California nightmare: County declares CSC in default

Negotiators seek to stave off death of outsourcing project<@VM>Timeline: A troubled life <@VM>Detailing default

Computer Sciences Corp. and San Diego County negotiators are desperately working to settle a contract dispute after county officials charged CSC with being in default on a groundbreaking information technology outsourcing project.

The county withheld a $44 million payment due to CSC in January, saying the company has failed to provide the required outsourcing services, such as adequate bandwidth for users, network support, security planning and refresh of infrastructure, applications and servers.

The county April 18 issued a formal "Notice of Default" three days after CSC broke off negotiations over the disputed contract, making it appear as if the company might take the dispute to court. But following a May 7 meeting between San Diego Chief Administrative Officer Walter Eckard and CSC Chairman and Chief Executive Officer Van Honeycutt, discussions began again.

The county views CSC's return to negotiations as a positive sign, and negotiators are working closely to come up with an agreement that is satisfactory to both sides, said San Diego County spokesman Joe Tash.

"The county and CSC are hoping that this can be worked out," he said.
Frank Pollare, a CSC spokesman, declined to comment on the county's allegations or any aspect of the contract dispute.

If not resolved, the problems with the San Diego County project would represent a major blow to the cause of outsourcing, at least on such a massive scale, said industry observers. CSC and the county are now in the third year of a seven-year, $644 million IT outsourcing deal signed in October 1999 that the private sector hoped would lead to similar large-scale opportunities around the country.

Among its responsibilities, the CSC Pennant Alliance team is tasked with improving and refreshing the county's infrastructure, modernizing applications and bringing services online. About 220 employees assigned to the project are former county employees, Tash said. Altogether, about 600 employees are assigned to the project, CSC told Washington Technology for a previous story.

At press time, the county was still withholding the $44 million it was scheduled to pay at the beginning of the year for services from January through June. Thus far, the CSC-led team has been paid $213 million on the contract, Tash said.

The San Diego County outsourcing project is the largest of its kind in the state and local market. Three years ago, Connecticut killed a similar deal with Electronic Data Systems Corp. of Plano, Texas, before the contract was signed.

When CSC broke off negotiations suddenly in April, county officials said they were left with no recourse but to notify the contractor that it was in breach of contract. In an April 18 default letter, the county demanded that CSC cure all failures within 30 days and participate in a dispute resolution process.

The county alleges that CSC has failed to improve its use of IT and telecommunications and to provide the county with the latest security systems and methods to improve privacy and protection of confidential information and data.

Moreover, the county demands that CSC stop requesting additional fees for base services under the contract, stop threatening to reduce service levels, stop demanding the county pay fees higher than those required under the contract, and continue to provide all the services outlined in the base agreement.

Eckard said in a May 28 statement that CSC has performed well in some areas. Since the contract was awarded, CSC has successfully installed a new telephone system for the county's 17,000 employees, reduced computer outages, improved response to IT service requests, provided new online services and provided desktop computers to some county employees who never had them before, according to the statement.

However, Eckard said CSC has failed to meet key contract milestones and perform IT services at the required level.

Leo Crawford, chief information officer for Orange County, Calif., which has a data center outsourcing contract with Affiliated Computer Services Inc. of Dallas, said the size of the San Diego County outsourcing project made it "a daunting task."

"It seems like they were biting off an awful lot," he said.

Mary Grillo, executive director of the Service Employees International Local 2028, said she doubts the two parties can complete what she said is a complicated project. "Neither group knew what they were getting into," she said.

Grillo, whose union strongly opposed the outsourcing plan, said the county never imagined it would have to monitor the project so closely.

Analysts and industry observers noted the project has had several key changes in leadership on both sides since it began. (See timeline in box to the right of this article.)

Despite current problems, county officials are not second guessing their decision to outsource IT services and still believe outsourcing was the right thing to do to improve the county's infrastructure, Tash said.

"Overall, we're better off than when this contract began," he said.

When San Diego County officials put together the outsourcing plan, they included stringent service-level goals to ensure the winning contractor provided high levels of service. They also wanted to assuage critics who said the county would suffer under the deal.

After the first year of the contract, the county assessed a $2.2 million fine against CSC for failing to meet some of the master service-level agreements.

"I don't think any [company] could have made these service levels, but they signed up for them," said Tom Boardman, then county chief technology officer.

While it is logical to have high standards, the way in which the customer enforces the standards says a lot about the partnership between the two parties, industry observers said. If the standards are enforced too rigorously, the contractor may lose substantial money on the project, they said.

Although CSC has declined to comment on the dispute, the county's default letter suggests the company believes the county is requesting many services that fall outside the contract's scope and requirements.

Jon Kutler, president of Quarterdeck Investment Partners LLC of Los Angeles, said some integrators that are accustomed to working in the federal sector have learned some hard lessons working on projects in the state and local sector, where some customers are not as sophisticated in structuring and managing contracts.

"In many cases, contractors assume that going from federal to state and local is the same as going from DoD to Treasury, and that there will be some differences, but they will be easy to overcome," Kutler said. "The reality is that it has been a much more difficult transition."

Payton Smith, manager of public-sector market analysis services at Input Inc., an IT market research firm in Chantilly, Va., said he doesn't think the fallout out from the Pennant Alliance contract will hurt CSC's federal business, where the company has an abundance of IT outsourcing jobs.

"Past performance is certainly important for federal agencies, but it's more important [in relationship] to other federal work and not state and local work," he said. "The impact of this deal at the state and local level will be minimal in terms of the company's federal contracting."October 1999
San Diego County and CSC-led Pennant Alliance sign a seven-year, $644 million IT outsourcing contract. The CSC team includes Science Applications International Corp., Pacific Bell and Lucent Technologies Inc.

November 2000
A first-year report on the project by the county finds Pennant Alliance is meeting 12 of the 14 minimum acceptable service levels. CSC is fined $2 million for failing to meet all the performance levels. CSC pledges to meet all levels by April 2001.

June 2001
Kristine Buitenhek is appointed CSC's lead executive for Pennant Alliance's outsourcing program. Richard Jennings continues as western region general manager for CSC's Technology Management Group.

September 2001
San Diego County Chief Technology Officer Tom Boardman becomes director of San Diego County's new Department of Child Support Services. He is replaced by Lana Willingham, who will serve as program manager for the county.

January 2002
San Diego County and CSC officials meet to resolve differences of opinion on the progress of the Pennant Alliance project. The county withholds $44 million due for services from January through June.

March 2002
Lana Willingham retires and is replaced by Gary Clarke, who will serve as the county's acting program manager.
April 2002 CSC breaks off talks with San Diego County April 15. The county tells CSC April 18 that it is in default on the contract.

May 2002
San Diego County Chief Administrative Officer Walter Ekard meets with CSC Chairman and CEO Van Honeycutt May 7. CSC officials come back to the negotiating table.

On April 18, Gordon & Glickson LLC, counsel to San Diego County, notified Computer Sciences Corp. that the county had declared CSC in default of their agreement. Here are a few excerpts from the letter outlining the county's position.

"CSC is well aware of the fact that the county has experienced numerous problems with CSC's delivery of the services ? yet the county has consistently cooperated with CSC in an effort to understand CSC's difficulties and problems, and to accommodate CSC's shortcomings in supporting the county's business in the hope that CSC would eventually provide all of the required Sevices in a satisfactory manner. The county's good-faith attempt to work with CSC, unfortunately, has not been successful."

"All of CSC's continuing failures, both individually and in the aggregate, during the term of the agreement, are material failures by CSC to provide the services pursuant to the agreement. CSC's failures have caused and will continue to cause damages to the county."

"It appears that CSC has put into practice a process whereby virtually every request for services by the county is being improperly treated as an out-of-scope chargeable task,..."

About the Author

William Welsh is a freelance writer covering IT and defense technology.

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