The outsourcer's dilemma

Rapid technology changes, aging government workforces and shrinking budgets are driving a growing number of state and local officials to turn to private contractors for help in running technology-based operations. But under the surface of those common challenges, state and local technology outsourcing is difficult to pigeonhole.

A close look reveals diverse motivations, contracting approaches and pitfalls. The responsibilities jurisdictions choose to outsource range from help-desk operations to welfare eligibility. Results also vary. Some governments claim success, while others toil to develop a winning formula. Local political considerations also shape information technology outsourcing projects, introducing another element of variability.

Market watching firm Input forecasts that the state and local outsourcing market will expand at a moderate pace of 8 percent this year and accelerate beginning in 2008. However, how fast outsourcing takes off may depend on the fate of a handful of bellwether outsourcing deals. During the past 20 months, Indiana, San Diego County, Texas and Virginia have made major bets on outsourcing, inking contracts totaling more than $3 billion.

Outsourcing drivers
One element that industry analysts say cuts across outsourcing projects — regardless of scope — is the need for effective planning.

“The biggest mistake that a number of both public- and private-sector organizations make is not spending the time upfront in completing an accurate business justification document,” said David Sanders, partner and managing director of corporate development at TPI, an outsourcing consultant. “Without a solid business case to make critical sourcing decisions, the organization will not be able to accurately set expectations for leadership.”

Reduced cost is among those expectations.

“The majority of the deals that have been done in state and local governments recently have been primarily driven by cost savings,” Sanders said.
Savings stem from the consolidation vendors provide, Sanders said. A service provider can help identity savings opportunities in governments running multiple data centers and support organizations.

Chris Dixon, manager of state and local market analysis at Input, also zeroed in on savings as a pivotal outsourcing factor. He said government entities are eager to save dollars wherever possible and shift those funds to the public-facing agenda: Medicaid, education and road projects, among other items. “They are looking to leverage every pocket of money they can find.”

However, government IT managers often envision benefits beyond savings.

Aneesh Chopra, Virginia’s technology secretary, cited technology improvements as the pivotal factor in the state’s contracts. In November 2005, Virginia selected Northrop Grumman for a 10-year, $2 billion IT infrastructure partnership contract. Weeks later, the state tapped CGI-AMS for a $300 million overhaul of business systems.

“The No. 1 benefit in this program is that we have elevated the quality of our IT infrastructure across the board,” Chopra said.

Chopra inherited the IT contracts in January 2006 as a member of Gov. Tim Kaine’s administration. An uneven distribution of IT capability across state agencies existed in previous years, resulting in technology haves and have-nots, he said. The lack of a modern, consistent infrastructure hampered the state’s ability to deliver IT applications and improve citizen services.

Northrop Grumman has committed to invest $270 million in Virginia’s IT infrastructure as part of its partnership contract. The ribbon-cutting for the first of two data centers the integrator plans to build is slated for July. It would have cost the state $300 million to do the infrastructure expansion on its own, Chopra said, citing state estimates.

Workforce issues also drive outsourcing. An Input report from last year cited the retirement of IT workers as a factor in outsourcing. Agencies face a challenge in filling those vacancies because the government must “recruit and hire, but with historically lower wages offered,” the report stated.

Agencies find it especially difficult to bring in workers skilled in specific technologies on a just-in-time basis, as they sometimes must do. The Port Authority of Allegheny County, a transportation agency operating in the Pittsburgh metro area, used outsourcing to obtain workers with specific skills. Maureen Bertocci, the county’s chief technology officer, said on one project, for example, the county needed insight into WebMethods software, but it had no in-house expertise in that area.

In such cases, it would be difficult to hire the necessary employees without adding to the cost of the project, Bertocci said. In addition, the contractor’s broader range of expertise means the country has a wider array of solutions to use.

Without outsourcing, “we would have been restricted to the solutions…that we knew internally,” she said.

Outsource a little — or a lot
The Allegheny County Port Authority has worked for several years with outsourcing vendor Infocrossing. The agency recently enlisted the company for help on an Oracle/PeopleSoft enterprise resource-planning upgrade. The upgrade will help the authority manage a $300 million-plus tunnel project to extend a light-rail system from downtown Pittsburgh to the city’s North Shore.

The port authority’s brand of outsourcing, however, isn’t of the lock-stock-and-barrel variety. The PeopleSoft application resides in the agency’s data center. Infocrossing provides on-site and remote project support. The project lead on the PeopleSoft upgrade is an Infocrossing employee. Other technical employees provide programming services from off-site locations — all domestic rather than off-shore sites.

“I’d like to think that we are outsourcing strategically here,” Bertocci said.
Chris Esworthy, vice president of Enterprise Application Services at Infocrossing, said larger-scale outsourcing didn’t make sense in the port authority’s case because of the visibility of the massive construction project.

“Now is not the time to take all of this infrastructure out and give it to us,” he said.
However, a customer who hires a vendor to supply remote programming employees may eventually request remote systems administration as well, Esworthy said. And from there, the customer may opt to move hardware and applications to an Infocrossing data center.

At the other end of the spectrum from the port authority project are those such as Virginia’s IT partnership. That outsourcing initiative includes the provision of network services, a centralized help desk and desktop upgrades in addition to the consolidation of data centers into two new facilities. Instead of weighing the scope of outsourcing function by function, the state opted to have outsourcing companies propose the proper scope.

Chopra described the IT partnership as a problem-based procurement. The state described its problem — the need for infrastructure modernization — and let the outsourcing vendors tell it what functions they could take responsibility for.

Political pushback
A perennial objection to outsourcing — in the public and private sectors — is the potential for employee displacement. In the state and local market, vendors have offered employment to government workers — often at a higher salary — as part of outsourcing deals. The Input report cited such job offers and salary increases as among the techniques governments use to win support from legislators and citizens for outsourcing.

Chopra said almost 70 percent of the state employees affected by the Northrop Grumman contract voluntarily agreed to accept the vendor’s employment offers, far exceeding his expectations.

Citizen-facing outsourcing projects, such as welfare eligibility, raise other concerns. Disruption in the morale or performance of eligibility workers may result in bad publicity or “stories on the six o’clock news,” Dixon said.

Accenture’s $800 million-plus welfare eligibility outsourcing contract with Texas hit a snag in 2006 when the contractor had difficulty processing cases quickly enough and call center staff could not handle some questions. That situation places similar projects — Indiana’s $1 billion award to IBM, for example — under the microscope.

“Given the struggles that Texas had that were highly publicized, I think everyone is watching with keen interest the IBM/Indiana deal,” Dixon said.

A smooth-running contract may boost prospects for business process outsourcing projects, Dixon said. However, he added, sub-par performance could lead state IT executives to rethink the practice.