April 22, 2003 By Jim McKay, Editor
Exploding health-care costs, dwindling tax collections, and shrinking manufacturing and high-tech sectors have left many states with little to cut or fall back on. During the boom between 1995 and 2001, states built up rainy-day funds of nearly $50 billion collectively.
Most of that is gone.
State budget gaps grew by nearly 50 percent from November 2002 to February 2003, and two-thirds of states must accomplish nearly $26 billion in budget reductions before June 30, according to a report released by the National Governors Association. Twenty-six states were forced to make cuts in their fiscal 2003 budgets that will include Medicaid, K-12 and higher education, transportation services, aid to local governments, and health and human services, according to the report. And more needs to be done.
Given these circumstances, governments heaped any solution back on the table that might push them toward the black, including outsourcing, which has re-emerged in a slightly different form.
Business Process Outsourcing
The reputation following certain outsourcing projects of the 1990s lingered in some states, making new projects controversial and sometimes difficult to implement. Efforts are underway to change that.
In Minnesota, Gov. Tim Pawlenty recently railed against an obscure statute preventing outsourcing. "Minnesotans need to know that we have a law on the books that prevents us from saving money," he told the Minneapolis Star Tribune. The law says the state can't outsource an assignment if the layoff of a state employee would result. Ironically, when the law was implemented by then-Gov. Arne Carlson, it was seen as a cost-saving measure.
But some states are finding that outsourcing can cut costs, as well as help collect revenues. An outsourcing strategy called business process outsourcing differs from some outsourcing projects of years past -- it focuses on outsourcing a specific function of an agency rather than an entire agency or department.
The concept of business process outsourcing took root in the private sector, where commercial organizations find it easier and cheaper to outsource a variety of business functions that are not considered mission critical, such as payroll and accounts payable. The idea is migrating to governments trying to save money or collect revenues.
Florida recently announced a seven-year deal with Convergys, an information management firm that will handle some of the state's personnel administration duties.
When Florida's Department of Management Services (DMS) considered the prospects for replacing or continually updating its outdated Cooperative Employment Personnel System (COPES), the agency decided neither would be as cost-effective and efficient as outsourcing some of its HR functions. The state hopes to save between $65 million and $90 million by transferring some DMS functions to Convergys and not replacing COPES.
Convergys will house state employee personnel information, which will be accessible through a Web portal. State workers will access the portal to update or review their personal information instantly. Outsourcing a portion of the department's duties uses the strengths of the private sector, which has access to the best technology and can often pay more for IT employees.
The sort of analysis undertaken by Florida is occurring with more frequency in jurisdictions throughout the nation.
"The deficit is making states that do these things in-house look at what it costs them," said John Brophy, group president of state and local solutions for ACS, a Dallas-based firm that provides outsourced services to number of government agencies.
Business process outsourcing is less risky than outsourcing an
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