifting at first." But the approach may prove to be the vehicle in which application outsourcing takes off in the federal market.

Moore is a freelance writer based in Syracuse, N.Y.

***

The Internet service sector — including application service providers — continues to reel, in the wake of the dot-com meltdown.

What can agencies do to shield themselves from financial fallout? The first step is to take a hard look at a provider's fiscal track record. Jim Williams, director of security solutions at Solutionary Inc., a managed security services firm, reports that customers are examining a vendor's "financial and business situation."

Protection can also be built into contracts. Customers working with ailing vendors face the prospect of paying for services that will never be delivered. To mitigate this risk, an organization can structure a deal to hold back a certain percentage of payments until a particular milestone is met or the project is completed, said David Nadler, a partner at Dickstein Shapiro Morin and Oshinsky LLP.

Agencies and contractors may also set up a third-party escrow account. When payments are due, the money goes to an escrow agent and will be released only after certain milestones are met, Nadler said. "Use contractual mechanisms to keep vendors on a short leash."