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.

PRIMARY REASONS

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