Across the Digital Nation: Business process outsourcing may be next frontier

Rishi Sood

State and local government organizations have long had a skeptical view of the need to outsource functions to vendors. Political realities, turf battles and cost constraints have made outsourcing a highly contentious issue.

In many respects, however, the debate about outsourcing has been focused on management of technology assets, or information technology outsourcing. Increasingly, business process outsourcing, an extension of IT outsourcing, has emerged as a potentially better mechanism to help government organizations focus on core service delivery.

Business process outsourcing is the transference of an entire business process to the vendor. In the private sector, business process outsourcing has thrived in specific areas, such as payroll.

This type of outsourcing is not entirely new to public-sector organizations. State and local governments have long relied on vendors to manage Medicaid claims processing.

However, a number of other business processes appear to be open for outsourcing opportunities. In many respects, a number of these functions are agency specific.

In particular, the broad responsibilities of human services, transportation and administration and finance agencies are good prospects for business process outsourcing services. Some of the initial business processes that may emerge as functions to be outsourced include toll and ticket collection, cash management, reservations management, credit card processing, payroll and human resources, eligibility verification and fingerprint processing.

Furthermore, several states have moved toward the leading edge of using business process outsourcing engagements. For example, Georgia has embarked on such an arrangement to administer all health-related claims processing. The Georgia Health Partnership consists of Medicare, Medicaid, children's health and state employee health programs. And Florida may look to use a business process outsourcing program to help manage its human resources functions.
The success of these engagements will spur more opportunities in the marketplace.

The federal government's increasing openness toward traditional IT outsourcing will undoubtedly spur state and local governments to move in a similar direction. Success at the federal level will certainly open up opportunities within state and local governments. Already, Maryland, Virginia and Texas have established seat-management outsourcing contracts with the vendor community.

Given some of the structural changes and technology reforms taking place in the federal government, business process outsourcing initiatives will likely take root over the next three years.

By the very nature of these engagements, the universe of vendors that can target business process outsourcing opportunities is relatively small. These vendors must be highly specialized and able to translate public-sector operations quickly. The focus of many business process outsourcing engagements is not merely to replicate current processes, but to create new paths to make the overall process more efficient.

The competitive environment for business process outsourcing will include traditional government vendors but also newer firms with specialized services, such as financial services firms.

Partnerships between these two camps may be key to establishing market opportunities.

It should be noted that the opportunity for business process outsourcing within the state and local government marketplace is still an emerging one. All the traditional issues ? political realities, cost constraints, turf battles ? still represent significant obstacles to overcome. However, if successful, there is a significant upside to these type of engagements.

Rishi Sood is a principal analyst with Gartner Dataquest in Mountain View, Calif. His e-mail address is rishi.sood@gartner.com.

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