Iowa's Field of Dreams

Outsourcing, a subject under spirited debate inside numerous corporate boardrooms, is now shaking up the state and local government marketplace. And nowhere is the clamor louder than in Iowa, where a ground-breaking information technology assessment is promising to rewrite the state's IT rule book.

In a report commissioned by Iowa, the Yankee Group Inc. -- a high-tech consulting and research firm -- recommended that the state outsource all executive-level functions, a feat not yet undertaken by any state. To help examine the issue more closely, Electronic Data Systems Corp. and IBM's Integrated Systems Solutions Corp. submitted information on the feasibility of outsourcing, which the Yankee Group included in its analysis.

Doug Couto, Iowa's chief information officer, continues to field frequent calls from businesses that want to know the status of the ambitious technology assessment that could dramatically alter the way Iowa procures IT-related products and services. What's more, the assessment has put Iowa at the center of a widening outsourcing debate over whether private companies can operate state IT functions better than public entities -- or even if they should be allowed.

"We're tracking more than $1 billion in state and local outsourcing contracts that are in the [pre-request for proposal] stage," said Thomas Davies, vice president of state and local government consulting for Federal Sources, a McLean, Va., market research and consulting firm.

It's a matter of time before outsourcing becomes the largest business in the government arena. This will be a very significant market, said Jack Winters, vice president for government with IBM/ISSC.

The rising noise level surrounding Iowa's outsourcing evaluation has led Couto to remind integrators that no request for proposal yet exists. In fact, Iowa's CIO said the state has decided that some functions, such as application development, would best remain under the state's direct control because of the critical nature of the work. Workstation management and the operation of the state's three data centers will likely be consolidated under one central authority, but it's unclear whether that will be the CIO or an agency.

Iowa's goal is a competitively run government, and that does not necessarily mean outsourcing, cautioned Couto. If outsourcing is selected, there is still much work to do before a request for proposals can be issued, he said.

Outsourcing can fail if the customer does not have a clear management focus and an understanding of standards for equipment and services. Iowa will need to formalize those before it can issue a request for proposals, said Couto.

Before a request for proposal even becomes an option, the state wants to further investigate financial concerns. The numbers in the Yankee Group report were pulled together in a week, and there are some concerns about their accuracy, said Couto. He hired KPMG Peat Marwick to determine the state's real IT fiscal resources. KPMG's report should be issued July 15.

The state and local market for outsourcing started approximately 10 years ago and was growing gradually until 1994, when it started an upward spike, said Davies. That spike was a combination of many things, most notably a new wave of governors with a private sector orientation, he said.

"It's a very immature market and will continue to grow significantly for the foreseeable future -- at least the next five years, said Davies.

Outsourcing will hit the public sector in a fairly dramatic way in the next three to four years, said Douglas Ryckman, managing partner with Andersen Consulting's Government and Health Services practice. It already has occurred in pockets, but as there is continued pressure both on quality of services and cost, more and more organizations will look to this as an option and will play in that area.

There are two main types of outsourcing, Ryckman said. The first is driven by a desire to lower costs and to deliver a commodity service, such as running a state's data center. These will be highly price-competitive. Andersen is not interested in those opportunities, but it is interested in the second type of outsourcing, business process outsourcing, which holds high-value opportunities. This would include privatizing state operations, in which a vendor builds and operates state functions and may hire some state employees.

Managing Medicaid information systems is the most mature outsourcing market segment, according to G2 Research, Mountain View, Calif. Other segments include lottery systems, child support enforcement, electronic benefits transfer and parking ticket collections.

By the turn of the century, revenues from business process outsourcing contracts will be more than double that of IT outsourcing, predicts Bill Loller, an analyst with G2. He anticipates a 19 percent growth rate, which means that business process outsourcing will present companies with a $4.1 billion opportunity by 2001. Data center outsourcing is expected to have an annual growth rate of 18 percent, but because of the lower costs, market opportunities will be only $961 million in 2001.

The number of companies with a strong federal government presence that are interested in state and local government outsourcing is growing exponentially because of the opportunities, said Davies. EDS, Unisys and IBM/ISSC are key players in the outsourcing market. Smaller companies that have catered to state and local governments also should capitalize on the outsourcing trend.

But before that can happen, states must overcome several obstacles -- many of which deal with public perceptions -- before attempting outsourcing. Job loss tops the list of employee concerns. Iowa is combating this problem by having employee representatives sit on several committees that are evaluating the IT assessment process. An effort to outsource Indiana state government functions failed in part because of the political backlash from employees who feared their jobs would be lost.

There also is a fear that critical functions cannot be maintained, which is part of the reason that Iowa decided to keep application development in-house.

There also could be negative fallout if constituents perceive the outsourcing as an unneeded, costly investment, or if they perceive it as an attempt to move high-tech jobs away from the local area, said Winters.

Colorado's law dating back to 1920 essentially bans outsourcing of government functions and requires civil servants to do the work. The state can circumvent the requirement for programs enacted since that time, but the law shows how emotional people can become about outsourcing.