Outsourcing Takes Off In State, Local Market

Outsourcing Takes Off In State, Local Market

Rob Berton

By Steve LeSueur

The growing complexity of technology and a conservative budget climate are driving state and local governments to turn increasingly to the private sector to manage their sophisticated information systems.

While outsourcing is not new, momentum clearly is building for the private sector to take over many functions and services previously performed by state and local governments, industry and government officials said.

Among other things, many state government leaders lack adequate resources to develop and manage automated systems now being used for data processing, welfare projects and human resource programs.

And even if a state or local government has the necessary resources, the private sector often can perform more efficiently those tasks that are not deemed core responsibilities, industry observers said.

"There are clearly a lot of drivers out there making governments look more closely at outsourcing," said Ellen Zidar, a senior research analyst with the Gartner Group, Stamford, Conn. She cited a lack of skills among government staff and a desire by governors and legislators to reduce expenditures and maximize efficiencies.

"We're seeing a move to shift less-strategic functions to the private sector," Zidar said.

Spending by state and local governments on outsourcing projects is projected to jump 25 percent annually during the next five years, from $1.25 billion in 1998 to more than $3.8 billion in 2003, according to Rishi Sood, a principal analyst with Dataquest, a Mountain View, Calif., market research firm.

The expected jump in outsourcing is doubly significant because total IT spending by state and local governments will increase by only about 10 percent annually during the next two years, from $46.1 billion in 1998 to $55.8 billion in 2000, according to Federal Sources Inc., McLean, Va.

A number of major outsourcing projects already are under way at the state and local government level. The largest is in San Diego County, where the government intends to outsource its data processing, telecommunications and other information technology functions to the private sector. The planned 10-year contract is valued at up to $700 million and likely will be awarded in the fall.

Sood said that Dataquest has been getting large numbers of requests from government representatives seeking help with potential outsourcing projects, but he declined to mention names.

"As governments see more success in the private sector and the public sector, they are more willing to try outsourcing," said Rob Berton, head of the business process management portfolio for the Americas state and local practice within Andersen Consulting, Chicago.

His assessment is echoed by Holli Ploog, president of DynCorp Management Resources Inc., Reston, Va. "As soon as we get past the year 2000 issue, I think there's going to be an explosion of outsourcing," she said.

The three contractors competing for a prime role on the San Diego project are Computer Sciences Corp., El Segundo, Calif.; Electronic Data Systems Corp., Plano, Texas; and IBM Corp., Armonk, N.Y.

Other large outsourcing projects being eyed by systems integrators include a child support enforcement effort in Texas and a communications network effort in Iowa.

And District of Columbia officials intend to outsource the city's data centers, network management, applications development and help-desk services. These outsourcing efforts will "free management to focus on core competencies," said Suzanne Peck, the district's chief technology officer.

The planned efforts come on the heels of several prominent outsourcing awards made during the last year:

*In December, Connecticut selected EDS for a seven-year, $1 billion deal to operate and maintain most of the state's information technology services.

*Earlier in the year, Pennsylvania selected Unisys Corp., Blue Bell, Pa., for a seven-year, $410 million effort to consolidate and manage the state's data centers.

*California awarded a $900 million contract to a team headed by Pacific Bell and MCI to operate the state's telecommunications network.

Pennsylvania officials have projected savings of $140 million during the first five years of their outsourcing effort. Other state and local governments are watching Connecticut and Pennsylvania closely, waiting to see whether those projects achieve the expected benefits, said industry officials.

Consequently, it is significant that both states are still enmeshed in contract negotiations with their selected prime contractors, suggesting that officials are still figuring out how to structure and manage complicated outsourcing deals.

More than two dozen smaller cities and counties have outsourcing arrangements with systems integrators to provide a full range of IT services. Most of these contracts, which range from $1 million to $18 million annually, belong to two companies: Systems & Computer Technology Corp., Malvern, Pa., and Affiliated Computer Services Inc., Dallas.

The accumulation of government clients for these companies, while not dramatic, has been steady over the last several years. "We can count on two to three new customers each year," said Cathy Welsh, president of SCT Services.

Most governments outsource specific functions or applications rather than all of their IT services, according to analysts.

Several areas are viewed as particularly fruitful.

"Data centers are a natural market for outsourcing, because they can bring economies of scale," said Zidar.

But state and local officials also are turning to the private sector for desktop-related work such as help desk, procurement and infrastructure tasks, which "are becoming more of a headache for governments," she said.

Systems integrators also are cashing in on outsourcing opportunities stemming from systems they design for state and local governments. It is often more cost effective for a government agency to keep the development contractors in place than train its staff to manage a new system, said Berton.

Andersen Consulting, for example, designed and implemented a child support enforcement system for Tennessee. After its initial contract expired, Andersen received a five-year contract to run the system for the state, perhaps in part because child support collections have increased 34 percent since the system was implemented in 1994.

Similarly, Andersen is managing a human resources system it designed for New Brunswick, Canada, and an automated criminal justice system it designed for Dade County, Fla.

Outsourcing wins are very significant in terms of Andersen's ability to maintain a 20 percent growth rate, Berton said. "We see a lot of growth in outsourcing now, and expect it to be a growing trend in the next several years," he said.

These and similar projections have persuaded other systems integrators to enter the outsourcing market. One case in point is ManTech International Corp., Fairfax, Va.

"There's a strong push at ManTech to get into the state and local government market, particularly related to IT," said Gordon Steever, vice president of business development for ManTech's Advanced Systems group. ManTech's state and local business is worth an estimated $15 million annually, he said.

Although the privately held company does not currently have any outsourcing business in this market, it does a lot of services support work helping to maintain equipment, systems and software.

"If you're already doing a lot of support, it's not that far of a step into outsourcing," Steever said.

Industry officials also said that while only the largest systems integrators have the experience and expertise to bid as primes for the outsourcing projects in Connecticut and San Diego, they in turn recruit other technology-related companies, both large and small, for their teams.

In Connecticut, EDS assembled a team that includes American Management Systems Inc., Lucent Technologies Inc., Microsoft Corp. and Unisys.

In San Diego, Science Applications International Corp. has joined the CSC team; AMS is again teamed with EDS; and Lockheed Martin Corp. and KPMG International have teamed with IBM. Many other companies are still trying to hook up with one of the primes.

A role as a subcontractor on one of the teams "would be a natural fit for us," said ManTech's Steever.

Still, the bulk of government spending on outsourcing will be for more modest projects. Missouri, for example, has been outsourcing smaller development projects for years, said Mike Benzen, the state's chief information officer.

"We're not expecting to outsource on the scale of Connecticut," he said, but the state will continue to outsource "on a piecemeal basis where it's needed and where it makes sense."

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