Outsourcing gathers steam

Agencies look to private sector for cutting-edge IT services<@VM>The hit list<@VM>U.S. agencies look abroad for outsourcing needs

The Transportation Security Administration is being asked to go from zero to 50,000 ? people, that is ? in one year.

Signed into existence by President Bush Nov. 19, 2001, as one of the first homeland security initiatives, the TSA was created in part to provide the infrastructure for protecting the nation's airports and travelers. The speed with which TSA was required to get up and running has pushed it to acquire services through outsourcing rather than building them internally.

In March, for example, the agency awarded a contract worth more than $103 million to NCS Pearson Inc. to recruit and hire airport inspectors. In April, it awarded a $105 million contract to Lockheed Martin Corp. to train new screeners. And June 7, TSA picked Lockheed Martin for a contract worth up to $490 million to upgrade passenger security measures at airports around the country.

But the biggest outsourcing prize is still on the way. This month, the agency is expected to release a request for proposals for a $1 billion program to create a nationwide information technology infrastructure for the new agency.

The contract likely will include data centers, seat management and telecommunications. A draft RFP has not been released, and TSA has not announced whether it will let its own contract or use an already existing governmentwide acquisition contract.

TSA may represent the upside of government outsourcing, both for the types of services offered and in the fresh approach to governing. Input Inc., a Chantilly, Va., market research firm, has estimated federal spending for IT outsourcing will grow 15.9 percent annually between fiscal 2001 and 2006, from $6.4 billion to $13.2 billion.

This forecast is a significant increase over its estimate for fiscal 2000 through 2005, which had a 7.3 percent growth rate. The new forecast, the company said, makes outsourcing the fastest-growing segment in the overall federal IT market.

"I'm bullish on the outsourcing market in general," said Mike Fox, vice president and director of sales and marketing for SRA International Inc., Fairfax, Va. "That train is moving down the tracks and picking up speed, as federal agencies have more and more experience with it and free themselves up to do other parts of their mission."

Benefits and barriers

Several factors are driving the spread of outsourcing. One is the looming retirement of up to half the federal work force over the next five to seven years. The government doesn't compete well for skilled workers with the private sector, which offers better pay and benefits, more training and better opportunity for individual career development.

Budget constraints also are pushing agencies toward outsourcing. Many contracts, such as the Navy-Marine Corps Intranet program won by Electronic Data Systems Corp. of Plano, Texas, put the burden on the contractor to make the upfront capital expenditures on hardware, software and systems integration, with agencies paying fees for services rendered.

"If I were in charge of IT in any large government activity right now, [with] multiple programs that I was going to the Hill annually trying to defend ... I would seriously look at an outsourcing approach," said Al Edmonds, president of EDS Federal.

A third factor contributing to outsourcing's growth is the Bush administration's desire to outsource more government activities. The Federal Activities Reform Act of 1998 directed agencies to prepare inventories of jobs that could be turned over to the private sector. Of the 900,000 positions on the lists, the administration has stated it would like to open at least half of them to competition with the private sector.

However, federal labor unions have generally opposed outsourcing measures, most notably public-private competitions carried out under the Office of Management and Budget's A-76 circular.

When the congressionally mandated Competitive Activities Panel released its report April 30 suggesting that A-76 competitions be phased out and replaced with new procedures based on federal acquisition regulations, members of the panel representing labor interests strenuously disagreed.

Labor representatives joined business representatives in labeling A-76 a "broken" procedure, but they rejected the panel's recommendations to open up the competitive process even more.

Another obstacle to outsourcing is opposition by government customers or users, who worry that IT services will decline when contractors take over. Karen Smith, acting program manager for ODIN, the Outsourcing Desktop Initiative for NASA, said one way to overcome internal resistance is to monitor customer satisfaction and ensure contractor performance.

ODIN is NASA's governmentwide acquisition contract for outsourcing desktop hardware, software and management support services, including administrative workstations and some engineering and scientific workstations. The multiple-vendor contract was awarded in June 1998, with a ceiling of $13 billion. Through March 31 of this year, almost 126,000 seats have been installed.

Smith said the metrics show customer satisfaction is increasing the longer ODIN is in place. While some centers have not yet reached their target levels, all NASA facilities measured in March recorded a better than 90 percent satisfaction rate.

At Goddard Space Flight Center in Greenbelt, Md., for instance, customer satisfaction is measured for elements such as help desk, fax services, cell phone services and desktop and network services.

But people take a while to get over their perceived lack of control over their own desktops, Smith said. This contributes to "water cooler talk" ? employees discussing the system among themselves ? that doesn't match the metrics showing satisfaction, so "we're trying to look right now if we are looking at the right things."
"We had a study done ... It takes about three years for the [outsourcing agency] to see the benefits" of cost savings and better technology, Smith said. At Wallops Island Flight Facility in Virginia, for instance, using ODIN has reduced costs by 32 percent.

Trends and developments

While outsourcing traditionally entails the shifting of government employees to the private sector, this has not always been the case in recent years, when agencies have created new functions that are immediately outsourced to experienced contractors.

At Voice of America, for instance, all of the agency's streaming media and Web hosting are outsourced.

"The Web stuff is managed offsite," said agency spokeswoman Tish King, who said the agency is still responsible for and controls the content.

"We need broad connectivity, broad bandwidth and a widespread international presence, and we can contract out instead of having to compete to pay for [bandwidth]," she said. "In terms of efficiency, getting these services now in order to reach our audience, delivering it well and quickly, would require considerable lag time, investment in [equipment] and salary competition."
King credits using outsourcing in promoting VOA's mission. "We're streaming 200 hours of programming on a daily basis in 53 languages. That includes audio, video and text news. I'm told that CNN brags when it streams 20 hours a day," she said.

Homeland security also is creating new outsourcing opportunities. One of the hottest growth areas is information security, including intrusion detection and firewalls to protect agency networks.

"We're definitely seeing a trend, particularly in state and federal governments, toward outsourcing various types or levels of security services," said Scott Miller, vice president of marketing for Veritect Inc., a subsidiary of Veridian Corp. of Arlington, Va. "We're finding the government is being pretty creative in terms of how they do the outsourcing."

Some agencies are looking for a complete, around-the-clock approach, while others maintain their own staffing for business hours and need an outside party for monitoring the off hours, Miller said. Or, in some instances, an agency has some internal capabilities, and Veritect places some of its staff onsite to combine resources and share responsibilities.

Another noticeable trend is that many outsourcing projects are becoming more costly and complex, requiring a greater commitment of resources from contractors to bid on, as well as perform, the contracts. NMCI, for instance, has a $6.9 billion price tag over eight years; Project Groundbreaker, Computer Sciences Corp.'s outsourcing project for the National Security Agency, is $2 billion over 10 years.

One side effect, said Dan Norton, vice president of NASA services with Lockheed Martin Corp.'s Information Technology division, is that the number of viable competitors is getting smaller.
"The deals are becoming larger," he said. "Other than the set-asides that will always exist, you're not buying 10 piece parts from different companies."

Norton said the contracts are running for longer periods to balance attractive pricing to the federal customers against the larger expenditures and greater risks being taken by the vendors.
That's not to say, however, small outsourcing projects don't exist. Many times companies will take on such projects as an extension of work they are already providing to agencies.

Sprint Communications Corp., Westwood, Kan., and WorldCom Inc., Clinton, Miss., both provide network services to federal customers. Outsourcing is an extension of the services the companies already provide agencies, rather than a primary business, according to representatives of both companies.

For example, WorldCom provides call-center services to the Social Security Administration, said Susan Zeleniak, who manages that contract for the company.

"We're not actually putting call-center agents in seats," Zeleniak said. "We supply everything from when you, the citizen, place the call, to the headset [of the agent], management reporting, whatever needs to be done to keep the network as efficient as it can be. We also manage their data network."

Between the call centers, managing the network and providing dedicated engineering support , Zeleniak estimated WorldCom and its subcontractors provide about 50 people.

Sprint also provides outsourcing for network services, engineering services and consulting services.

"It's not a huge business for us, [but] managed services is getting huge traction for us now," said Tony D'Agata, vice president and general manager of the company's federal unit.

Another outsourcing trend is the growing popularity of service-level agreements, elements in a contract that specify performance levels for the contractor and generally attach financial incentives or penalties to their achievement. Both NMCI and ODIN, for instance, include significant service-level agreements.

EDS' Edmonds offered two suggestions for using such agreements.

First, agencies and companies should set priorities, especially with regard to whether a particular service level should apply to everyone and at all times. "How many people need 99.999 [percent] for uptime if they're working 8 to 5, Monday through Friday?" he said.

Second, Edmonds said the agreement should not overspecify. "It's like a government-specified weapons system. If you overspec it, you might get something that you really don't plan to get, and then you can't perform in some ways."

For example, a service-level agreement should take into account the tradeoff between a system's speed and the amount of security measures it's loaded down with. Inflexible demands on one will affect the other.

In the end, the key to winning outsourcing work is identifying the disciplines where government agencies need assistance, said Eric Gioia, executive vice president of Robbins-Gioia Inc., an Alexandria, Va., program management firm.

"They tend to outsource things they're not very good at, such as payroll and staffing," Gioia said. "And now they're saying they're not very good at IT."

But agencies are becoming smarter customers as they expand and improve the use of metrics to measure contractor performance. "The days of the $700 hammer and those kinds of horror stories are getting few and far between," Gioia said.Major federal outsourcing contracts on the horizon

Housing and Urban Development Information Technology Services (HITS)

Value: $4 billion

Purpose: IT outsourcing services to support information processing, telecommunications and other requirements

Status: Award expected in June

Potential bidders: EDS, IBM, ACS, Lockheed Martin

Energy Department Outsourcing IT

Value: $3 billion

Purpose: The Idaho National Engineering and Environmental Laboratory needs IT services, such as applications development, maintenance and operations, help desk and support, for 5,000 users.

Status: RFP expected in November

Potential bidders: None identified

FAA Telecommunications Infrastructure

Value: $2 billion

Purpose: Provide integrated communications system to replace myriad systems in use

Status: Award expected in late June

Bidders: Harris Corp., Lockheed Martin, WorldCom

Transportation Security Agency Nationwide IT Infrastructure

Value: $1 billion

Purpose: Provide a national infrastructure for the new agency

Status: Pre-RFP

Potential bidders: None identified

Postal Service Contact Center Network Solutions

Value: $400 million

Purpose: Provide contact center network that integrates disparate IT and communications systems and reduces costs while improving service

Status: Pre-RFP

Potential bidders: Apple Computer Co., Hewlett-Packard, EDS, Northrop Grumman, On-point, Orkand, Teletech Holdings

Source: InputOne aspect of outsourcing is growing, though much of it is invisible: the use of offshore companies to provide some services.

Among the most prominent offshore opportunities are 24-hour call centers, especially in countries such as India, where labor costs are lower and there is an English-speaking population. But international companies provide other services as well, such as business process outsourcing, software development and knowledge management.

Companies such as Datamatics Ltd., Tata Infotech Ltd. and Wipro Ltd., all based in India, work as subcontractors with some of the largest systems integrators serving the government market, including Lockheed Martin Corp. of Bethesda, Md., Computer Sciences Corp. of San Diego, Electronic Data Systems Corp. of Plano, Texas, and IBM Corp. of Armonk, N.Y.

To date, most offshore outsourcing for U.S. government customers has been done at state and local levels, said Harsh Moharir, a spokesman for Tata.

"The state and local governments are more amenable to offshore outsourcing of their application development on a project basis," Moharir said. "State governments are looking at a model of establishing partnerships with the vendor and paying vendors from the savings in implementing new systems or outsourcing."

Tempe, Ariz., in April selected Tata's integrated tax solution for tax assessment and collection. Datamatics has been providing its services to Massachusetts.

Rahul Kanodia, managing director of Datamatics, said his company has been doing work with Manugistics Group Inc., Rockville, Md. "We're working on transportation [and] distribution," Kanodia said. "We are running a dedicated facility. ... We operate almost like an office of Manugistics."

The savings can be significant. Kanodia said that when offshore centers are used, it can result in almost 50 percent cost savings.

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