Watershed Moment

Demand for outsourcing forces CIOs to sharpen their negotiation, leadership and management skills.

by / December 18, 2006
Virginia CIO Lem Stewart started his new job with less of a bang and more of a thud. Recruited in 2004 by the state's newly formed IT Investment Board, he was given a mandate to consolidate Virginia's IT assets and resources, involving 90 executive agencies, into a new structure known as the Virginia Information Technologies Agency (VITA).

"I did a 90-day review paper on the commonwealth for the board," Stewart recalled. "It discussed what I thought the strategy [for IT] should be going forward. I concluded Virginia was a pretty diverse, solo-oriented IT environment. I thought it would take $300 million to make the consolidation happen, with intense conversion in the next 36 months."

Stewart's strategy paper didn't go over well with Virginia's General Assembly. "They basically told me the state didn't have the money, 'But, by the way, you have to fix this problem.'"

Fast-forward to 2006. Stewart still oversees Virginia's IT assets and resources with one significant difference. The infrastructure -- including the staff -- is managed by Northrop Grumman, the defense contractor and IT services company. Two-thirds of the state's more than 900 IT workers now receive their paychecks from the company.

In July 2006, Northrop Grumman began a 10-year deal with VITA to consolidate, modernize and run the state's computers, servers, e-mail systems and help desk services -- a contract worth up to $2 billion.

For the first time, an entire state government has outsourced all of its IT infrastructure. In many ways, it symbolizes a watershed moment in the IT outsourcing movement that continues to grow within all sectors of government. It also heightens the role of the CIO as he or she balances partnerships, negotiations and potentially volatile culture shifts among workers with their other responsibilities. Every government CIO has to deal with outsourcing to some degree, but these days, government is outsourcing key IT functions more than ever.

The Shift Is On
The proof can be found in a number of recent reports. In 2003, Accenture conducted a survey of 22 national governments and found that:

  • IT outsourcing is growing;
  • value-added objectives -- not cost savings -- drive IT outsourcing most often; and
  • outsourcing is maturing along two different paths: efficiency and transformation.

    Globally outsourcing in government is growing by as much as 17 percent annually, according to Accenture. While infrastructure outsourcing remains high worldwide, it has been surpassed by IT applications and business process outsourcing (BPO), which includes government Web sites and portals, customer relationship management, training, human resources, finance, procurement and supply chain management.

    The shift toward software application and BPO represents a "significant movement up the value ladder," according to Accenture. Those values include: improving service speed, gaining access to expertise and standardizing operations for greater efficiency.

    Value-based outsourcing also leads to greater success in government, compared to outsourcing deals aimed at reducing costs. Accenture's survey found national governments that target value-added objectives, such as gaining access to new technology or standardizing operations, claimed a 71 percent success rate. Governments that used outsourcing to reduce costs met their objectives only 50 percent of the time.

    In the United States, outsourcing is the fastest growing IT segment within the federal government, according to a 2003 report published by Input Research. And just as Accenture found out, Input says BPO is the fastest growing type of outsourcing inside the Beltway. In a report issued in 2006, Input noted that outsourcing in state and local government, which has grown moderately in the past, is expected to pick up steam as these sectors overcome their traditional aversion to outsourcing and contract out IT as waves of skilled workers retire in greater numbers in the coming years.

    Alan Webber, senior analyst at Forrester Research, has investigated outsourcing at all levels of government, and sees two big reasons for its growth. "Budget constraint is a huge one," he said. "But the biggest reason has to do with the fact that government doesn't have the resources, capabilities, flexibilities or agility to keep up with technology."

    Behind that statement is the plain and simple fact that IT workers will be retiring in record numbers in the coming years, leaving government CIOs with fewer resources to develop and run the applications and infrastructure that have become critical to public-sector operations.

    That fact, along with ever tightening budgets, has left government with little room to maneuver if it wants to drive down costs while raising the quality of services. Like Accenture's findings corroborate, government is increasing the amount of outsourcing for software applications and business processes, such as human resources, finance and accounting, according to Webber.

    Governments are likely to tap outsourcing as a way to customize packaged applications, such as enterprise resource planning, to address the gaps between what the software is designed to do and what government's unique needs require the software to do. "Half of government managers are looking for help in developing and implementing a packaged application," Webber wrote in a Forrester report published in September 2006. "Government IT leaders require additional customization as the business needs of the agencies evolve."

    As for which level of government has gained the most from outsourcing, the answer remains mixed. At the global level, some national governments have embraced IT outsourcing wholeheartedly. They include the UK, Canada, South Africa, Singapore and Australia. Our federal government is also in the top ranks when it comes to outsourcing. "They have more experience at it than state or local governments, but aren't necessarily better at it," Webber commented. "Overall, it's a mixed bag across government."

    Outsourcing's Role Broadens
    There's no question that all levels of government are stepping up their use of outsourcing and are seeking value. A prime example is the number of states that have outsourced their Web portals. States are also signing mega-outsourcing deals, including a recent $853 million data center agreement between Texas and IBM. Now local governments are turning toward outsourcers for the same services. And the overall size and number of local government outsourcing contracts has increased steadily, according to several reports.

    Though some of the contracts are aimed at adding value, the focus at the state and local levels remains on infrastructure for now. "Applications management, platform operations and desktop services will continue to grow aggressively and will be the catalyst of growth [in state and local outsourcing]," reported Input in 2006.

    Minneapolis; Indianapolis; Monroe County, N.Y.; and San Diego County (for the second time with a different firm) have outsourced all or part of their IT infrastructure. Chicago and Grand Rapids, Mich., have outsourced chunks of theirs. Now with Virginia's recently signed contract, states are beginning to broaden the role of outsourcing to include large swaths of IT infrastructure.

    But what about the role of the CIO? Does shifting management of infrastructure and assets to private contractor change or even diminish the government IT leader's role?

    As far as change is concerned, Virginia's Stewart said he is still ultimately responsible and accountable for service delivery and governance of IT investments in the state. "My role has changed from the standpoint that we have a large partner, so that our governance role over that partnership has changed. We don't deliver the service, but we manage the partner who does."

    Nor does Stewart believe the transfer of the IT work force to Northrop Grumman diminishes his position as CIO. "It's people and numbers" he said. "The ultimate outcome is the same: Deliver better service done differently than the way we had been doing."

    Stewart said he sees the outsourcing partnership freeing up his time to use his role more strategically, once the "basic foundation" of the partnership is fully in place. A key focus will be the development of more enterprise systems within the state. Stewart believes the General Assembly was correct in saying the state was already spending enough on IT when he first laid down his proposal for overhauling, centralizing and modernizing the state's infrastructure.

    "We have enough money already," he said. "It's all about how you use it to reorganize and modernize more wisely." From Stewart's strategic viewpoint, the outsourcing deal will let him focus on combining the state's IT capital so it can "invest one time in a solution that will serve many as opposed to individual agencies."

    Knowing When It's Appropriate
    But does government have the depth and experience to make outsourcing succeed? "Most of what government outsources is appropriate," said Forrester's Webber. "But government doesn't really do a good job of managing outsourcing. They need to do a much better job of finding out exactly what it is they want their outsourcers to do, and the outcomes they expect."

    Webber advises CIOs to focus on an area where the cost numbers overwhelmingly favor privatization. "A perfect example is the call centers. Look at the help desk. You can have four or five small agencies outsource their help desk needs to the same company, and as long as the desktops are fairly similar, they will save money." A key component of Virginia's outsourcing partnership with Northrop Grumman calls for the construction of a $23 million facility that will house help desk support for agencies, as well as a backup data center. The outsourcing deal also benefits the state economically because the facility will be built in an impoverished area of Virginia, adding badly needed jobs.

    Stewart's recommendation for CIOs delves into the details and nuances of communicating with so many constituents with differing agendas and the cultural change that is part of a new way of doing business. He talks about agencies accustomed to competing for dollars to fund their own projects and directing their efforts toward a particular service. Now they have to change their mindset, and it's the CIO's job to make them realize that outsourcing means IT services are now done for the enterprise -- the state -- not just their particular agency. "That's not something you can just walk in and explain and expect them to accept."

    But Stewart is proud of what the state has crafted, calling it a potentially good model for states, especially in terms of protecting the best interests of the employees. "In our case, we negotiated with them to carry the [employees'] service years over to the private sector. That's never been done before, as far as I know. It's highly unique, but it only works if the private-sector partner believes you can deliver your end of the bargain and are willing to be a partner."
    Tod Newcombe Senior Editor

    With more than 20 years of experience covering state and local government, Tod previously was the editor of Public CIO, e.Republic’s award-winning publication for information technology executives in the public sector. He is now a senior editor for Government Technology.