Across the digital nation: Outsourcing pool: Local govts. swim, states test the water

Rishi Sood

Information technology outsourcing is a tough sell in the state and local government marketplace.

Public-sector organizations embrace consulting and systems integration work, often mislabeled as outsourcing, for turnkey projects, but there is usually stiff resistance to transferring management of IT operations to a third-party vendor in a multiyear contract (true outsourcing).

Over the past five years, however, there has been a subtle yet significant shift toward greater acceptance of IT outsourcing. Although various issues -- an aging workforce, managing maintenance costs, access to a greater skill and technology set -- haven't produced an onslaught of outsourcing initiatives, they have contributed to the increased use of outsourcing.

Local governments are using IT outsourcing the most. Contracts in jurisdictions such as Indianapolis/Marion County, Ind., San Diego County, Calif., Memphis, Tenn., Chicago and Dallas reflect the breadth and depth of local government outsourcing engagements. In some cases, these reflect several areas of the outsourcing continuum and have been extended to cover more years or better service-level agreements.

Over the years, however, there has been an important change in the local government outsourcing market. As pricing has become more commoditized and service levels have stabilized across vendors, local governments have sought new and added services through IT outsourcing. Many local government entities now combine IT needs for targeted services, such as 311, geographic information services and wireless, with outsourcing initiatives. In many ways, this lets local governments offload specific IT management functions while upgrading or adding specific technology services.

State governments are still more selective in their use of IT outsourcing. Work in Pennsylvania, Florida, Texas, California, and Virginia reflects strategic sourcing principles in developing their plans. Often, states focus on one area of outsourcing as a part of a broader technology change initiative.

In many circumstances, however, successfully building an IT outsourcing initiative has more to do with the level of governor support, the strength of the chief information officer's office in driving consensus among the agencies, and the extension of consolidation efforts to third-party management.

An important change to state outsourcing is the potential of using these vehicles to drive more participation by local government organizations. In some contracts, outsourcing the state data center may allow local governments to piggyback onto the infrastructure.

The state and local outsourcing marketplace hasn't matured as fast as many vendors had desired. But the slow and steady pace of outsourcing deals has created a

$5 billion opportunity that has significant market potential over the next three years. In fact, outsourcing is the fastest growing area of services spending and eventually may eclipse systems integration expenditures by 2010.

Given these issues of size and growth, the competitive landscape for state and local outsourcing contracts has attracted a diverse group of vendors. Usually, large vendors such as EDS Corp., IBM Corp. and Unisys Corp. win major contracts in the marketplace. But over the past three years, a cadre of vendors usually focused on the federal government -- Computer Sciences Corp., Lockheed Martin Corp., Northrop Grumman Corp. and Science Applications International Corp. among them -- have joined these vendors with varying degrees of success. Acquisitions mark important changes to the local government landscape, with Atos Origin S.A.'s purchase of SchlumbergerSema in January 2004 and Affiliated Computer Services Inc.'s purchase of SCT in 2001.

Clearly, the outsourcing market is not for everyone. Success in this segment can be highly variable, and the barriers to entry can be formidable. The risk of failed IT outsourcing deals or misguided risk management assessments can push vendors to the brink.

Rishi Sood is a principal analyst with Gartner Dataquest in Mountain View, Calif. His e-mail address is rishi.sood@gartner.com.

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