Outsourcing for Competitive Government

State and local governments are beginning to recognize the benefits of outsourcing.

by / September 30, 1996
In the last four years the U.S. political landscape has been transformed into a more conservative beast, one willing to adopt commercial practices. This change has been felt at the federal, state and local levels of government. One result of the new political environment has been a dramatic increase in demand for downsizing government through privatizing traditionally public-sector functions. A recent G2 Research study found that state and local governments are more ready than ever to consider the privatization of government information systems and processes through outsourcing.

Outsourcing is a broadly used term to describe the privatization of a function, or a component of a function, to an external party. G2 makes a distinction between IT Outsourcing (ITO) and Business Process Outsourcing (BPO). G2 defines ITO as the "contractual vehicle through which governments privatize life-cycle service and support operations for their IT infrastructure." Alternatively, BPO is defined as the privatization of entire processes, such as Medicaid claims processing.

State and local governments are showing an increased willingness to examine their internal processes and use innovative methods, including outsourcing, to improve the effectiveness of their operations. This is evident in governments' focus on improving relationships with their customers -- the citizens -- through greater accessibility to services and a prominent emphasis on customer service. In order to meet these goals, many governments have determined that, due to limited resources, some functions must be shifted to the private sector to improve overall service levels and concentrate on meeting citizen expectations.

Many jurisdictions, including Connecticut, Massachusetts, Michigan, Virginia and Indianapolis/Marion County have emerged as leaders in this thinking. In addition, governments have formed "competitive councils" that analyze government operations in order to improve business processes or eliminate non-core responsibilities through outsourcing. Prominent examples include the Texas Council on Competitive Government and Arizona's Competitive Government Handbook, which outlines the criteria necessary to evaluate the outsourcing of any government process or IT system. Michigan has developed the PERM (Privatize, Eliminate, Retain and Modify) model to assist in determining the appropriateness of outsourcing. The model assesses operations and processes with the intent of implementing one of the four alternatives.

California Gov. Pete Wilson's Competitive Government initiative also promises to provide an example for other governments interested in maximizing government operational efficiency and concentrating on core responsibilities. Wilson's proposal addresses a wide variety of operations and processes from outsourcing the management and administration of local and wide area networks to privatizing the collection of fines owed to the state's 33 licensing boards and commissions.

Beyond the existence of a favorable political environment, jurisdictions interviewed by G2 Research indicated the following issues as primary reasons behind their decisions to outsource an IT operation or business process:

Need to centralize and/or consolidate widespread IT operations. The consolidation of IT operations can assist a jurisdiction (primarily states) reduce overall IT expenditures and improve internal service.
Opportunity to improve service levels through competition. State and local governments have found benefits in creating a competitive environment between existing internal IT personnel and external firms. California's Teale Data Center now operates on a competitive principle, regularly offering its services at "competitive prices" in order to win clients among state agencies seeking a data processor.
Business Process Reengineering (BPR). BPR projects involve an in-depth appraisal of a particular government process. The isolation and examination of a business process can easily lead to the determination that the process or its IT component is not a core government function or that the process can be better performed by an entity other than its owner.
Consolidation of IT power structure. Also driving outsourcing demand in state and local government is the consolidation of a government's IT management structure. This is occurring through the appointment of chief information officers or commissions that are assuming oversight of all IT operations. With a comprehensive view of a government's IT operations and expenditures, the CIO or equivalent is able to use outsourcing on a larger scale than previously possible.
While cost savings was cited by most of the jurisdictions interviewed by G2 as a major benefit, no government cited it as the only factor behind outsourcing. In fact, state and local government agencies cited a variety of benefits to outsourcing.

For example, Orangeburg County, S.C., has outsourced its data center to SCT. One of the greatest benefits outsourcing brings to the county is the fact that SCT has database and networking specialists that Orangeburg could not afford to hire on an individual basis. In addition, SCT is able to provide general technical expertise that the county would not have been able to maintain on its own.

A consortium of 19 California counties has outsourced the operation and maintenance of the Case Data System to EDS. The Case Data System tracks welfare recipients throughout the 19 counties as well as their benefits checks. Centralized maintenance and support of the application has allowed the cost of a single system to be spread among a number of counties rather than each paying for its own system.

The North Carolina Human Resources Department also works with EDS in outsourcing Medicaid claims processing. This permits agency personnel to concentrate on improving the actual Medicaid program, working with clients to determine eligibility, explaining care options, etc. Beyond the economies of scale EDS brings to the table, the department also cited the fact that it is buying the expertise of a group that just concentrates on Medicaid processing.

Government agencies, understandably, are hesitant to relinquish control over their IT infrastructures. Orange County, Calif.'s, data center contract had an interesting solution to this problem. They literally exchange management with the external firm. In this case, government personnel report to Lockheed Martin officials and Lockheed Martin personnel report to the government managers. While the county acknowledged that this has proven to be tremendously successful, it did note that the uniqueness of the arrangement probably prohibited easy replication, and was instead more likely dependent upon compatible personalities. Northampton County, Pa., noted that the on-going success of its outsourcing contract has largely been due to the formation of a public/private "governance" board which oversees the data center's progress.

Many government agencies believe that application development and management is a skill that should be retained and developed by internal MIS personnel. As government agencies reengineer and reevaluate business processes, many recognize the value of managing information. Therefore, because the IT application can itself be an integral part of the agency's business operations, governments want to retain control over
the systems.

The idea of having a private-sector organization take over a function previously handled by government is still a sensitive issue in state and local government. However, tremendous progress has been made by state and local governments and the private sector in implementing outsourcing solutions that save taxpayers money and improve service delivery.

For more information, contact Bill Loller at G2 Research Inc., 415/964-2400.

State and local
are beginning
to recognize the
benefits of
outsourcing and
are making
themselves more
in the process.