State and Local Sets the Outsourcing Trend

Eye on
the States

State and Local Sets the Outsourcing Trend

By Thomas R. Davies
Contributing Writer

The emergence of a new generation of state and local government leaders is resulting in a new era in government outsourcing. Not content to simply contract out traditional information technology services, such as application development, facilities management and maintenance, these leaders are acting boldly, stretching their organizations and taking risks.

It's too early to tell whether this new wave of outsourcing will fundamentally improve the performance of government. But outsourcing is clearly changing the way the business of government is conducted and is dramatically changing the fortunes of many companies.

Commercial-like outsourcing in state and local government is gaining momentum across the country. In the not-too-distant past, outsourcing in state and local government was largely driven by the relative failure of governments to successfully manage their information technology operations.

Over the past few years outsourcing has become an acceptable part of mainstream thinking on how best to manage state and local government. It is now more a question of how outsourcing will be accomplished as opposed to whether or not it will be done.

Outsourcing contracts today are bigger, longer, broader and riskier than ever before. It is not unusual for outsourcing contracts in the public sector to surpass $50 million in total value. Last year, for example, the city of Indianapolis outsourced all of its information technology operations for more than $80 million. They can potentially exceed $1 billion, as evidenced by the recent attempt by Texas to outsource the administration of its human services program.

Contracts now also run up to 10 years, with base and option years included, versus three- to five-year contracts in years past. Where contracts once were limited to data center operations and application development, they now include strategic IT planning, business process re-engineering, telecommunications, network integration, year 2000 conversion and business process outsourcing.

Outsourcing contracts, once based on fixed monthly payments, now include shared benefits, risks and performance incentives. And where government buyers were once satisfied with simply gaining control over rising IT costs and operating reliable IT enterprises, they now demand access to the latest skills, technologies and business benefits.

Massachusetts, for example, is currently planning to partner with three different companies to aid in the assessment and collection of taxes. The companies will be risk-sharing partners with the state and will take a percentage of the collected revenues.

Some interesting initiatives under way could set the stage for state and local government outsourcing for the remainder of the decade. A Connecticut outsourcing project, whose estimated contract value could reach $1.5 billion, is one that is receiving a significant amount of well-deserved attention. The bids are in and a contract award is scheduled for later this year. The enterprisewide outsourcing project will not only establish Connecticut as a leader in the public sector, but should add tremendous momentum to the market.

Another area to watch? Telecommunication outsourcing initiatives under way in Maryland, Tennessee and Arizona. Maryland is in the process of procuring operations and technical support services for the state's telecommunications networks. Tennessee is in the planning stages of a procurement for the consolidation and operation of the state's communications systems. Arizona is asking respondents to its communications procurement to implement and operate the new state's communication system.

These efforts represent a new focus on telecommunications and a growing realization that state and local governments need assistance in designing, building, implementing, maintaining and operating the advanced networks of the 21st century that will deliver government services.

The momentum for business process outsourcing, as reflected in the shift of responsibility for running the day-to-day operations of government, has been building for some time. Child support collections, student loan processing, claims processing and ticket collections are examples of this growing business. Devolution broadly, and welfare reform specifically, is expected to produce a wide variety of partnership arrangements between government and industry to include outsourcing.

As the character of outsourcing has changed, the expertise needed to purchase these services has lagged considerably. The inability of government to build convincing business cases and gain support for outsourcing, along with the lack of experience in negotiating and managing contracts, are major barriers to growth of the market.

These early efforts have demonstrated that outsourcing requires a tremendous investment of intellectual, political and economic capital on the part of the government buyer.

The dynamics of the public sector outsourcing market are in a significant state of flux. If the determination of this new generation of leaders to make a difference, and not simply settle for business as usual, is a precursor of what lies ahead, outsourcing is here to stay. And by all indications, state and local government will continue to set the trend for the public sector.

Thomas R. Davies, Ph.D. is vice president of Federal Sources state and local government consulting practice in McLean, Va. He can be reached at daviest@fedsources.com. Dave DeBrandt contributed to this article.

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