Outsourcing's popularity rises as means to address staff, tech challenges
- By William Welsh
- Jun 12, 2002
"When you have budget deficits this deep, it forces [state and local governments] to come out of the stovepipes," said Anne Reed, vice president for state and local business for Electronic Data Systems Corp. of Plano, Texas.
(Washington Technology photo by Olivier Douliery)
"Unisys views outsourcing at all levels of government as a major growth opportunity," says Unisys' president of Global Public Sector Greg Baroni.
(Washington Technology photo by Henrik G. de Gyor)
Following years of entrenched opposition to information technology outsourcing, state and local government officials are recognizing it can help them overcome staff shortages and modernize their technology and services.
The change in attitude is due in part to the willingness of federal agencies to embrace various kinds of outsourcing, according to industry officials and analysts. As outsourcing expands throughout the federal government and successes are documented and recorded, state and local governments will be more apt to try similar approaches in their jurisdictions.
IT outsourcing among state and local governments is expected to grow at an annual rate of 25 percent, from more than $3 billion in 2002 to nearly $6 billion in 2005, according to the market research firm Gartner Dataquest, Stamford, Conn.
While outsourcing is not new in the state and local market ? the private sector has been providing Medicaid IT services for years ? state and local governments are now outsourcing a wider variety of functions, such as data center operations, call centers and help desks, Web hosting and seat management.
"IT outsourcing has exploded in its multidimensionality," said Costis Toregas, president of Public Technologies Inc. of Washington, a nonprofit group that promotes the use of technology by local government.
"It's clearly a viable alternative, and it can work for a wide range of tasks if set up properly," said Mark Mayo, a partner with the sourcing advisory firm of Technology Partners International Inc. of Houston.
Ray Bjorklund, vice president of consulting services for Federal Sources Inc., McLean, Va., cautions that outsourcing growth might be limited in 2003, because budget shortfalls could inhibit discretionary spending by state officials. But some see the shortfalls as adding impetus to outsourcing.
"When you have budget deficits this deep, it forces [state and local governments] to come out of the stovepipes," said Anne Reed, vice president for state and local business for Electronic Data Systems Corp. of Plano, Texas. "I see more people turning to outsourcing as a way to manage their infrastructure more effectively."
State and local IT outsourcing includes enterprise IT, data center operations, call centers, network management, applications services, desktop services, business process outsourcing and telecommunications and convergent communications outsourcing.
Among the integrators that can boast of robust outsourcing business in the state and local market are Affiliated Computer Services Inc., Dallas; EDS; IBM Corp., Armonk, N.Y.; and Unisys Corp., Blue Bell, Pa.
Industry officials said they see a particularly strong demand at this time for outsourcing of data center operations and desktop services, also known as seat management.
Unisys views outsourcing at all levels of government as a major growth opportunity and is focusing primarily on data center, business process outsourcing and network management, which includes seat management, said Greg Baroni, Unisys' president of Global Public Sector.
Unisys manages the largest outsourcing deal held at the state government level. The company won a $500 million contract from Pennsylvania in 1999 to take over data center operations for 15 state agencies. Unisys hopes to provide data center services to more agencies and add more years to the contract, Baroni said.
In addition, Unisys has Medicaid management information services (MMIS) contracts in five states, and is one of three vendors with a seat management contract in Virginia. The company also has seat management contracts with state agencies in California, New York and Texas as well as several local governments.
At the local government level, Computer Sciences Corp. of El Segundo, Calif., has a seven-year, $644 million IT services contract known as the Pennant Alliance with San Diego County, while ACS has a 10-year, $260 million data center outsourcing contract with Orange County, Calif.
The San Diego County deal has encountered problems, and the parties are holding discussions about areas of concern, such as whether the Pennant Alliance is meeting project goals and whether the county is being overcharged for additional services it believes are covered under the original agreement.
While it's premature to say CSC's problems in San Diego County will put a damper on large-scale IT outsourcing projects, industry observers expect that companies will weigh heavily the risk and reward of taking on a project of that size in the immediate future.
The Orange County outsourcing project comprises data center operations, a telecommunications upgrade and application services. ACS has just completed the telecom upgrade, and there have been no performance penalties assessed on the contract, said Mike McKenzie, managing director of ACS' Information Systems Group.
"This project is right on track for where we thought it would be [by now]," McKenzie said.
Leo Crawford, chief information officer of Los Angeles County, attributes the contract's success in part to the arrangement that allows ACS to sell surplus data capacity to other public and private entities. The revenue will be shared between the partners, with the county guaranteed to receive $21 million from the additional sales.
"Where you get at odds with the vendor is when they want to make a profit, but you still need good service," Crawford said. The revenue sharing arrangement effectively solves that problem, he said.
ACS has about 30 local government IT services contracts. "We continue to see more and more local governments interested in the full-service [IT] outsourcing model, said McKenzie.
EDS has 20 state MMIS contracts and provides outsourcing for several other functions, such as traffic enforcement cameras. But EDS has outsourcing ambitions for the state and local market far beyond those particular projects, Reed said.
For example, EDS is competing against WorldCom of Clinton, Miss., for a convergent communications outsourcing project in Georgia, valued at $1.8 billion. In addition, EDS has bid on a $500 million IT services outsourcing project that the New York City Board of Education will award this year.
"We aren't as engaged as I would like us to be," Reed said, referring to EDS' state and local outsourcing business. "But we have the capability, and we're right in there swinging for it."
Staff Writer William Welsh can be reached at email@example.com
William Welsh is a freelance writer covering IT and defense technology.