Big Deals, Small Worries

Orange County, Calif., proves outsourcing doesnt have to be difficult.

by / March 3, 2001
It seems as though another large IT outsourcing contract is announced each week. Some of these projects are successful. State and local jurisdictions that are forging ahead boast of reduced costs, faster time to market and, sometimes, higher revenue. Others, however, experience overwhelming obstacles. One Midwestern city, for example, hoped to save millions of tax dollars by outsourcing, but political infighting and indecision have stalled the project.

Orange County, Calif., recently signed a $260 million IT outsourcing contract. Though the project is just under way, Orange County is already confident it will result in a better-run county government. How can they be so sure? Because the county went through a process of careful vendor selection and complex negotiations designed to ensure they get exactly the benefits they are looking for.

The Deal

Orange County has successfully outsourced since the mid-70s, culminating recently in a $260 million deal with Lockheed Martin IMS (LMIMS), a Washington, D.C.-based provider of technology services to state and local government. Under the terms of the agreement, LMIMS will provide 10 years of IT services to Orange County, including voice, WAN, LAN, programming (legacy and Web) and data-center operations. The county will supply the hardware, facilities and software. LMIMS will use the countys data center to support other customers and share that revenue stream to help the county reduce the cost of providing services to its departments and agencies. Further, the vendor guaranteed Orange County revenues of at least $21 million over the term of the contract. Other revenue opportunities are anticipated.

For Orange County officials, vendor selection was by no means a shoo-in. "Orange County went through quite a process to select the contractor on a long-term basis," said Naomi Marr, vice president of Technology Solutions at LMIMS. "While we had the edge on experience, price and value were the dominant factors in the negotiations."

When one of Orange Countys existing contracts with LMIMS expired, it carefully researched its options. The county went through a request for proposal (RFP) evaluation process that looked at several outsourcing models and vendors, as well as the possibility of an in-house operation. The primary decision points were operating costs, revenue opportunities, technical expertise, resource availability and the ability to hire or retain qualified staff.

"We had a steering committee of a number of department heads who guided us through the process and endorsed our conclusions," said Leo Crawford, assistant CEO of Orange County Information and Technology. "As the employees and departments are our customers, it was essential to provide a solution that they actually wanted."

The committee concluded that paying a vendor best fit the countys needs. "We believe that outsourcing enables us to better service our customers and respond much faster to technology changes," said Crawford. "Also, the contract gives us a significant revenue stream that otherwise would not have been possible."

After identifying the best outsourcing methodology and the most cost-effective technical approach, the county developed more detailed terms and technical specifications. Orange County incorporated these into a "model contract" for subsequent negotiations with the three highest-ranking vendors. Operational costs, revenue potential, technical approach and compliance to the model contract determined final selection. LMIMS won, largely based on experience, price and value.

The total time elapsed from RFP drafting to final award was one year -- short for a project of this magnitude. Crawford attributes the fast pace to strict control of the procurement process and keeping the user community, as well as the County Board of Supervisors, well informed throughout the process. He also credits a responsive legal team for resolving the many legal issues that came up during negotiations. Further, he cautions that anyone embarking upon an outsource contract be ready to commit his or her best staff due to the inherent difficulties of the process.

"Orange County started out with a model agreement that proved quite difficult for us to conform to at times," said Marr.

The county stuck to its guns on certain make-or-break conditions. Those vendors that couldnt comply were automatically disqualified. For LMIMS, contract terms sometimes clashed with corporate policy.

"After some negotiations, we both became more flexible and creative," Marr continued. "It was an interest-based contract that worked well for both sides."

Despite the extended negotiations, Marr believes that a model contract is a smart vehicle for local governments to employ as it gives them a clear starting point for use in project specification and vendor selection.

New Technologies, New Attitudes

Marr believes that times are changing when it comes to government contracts. In the past, relationships rarely moved beyond a somewhat formal vendor/purchaser arrangement. These days, however, due to the demands of the marketplace and the needs of government, tight partnerships, like the Orange County/LMIMS contract, are becoming the norm.

"We are very much a partner with Orange County," said Marr. "We profit from small transaction fees and the city gets money quicker and more efficiently."

She points to revenue sharing as one manifestation of this newfound partnering relationship, such as LMIMS reimbursing Orange County for the use of county IT resources. If LMIMS requires a lot of printing to be done, it can use a night-shift data-center operator, for example, and pay the county for the privilege. That brings revenue to the county during the off-peak hours of data-center operations.

Another form of revenue sharing involves the leasing of space in the countys data center. Subject to Orange County approval, LMIMS leases idle resources to outside companies and also provides Web-hosting services. The resulting income is shared between the vendor and the county.

Keeping Pace with Change

Keeping up with rapid change in technology is difficult, even for high-tech companies. Crawford says Orange County uses its resources wisely in order to stay ahead. Technical staff work on leading edge projects such as the county ATM network and a number of electronic government initiatives. But for major upgrades and maintenance, Crawford turns to an outside vendor.

"When we went onto the Web in a big way, we simply told the vendor we needed more Web programmers," said Crawford. "It makes things easy when you have a collaborative team approach between you, your vendors and the user community."
Drew Robb Contributing Writer