Va. takes radical outsourcing approach

Virginia technology officials are using a bold contracting approach to turn over the state's information technology infrastructure to the private sector.

Armed with a law passed by the state legislature two years ago to encourage creative financing of education facilities and infrastructure, the Virginia Information Technologies Agency is halfway through the award process for a public-private partnership informally known as the IT Transformation Initiative, according to state officials.

The Public-Private Education Facilities and Infrastructure Act of 2002, or PPEA, which was amended last year to include IT infrastructure, essentially allows private-sector teams more flexibility and room for creativity when proposing solutions than is possible in a traditional request for proposal process with prescriptive requirements.

Chasing the contract are teams led by CGI Inc., Montreal; IBM Corp., Armonk, N.Y.; Northrop Grumman Corp., Los Angeles; and Koll Development Co., Dallas.

The agency is using the new law to encourage companies to offer innovative proposals, such as share in savings, which it hopes will generate upwards of $1 billion in savings over a 10-year period, according to company officials familiar with the project.

The state wants to outource services ranging from data center operations and disaster recovery to enterprise messaging and help-desk support.

The enormous savings such a project could produce have captured the attention of a number of other states, officials said.

"There are a bunch of states watching this like a hawk," said Caroline Rapking, vice president of consulting services for state and local government at CGI-AMS Inc., the Fairfax, Va., U.S. operating subsidiary of CGI.

The value of the initiative has not been determined and will depend on the final scope of the project, state and company officials said. But the 10-year project may be worth between $2 billion and $4 billion, according to market research estimates.

Other states have tried statewide outsourcing of IT services and failed, largely because such ambitious projects require the support of many stakeholders, such as legislators, unions and agencies. Florida terminated the $250 million MyFlorida Alliance program in September after investigations raised questions about how the contracts were awarded. Statewide outsourcing projects also foundered in Georgia and Connecticut.

State government experts are divided about whether the new contracting approach will succeed for Virginia. Some said states can't afford to risk exposing themselves to service interruptions that might result if the project fails.

Similar contracting approaches have been used before by state and local governments for transportation infrastructure, but not for IT, company officials said.

"The best part about PPEA is that it encourages us as business partners of the state to come up with really creative, innovative and transformational ideas that are nearly without boundary, rather than being forced to respond to a set of very defined requirements that often become outdated on the day they are published," Rapking said.

Other companies competing for the opportunity had similar reactions.

"The jury is out about how well the procurement vehicle will work. But we like the idea that we had the latitude, flexibility and the option to be creative in trying to fashion solutions for the commonwealth and its citizens," said Jean Cantrell, director of government relations for the northeast region for EDS Corp., which is on the Koll team.

Virginia expects to begin a detailed review of at least some of the proposals this month, said Lem Stewart, the state's chief information officer and head of the Virginia Information Technologies Agency. The Virginia secretaries of administration, finance and technology as well as the Virginia Technology Investment Board, a group responsible for IT strategy and oversight, will review the proposals, he said.

The state is calling the initiative a "public-private partnership," because the winning team will share the risk of the project's success with the state essentially by financing the initiative, he said.

Ultimately, the state hopes to move $500 million from IT utility expenditures associated with IT to infrastructure modernization and business process redesign, Stewart said.

During the so-called conceptual phase earlier this year, the companies submitted proposals that were posted on the Virginia Information Technologies Agency Web site for all competitors to see. However, under the process the companies were allowed to request that the state keep confidential some parts of their submissions, such as pricing information, Stewart said.

"The companies understood the rules and had no problems with the posting," he said. If a company did have a problem, "they had the option of withdrawing their proposal."

"The initial proposals were not really in depth enough to give away a lot of trade secrets, especially about pricing," said John Kost, managing vice president for worldwide public-sector research for research and consulting firm Gartner Inc., Stamford, Conn.

After the companies reviewed each other's proposals, Virginia asked them to resubmit their proposals reacting both to their competitors' ideas and some guiding principles set forth by the state, Rapking said. The state is keeping the revised proposals confidential, she said.

It's unusual to post the proposals and allow public comment and competition to occur in an open forum, she said. "Many states, once they have issued an RFP and received proposals, make them public pretty quickly after they're opened, but there is no opportunity to clarify other than through a controlled process," Rapking said.

While the process might work for some states, it won't work for others, said Jim Dillon, New York's CIO. In New York, for example, state technology officials exercise considerable caution regarding how they buy IT services.

"We certainly don't want to be bleeding edge on technology. We can't go out of business for a month because something we tried didn't work out," he said.

Thom Rubel, vice president of government strategies for research and consulting firm Meta Group Inc., Stamford, Conn., said the real issue in Virginia is whether the lead agency can get the project through the rigid approval process.

"People will have to figure out, based on benchmarked costs, whether it will work and they will have to agree on some fairly hard dollar savings before they move forward," he said.

There also are the usual cultural and workforce issues that can derail any statewide outsourcing agreement, Rubel said. Still, the state has gotten off to a good start by using PPEA to encourage innovation.

Virginia Gov. Mark Warner (D), backs the project, giving it a strong chance for success, company officials said.

"The benefits that can be derived through this program are incredibly important, and I don't see anybody [in state government] saying no to it," Rapking said.

States like Virginia will continue to explore partial or total outsourcing because of the lure of savings, Rubel said.

"The reason you continue to see these efforts is the belief that you don't know what you might be saving until you try," he said. n

Staff Writer William Welsh can be reached at wwelsh@postnewsweektech.com.

In this corner ...

While each team has given its proposal a different title, all are
chasing the same prize: Virginia's outsourcing initiative that could
be worth up to $4 billion over 10 years.

Virginia Business Modernization Initiative

Team leader: CGI-AMS Inc., Fairfax, Va.

BelaCorp, Reston, Va.

First Data Government Solutions Inc., Greenwood Village, Colo.

MCI Inc., Ashburn, Va.

SiloSmashers Inc. Vienna, Va.

Unisys Corp., Blue Bell, Pa.

Virginia Consolidated Data Center Initiative

Team leader: IBM Corp., Armonk, N.Y

Advantus Strategies LLC, Richmond, Va.

BearingPoint Inc., McLean, Va.

E.L. Hamm & Associates Inc., Virginia Beach, Va.

Hayes, Seay, Mattern & Mattern, Roanoke, Va.

Indigetech Inc., Richmond, Va.

Integration Systems Analysts Inc., Arlington, Va.

Internosis, Arlington, Va.

Microsoft Corp., Redmond, Wash.

Liberty Property Trust, Malvern, Pa.

Manhattan Construction Company, Tulsa, Okla.

STI Knowledge Inc., Atlanta

Virginia IT Transformation

Team leader: Koll Development Co., Dallas

Capital Results, Richmond, Va.

DPR Construction Inc., Redwood Shores, Calif.

EDS Corp., Plano, Texas;

Ellerbe Becket Inc., Minneapolis

Morgan Keegan & Co. Inc., Memphis, Tenn.

Staubach Company Inc., Addison, Texas

Thompson & Litton, Wise, Va.

Troutman Sanders LLP, Atlanta

Virginia Technology Passport Program

Team leader: Northrop Grumman Information Technologies Inc., Herndon, Va.

Accenture Ltd., Hamilton, Bermuda

Gateway Inc., Irvine, Calif.

Hewlett-Packard Co., Palo Alto, Calif.

J.P. Morgan Company Inc., New York

Knowledge Information Solutions Inc., Virginia Beach, Va.

McKinney and Company, Ashland, Va.

Networking Technologies & Support, Inc., Richmond, Va.

Virginia Bio-Technology Research Park, Richmond, Va.

Whiting-Turner Contracting Co., Baltimore

For a description of each team's proposal, go to
http://www.vita.virginia.gov/ppea/archive.cfm.

Source: Virginia Information Technologies Agency