Outsourcing runs aground in Florida

Two months after Simone Marstiller took over as Florida's chief information officer, a report landed on her desk from the state auditor general blasting the way her predecessor had awarded three statewide outsourcing contracts, known collectively as the MyFlorida Alliance.Contract planning and procurement was not done properly, according to the report, which was released in July. Marstiller promptly launched her own investigation into the award process."I felt that it would behoove me to look at the procurement process myself and see if I found anything else to be concerned about, separate and apart from what was contained in the auditor general's report," she said.The outsourcing program quickly unraveled. In August, Marstiller terminated an $87 million help-desk contract with Accenture Ltd., saying the project did not meet the state's needs. On Sept. 30, she abruptly terminated the entire MyFlorida Alliance program by canceling a $126 million data center contract with BearingPoint Inc. and a $46.7 million applications management contract with Accenture."In light of the additional information we found, I felt the best thing to do would be to terminate those contracts and re-procure the services," she said. Among the most serious problems identified in the investigation, Marstiller said, was evidence of potentially illegal communications between a state employee and one of the contract bidders. She informed the contractors that she had given the correspondence to the Florida Department of Law Enforcement to investigate whether any laws were broken. Marstiller has not named publicly which of the two companies was involved, but an official with BearingPoint said the correspondence involved one of its employees and then state CIO Kim Bahrami, who now works for BearingPoint. The BearingPoint official, who asked to remain anonymous, contended that neither the correspondence nor the company's actions violated procurement laws.The turn of events stunned the primes.The cancellation "was as far from anyone's thoughts as it could have been," said the BearingPoint official. Accenture officials felt the same way. "It caught us by surprise. We were not aware of the situation," said David Wilkins, a partner with Accenture's Florida Government Practice. The collapse of the MyFlorida Alliance illustrates the pitfalls that await both state governments and contractors that embark on ambitious outsourcing programs. Statewide projects require the support of so many different stakeholders and constituencies -- such as state employee unions, legislators, local businesses and the users of the new outsourcing services -- that a dissatisfied party easily can derail the projects. Although such projects promise great financial rewards for contractors, they also carry significant risks. Both Accenture and BearingPoint, which spent great resources pursuing MyFlorida Alliance, now find themselves without contracts and fighting to defend their reputations. Events are still unfolding, and it is unclear whether Florida will restart the entire outsourcing program, despite Marstiller's stated intent to do so. The two companies simply must accept her decision to cancel the program and begin anew."There wasn't a lot of choice in the way she presented it to us," Wilkins said.A CONTROVERSIAL E-MAILThe MyFlorida contracts were awarded as part of Gov. Jeb Bush's (R) strategy to reduce state employment by turning over government functions to the private sector. [IMGCAP(2)]Under Bahrami's direction, the Florida State Technology Office sought proposals for products and services to support initiatives related to security, the state Web portal, help-desk services, data center consolidation and aggregated purchasing. Bahrami negotiated the contracts that were awarded to Accenture and BearingPoint in August 2003. About 10 months before the contracts were awarded, a BearingPoint official sent Bahrami an e-mail regarding the state's strategy for the program. BearingPoint gave Washington Technology a copy of the e-mail, which company officials said is at the center of the investigation. The one-sentence e-mail, from Tanya Jackson, a managing director with BearingPoint, to Bahrami Nov. 4, 2002, said that Jackson had reviewed and edited a two-page document that outlines how the State Technology Office might fund six major technology initiatives in fiscal 2003-04. Florida officials would not confirm which documents they were reviewing or which individuals were under investigation. However, the department did confirm that an investigation is in progress. The e-mail raises the question of whether BearingPoint had an unfair advantage over other potential bidders because of its involvement in the project during these early stages. Procurement laws require that all companies have equal access to the relevant officials and information when competing for a contract. The BearingPoint official said that procurement and legal staff were present during all meetings between the company and the State Technology Office before the MyFlorida Alliance award. Significantly, some contractors complained during the bidding process that the contract was being steered toward BearingPoint. The State Technology Office denied these charges at the time, and said it would involve many companies as subcontractors in the project. The complaints subsided, but eyebrows were raised again when Bahrami resigned as CIO in February and then joined BearingPoint's health care practice four months later. However, before joining the firm in July, she obtained a written legal opinion from a law firm in Tallahassee, Fla., stating there was no conflict, according to a BearingPoint spokesman. If the investigation by the Florida Department of Law Enforcement produces enough evidence of wrongdoing, the department will forward the information to the State Attorney for further investigation and possible prosecution, said Tom Berlinger, a Florida Department of Law Enforcement spokesman. If no charges are brought, the department will close the investigation, he said.  AUDITOR'S QUESTIONSMarstiller, a lawyer who was serving as Gov. Bush's deputy chief of staff, was named CIO in May. By that time, Florida State Auditor General Bill Monroe was wrapping up the evaluation of the MyFlorida Alliance outsourcing deal, which his office began in December 2003. Monroe performed an operational audit of the State Technology Office's management of the MyFlorida Alliance. He sought to assess whether it had exercised proper control over the procurement planning process, had complied with established IT procurement procedures and was effectively monitoring contract compliance. He found weaknesses both before and after the award. His report asserted that under Bahrami, the State Technology Office failed to document its decision to outsource, keep proper contract records, properly evaluate and negotiate bids or properly document cost savings. "Deficiencies existed in the STO's proposal evaluation and negotiation process, limiting fairness and competition within the MyFlorida Alliance procurement [and] the STO contracts with Accenture and BearingPoint lacked certain provisions to adequately protect state resources," Monroe wrote.The BearingPoint official disputed the findings. The official said the auditor general failed to take into account that the best-value solicitation allowed the State Technology Office flexibility in the procedures it used. For this reason, the report shows a fundamental misunderstanding of the best-value procurement process, the official said. If the State Technology Office had followed the requirements and procedures set forth in the report, Florida would not have been able to pursue a best-value acquisition, the official said."We followed the process as we understood it to be working," the BearingPoint official said. "What we see in the auditor general's report is criticisms of the state for following its own stated process, and that's confusing to us." WEB OF INTRIGUEThe MyFlorida Alliance was the first statewide IT outsourcing project to make it through the award process. A similar effort four years ago to outsource IT in Connecticut failed when the state and EDS Corp. failed to agree on terms of the deal. Similarly, a $1.8 billion communications outsourcing project in Georgia was canceled before it could be awarded last year when a new governor took office. By their very nature, large state IT outsourcing projects are highly complex and carry a huge amount of risk, according to industry experts. They dramatically change the status quo in state government, create adversaries among the state employees whose jobs are eliminated, and pose a political risk to those who initiate these projects. The public and state politicians often look with suspicion at the substantial compensation that contractors receive. "There is a lot of money involved in government, and wherever there is a lot of money, there is a lot of intrigue," said Larry Singer, Georgia's former CIO, who was the architect of the state's outsourcing initiative. He now is vice president of the Global Information Systems Strategy Office with Sun Microsystems Inc. "Those who are currently benefiting from the system will always resist the change," Singer said.Although the three MyFlorida Alliance contracts were estimated to be worth more than $250 million over seven years, Accenture had received only $2.2 million for applications management services, and BearingPoint had received $5.4 million for data center operations before the projects were canceled, state officials said last month. Both contractors said they had successes in the first year. Accenture created several standard processes and improved business functions around the software development process, Wilkins said. BearingPoint helped Florida save $3 million by improving data center operations, the company official said.Accenture's Wilkins said the challenge for contractors doing large-scale outsourcing is to demonstrate the project's value. "I believe that [Florida] was going down the right path in terms of outsourcing some of the functions, proving the benefit and then letting the value that has been generated be the testimony, so that other agencies could, in essence, sign up for the services," Wilkins said. ANOTHER DEAL?Marstiller said she wants to restart the outsourcing project, and so is taking steps to launch another procurement for the same services before the 90-day termination period expires at the end of the year. To do this, she is putting together new business cases and feasibility studies. Terminating the contracts was not meant to imply that outsourcing was the wrong approach, she said. If anything is to blame, it is Florida's procurement process and not the contractors' performance, she said. She does not rule out awarding the same work again to Accenture and BearingPoint."At the end of the day, what I want to accomplish here is a procurement process that is clean, transparent and fair," she said. Meanwhile, the contractors struggle with a new reality in Florida. Both companies lost contracts that would have brought each of them more than $120 million over seven years. BearingPoint's reputation in the government contracting market could be tarnished by the news of the investigation, even though no charges have been brought. Still, both companies said they would consider bidding on a new contract should the opportunity arise. Both are also wary."We have meetings coming up with the state to discuss the termination. We will see where that goes," the BearingPoint official said. "I worry that I am going to learn more lessons between now and then." Staff Writer William Welsh can be reached at wwelsh@postnewsweektech.com.