Feds Force Vendors, States To Cool Heels

Feds Force Vendors, States To Cool Heels<@VM>It's Not One-Stop Shopping Yet

Rock Regan

By Steve LeSueur, Staff Writer

Landmark information technology projects in Pennsylvania and Connecticut are facing unexpected delays that could prove costly to the prime vendors preparing to begin work in those states.

Pennsylvania selected Unisys Corp. last September to consolidate and manage the state's data centers, hoping that the Blue Bell, Pa., company could start work by April. But the outsourcing project still needs a final go-ahead from federal agencies, a process that began in mid-May and could take two to three months, state officials said.

In Connecticut, the May 1 target date set by state officials for signing an outsourcing contract with systems integrator Electronic Data Systems Corp., Plano, Texas, has slipped 45 days to June 15.

A number of factors have contributed to the delay, including the complicated nature of the project to manage all of Connecticut's information technology services. But industry observers said a main problem has been the process for securing the needed approvals from federal regulators who review major IT initiatives in the states.

"As with any project, you have a plan that allows for contingencies," said Bill Dvoranchik, the managing director of the EDS project in Connecticut. But he said he does not regard the project as behind schedule, and emphasized that EDS and the state are making progress in getting a contract signed.

"There's always a sense of urgency to get things done as quickly as possible," he said.

While Dvoranchik said there is no simple answer to whether the lengthy contract negotiations are costing EDS extra money, industry analysts and officials agreed delays can place a huge burden on contractors who are marshaling personnel and resources to begin work on a specific date, and then must wait.

A $1 billion contract over seven years translates into millions on a monthly basis, said Thomas Davies, a senior vice president with Federal Sources Inc., McLean, Va., alluding to the expected value of the IT outsourcing contract that Connecticut intends to award to EDS.

The expected value of the Unisys contract is $410 million over seven years. Unisys officials declined to comment because the contract award has not yet been made.

Sometimes companies can assign personnel to other contract work while waiting for a particular project to begin, but that makes it harder to keep the original project team together, said John Kost, a vice president with the public sector solutions unit for TRW Inc., Cleveland.

"I don't know whether either of these companies is losing money right now, but the clock is ticking, and no revenue is coming in," he said.

While the federal approval process is not the only cause of delay, many view it as a major headache and key stumbling block for these states.

"The process was meant to help the states, but it has become more restrictive than facilitative," said Larry Singer, president of Public Interest Breakthroughs, a Vienna, Va.-based, non-profit organization that helps governments apply information technology in human services programs.

Federal agencies, most notably the departments of Agriculture, Health and Human Services and the Health Care Finance Administration, provide matching funds to the states to help them build and maintain automated health and welfare systems. These IT systems support programs such as school breakfasts and lunches, child support, child welfare and Medicaid.

When a state embarks on an outsourcing project that could affect the IT systems administering these programs, federal regulators are required by law to approve the proposed outsourcing contract if their agency is providing $5 million or more in matching funds for the systems.

The approval process requires the states to submit planning documents to the individual agencies providing matching funds. The documents lay out the strategy and likely impact of an outsourcing project on federal programs.

In theory, the states could forego the approval process and do without the federal matching funds, but as a practical matter they need the funds to build automated systems that comply with federal laws, said state and industry officials.

Equally important, state officials worry that if regulators reject their state's outsourcing plans, the state not only could lose federal funding for its IT systems, but also for the health and welfare programs themselves. In Connecticut, this amounts to more than $400 million annually.

Consequently, state officials said they are cooperating in every way possible to obtain the required approvals.

"We're not going to do anything to jeopardize our federal funding stream," said Rock Regan, Connecticut's chief information officer. "If there's anything we need to do, we'll do it."

The states can begin consulting with federal officials and submitting advanced planning documents during the early stages of an outsourcing project to ensure more rapid federal approval when the contract is finalized. This is what Pennsylvania did, said Kost, who followed the project as a consultant with Federal Sources at the time.

In March, Pennsylvania officials reached tentative agreement with Unisys on a contract to outsource the state's data centers. And May 11, the state submitted final planning documents to federal agencies.

Nevertheless, Thomas Paese, Pennsylvania's secretary of administration, said final approval from all the interested agencies likely would take several months.

"Pennsylvania spent a lot of time negotiating with the federal agencies in the beginning of the project," Kost said. "I'm a little surprised that the agencies are dragging their feet."

Federal officials charged with oversight are sympathetic to concerns about delays, but say they must ensure that their customers — the citizens who receive billions of dollars in federal welfare and health benefits — are not shortchanged when a state transfers IT functions to the private sector.

When examining an outsourcing proposal, they want to make sure that it protects the security of data and the privacy of individuals, that matching funds for state IT systems are spent wisely, and that payments and benefits to citizens are not disrupted.

"We don't necessarily want food stamps to be the guinea pig in the transition from one system to another," said Joe Leo, deputy administrator for management of food and nutrition services at the Department of Agriculture.

Federal officials declined to say precisely how much funding is at risk in these two states. Leo estimated that the federal government provides more than $1 billion annually in matching funds to all the states to help automate and improve their IT systems for delivering health and welfare services.

Leo acknowledged that the approval process sometimes slows projects, but he also said that "some states chose to let us know about their projects at the last moment."

The tension between the federal government and the states is an inherent part of the approval process, said Harris Miller, president of the Arlington, Va.-based Information Technology Association of America, which represents over 11,000 direct and affiliate members.

"It's creative tension, but not irreconcilable," he said. "It can be worked out over time."

Some observers said federal agencies actually have reduced their oversight and micromanagement in state programs.

"The federal government's ability to shut down projects used to be much greater than it is today," said Rishi Sood, a principal analyst with Dataquest in Mountain View, Calif.

Federal regulators also provide helpful advice during their reviews, others said. "They want to learn as much as possible to understand and improve the process," said Connecticut's Regan.

But many state and industry officials still say the federal government unnecessarily slows and disrupts state projects with its intrusive reviews.

Two years ago, for example, the Clinton administration blocked a Texas plan to outsource the delivery of its welfare services, forcing the state to scale back the project.

John Thomas Flynn, a former CIO of both Massachusetts and California, said the federal government should let the states decide how to spend the matched funding.

"The states are spending their own money, too. They're not going to waste it," said Flynn, now a vice president of the state and local government business group with Litton-PRC Inc., McLean, Va.

Some state and industry officials are afraid that federal red tape could dampen enthusiasm for outsourcing among other state and local governments.

"It raises the question of whether the states are in control of their IT destiny," said Davies.

In Connecticut, opponents of the outsourcing project have criticized state officials for not consulting soon enough with federal agencies, and contend that the delays are symptomatic of more fundamental problems with the state's outsourcing plan.

"This just shows the level of incompetence of those running the project," said Rick Melita, a spokesman for the Connecticut State Employees Association, which opposes the privatization effort.

Connecticut officials hope to have an approved contract ready for EDS to sign by June 15. The contract then must be audited by state officials and reviewed by state legislators, who can veto the deal with a three-fifths vote of either house.

The outsourcing effort could face a serious challenge in the Democratic dominated House of Representatives.

"The longer this drags out, the greater the chance that it will just whither away," Melita said.By Steve LeSueur

Why does the federal approval process raise the hackles of so many state and industry officials?

For starters, it can increase costs and possibly derail a planned information technology project.

Some officials object as a matter of principle, saying the federal government has no right to intrude upon the internal business of the states.

But even those who concede that federal agencies have a legitimate interest in approving major IT outsourcing projects in the states say the process is far too lengthy and confusing.

A major reason for this confusion is that the process was designed for reviewing individual IT systems, such as state systems for tracking dead-beat dads, and not for large-scale outsourcing projects, said officials.

"There are few or no formal guidelines in approving large-scale outsourcing transactions," said Richard Fogel, a partner with Gordon & Glickson, a Chicago law firm hired by Connecticut to help the state privatize its data centers and other IT services.

Because the regulations were conceived before states and municipalities began outsourcing, they do not state clearly which agencies must receive the advanced planning documents, Fogel said.

"We would like to know the answers to the question, who, what, when, where, why and how," he said.

The states also are hampered by the fact that they must deal individually with each agency. "It's not one-stop shopping," said Rock Regan, Connecticut's chief information officer. "It's cumbersome."

Federal officials acknowledge that the review process could be improved but contend the basic framework to do so already exists. And, they said, they already have considered the one-stop shopping approach, but that could add another layer of management to the process.

"It might make things more difficult, not simpler," said Mark Ragan, director of the Department of Health and Human Services' Office of State Systems. He said that federal agencies try to coordinate their activities, at least informally, when they review a state's outsourcing plans.

Ragan pointed out that federal agencies have approved innumerable IT projects over the years, demonstrating that the approval process is not endless.

To avoid problems or frustrating delays, federal officials recommend that the states consult with them during the early planning stages of a project. "Get in touch with us informally to ask questions and seek our advice," said Ragan. "It works more smoothly when the states let us know where they are in the process."

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