Crunch Time

Outsourcing and other options are back on the table as states scramble for answers to a dire budget situation.

by / April 22, 2003
A budget situation so dire it compares to the World War II era has state and local governments scrambling for e-government solutions that will either save a buck or collect due revenues. Amid the gloom, outsourcing -- a bad word to some government officials -- is emerging as a viable opportunity for jurisdictions to stretch scarce dollars and find more of them.

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 entire agency or department, Brophy said. "That's because you're dealing with a perfectly tried and true technology," he said. "It's not as complex, because you're not trying to weave together all the different departments or agencies in a government. It's much more focused and narrow. It allows you to use a scalpel to get at a particular problem."

In Ohio, where the Department of Job and Family Services processes an average of 50,000 child support payments a day, outsourcing may be the most efficient way to go.

The process of disbursing child support payments changed in the late 1990s when the federal government mandated that payments go through a state operated system rather than having each county process them. The law also requires a two-day turnaround, which is difficult to do without a seven-day workweek.

Ohio processed $1.9 billion in child support payments in 2002. The paper-based system it used to process the more than 900,000 cases cost $50 million. Last September, the state put the job out for bid, requiring the new system be up and running by year-end. ACS won the contract, at a prorated cost that is expected to be less than $34 million.

Processing child support payments is high-volume work and doesn't lend itself to automated, retail processes such as MasterCard payments. More than 70 percent of payments come from garnished wages and arrive as checks from employers. The new system makes computer images of all documents, which eliminates weeding through stacks of paper or microfilm. The system makes images of the documents, processes the checks and records the images, which are accessible online to county or state personnel a day into the process.

Imaging technology streamlined the process immediately, said Joe Pilat, deputy director of the Ohio Department of Job and Family Services. "Obviously they [ACS] have state-of-the-art technologies. They image everything coming into the system, and based on that image, they post the payments," he said.

The technology includes a process called "forward track," which locates the client's current address and automatically updates the database before the check is sent out. "Our requirements are that the client needs to keep the agency advised of his current address," Pilat said. "A lot of times they don't."

Previously, checks often were sent to the wrong address then returned, and someone had to find the right address, record it in the database and resend the check.

Under the new arrangement, all processing is done at one location. Previously it was divided among different locations, which added to the cost. ACS has a 40,000 square-foot facility in Columbus, Ohio, that processes as many as 125,000 payments one day and as few as 16,000 the next.

That flexibility, combined with the difficulty of securing the necessary technology, makes it hard for many governments to duplicate this sort of operation. Furthermore, the arrangement makes county social services employees more effective, Pilat said. "They're taking advantage of having people who were once processing payments do other tasks."

Collecting Due Revenue
While some projects focus on cost cutting, others aim at collecting more revenue at less expense. For example, a number of agencies now outsource the collection of parking fines. Vendors like ACS, which offers its Ticket Information Management Systems (TIMS), provide technology and services that make quick work of garnering these funds.

Some features TIMS adds to the process are imaging and data entry of handwritten violations, an interface for uploading electronically written violations, bilingual telephone customer service, pay-by-phone and pay-by-Web options, and the ability to withhold vehicle registration for delinquent motorists.

Montgomery County, Md., recently inked a three-year, $1.5 million contract with ACS to provide TIMS.

Some jurisdictions also are launching efforts to capture unclaimed property, viewing it as an opportunity to collect found money without much effort. When a property goes unclaimed for a number of years -- the length varies per state -- it becomes the state's property. But scarce revenue and a tangle of complicated regulations often make it difficult for governments to find and collect such properties.

Third-party companies now offer to locate unclaimed property and bring it to the attention of agencies, which then attempt to locate the owners. More than 70 percent of the time, owners can't be found and the property is turned over to the government and becomes available for general fund use.

"[The government] looks wonderful to the citizens because they are trying to give them some money that's rightfully theirs," Brophy said. "On the other hand, they know that no matter how conscientiously they do that, they are going to get to keep most of the money. For every $10 we bring them, they get to keep $7 or $8 of it."

Controversy Brewing
More evidence that everything is back on the table comes from the re-emergence of traffic enforcement cameras. Court challenges to the validity and accuracy of photo enforcement technology slowed its implementation, but the concept is picking up steam around the country as budgets continue to contract, Brophy said.

"It is somewhat controversial, and without the deficit wolf at the door, some local officials would shy away," he said. "But we're hearing all over the country that states are willing to consider legislation now."

More than 100 cities around the country have the cameras, 57 of which contract with ACS. The company said its revenue from photo enforcement has grown 600 percent since 1999.

ACS acknowledges that photo enforcement is profitable, but the company prefers to talk about the technology's safety aspects. The company cites information from the Insurance Institute of Highway Safety, which recently proclaimed the technology "can be very effective at reducing crashes and improving safety" because it serves as a deterrent.

But jurisdictions have encountered problems with errant systems and have been criticized for implementing technology that rewards the manufacturer each time a ticket is issued. ACS, for one, is beginning to alter the way it offers the services, charging for the system as a whole, instead of individual tickets.

Still, police in Washington state were forced to throw out nearly 2,000 tickets after realizing those citations were based on incorrect speed limits. Police in Portland, Ore., said their system, supplied by ACS, ended up costing the city nearly $300,000 last year.

But those problems haven't slowed implementation, and other companies are entering the market. A report by Dow Jones Newswires recently said new systems designed by Redflex Traffic Systems have eliminated some drawbacks of photo enforcement, and the company is becoming a fierce competitor.

Benefit Sharing
Meanwhile, Arizona's Department of Revenue (ADOR) and Accenture are working out a contract of a different sort -- a benefit sharing arrangement. The pact calls for a re-engineering of Arizona's tax system. The state hopes the project, known as Business Reengineering and Integrated Tax System (BRITS), will simplify tax process for all involved and yield significant cost savings. That savings largely will determine how much Arizona pays Accenture. No savings, no payment.

"Basically what we hope to accomplish in the next four years is that we will actually re-engineer all of our business processes," said Lynette States, BRITS project manager for ADOR. "It will save money in the long run and make us more efficient."

The project will integrate four tax types -- corporate, withholding, sales and individual. It adds electronic filing and electronic registration to the existing paper-based options, which will hasten tax processing. It also puts handheld computers into the hands of tax collectors, giving them instant access to taxpayer accounts while in the field.

ADOR will "score" receivables and prioritize them, allowing the agency to focus on accounts with the greatest revenue potential. Also as part of the project, Accenture has incorporated a skip-tracing process, which will allow ADOR to locate entities that should have filed taxes in Arizona but haven't. "From our perspective, we had exhausted the tools to find them," States said.

Part of the money the state collects on those accounts will go toward Accenture's payment. The other method of payment isn't so clear-cut. Every month the state will compare its collected dollars with a predetermined baseline amount to gauge the benefit or lack thereof. The benefits -- collections above the baseline -- will determine Accenture's reward.

Arizona followed the lead of Kansas and Virginia, which have implemented similar integrated tax systems that put more risk on the vendor.

Benefit-based contracting is tailor-made for agencies that collect mandated payments, such as taxes where some people will choose not to pay. Collecting those payments with better systems helps agencies track down revenue they would normally have a hard time capturing.

"In cases where the government agency doesn't have the upfront capital, we've looked at models that either pay out of benefit pools,