Outsourcing Efforts Gather Steam Among Fed Agencies

Outsourcing Efforts Gather Steam Among Fed Agencies<@VM>States, Towns Progress Despite One Dead<@VM>The Pace of Progress

By Ed McKenna

Two huge outsourcing efforts within the Navy and NASA could provide a window on how U.S. federal agencies will rely increasingly on the private sector to help them manage their information systems.

Federal spending on information system outsourcing is expected to grow 13.5 percent annually over the next five years, said Cynthia Murphy-Doyle, senior analyst for information system outsourcing and the business process outsourcing program at International Data Corp., Framingham, Mass. The firm expects federal outsourcing spending to grow from $1.7 billion in 1999 to almost $3.3 billion in 2004.

"The government [market] will remain strong," rivaling most commercial segments in spending and outpacing everyone in growth, she said. Overall, private-sector outsourcing is expected to grow at about 12 percent annually over the same span, according to IDC.

While outsourcing in both sectors is growing, the private and public sectors have differed widely in their approaches. Commercial customers often ask vendors to take over their whole information technology management, while federal organizations generally outsource just certain aspects of their information technology functions, such as the desktop or help desk, said Robert Cann, group senior vice president of customer solutions and services for Science Applications International Corp., San Diego.

However, two federal agencies are bucking this trend. In implementing its massive $10 billion Navy-Marine Corps Intranet program, the Navy launched a servicewide seat management initiative that dwarfs in size and scope the initiatives started under the General Services Administration's Seat Management and the Outsourcing Desktop Initiative for NASA (ODIN) programs.

In an even more radical break, NASA has outsourced not only its IT but also its mission-critical businesses under its Consolidated Space Operations Contract with Lockheed Martin Corp., Bethesda, Md.

According to Christopher Wren, GSA's program manager for the Seat Management project, the intranet initiative and the space operations deals are, for now, exceptions to the rule. However, if existing market trends continue, namely the convergence of a skilled labor shortage and increasingly complex technology, outsourcing from a commercial perspective will become a common offering within government, he said.

Cann said the total outsourcing model provides the client with the best way to cut costs and improve services.

The future shape of outsourcing in the government likely will be hashed out in a clash that pits growing skills and technology needs vs. complex cultural issues, said industry and government officials. The former issues are driving virtually all of the existing outsourcing initiatives.

For example, the Census Bureau is relying on a trained cadre of 6,000 employees from Cleveland-based TRW Inc., to run three of the bureau's four data capture centers for the upcoming year 2000 count, said Hank Beebe, manager of the census program for TRW. Under a three-year, $158 million outsourcing contract inked in 1998, the company not only will provide personnel but also help the bureau manage its new Data Capture Solutions System developed by Lockheed Martin.

GSA tapped the expertise of Litton-PRC, McLean, Va., to update its headquarters' IT architecture under a $114-million seat task order covering 2,500 desktops.

When PRC began its work early last year, "we found about as diverse a network, server and desktop architecture population as you can imagine," said Cora Carmody, Litton-PRC's chief information officer and executive manager for Seat Management tasks for GSA. The company eliminated old stovepipe systems and introduced cost savings by eliminating redundancy, she said, noting that the agency is looking at expanding the initiative to an additional 17,000 seats at GSA's nationwide facilities.

The chief challenge to outsourcing in both the private and public sectors comes under the amorphous heading of cultural change.

On one level, that means resistance to giving up authority over the process, said Peter Bendor-Samuel, chief executive officer of the Dallas-based Outsourcing Center, an Internet portal that contains a wide range of outsourcing information. "Managers and executives live by owning those processes," he said.

For managers, the decision to outsource carries consequences. The changeover could result in a loss of critical skills that will not easily be recouped, Murphy-Doyle said, noting that employees tend to go to work for the outsourcer or move to other positions.

"It is very, very difficult to bring an outsourced operation back in house," she said.

In the public sector, efforts also are hobbled by funding and congressional oversight issues, which "diminish the direct control and authority that the contractor has over the environment when compared to the commercial market," said Tim Long, vice president of strategic communication and market development at Litton-PRC.

Many federal organizations lack a full understanding of the costs of their information systems, said Cann.

"If you have a full understanding, then you are apt to consider alternatives," such as outsourcing, he said.

These issues could be resolved by effective IT leadership. However, government chief information officers lack the clout their private-sector counterparts carry when it comes to budget items, according to Wren.

Allocated through the various programs, IT dollars become subject to parochial politics rather than bottom-line concerns that predominate in the commercial world, he added.

With these issues in mind, government outsourcing programs such as Seat Management have been crafted to allow for gradual implementation.

"You can take small steps under both Seat and ODIN; you are not forced to take the whole enchilada," said Wren. "What we tried to do with Seat is create a granular model," allowing customers to outsource just a portion or "layer" of their infrastructures, such as just the desktop, portable or networks, he added.

To date, eight orders valued at about $545 million have been booked on the two vehicles projected to be worth a combined $22 billion over 10 years.

All have been small, incremental orders.

By far the largest customer, NASA also was the last to place an order off ODIN in January for 1,400 seats at its headquarters from SAIC. This is the third task order award by NASA; the space agency earlier outsourced 47,000 seats under separate ODIN contracts with OAO Corp., Greenbelt, Md., and Intellisource, Fairfield, Conn. NASA plans to place another order for about 20,000 seats later this year.

Such moves are very typical of how federal agencies are approaching seat management, according to Cann.

An agency with 20,000 desktops will outsource part of its organization, such as its headquarters with 2,000 desktops, to see how it goes, he said.

But "whoever is doing that business, however, certainly can't do it as cost effectively as if there were 20,000," Cann said, adding "in this kind of work, scale is terribly important."

With the Intranet project, the Navy is looking to break out of that box by outsourcing all of its and the Marine Corps' desktops, which total about 400,000 seats.

By going to a single, enterprisewide initiative, the Navy will be able to leverage economies of scale in ways it had not been able to do with multiple contracts, said Rick Rosenburg, senior vice president and chief operating officer of Electronic Data Systems Corp.'s federal government division, Plano, Texas.

Along with EDS, Computer Sciences Corp., IBM Corp. and General Dynamics Corp. are competing for the Navy-Marine Corps Intranet program.

"The broad range and scope of [the program] makes it unique, and if it works, it will be the blueprint for future services [contracts]," said Rosenburg.

"I would qualify it as sort of 'Seat plus plus plus,' " Wren said, noting the program was a hybrid that included elements of desktop and infrastructure outsourcing similar to the commercial model.

NASA's Consolidated Space Operations Contract with Lockheed Martin Corp., valued at $3.5 billion over 10 years, is an even more radical break from the government norm. It represents "the highest level of outsourcing," where not only IT but also business functions are outsourced, Wren said.

"We've got about 40 companies on the contractor team ... and a work force right now of about 3,000 employees," said Doug Tighe, vice president and program manager at the Consolidated Space Operations Contract (CSOC).

Under the contract, which was awarded in late 1998, the Bethesda, Md.-based Lockheed Martin has assumed responsibility for managing all of NASA's data collection, telemetry and communication operations supporting its Earth-orbiting satellites, planetary exploration and human spaceflight activities. The company has been tasked "to save NASA money in terms of its operations infrastructure [through] consolidation, commercialization, outsourcing and best practices," Tighe said.

In the last year, the company has been sustaining the current IT infrastructure as it works on an architectural upgrade, called the Integrated Ops Architecture, Tighe said. The new architecture will consolidate, streamline and commercialize the Space Operations structure "so we get more cost effective as time goes by," he added.

A key goal of the program is to bring the space agency cost savings comparable to that gained in the commercial market.

As part of the contract, the company outsourced key information system functions, such as the space agency's wide area network, which is used to fly the spacecraft as well as operate NASA's administrative tasks, to Wang Global under a 10-year, $440 million performance-based contract.

"It has been contracted out on the basis that it is a commercial activity," and we are buying circuits from carriers on a commercial basis, said Stan Mann, program manager for wide area networks at CSOC.

"We are continuously looking to see if there are commercial suppliers of services we need to do our primary mission," Tighe said of NASA's outsourcing effort. By Ed McKenna

State and local government spending on outsourcing has surged ahead even with the collapse of the Connecticut outsourcing initiative in 1999.

"Last year we saw real growth in the state and local government outsourcing," jumping from $1 billion in 1998 to almost $1.6 billion or about 13 percent, according to Cynthia Murphy-Doyle, senior analyst for information systems outsourcing and business process outsourcing programs at International Data Corp., Framingham, Mass.

Outsourcing in the state and local government market is expected to grow nearly 12 percent annually during the next five years, according to IDC.

Last year's growth was spearheaded by San Diego County and Pennsylvania outsourcing deals after the state of Connecticut decided not to proceed with its privatization plans, she said. Connecticut's Gov. John Rowland canceled plans to privatize the state's information technology last summer after extensive negotiations with Electronic Data Systems Corp., Plano, Texas. The plan fell victim to escalating costs and labor issues, according to industry officials.

"There was a lack of due diligence up front," said Murphy-Doyle.

"Those are just the ones that break the radar screen," added Thomas Davies, senior vice president at Current Analysis, a business intelligence and analysis company in Sterling, Va. In almost every area of state and local government, "outsourcing decisions are being made with financial values in the hundreds and hundreds of millions every day," he said.

"The state and local market has always been a more attractive potential market than the federal," Davies said. Unlike at the federal level, state and local authorities have shown a willingness to outsource traditionally core government functions such as schools, trash collection and prisons, "so when it comes to IT, it is pretty difficult [for the states] to argue that IT is inherently governmental and outside the permissible boundaries of what can be outsourced," he added.

In real terms, states, like federal agencies, are struggling to maintain a skilled work force and remain current with technology, said Curt Haines, director of the bureau of consolidated computer services for the state of Pennsylvania.

In one of the larger deals last year, Pennsylvania outsourced its data centers to Unisys Corp., Blue Bell, Pa., under a seven-year, $500 million contract that was finalized in August 1999.

The state studied its options for almost four years, said Haines. With no public-sector models out there, Pennsylvania looked for guidance to PPG Industries Inc. and H.J. Heinz, both of Pittsburgh, which had earlier outsourced their mainframe-based systems, he said.

In the end, Pennsylvania opted to outsource only its data centers, keeping applications development and network management in house, he said.

"We thought that this was a very conservative outsourcing initiative that had a track record and fit very nicely into our bigger strategy, which was to free up resources to apply to the 'e-revolution,' " he said.

Unisys will complete the first facet of the deal, consolidation of Pennsylvania's 20 data centers, in August, said Gary Richardson, Unisys program manager for the project. As the data centers are closed, the government will be able to redeploy the resources used to support those data operations to other projects, he said.

San Diego County eschewed the conservative approach and outsourced virtually all of its IT to what is called the Pennant Alliance team, led by Computer Sciences Corp. The team includes Science Applications International Corp., Pacific Bell and Lucent Technologies in a deal worth almost $1 billion over seven years.

"We're the biggest in size and scope of any state or local government outsourcing [program]," said Tom Boardman, chief technology officer for the county.

Under the outsourcing initiative, almost all of the county's IT positions were transferred to the Pennant Alliance. Everyone affected was offered a job on the new team, and about 250 of the county's roughly 500 IT employees accepted, he said.

The contract includes 101 performance-based standards, "about 40 of those are called critical service levels," he said. Penalties for not meeting the latter standards could cost the contractors up to 10 percent of the monthly service fee or $800,000, he said.

The Pace of Progress

Information system outsourcing spending by industry from 1999-2004 (in billions)

Federal Government1.742.002.302.602.923.2813.5%
State & Local Government1.161.301.451.601.792.0411.9%
Other Financial Services2.082.312.562.863.213.6411.8%
Discrete Manufacturing1.441.581.801.982.222.5211.9%
Process Manufacturing1.341.451.661.892.112.4012.3%
Health Care1.301.481.661.862.082.3112.3%
Business Services0.881.011.131.301.461.5512.0%
Printing & Publishing0.320.360.380.420.470.508.9%
Data for 1999 is actual estimated spending years 2000-20004 is projected
*Compounded annual growth rate. Totals my not add up due to rounding.
Source: International Data Corp.

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