DPC: Public Group, Big Business Success

By Steve LeSueur, Staff WriterTwenty years ago, when San Diego's then-Mayor Pete Wilson became frustrated by his city's inability to attract and retain skilled technology personnel, he did not turn completely to the private sector for an outsourcing solution. Instead, he created a non-profit corporation owned by San Diego and staffed primarily with employees from the city's IT department to provide information technology services to the city."This really was the first major outsourcing contract for a local government," said Rishi Sood, a principal analyst with Dataquest, a Mountain View, Calif., market research firm. "It was an innovative move."The venture, called the San Diego Data Processing Corp., has grown from about 40 employees and annual revenue of $3 million to more than 400 employees and expected revenue of $73 million in 1999. The DPC today provides IT services not only to San Diego, but also to dozens of federal, state and local agencies.In fact, if the DPC were a commercial company, it would be numbered among the nation's top 15 systems integrators in the state and local market, based on annual revenue. Despite its success, no other cities have attempted to follow the DPC model, officials said. Representatives from other cities have come to San Diego to look at the DPC, but all apparently rejected the concept, said Philip Thalheimer, vice president and general manager of customer service.Thalheimer mentioned Dallas, Philadelphia, San Francisco, Seattle, and Palo Alto, Calif., as having visited the DPC.Industry officials are uncertain why other cities have not set up their own non-profit corporations to perform IT functions. Some suggest the reason might be that outsourcing to the private sector is a more viable option today, both politically and economically, than it was in 1979."I think it would be less likely to be emulated now, because tier-one vendors can do the outsourcing," said Sood, referring to availability of top systems integrators to do the work.In recent years, industry officials have expressed concern about having to compete for government contracts against other government agencies and non-profit organizations like the DPC. They argue, for example, that the true costs of doing business with a non-profit organization are much higher than their bids reflect because non-profits do not pay taxes.IT companies do not object to competing against government and non-profit organizations as long as they can compete on a level playing field, said Harris Miller, president of the Information Technology Association of America, Arlington, Va., a lobbying arm for the IT industry."But every time we've seen these competitions, the IT companies are standing six feet in the hole," he said.Although DPC officials occasionally hear grumbling from private-sector competitors, the corporation has not encountered any serious opposition. Because it is a one-of-a-kind corporation, the DPC "has never been a real threat to private industry," said Thomas Davies, senior vice president with Federal Sources Inc., McLean, Va. "If the model grew and was successful in other cities, then I think you might see some concern," he said.DPC officials contend that the corporation's half-public, half-private nature combines the best of both sectors.Like private companies, the DPC must bid on contracts, stick to budgets and perform satisfactorily on the contracts it wins. It even competes for ? and occasionally loses ? projects for the city of San Diego. DPC's status also frees it from civil service restrictions that can undermine a city's ability to attract IT workers. "Governmental agencies are not able to pay market rates for their personnel," said Roger Talamantez, DPC president and chief executive officer. "We have more flexibility to hire and retain highly skilled, high-tech personnel."While the DPC cannot offer stock options and some of the other perks common in the private sector, the corporation tries to provide other, less tangible benefits, such as broad and varied technical experiences and a less demanding work schedule."Don't get me wrong," said Talamantez. "Our people work hard and deliver quality products. But many of the organizations that are competing for the people we have on staff have reputations of requiring excessive travel and working very long hours."The DPC's non-profit status also gives it an advantage in competing for contracts. "We don't have a profit margin to worry about," said Talamantez. "All we have to do is break even."But the DPC does not have complete autonomy. It is still owned by the city of San Diego and managed by an independent board of directors appointed by the mayor and the city council, which also reviews and approves its budget. This enables the city to keep a close eye on the DPC and retain a measure of control it would not have over a private vendor."We know who our main customer is," said Talamantez.The corporation's annual revenue from the city of San Diego is more than $60 million, making it perhaps the largest IT outsourcing deal at the local government level.By way of comparison, the highly publicized effort to outsource IT functions in San Diego County, which is a separate government entity, is valued at up to $70 million annually. DPC's revenue is growing by about $5 million to $7 million a year, or just under 10 percent. A significant portion of this growth comes from an expanding demand for DPC's products and services outside of San Diego."A number of the technologies that we developed for San Diego have caught the attention of other municipalities," Thalheimer said.Most of DPC's projects range in value from $10,000 to $6 million. A typical example is its $1 million contract in Riverside County, Calif., to implement and maintain a sophisticated software application for clean water distribution systems. "We're considered state of the art in water testing and treatment," said Talamantez. Other areas of DPC specialty are geographic information systems, law enforcement and year 2000. The corporation recently signed an agreement valued at about $500,000 to provide year 2000 consulting services to the state of California. The DPC works only for governments and educational and non-profits organizations ? not for commercial businesses, he said.