CSC Suffers $2 Million Penalty in San Diego
Despite Fine, County's Report Gives Outsourcing Project High Marks
By William Welsh, Staff Writer
Computer Science Corp. has been fined $2 million for failing to meet stringent service goals during the first year of its landmark contract to provide information technology outsourcing services to San Diego County.
CSC and county officials said the fine does not mean San Diego is dissatisfied with CSC, but signifies how serious county leaders are about holding the CSC team to what both sides agree are extremely demanding thresholds for IT services.
"I don't think any [company] could have made these service levels, but they signed up for them," said Tom Boardman, San Diego County's chief operating officer.
Richard Jennings, CSC's lead executive on the seven-year, $644 million outsourcing project begun in December 1999, said he is not surprised that the so-called Pennant Alliance project team fell short of the contract's service requirements. The contact stipulates that the CSC-led alliance will be fined if it does not provide specified thresholds of service to support the technology it is implementing.
The $2 million will be applied as a fee reduction to the first-year payment, said Boardman, adding the maximum amount of penalties that could have been applied for the first year was $4.4 million.
Some of the problems CSC encountered included outdated applications with no documentation and a loss of institutional knowledge because of the retirement of many San Diego County IT professionals.
"We knew we would absorb some of the penalties," said Jennings, vice president of the Technology Management Group's Western Region for CSC of El Segundo, Calif.
And the county agrees that progress has been made.
"While the Pennant Alliance didn't meet some very aggressive service levels, the services across the board that they have delivered to the county over the first 10 months of the contract have been better than the services the county IT staff was able to provide," Boardman said. "So we are between where we used to be and where we need to be."
By November, the alliance was meeting 12 of the 14 minimum acceptable service levels the county established. And CSC has pledged to meet all service levels by April 2001, said Walt Ekard, San Diego County's chief administrative officer, in a first-year status report issued Nov. 14 to the county board of supervisors.
Ekard also said that, despite the shortcomings, county employees have given CSC high ratings for the services it is providing the county.
"We are meeting aggressive schedule milestones; we are within the annual budget established by your board; and we are exceeding IT performance measures," Ekard told the board.
But Ekard also said that the financial penalties will continue until 100 percent compliance is achieved.
Although the average annual cost of the project is $92 million, the Pennant Alliance stands to receive $120 million in the first year. This is because payment is structured so the vendor gets more money in the first few years of the contract, Boardman said.
Jennings would not comment on the fine's impact on the project's profitability in the first year. CSC makes its profit projections over the life of a contract, he said.
These projections take into account several factors, such as expected startup costs and unplanned events, he said, adding that CSC's investment in San Diego County during the first two years will exceed $100 million.
The four-page report provides a detailed glimpse into the progress of the high-profile contract awarded to CSC and its partners, which include Science Applications International Corp., Pacific Bell (part of SBC Communications Inc.) and Lucent Technologies Inc. The Pennant Alliance's basic tasks are to improve and refresh infrastructure, modernize applications and enterprise resource planning and bring county services online.
The county will begin moving services online as the Pennant Alliance refreshes the infrastructure, Ekard said. During the upcoming year, the county and alliance will establish dates for when specific services will be available, he said.
The report also said that 3,600 new personal computers will be installed before year's end, and that 4,000 more will be on county desktops by the end of 2001. The CSC team also has consolidated its computer help desk at a single site, so every request for IT services is tracked and critical problems receive top priority.
San Diego County's outsourcing project is the largest of its kind among state and local governments. Consequently, many government officials are watching the project to see whether it represents a solid business model before proceeding with their own outsourcing projects, said analysts and industry officials.
As a way to ensure success, the San Diego contract contains 100 extremely aggressive service levels that require more than 150 individual measurements tied to financial incentives or penalties.
The contract's high expectations for service "make it one of the most aggressive contracts of its kind in the country," Jennings said. The Pennant Alliance, for example, is expected to fix 95 percent of all problems related to desktop hardware or software within four hours, he said.
Setting standards so high that they are difficult to achieve is somewhat surprising, given that "everyone wants an unblemished record during the first year," said Tom Davies, senior vice president of Current Analysis, Sterling, Va.
But the very nature of such a large, complex contract makes it almost impossible to avoid significant problems, said Rishi Sood, principal analyst with the market research company Gartner/Data-quest, Stamford, Conn.
"The promising issue is that both the county and the vendor appear to be working together, rather than blaming one another, to overcome some of the unfulfilled objectives," he said.
To this end, the county and the alliance have designed an issue resolution process aimed at clarifying operational processes related to billing issues, configuration standards, work order processing and support of non-county agencies, Ekard told the board.
During the first year of the contract, the Pennant Alliance focused on improving the county's massive infrastructure by replacing phone systems and desktop computers, installing a fiber-optic network and consolidating mainframes and servers.
Both sides note there have been unexpected delays installing and replacing desktops and updating applications.
Because of the number of outdated applications encountered and a lack of documentation for many of them, many computer applications had to be rewritten from scratch, Boardman said. Updating applications "was something that we knew we had to do eventually, but didn't realize we had to do while rolling out the PCs," he said.
As part of the contract, the alliance guaranteed two years' employment to the county's IT employees desiring work on the outsourcing team, along with pay raises, profit sharing and bonus plans. Nevertheless, nearly one quarter of them chose retirement, Ekard said.
Their exit resulted in a loss of institutional knowledge that adversely affected the transition, said Jennings. About one third of the 600 employees assigned to the project are former county employees, said John Gulick, CSC's spokesman.
For government and industry observers, several aspects of the contract are worth watching, Davies said.
One is the Pennant Alliance's ability to meet the minimum acceptable service levels. Another is whether the Pennant Alliance can eventually scale back staffing and still maintain high performance levels.
Yet another factor to watch is whether the alliance can continue to sustain high satisfaction ratings from county employees, who rate its performance each week, he said.