Pennsylvania's Data Center Deal Brightens Outsourcing Picture

Pennsylvania's Data Center Deal Brightens Outsourcing Picture<@VM>Unisys' Bulging Services Business

Jack Winters

By Steve LeSueur Staff Writer

Pennsylvania and Unisys Corp.'s seven-year, $500 million contract to consolidate and outsource the state's data centers completes a widely watched effort that could help shake loose similar opportunities at the state and local level, state and industry officials said.

But even if the Pennsylvania deal provides only a moderate boost to other data center outsourcing projects, it still represents a welcome piece of news following Connecticut's decision to terminate its $1.4 billion information technology outsourcing initiative.

"You could almost hear the collective sigh of relief" among industry and government officials, said James Macaulay, public sector analyst with Dataquest, a research arm of the Gartner Group Inc., Stamford, Conn.

On June 29, Connecticut Gov. John Rowland abruptly canceled a controversial outsourcing effort planned by the state after six months of contract negotiations with Electronic Data Systems Corp. of Plano, Texas. The state selected EDS in December 1998 over Computer Sciences Corp., El Segundo, Calif., and IBM Corp., Armonk, N.Y., to enter negotiations for the large-scale effort to manage most of its IT systems.

Many worried that Pennsylvania's outsourcing project, which also was taking longer than expected to complete, would suffer a similar fate. But Pennsylvania and Unisys officials announced Aug. 25 that they had reached an agreement on a contract expected to save the state more than $100 million during the next seven years.

The contract calls for Blue Bell, Pa.-based Unisys to consolidate up to 20 data centers into one centralized data center in the state capital of Harrisburg and provide ongoing management and operational support.

The data center outsourcing project is the most comprehensive of its kind by a state government. The transition from agency-run data centers to the Unisys data center is expected to take one year.

Pennsylvania officials have received inquiries about the project from at least a dozen other states and two or three European countries, said Curt Haines, director of the data center project for Pennsylvania. "This is an emerging trend, without a doubt."

But Haines and others also emphasized that the process is lengthy; Pennsylvania began the effort more than two years ago. It also requires painstaking preparation, even for smaller outsourcing projects.

Consequently, while it appears that more state and local governments will turn to the private sector to consolidate and run their data centers, the pace of growth in this area is uncertain.

In a recent survey of U.S. government officials, 49 percent of the respondents said it was likely or highly likely that their government agencies or entities would outsource data center functions by 2010, as opposed to only 14 percent today.

The expectation is even greater in some foreign countries, such as Australia and the United Kingdom, where more than 50 percent of government officials said outsourcing data center functions would be likely or highly likely in 2010.

The survey, released Aug. 4., was conducted by the Economist Intelligence Unit of the Economist Group Ltd. of London.

While industry officials said the Pennsylvania experience will help pave the way for other states, especially by providing a blueprint for how to go about the process, officials don't expect a major stampede in this direction.

"I think you're going to see one to two a year, rather than half the states running out and kicking off new projects," said Jack Winters, vice president of government and education industry for IBM Global Services, which is partnering with Unisys in the Pennsylvania deal. Winters estimated there could also be five to 10 smaller deals at the state and local level.

Revenue from data center outsourcing will continue to grow, just not as rapidly as in some other outsourcing areas such as desktop outsourcing and network management, said Macaulay.

Dataquest predicts state and local governments will spend $685 million on data center outsourcing in 1999. This figure is expected to grow annually at a rate of 17 percent, according to Dataquest.

The two top opportunities are San Diego County's initiative to outsource its information technology services, including data centers, and the District of Columbia's plan to consolidate and outsource its eight data centers.

San Diego is expected to select a winner early this fall for a 10-year outsourcing contract valued at $50 million to $70 million annually. The prime vendors vying for the award are Computer Sciences Corp., EDS and IBM Corp.

District officials intend to release a request for proposals by early next year. Suzanne Peck, the district's chief technology officer, has said the RFP will favor a vendor that locates the consolidated data center in the district.

Chicago recently awarded a five-year contract valued at up to $40 million to Acxiom Corp. of Conway, Ark., to manage the city's data centers.

And Lockheed Martin Corp. of Bethesda, Md., has an eight-year, $95 million contract to operate the data centers in Orange County, Calif. That contract runs through October 2000.

Unisys has led efforts in Michigan and New York to consolidate each state's data centers, said Kevin Harnisch, director of business development for Unisys Outsourcing. After the consolidations, those states continued running the data center operations themselves. Unisys also has consolidated and operated data centers for local government agencies.

Outsourcing data centers was the first type of outsourcing Unisys made available to clients, but now it is just one piece in the company's expanding business for IT outsourcing and services, said Harnisch.

IBM also has provided data center outsourcing services for state and local governments, including Maryland's child support enforcement system and Michigan's unemployment data center, said Winters. The Michigan contract, awarded in 1995, has an estimated value of $60 million over 10 years.

Data center outsourcing may not make sense for everyone, said industry and government officials. Missouri, for example, consolidated its four data centers into one from 1995 to 1997.

But Mike Benzen, the state's chief information officer, said he decided against outsourcing the data centers partly because he did not think that Jefferson City, the state capital, could attract a new set of skilled IT workers if the state ever wanted to bring back the function in-house.

Outsourcing the data centers "is a permanent decision if we make it," he said.

Pennsylvania, however, expects many benefits from its new partnership with Unisys. The consolidation will make it easier for state agencies to share data, and Unisys will be able to respond faster to changing technology than could the state, said officials, who downplayed the significance of the expected savings.

"This project has never been solely about savings," said Haines. "What's important is that we'll be able to redirect resources toward other important projects, such as Web-based Internet services to citizens." By Steve LeSueur

Unisys Corp.'s seven-year, $500 million contract to consolidate and manage Pennsylvania's data centers is another major step in the company's dramatic makeover from a computer hardware manufacturer to a world-class provider of information technology services.

As recently as 1993, Unisys derived more than 50 percent of its revenue from hardware sales, said Brian Daly, director of corporate public relations for the Blue Bell, Pa., company. But in 1998, 68 percent of its $7.2 billion in revenue came from systems integration and support services.

The company is projecting total revenue of more than $11 billion in 2002, of which $8 billion, or more than 70 percent, will be generated by its services business.

An important part of the services growth will come from the company's outsourcing services, whose revenue is expected to grow from $900 million in 1998 to between $2 billion and $2.4 billion in 2002.

"Unisys is transforming itself in the 1990s into a different type of company," said Daly.

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