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You Can't Outsource City Hall

You Can't Outsource City Hall

Beyond unforeseen expenses, which can dog any IT project, public sector outsourcing poses some unique challenges - any one of which could kill a deal.

In the US, the state and local government outsourcing marketplace was supposed to explode, but as yet there isn't even a spark. Is large-scale outsourcing unworkable in the public sector?

- Understand why state and local government IT outsourcing in the US is a bust.

- Find out what some governments are doing as an alternative to wholesale outsourcing.

Two years ago, San Diego County was supposed to be the proving ground for wholesale IT outsourcing of local and state government functions in the US. Its seven-year, $US644 million pact with a vendor consortium led by Computer Sciences Corporation (CSC) was said to be the first wave of a flood of new public sector outsourcing deals - all of them aimed at making government faster, more efficient, more e-businesslike for everyone. As the deal unfolded, government CIOs around the US had one eye on San Diego and the other on their own preliminary outsourcing plans. The top outsourcing vendors, fresh from Y2K, promoted the state and local government marketplace as their Next Big Thing.

But today, San Diego is a mess. After some initial successes, the two principal executives who struck the deal have moved elsewhere (never a good thing in an outsourcing relationship). The new day-to-day managers are embroiled in such a bitter behind-the-scenes dispute over costs, service levels and a late ERP rollout that CSC has imposed a gag order on the account, for fear of igniting a public war of words. And the lucrative state and local government outsourcing bonanza that was supposed to develop right after San Diego's ink dried has never materialised.

CIOs who remain committed to outsourcing - but are wary of following San Diego's lead - are trying different tacks, such as breaking out smaller pieces for vendors. But by and large, across-the-board outsourcing of state and local government has become a prospect that never quite got off the ground - and, because of several intractable hurdles, it probably never will.

Even Rock Regan, the state of Connecticut CIO who has long been the poster boy for state and local government outsourcing, now says if he had the chance to outsource all over again, he'd take a very different tack. "Knowing what I know now, if we outsourced we'd do it in chunks - not all at once," says Regan, who is the current president of the National Association of State CIOs (NASCIO). As he surveys the national landscape, Regan sees little new outsourcing activity in the public sector. He attributes part of the stall to the recession. But mostly he cites what he now sees as the fatal flaw of wholesale outsourcing in local government: too much, too soon. "Too much change, too much politics, too many battles," he says.

Why Can't We All Just Get Along?

Outsourcing is a proven business strategy in the private sector, so why can't it work in City Hall?

Part of the problem, says Howard Lackow, senior vice president at The Outsourcing Institute, is the fundamental disconnect between big business (which wants to move fast) and municipal government (which traditionally moves slow). "Government is so archaic and cumbersome," Lackow says. "The whole objective [of outsourcing] is to try to streamline government, but that doesn't seem to happen."

Although outsourcing might at first seem cost-effective for CIOs and lucrative for vendors, once projects are under way both parties find themselves spending a lot more time, money and energy than expected. Just ask CSC, the $US10.5 billion IT services provider, whose Pennant Alliance consortium has already exceeded its projected investments in San Diego County by about $US10 million and 300 extra people. "Government takes a lot more hand-holding, care and feeding than people expect," Lackow says, and as a result there are fewer clients or vendors willing to take the risk.

But beyond unforeseen expenses, which can dog any IT project, public sector outsourcing poses some unique challenges - any one of which could kill a deal.

The scope of work. Frankly, state and local government IT is in worse shape than one might think. Because IT investments have been spotty at best in most agencies, the equipment is old, the networks are patched together, and the information silos are unbreached. It being the public sector, political turf is fiercely protected. Even though both sides in the San Diego contract did their due diligence before inking the pact, the county never really knew what it had for IT assets - much less what shape they were in. And no amount of homework prepared CSC's Pennant Alliance for the amount of work that needed to be done just to get the county's creaky infrastructure ready for upgrading. "We knew the triage work was going to be complex and difficult, but it was more than we expected," says CSC's Richard Jennings, the former project manager of the San Diego contract. To complicate matters, all the work has had to be done while maintaining high levels of public service. "We're changing the engine in a car that's moving," Jennings says.

The publicity. Even though most private sector outsourcing deals are conducted between publicly held companies, the negotiations are still held in private. Not so in government, where every bid is a public document. The government executives are used to this transparency (not that they like it), but the vendors aren't. "It's a turnoff," Lackow says. "From the vendor's perspective, even if you lose the contract, suddenly your pricing structure is public." And from the CIO's perspective . . . well, would you want all your dirty data aired in public?

The unions. In the US, organised labour is rarely a great obstacle in industry anymore, but in government the unions are still powerful enough to kill an outsourcing project. That is what happened in Connecticut, where from day one CIO Regan was outgunned by two employee unions that controlled his IT staff and lobbied hard against his plans. Ultimately, Regan and the governor were the ones who made the final call, but it's safe to say that the unions had the last laugh after Regan pulled the plug on his outsourcing proposal in June 1999.

Organised labour was less of an obstacle in San Diego, where fewer IT staffers were union members. But after the deal was done, the union kept the county busy with requests for sensitive documents and even audits. "We want them to do an internal audit [of the outsourcing initiative] and prove they're good managers," says Mary Grillo, executive director of the local 2028 Service Employees International Union, which had 50 members in county IT before it was outsourced. "I think they're afraid of what they're going to find." Again, government people are used to this politicking, but the vendors find the constant tug-of-war taxing. "The union does not advocate privatisation of services," says Jennings, "so they want to use us as a poster child for Â'don't outsource' in general."

San Diego: What Went Wrong?

San Diego started out with promise. In the first 18 months of the outsourcing deal, which kicked off in December 1999, the Pennant Alliance replaced nearly 22,000 telephones, installed 7200 new desktop PCs, replaced the county's LAN and WAN, and relocated all the major data centres. Service levels, which had never even been measured prior to outsourcing, started out shaky with more outages and dissatisfied customers than anyone anticipated. But by last August, satisfaction across the board ranged from 95 per cent to 100 per cent.

Still, despite the high satisfaction levels, there were some major screwups in the first 18 months, the biggest being Pennant's inability to get all county employees on a common e-mail platform. The vendor paid a $US250,000 penalty for that failure - the single highest fine it's faced in San Diego, so far. In all, Pennant shelled out between $US2.1 million and $US3.5 million in penalties in 2000 (the amount depends on which side you ask) mostly for missed service levels, but nothing in 2001.

Then two things happened to send this already-rocky relationship into a spiral. First, in unrelated moves, the two principals in the deal, county CTO Tom Boardman and CSC vice president Jennings, were reassigned in early 2001. Boardman was sent on an emergency assignment to the county district attorney's office to fix the faulty child support system. He was replaced by Lana Willingham, a 30-year county official coaxed out of retirement to temporarily manage the outsourcing team. Jennings, meanwhile, was promoted to other regional accounts and replaced by one of his deputies, Kristine Buitenhek. Typically, changes at the top mean an outsourcing deal is in trouble, but at the time these moves seemed innocuous. Then came ERP.

ERP was to be the highlight of year two. By January 2002, CSC was scheduled to have rolled out two countywide ERP projects - PeopleSoft in HR and payroll, Oracle in finance - and then the county could start enjoying the information efficiencies that executives had promised all those months ago. But the project was taking longer than expected, and the two sides had become tangled in scope creep and disagreements over contract renegotiation. The result: a big dip in end user satisfaction and impatient sabre rattling from the county - specifically from Willingham, a hard-line negotiator who saw this delay as a clear example that the county wasn't getting its money's worth from CSC and the Pennant Alliance. "We negotiated service-level agreements that amount to us getting a Cadillac," Willingham says, "but we're actually getting a Volkswagen."

Frustrated by the vendors' inability to even set a new, firm deadline for the ERP rollout, Willingham withheld $US45 million in payments owed to CSC until the project's completion. Her message with this shot across the bow: Pennant should do what it signed on to do. Now. "In government, you expect everything in a service agreement to be provided," she says. "But in the private sector everything seems to be subject to constant rethinking. They must meet all the agreements, not just tell us which ones we'll get."

CSC executives, sensitive to the glass-house effect of conducting business in public, won't discuss the ERP flap, confirming only that they've slapped a gag order on all principals involved in the account, just so no one will say anything incendiary.

What next? This mess could get messier. With five years left to go in the contract, and with finances and reputations at stake, both sides have every reason to want this marriage to work. Neither would benefit from the publicity or political fallout of an outright failure. But they also have termination clauses they can invoke. If this ERP confrontation escalates, then local government's first big outsourcing marriage might well become its first big divorce.

Outsourcing Alternatives

So, if not wholesale outsourcing, then what? Some municipalities have done very well without outsourcing. Phoenix, for example, has won global recognition for its efforts to create a wired, Web-friendly city government - and all of the IT is in-house. The differentiator, though, is that Phoenix recognised the importance of IT decades ago, and city leaders have consistently invested in technology projects and staff. "We've never had to spend a zillion dollars to catch up," says Danny Murphy, CIO of the city of Phoenix. "Other places that haven't kept up, haven't invested, are the ones that are backed into a corner and having to play catch-up now."

A few local governments have found success in partial outsourcing. The Commonwealth of Pennsylvania, for one, has successfully outsourced its data processing functions. The Georgia Technology Authority (GTA), the state's IT agency, is circulating an RFP to outsource its telecommunications infrastructure and services. But because IT outsourcing is so new to Georgia, in mid-March the state legislature introduced a bill to appoint a new GTA overview committee to keep a close eye on these developments. Was that shades of conflicts to come?

Some public sector organisations have devised their own unique twists on outsourcing. In Chicago, the Public Housing Authority now outsources discrete projects, not processes, to prequalified bidders. And in Connecticut, where wholesale outsourcing was rejected, CIO Regan is leading an IT transformation that's making his IT organisation look and act increasingly like an outsourcing vendor. Regan has centralised IT across all 65 state agencies.

Clearly, for those US state and local governments that haven't yet embarked on wholesale outsourcing initiatives, there are alternatives. But a caveat for those who might ignore the warnings and explore further down the privatisation path: once you go all the way, there might be no turning back. That is the situation in San Diego. As messy as the relationship has become, the county is stuck now that it has outsourced so many people and services. The county will not buy back the IT assets it sold to Pennant or hire back all 234 outsourced employees (who now are accustomed to better salaries and benefits) because it can't maintain all the new service levels and strategies. "It'd be impossible," concedes San Diego's Board-man. "There's no way a government organisation such as ours can supply the same level of service as an IT vendor."

To his credit, Boardman still thinks the San Diego and Pennant relationship can be salvaged. But even if he's proved wrong, "there's no turning back for us," he says. "We're going to outsource forever."

For better or for worse.

Connecticut: Rebuilding a Dynasty or a Dinosaur?

When outsourcing failed, state CIO Rock Regan brought the outsourcing model in-house. Since the state of Connecticut abandoned its outsourcing initiative three years ago, CIO Rock Regan has been rebuilding his IT organisation - literally. More than just arranging org charts and skill sets, Regan has had to replace his ageing headquarters, which was actually condemned last year. So now in a new facility, Regan is managing a new-look IT department - a centralised group that manages IT across all 65 of the state's different agencies. As opposed to the old decentralised approach in which the state basically had dozens of different IT departments at odds with one another over standards and purchasing, today's central IT organisation deploys a standard set of technologies and services to its agency clients. "We've essentially adopted the outsourcing model, but we've become the outsourcer," Regan says. "We've become the vendor."

So far, the new group has been able to upgrade infrastructure, networks and information security across the agencies, as well as initiate some new e-government projects and a new statewide ERP rollout.

The results appear to have been mixed. A 2001 satisfaction survey by the state's Office of Policy and Management found that 72 per cent of respondents labelled IT's efforts either fair or poor, with only 28 per cent labelling it good or excellent. But the timing of that survey was poor, Regan says, because it fell amid the IT group's relocation. "The biggest issue we had at the time was communication [with the agencies]," he says. Since then, he believes relationships with the agencies have improved, and that a new satisfaction survey would show better results.

But no matter how much the state's IT efforts may have improved in a year, Regan still wishes traditional outsourcing had proved successful in Connecticut. Yet he also accepts the reality of his situation and limitations. "We're trying to meet our needs through other means," he says.

Minneapolis: Once More into the Breach

Can this city's outsourcing plans succeed where others have failed?

Budget deficits increase the odds.

He knows the risks, but he still wants to give it a shot. Karl Kaiser, CIO of the city of Minneapolis, is issuing an RFP to outsource "the break-and-fix business" - all the city's desktops, networks, help desk and support staff. "I've decided that 60 per cent of my money and management go into that break-and-fix business," Kaiser says. "I want to refocus on becoming an information services provider rather than a maintenance organisation."

He has the same compelling argument the state of Connecticut and San Diego County used to promote outsourcing: that a single vendor could beef up the city's IT infrastructure and simultaneously reduce the cost of doing business by as much as $US12.5 million over seven years.

But Kaiser also faces the same challenges that have crippled those other initiatives - changing the way government does business and selling the change to powerful labour unions. So far, Kaiser has persuaded a majority of the City Council to at least support his outsourcing RFP, which was supposed to hit the streets in April. Kaiser hoped to return to the council with a winning bid and a contract proposal in July.

The Minnesota Public Employees Association, which stands to lose 45 members (including its chapter president) through outsourcing, is bracing for a fight, however. "They're powerful - labour does have a strong influence on who's elected," Kaiser says. But he feels his business case for outsourcing is even more powerful. "The state government is in a $US2 billion deficit and is actually trying to get money back from the cities," Kaiser says. "Our timing couldn't be better."

But, then, Connecticut and San Diego County felt the same way. And today they know better.

Chicago: A Qualified Approach to Outsourcing

The Housing Authority wants competitive bids for short-term projects only. But vetting vendors is a long-term process.

WALTER SMITH, CIO of the Chicago Housing Authority, wants to try something a little different. Traditionally, when cities (including Chicago in the past) outsource technology, they issue RFPs, then sign a multiyear deal with a vendor to take over an IT process.

But Smith's new approach is to issue RFQs - requests for qualifications - so that he can develop a list of prequalified vendors for any IT task imaginable. Then he can accept competitive bids on individual, short-term projects such as PC and network upgrades. "We're looking at outsourcing from a strategic sourcing perspective, rather than as a long-term solution," Smith says. "We'll manage the vendors, but we won't hire them for long-term engagements."

The advantage of Smith's idea: rather than tie up city money to have vendors sitting on the bench while between projects, he pays for exactly the work that needs to be done, when it needs to be done. Smith says this move will result in an additional cost savings of 10 per cent to 15 per cent during the next three to five years.

The challenge, however, is doing the due diligence to prequalify vendors. He's put together a cross-functional team from his legal, finance, IT and user groups to study the marketplace and certify the vendors. But it's become an ongoing process - not a one-time deal - because new projects and new vendors keep arising.

In the first 18 months of his administration, Smith's approach has worked well enough that it's being copied by other Chicago agencies as well as public housing authorities across the country. And if the vendor community doesn't like the extra level of competition and price-cutting to stay in contention, that's just too bad. "If they want to do business with the authority, then they have to compete with other vendors," Smith says. "With the market the way it is, we can afford to do it this way."

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