Contractors beware, Virginia eyes insourcing

In just his second executive directive since taking office, Virginia Gov. Terry McAuliffe is asking for a review of all state IT contracts worth over $1 million.

His concern is that the state is using too many contractors when state employees can do the job better and cheaper. He wants state agencies to report back by Oct. 1.

It’s a refrain that should sound familiar to federal contractors, who faced the same argument early in the Obama administration, when there was a strong push to insource jobs and there were debates about what kind of jobs were “inherently governmental” or closely tied to what should be government-only jobs.

The Northern Virginia Technology Council, whose membership includes a large number of government contractors, has fired off a letter to the Virginia governor criticizing his premise that state employees are superior to contractors.

“We are unaware of any data that support an assumption that state IT employees generally perform at a higher level than private sector IT contractors or that public employees cost taxpayers less than private sector contractors,” the letter states.

It goes on to describe federal efforts to insource contractor jobs. “As it became clear that anticipated cost savings were not materializing, this initiative was significantly scaled back,” wrote NVTC Chairman Sudhakar Kesavan and President and CEO Bobbie Kilberg.

Getting just a brief mention in the governor’s executive directive and no mention in the NVTC letter is the $2 billion Virginia outsourcing contract held by Northrop Grumman.

The company won the 10-year contract in 2005 to build a state-wide IT infrastructure. The project ran into a variety of problems by 2009. But by 2010, the state had restructured its IT oversight and as part of a settlement with Northrop, extended the contract by three years.

Since then, the contract has been relatively quiet, but even with the end date a few years off, the state needs to make some decisions about how to manage IT sooner rather than later.

The biggest decision is what will replace the Northrop contract. Will it be another large outsourcing contract? Will the state break it up into a series of smaller contracts and decentralize its IT operations? Will it try to take the work back in-house?

I have to assume this is part of McAuliffe's desire in asking for analysis of how contractors are used.

Interestingly, the contract has bounced back and forth between the two political parties. It was originally awarded under Gov. Mark Warner, a Democrat and current U.S. senator, at the end of his term. It ran into troubles under his successor, Tim Kaine, also Democrat and a current U.S. senator. The contract was revamped and rescued under Republican governor Bob McDonnell, who’s term ended in January.

Now McAuliffe, a Democrat, is turning his attention to it and will make the decision on what will follow.

Without arguing the merits of whether the outsourcing contract should continue as it is, politics will carry the day on what will happen next.

The Richmond Times Dispatch reports that Virginia is facing a revenue shortfall that will trigger cuts, and cutting contractors is always an easy short-term fix. The long-term benefits are more open to debate.

I wouldn’t be surprised if the contract is broken up. We’ve seen the same trend in the federal market.

If McAuliffe goes in this direction, the state likely will need to bolster its oversight capabilities, and it needs to establish better and more consistent standards for managing contracts.

As the governor writes in his executive directive, “Currently, there is no clear singular protocol for approving contracts or amendments of major contracts.”

A break up of the contract also would fit with a new executive order signed by McAuliffe to direct 42 percent of state contracting dollars to small, women-owned and minority-owned businesses.

Agencies will need to report their compliance with this order by Oct. 1, 2015.

It'll be a while before any decisions are made on Virginia's IT operations, but we'll be watching.