Breaking Into Government Managed Services

State and local governments are in a uniquely difficult position when it comes to upgrading technology. For them, it comes down to one word--politics. State and local CIOs have to jump through the requisite political hoops in order to get the capital funds to implement anything, from PCs to network upgrades.

As Karl Kaiser, CIO of the city of Minneapolis, describes it, "About half of the technology was obsolete when I came on board, and trying to find capital money in the public sector is not an easy thing. If I go to the city council and say I need to replace 1,000 PCs, it's not high on the political list, so we always end up being technologically behind."

To get around this, Kaiser decided to take what might have once been considered a drastic move for local government; he went looking for an outsourcer to take over both ownership and control of the city's technology assets. Minneapolis turned to Unisys in December 2002, signing a seven-year, $56 million contract that covers everything from PCs and laptops to servers and system software. And Kaiser is not alone.

This move toward outsourcing, or managed services as anyone in government is apt to call it, lest it be associated with offshoring or moving technology jobs and control away from the state or locality, is catching on at the state and local levels.

And while the terminology may sometimes be confusing, one thing is for certain--the managed-services market is poised to become a $17.7 billion market at the state and local levels by 2009, according to Reston, Va.-based researcher Input.

Jim Krouse, manager of state and local analysis at Input, says that the states will be the leaders in adopting a managed-services approach, followed by local governments and the federal side. At the highest level, managed services technically refers to the outsourcing of a range of IT services to a third party. "It will get to the federal level eventually, but it will be much more scrutinized; they're not the laboratory for change that states are," he explains.

Krouse says that, in general, managed-services providers are already smelling opportunity and staking out their turf. "There has been an uptick in partnerships, the ability and the willingness to partner with anybody to close a deal rather than be left out," Krouse adds. And while there will continue to be a pool of very large integrators that will compete for the biggest contracts as primes, he says that smaller integrators will also have many opportunities to partner with the big guys.

"The primes will increasingly need the support of their partners and [they] will have to maintain an ongoing pool of subcontractors that are pretested and prequalified, so when the work comes in, the primes will be ready," Krouse says.

This, of course, means that work needs to be done up front, to prepare for these types of services. In order to cash in on these deals, integrators and solution providers will have to adjust their business models and service-delivery methods accordingly.

Managed Services Catches On

The managed-services trend is being driven by three main underpinnings: continued difficulty with justifying capital expenditures for technology investments that are out of date by the time they're in place; a growing concern over the shortage of workers to keep up with the technology; and a desire to better leverage economies of scale for cost savings.

Krouse says the "people shortage" that state and local governments are being faced with will be the most extreme driver in the years to come. "There will be a move away from cost-benefit analysis two to three years down the road to an absolute necessity that will force some sort of outsourcing or staff augmentation," he says.

Doug Helmink, president and COO at Apex, N.C.-based Net Direct Systems (NDS), agrees that the labor issue is forcing state and local governments to take a serious look at managed services. "Employees are retiring, and governments are struggling with getting replacements. They're looking to outsourced models more to fill those needs," he explains.

But when it comes down to justifying the move to managed services, states and cities often cite their need to focus on adding value to citizens rather than wasting time and money maintaining an IT infrastructure. Kaiser, in particular, was looking to get out of the infrastructure business. "When I came on board, 60 percent of my management energy and budget went into keeping the infrastructure alive, which was of no value to the business," Kaiser says. "So, we turned the infrastructure into a utility, and that freed up our energy to focus on adding value to the business. We don't talk feeds and speeds and widgets anymore; we talk business need."

Phil Smith, vice president of solutions management at Unisys Global Outsourcing and Infrastructure Services, says that what Minneapolis has undertaken is ultimately aimed at positioning the city to better serve its citizens. "Minneapolis was saying, 'Do we really need to own all the parts of our infrastructure?' It's strategic that we manage things like our own e-mail service, but what's really strategic to the city or state are the services to the citizens," Smith says.

When it came down to selecting an outsourcing provider, Kaiser says that he was looking for a relationship and how the relationship with the provider would be managed. "It's all about the people and not so much the technology," he says. "It's about finding a partner you can live with and obviously you have the ups and downs when you first get together, like a marriage."

Kaiser also says it was important to define very clearly in the statement of work what was expected within each category. "For instance, public safety would obviously come in with the most urgency in the desktop environment. If something happens, the provider has to hop on it right away, but in the standard agency environment, the next day is acceptable. So it was clearly defined based on the business urgency and the business need," he says.

His advice for a successful outsourcing marriage? Keep an open dialogue, and make sure the change-management and change-control processes are clearly defined. "This is more of a people relationship, and if the relationship stays intact, I have no intention of leaving Unisys. Why would I, when it would cost me a lot of money?" Kaiser says. "There is a strong incentive to make sure the relationship works."

In fact, Kaiser says that his model of outsourcing and selling off the components of the entire infrastructure is catching on across the country. "I get about three to four calls a week from other cities and local governments watching what we're doing, and they anticipate this being the way to go in the future," he adds. "I will never be able to attract the high-end technical talent to keep the infrastructure running because of salary constraints; we can't keep up with the private sector."

The city of Chicago is also leading the managed-services charge with a significant project with Unisys.

"We looked at a couple of our operations, and the most significant was the support for 15,000 personal computers, servers and a wide area network. We would have to do a lot of work internally to be strong at that. So, we looked at those providers that serve the market and could do it in a way that is more proficient than we could at a cost that could be predictable over time," says Chris O'Brien, CIO of Chicago.

When it came to selecting the outsourcing partner, O'Brien was also looking for a "high-touch model with on-site staff and dedicated management to migrate us through the process." The city also looks to other providers like IBM to handle niche applications and processing, such as parking tickets. In addition, O'Brien says there is a procurement out already to take over the city's voice and data network as a managed service.

The Commonwealth of Virginia recently made headlines with its 10-year, $2 billion outsourcing deal that was signed with Northrop Grumman. For Virginia, in addition to cost savings--which are estimated at $200 million--and staying on top of the IT curve, economic development was a key ingredient that its potential providers were required to address.

"We specifically stressed the requirement to do something in the area of economic development in distressed areas of the commonwealth," says Lem Stewart, CIO of the Commonwealth of Virginia. This means that the provider has to build facilities and/or service operations in distressed areas. For Virginia, it was important to put a major facility in the southwestern part of the commonwealth, where the economy was distressed, in order to bring 700 new technology jobs to the area. The commonwealth also has partnered with area colleges to set up new degree programs to develop an educated workforce.

Providing Managed Services

As states and cities are ramping up their interest in managed services, integrators and solution providers should be thinking ahead about how to best serve these customers. Charlie Browning, vice president of services at NDS, says solid processes and procedures, as well as the flexibility to customize when dealing with particular government agencies, is key to offering managed services.

"Workflow management is something that serves as a differentiator," says Travis Hartman, director of security services at NDS. "We've also instituted feedback mechanisms, which are very important. It's always possible to meet service-level agreements and still not have a happy client, so we make sure we're managing the expectations as well as the needs of the client." In terms of feedback, Hartman says NDS conducts regular client surveys on timeliness and overall satisfaction with the various phases of the engagement.

When it comes to establishing service-level agreements, Browning says NDS works off a set of standards that fit into a template, but they are adjusted based on the needs of each client. "With our model, we focus on solutions that truly add value to the agencies and allow the government entities to stay close to their business functions, and focus on that," Browning says. NDS also concentrates on hiring experts from the government sector that will understand and communicate effectively with clients.

Unisys' Smith says that the company takes the time to develop good relationships with CIOs and other city and state administrators in order to better understand their requirements. "Then we can take what we do and tailor it to meet their needs," he explains.

Smith adds that, as opposed to enterprise clients, which usually have a nine to 18-month sales cycle, the government is generally a 12 to 24-month sale. "There is definitely more public scrutiny for outsourcing and having to get city councils, mayors or city managers to sign off on things," Smith says. "We invest accordingly, and there's a commitment we make when we take on a bid opportunity. We sit down and say, 'Is this one we want to spend presales dollars on when it could potentially cost us several hundred thousand dollars just to get the deal done?'"

Brian Whitfield, vice president of state and local government for information-technology services, Americas at IBM, says that in addition to the state and local government sales cycles being lengthier, there is also a new trend toward dual negotiations in the deals.

"Over the last 18 months, we've been seeing clients that are keeping more vendors in the process longer to a point where a contract could be signed by multiple vendors," Whitfield says. This, of course, means more dedication from the provider to stick with the negotiations and be ready to invest the time and money into winning deals.