IT Handoff: State And Local Governments Warm Up To Outsourcing

High-profile failures in outsourcnig have left many state and local governments gun-shy about handing over business processes to the private sector. And who can blame them? Failure often translates to financial loss in the millions, a disruption in citizen services and political fallout. In other words, state and local governments have a lot to lose.

But with every success story, skepticism slowly begins to fade. And success stories are indeed starting to emerge as solution providers win over government customers by thinking outside the box about ways to eliminate risk and increase the return associated with outsourcing initiatives.

"Given the right environment and the right partner, [government] can save money and improve services for citizens by outsourcing particular initiatives," says Ed Burns, president of the state and local government practice at Greenwood Village, Colo.-based solution provider Ciber (GovernmentVAR 100 No. 33). "Outsourcing allows government to do what they do best, and IT, which may not be a core competency, to be managed by IT contractors that have the skills and expertise."

Reston, Va.-based research firm Input defines outsourcing as a long-term contract whereby the customer delegates all, or a majority, of the operations or functions performed by an organization to an industry partner. According to a recent study, Input predicts that the state and local outsourcing market will grow nearly 8 percent from 2006 to 2007, accelerating to double-digit annual growth starting in 2008, and reaching about $22 billion by 2011.

Driving such growth is the increasing significance of a few key internal challenges.

Similar to the federal market, state and local governments face a shrinking workforce as baby boomers approach retirement. A survey released by the New York State CIO Council's Human Resources Committee, for example, showed that nearly 25 percent of IT managers and 33 percent of CIOs are planning to retire within the next three years.

And in the city of Falls Church, Va., the IT department was outsourced when about half of the positions fell vacant. Such a reduction in internal resources makes management of IT processes and the ability to drive new initiatives far more challenging. At the same time, legacy systems and applications restrict agencies from moving forward on more sophisticated IT projects and become more costly to maintain.

"This area is going to grow because it has to," says Tom Burlin, executive vice president and COO of Affiliated Computer Services (ACS, No.14). Business process outsourcing is a primary focus for the Dallas-based systems integrator, which reports about $2 billion in annual state and local government revenue. "It's simply a response to demands of the market. Outsourcing was a difficult start-up, but the suppliers and clients are now becoming more sophisticated and learning how to make it work for everyone involved," Burlin says.

Rebounding From Failures

If history is any indication, state governments have a reason to be gun-shy about outsourcing. In 2000, San Diego awarded a seven-year, $644 million contract to Computer Sciences Corp. (CSC, No. 8) for the outsourcing of IT processes, only to be left with a mess to deal with a few years later. The contract was recently rebid to Northrop Grumman (GovernmentVAR 100 No. 1). And Texas stands as a more recent example of a state that attempted an ambitious outsourcing initiative, only to fail because of a badly developed business model.

"States can't afford to buy and replace hardware, so leveraging capital by outsourcing is an attractive option," says Celia Hagert, senior policy analyst at the Center for Public Policy Priorities. "But lawmakers don't always know enough about how complicated it is to build [complex] systems, underfund projects and set deadline expectations that are too lofty."

In the case of Texas, the state launched a new system for enrolling Texans in public benefits programs, called Texas Integrated Eligibility Services (TIERS). Theoretically, the system was a good one, providing online applications for such benefits as food stamps, Medicaid, children's health insurance and temporary assistance for needy families. A team of contractors led by Accenture (No. 13) was awarded a five-year, $899 million contract to develop and administer the new system. But since its launch in January 2006, the system hasn't saved the state a penny in administrative costs, and the number of children receiving health care through state funds dropped by more than 127,000, or 6 percent, between December 2005, when the new contractors took over, and April 2006. The contract was stalled in May 2006, audits were initiated by the State Comptroller of Public Accounts, and last month, the contract was canceled.

"There are certain types of government functions that are just not conducive to IT outsourcing," Hagert says. "The challenge is figuring out where to draw the line, and I think [Texas] crossed the line in this project and is now paying the price."

But with those kinds of failures come lessons learned for both the government customer and the channel community. While many states remain reluctant to move forward on outsourcing initiatives, more and more are coming around, with state officials trying to take a business approach to government processes and demanding more of their private-sector partners. At the same time, contractors are responding with proposals that offer tangible cost savings and returns on investment.