Getting the Best Value

More states are outsourcing functions to private industry to lessen their information technology burden

When California announced in late October its plan to outsource 17 of its telecommunication networks, its reasons for doing so weren't particularly complicated -- just honest.

"There's no reason that the government needs to be in the phone company business," stated Rich Halberg, assistant director for the state's Department of Information Technology. "We're losing money on that program every year, with something close to a $10 million annual deficit. So while we were trying to be in the business, we weren't doing a very good job of it."

And phone service is not the only "low-hanging fruit," as Halberg puts it, about to be plucked as an offering to private industry in California. Gov. Pete Wilson's office recently put out a booklet, "A Competitive Government Plan for Less Bureaucracy and More Results," which heavily encourages a shift to more outsourcing.

"The governor has basically asked all of the agencies to go through this process of identifying core functions and determining whether each is something that has to be done by government," Halberg explained. "They're supposed to use the 'phone book test.' If you can look in the Yellow Pages and find someone that offers a service, you have to ask whether there's any compelling reason for government to be doing it."

While California may be high-profile in its efforts, it is not the first state to recognize the disadvantages in trying be so many things to its residents. More states -- following earlier successes achieved by their local counterparts and individual agencies -- are looking to private industry to lessen their information technology burden.

"People are finally putting these ideas down on paper and formally proposing that the issue of covering the state's entire operations be examined," said Bill Loller, senior research analyst for G2 Research Inc., Mountain View, Calif. "You've got chief information officers and information resource councils that have statewide control or oversight of IT operations, who have the authority to... examine the benefits and economies that can be achieved through outsourcing."

Texas, for example, now outsources all of its new application development. Arkansas just contracted with BDM International Inc., McLean, Va., to take over its human services infotech operations. Iowa is in the process of consolidating and centralizing the data centers of three major departments into one, and when completed, will consider outsourcing it. Michigan became the first state to turn over its entire desktop computing infrastructure -- including purchasing of hardware and software, maintenance, training and LAN administration -- to a single vendor, in this case Plano, Texas-based Electronic Data Systems Corp. Other states have outsourced portions of their infotech functions involved in such labor-intensive services such as child support enforcement, lottery services, Medicaid claims processing and student loan repayments.

"All of a sudden, states are much more motivated to close the deal and get the job underway," said Sherry Sumits, outsourcing program manager for Input Inc., a research and consulting firm in Mountain View, Calif.

Of course, state governments have more compelling reasons to do so, including shrinking budgets, increasing global competition for economic development, a growing demand for better service by citizens, and an increasing shortage of technical skills in the work force. Moreover, deregulation of the telecommunications industry and other utilities are making the outsourcing of those services more attractive to government officials looking to cut costs.

Another more urgent factor has been the recent congressional trend to turn back a number of federal functions to the states, including welfare and work fare services.

"It's no longer the federal government that's growing and spending money on this type of thing, it's the states," Sumits said. "The states are getting so much responsibility and they don't really want to put out the capital investment required, so the IT companies [will] be the only ones that can really handle that for them. And politically, there are some basic potential disasters if the states don't do it right. So the pressure is really on to ensure that they get guaranteed results."

Given that pressure, at least nine states have considered outsourcing their entire IT infrastructures, including Connecticut and Maryland, according to a survey conducted by the National Association of State Information Resource Executives, Lexington, Ky. "Most of them are not looking to do something like that right now, however," said Angie Watson, the organization's research and publications director. "It's a pretty big undertaking."

Most states, Watson noted, still want to hold on to any function they feel is critical to the management of information. "The more impact a function has, the less likely government is to outsource it," she noted.

Still, in late 1995, Indiana began floating the idea of privatizing its enterprise infotech infrastructure. And although the plan was shot down pretty quickly, industry watchers hold out the belief that the venture could become reality in the near-term, especially since the current gubernatorial race features Indianapolis Mayor Stephen Goldsmith, one of the country's biggest proponents of outsourcing and privatization, in a tight race with the current Lt. Gov. Frank O'Bannon.

"Most people involved believed they had a good idea, but they didn't sufficiently educate the state employees as to what would happen," said Loller. "[It's] necessary for vendors and government to work as partners, build a relationship of trust and really educate the employees as to what will happen as a result of an outsourcing agreement, that they won't just be thrown out on the street."

Still, recognizing the issues involved will only go so far when challenging the turf traditionally held by both state employees and management information systems managers. Even those whose jobs are to dig out functions that might benefit from outsourcing can be defensive about the issue.

"We will not be wholesaling IT," emphasized Jim Youngblood, director of Information Technology Services for Iowa. "Any decision we make will be very much on a competitive/comparative basis as to who can provide the best value. And even if we do outsource, we feel very strongly that does not mean you just give it over to private industry but rather state government continues to manage and define what services and what level of services we expect to be delivered."

Carolyn Purcell, executive director of the Department of Information Resources for the state of Texas, agrees, noting that while her staff is aggressively looking for outsourcing opportunities, "every case has to be evaluated independently to determine if in fact a private company can provide lower costs, better services, or simply allow the government to concentrate on core competencies."

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