History lesson: San Diego County vows not to repeat mistakes with new outsourcing pact

By William Welsh

| March 18, 2005

Three years ago, San Diego County's massive IT outsourcing program teetered on the verge of collapse.

Three years ago, San Diego County's massive IT outsourcing program teetered on the verge of collapse. The county claimed that prime contractor Computer Sciences Corp. was not meeting numerous service-level agreements stipulated in the seven year, $644 million contract. CSC countered that San Diego County officials had set the bar too high on the performance standards. The dispute resulted in large part from ambiguities in the contract language, said Michael Moore, San Diego County's chief information officer. The two sides couldn't find common ground on dozens of requirements in the performance-based contract, and in April 2002, the county sent a default letter to the El Segundo, Calif., systems integrator, threatening to hold it in breach of contract."Our remedy at that point was for one or both parties to take the thing to court," Moore said. But instead of going to court, the two sides continued discussions and finally resolved their differences by defining more clearly the responsibilities of the contractor and the county in the outsourcing project.Since then, the county has been satisfied with CSC's performance on the IT infrastructure portion of the contract, Moore said.San Diego County intends to use the hard-won lessons from this dispute as it prepares to re-compete the outsourcing contract, which expires in December 2006. Moore said the county is removing "every ambiguity in the contract so that it is very clear what we are expecting" from the contractor.In addition, the county is giving the contractors that have expressed interest in the project ample time to familiarize themselves with both the customer and the contract's requirements. "We want to allow adequate time for transition," Moore said. "In the first few years of the contract, no one understood how it worked. The due diligence period was too short." Moore emphasized that CSC is performing well. "We're not going out to market [with a new contract] because we are unhappy with the current performance," he said. Still, the county has been less satisfied with CSC's ability to handle the applications side of the project. "We were hoping that the outsourcing providers would bring new skill sets and application capabilities to our deal. But we haven't gotten to where we wanted to get yet," Moore said. CSC officials declined to be interviewed for this story.

Michael Moore, San Diego County's chief information officer

Laura Embry / The San Diego Union-Tribune

A new first step

The county's three-step process in awarding the new contract began Feb. 18 when it released a request for information. It will continue with a request for qualifications April 4, followed by a request for proposal May 11. An award is expected before the end of the year, giving the new prime contractor about a year to transition into the contract.

More than a half dozen integrators have expressed interest in bidding on the new contract, valued at more than $800 million over seven years, including CGI Group Inc. of Montreal. Mike Keating, vice president for the U.S. west and state and local group with CGI-AMS, Fairfax, Va., praised San Diego's plan.

"This a pro-active way of going about the transition that you don't see in every type of outsourcing re-compete," he said. "It doesn't seem to be a number-crunching exercise for them. They want to really optimize their outsourcing, and they appreciate that it takes time to do it right."

San Diego County's Pennant Alliance project, as it is known, may be the largest IT infrastructure-outsourcing contract of its kind in the state and local market.
The outsourcing contract called for replacing San Diego County's telecommunications and IT infrastructure, including replacing obsolete telecommunications system with a wide area network, and refreshing all aspects of its IT infrastructure, including network equipment, desktops, printers and other peripherals.

Local governments such as San Diego County have succeeded where states that embarked on similar IT outsourcing efforts failed. Connecticut killed a deal with EDS Corp. in 1999 because the two sides couldn't agree on price. Florida last year canceled the MyFlorida Alliance, an IT outsourcing contract with Accenture Ltd. and BearingPoint Inc. of McLean, Va., because the state said the program wasn't meeting its needs.

For the new contract, San Diego County wants an integrator to provide not only infrastructure support, but also software applications capable of transforming key business processes, Moore said. The county wants new applications for mobile computing, land-use management and certain back-office functions.

The value of the new outsourcing contract won't be determined until final negotiations are completed and the winner is selected, Moore said.

However, he said the county is spending about $125 million annually on the outsourcing contract, and he expects that rate of investment to continue.

In addition to CGI Group, other integrators that have expressed an interest in the project are Accenture, Affiliated Computer Services Inc., EDS, IBM Corp., Northrop Grumman Corp. and Science Applications International Corp., Moore said. SAIC is a key subcontractor on the Pennant Alliance.

Notably absent from that list is CSC. Asked whether the company would bid on the contract again, CSC spokesman Mike Dickerson said, "It would be premature to speculate at this time."

Moore cited two indications that CSC is not likely to bid on the new contract. First, the company freed SAIC from an obligation to bid only with it on the new contract.

"SAIC said it wanted to stay teamed with CSC, [but] they have been cut loose from that obligation," he said.

Second, the Pennant Alliance did not bid on a major application outsourcing opportunity that complemented the team's existing work, Moore said. The county awarded the property tax project, which is worth $32 million over three years, to BearingPoint last month, he said.

The county won't know for sure whether CSC is bidding until the request for a statement of qualifications is issued.

"We don't think, right now, that they are going to bid, but we don't know for sure," Moore said. "We would like to see them bid."

Next wave

The companies interested in the project are gearing up for a fight.

"We have a whole team of people focused on it right now," said Cheryl Janey, vice president of business development with Northrop Grumman Information Technology's commercial, state and local solutions business unit.

San Diego County's emphasis on applications development in the new contract signals that it's ready to change contractors, Janey said.

The county "worked out some of the infrastructure challenges that it had early on, and thinks that it has hit a more even keel, but it is not as comfortable with the progress it has made on enterprise applications," she said.

The new outsourcing contract is a shift in state and local outsourcing from infrastructure overhaul to enterprise software applications, Janey said.

Although the contract is a recompete and not a "first mover" in the state and local market, it signals an important change in government outsourcing, CGI-AMS' Keating said.

"What's important about the timing of this engagement, as much as the dollar value or the size of it, is that we are at a point in the [government] outsourcing market where new trends are being determined," he said.

During the next seven years, when the popularity of outsourcing is expected to grow considerably in the government sector, many other state and local governments will be looking to the way this project is done, Keating said.

"They are going to look at this as a signal of whether this type of work could exceed or fail," he said. "The willingness of the rest of the market to open up will be determined in large part by this contract award." n

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

San Diego County outsourcing milestones*

*Dates are subject to change

2/18 - Request for information released
4/4 - Request for statement of qualifications released
4/18 - Statement of qualifications due from vendors
5/11 - Qualified vendors selected and request for proposals released
8/30 - Proposals due
10/15 - Negotiations begin
11/15 - Best and final offers due
12/5 - Project award

So long, state and local?

No bid from CSC may signal exit from market

If Computer Sciences Corp. does not bid on San Diego County's new IT outsourcing contract, the move could signal that the company plans to leave the state and local market, according to analysts.

The seven-year Pennant Alliance contract, worth $644 million, is the bulk of the company's work in the state and local market, analysts said. The systems integrator has a few smaller contracts throughout the market, but none near the size of the San Diego County deal.

CSC declined to comment for this story.

The company's annual revenue from its state and local business dropped from between $300 million and $500 million in 2003 to between $100 million and $300 million in 2004, according to Federal Sources Inc.

The McLean, Va., market research firm each year compiles Washington Technology's list of top systems integrators in the state and local government market, ranking companies by the size of their state and local sales.

John Kost, managing vice president of worldwide public-sector research for research and consulting firm Gartner Inc., Stamford, Conn., said CSC had hoped the San Diego County project would be a springboard to other large-scale state and local outsourcing projects. But that strategy fizzled, because "so few governments have tried" what San Diego County is doing, he said.

At this point, the Pennant Alliance has completed the IT infrastructure build-out for San Diego County and helped the county finish several key enterprise resource planning software implementations, Kost said. "The hard stuff is done," he said.

The emphasis the county is placing on software applications in the new contract could be one reason that CSC decides to walk away, Kost said.

He said that some federal contractors have found it difficult to achieve desired profit margins in the state and local market if they have not built highly repeatable applications that can be sold across multiple jurisdictions.

Because few governments have followed the San Diego model, the opportunity to create and sell repeatable applications built for it has not occurred for CSC.

The margins on the San Diego outsourcing contract aren't good for them for those reasons, Kost said.

? William Welsh

EDITORS NOTE: This story was updated on March 31, 2005, to correct comments by John Kost.

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