Texas auditor blasts HR project

Critics can't stop Lone Star State <@SM>from making larger outsourcing deals

Despite a stumble that's roused the ire of a Texas auditor, the trend toward states outsourcing health and human services administration likely will grow into a substantial business, industry officials said.

Although the private sector has invested in enterprise resource planning over the past 10 years, state and local government agencies have not, industry observers said. But that's changing today as many states consider implementing ERP systems and outsourcing inherently governmental functions in their search for ways to cut costs.

"We're in the early adopter market," said Brian Andrew, senior director for the public sector with Cincinnati-based Convergys Inc., which has human resources projects with Florida and Texas agencies. "Now that two of the four largest states have followed this approach, with successful projects, I believe others will want to do the same."

Beyond state governments, Andrew estimated that at least 40 large city or county governments and another 20 large school districts are potential clients.

But how successful those projects are is still unclear.

Convergys' system does not work, said Celia Hagert, a policy analyst for Austin, Texas-based Center for Public Policy Priorities. Texas is paying Convergys $85 million over five years to implement and operate the new human resource and payroll outsourcing system, but her office is still getting complaints it, she said.

"I've had a slew of phone calls from people within the agency, just complaining about the system not working," she said.

Andrew and Texas Health and Human Services Commission spokeswoman Jennifer Harris disagreed, saying the system runs fine. Both conceded, however, that when the final phase, the payroll system, went live Oct. 3, the network experienced performance delays. Harris said those delays have been corrected.

"Yes, there were some rough patches during the rollout of the last phase of the program," Harris said, referring to the payroll component.

"People were adapting to change," Andrew said. "But we saw, within 30 days, the call volumes go down, the hold times, too. It took about a 30-day cycle for folks to get adjusted to it."

Convergys' Florida project, a nine-year, $350 million personnel services outsourcing deal, also has come under fire for performance delays, Andrew said.

A September report by the Texas auditor's office questioned the state's reasoning and methodology for signing the outsourcing contract with Convergys. The project, which began in October 2004, calls for Convergys to handle payroll processing, recruitment and hiring, performance systems and records management, benefits processing and other functions.

The auditor cited "significant errors and omissions" in the assumptions HHSC made in its cost savings estimates. As a result, auditors couldn't determine whether the commission's decision to outsource was cost-effective when compared with providing the same services in an optimized in-house model.

Texas was switching from an outdated in-house system, and never optimized its own system before outsourcing. The capital outlay associated with building a new in-house system -- as well has having to go through a two-year budgeting process to get funding -- only to run it for a year before moving forward with outsourcing would not have been a smart financial decision, Harris said.

The commission revised its cost estimates twice since awarding the contract to Convergys, but the audit report states that estimates could not be verified.

The commission initially estimated the deal would save Texas $21.7 million over five years as part of a larger human resources consolidation plan that would save the state $45 million over the same period. But those estimates have been modified, and the projected savings from outsourcing to Convergys have been cut to $10.9 million, Harris said. The state now expects to save $32.7 million.

Texas hasn't yet saved a penny, Harris said, noting that because of capital expenditures, the commission didn't plan to save any money in the project's first year. The project will save Texas money in the long run, she said. "The savings ... at the end of the day, are quite significant," she said.

The commission is missing the point of the auditor's report, Hagert said.

"The commission is quibbling over the numbers, and I think what the auditor's report is saying is, 'No, it's not about your numbers, it's about your methodology,' " she said.

It is the same methodology the commission used to justify a five-year, $899 million outsourcing project with Accenture Ltd. of Hamilton, Bermuda, for a Medicaid eligibility call-center system. The Texas auditor has no plans to review that contract, but it could. If it did, it might find similar faults in the commission's estimated cost savings assumptions, Hagert said.

The Medicaid eligibility outsourcing project has been signed, but Texas and Accenture require approval from the Agriculture Department before they can move forward.

Convergys' Andrew said that as more outsourcing projects take off, the logistics of implementing one will grow less difficult and give flight to even more projects.

"As states apply lessons learned, as service providers do the same, this will get much more refined, and benefits and savings more clear to other states as well," Andrew said.

Staff Writer Ethan Butterfield can be reached at ebutterfield@postnewsweektech.com.

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