When government outsourcing arrangements encounter high-profile snags, those missteps may be enough to make other state and local CIOs think twice about using outsourcing as a solution for tight budget cuts.

Big state outsourcing deals have faced their share of misery over the past few years. Former Indiana Gov. Mitch Daniels pulled the plug in 2009 on a plan to privatize and streamline the state’s welfare eligibility process. The 10-year, $1.6 billion contact with IBM was terminated after just two years.

Virginia also has struggled with its 10-year, $2.3 billion contract with Northrop Grumman. The partnership, created in 2003 between the vendor and the Virginia Information Technologies Agency, has been plagued with problems. In 2010, Virginia renegotiated the contract’s terms: It added $105 million in cash payments to Northrop Grumman and a host of new performance, operational and financial requirements over the remaining course of the contract.

Still, plenty of IT departments are using outsourcing successfully to save money and increase efficiency. Former San Diego County CIO Michael Moore said that under fiscally constraining times, outsourcing can be a smart approach — and can be done effectively.

“I think the budget crisis is causing people to look at outsourcing in a very, very different way than they did four or five years ago,” Moore said. “There are probably 20 municipalities right now that are looking at [outsourcing] in some form or fashion as a way to deal with budget crunch.”

But the question remains: What makes one outsourcing deal thrive while another fails? Moore said governance is a key factor for successful outsourcing deals. And he speaks from experience, having overseen San Diego County’s large-scale and successful transition to outsourcing in 2002. “Governance is a big portion of why outsourcing deals work or don’t work,” he said, especially at the state level where decisions like these tend to become political between executive and legislative government branches. Local governments have an advantage because their decision-making groups, usually a county board or city council, are smaller and typically more politically aligned. Governance at that level is usually more direct than in a state environment, said Moore, who is now a client executive for outsourcing consultancy firm EquaTerra.

“[Outsourcing deals] are difficult under the best of circumstances,” said Moore. “The more aligned you are politically and the more straightforward your government structure is, the better chance you’ll have of them being executable.” 

The ‘Big-Bang’ Approach

Another factor to successful outsourcing, Moore said, is taking a “big-bang” approach: a complete outsourcing transition that’s done all at once, instead of an incremental approach that could take years to complete.

Minneapolis took a big-bang approach when it contracted with Unisys Corp. in 2003 to outsource all of its IT infrastructure. The city has since renewed its contract twice, and is estimated to save more than $2 million over the next few years.

To start, the city planned and executed a quick transition of its data center, said Beth Cousins, the city’s IT director. “Our data center was migrated in five months’ time; so that was really a huge initiative when they did that in 2003,” Cousins said. “It was a very successful initiative that people who were involved in that transition still are high-fiving each other today.”

As effective as the big-bang approach can be, it often involves a great deal of organizational change. In an outsourcing deal, agencies often are not only transitioning to new data centers, but also are transforming by consolidating and virtualizing data. The aftershock of this change can be massive, and governments may not see immediate cost-savings after implementing this approach. They can, however, realize those cost savings in the long run, Moore explains.

“What people tend not to understand is that outsourcing under any circumstance has a trough of despair. While you’re going through transition and transformation, the service actually declines before it gets better.”

Some argue that the big-bang approach is best used only if a city is switching outsourcing vendors. Santa Clara, Calif., CIO Gaurav Garg said that when cities change vendors, the middle period can create confusion about which provider is responsible for what, so a quick change is best. However, if a city has never outsourced, it should consider a phased approach because it can be difficult to make such a big, immediate change, he said.

Creating a Vision

Santa Clara’s IT outsourcing initiatives have been successful for more than 20 years.

After the city’s seven-year contract with Dallas-based consulting firm ACS ended in 2009, Santa Clara worked with neoIT (now known as Neo Advisory) to identify the city’s revised outsourcing strategy. Santa Clara wanted a complete IT transformation with what Garg calls “IT 2.0.” With this new strategy, it was important for the city to ask these questions: How do we enhance IT services while reducing costs, and how do we move from a departmental view to a citywide view?

Garg said for Santa Clara to accomplish its IT goals, the city’s IT department needed to maximize its ROI and maintain stakeholders’ trust by meeting expectations. So Garg and the city established a technology framework and service delivery framework, and decided to start over.

Santa Clara’s procurement initiative included a request for information, which was sent to 12 outsourcing firms. Eight responded to the request and five qualified to respond to the city’s RFP, which included services for IT infrastructure, applications and Web services, departmental IT solutions, and cross-functional services.

Santa Clara chose Unisys as its outsourcing provider. The city signed a five-year contract in August 2009 and officially went live that December. The delivery model within the contract agreement is estimated to save Santa Clara $3 million over the course of the contract.

To Garg, however, choosing Unisys meant more than just satisfying the RFP’s terms — the firm was to help Santa Clara carry out a vision of change. The internal strategy determined what the new IT organization should look like and how services would be delivered, asking questions such as: What do we want this new IT organization to look like? How will we interact? How will we deliver services?

“And that’s what our RFP contained,” Garg said. “So when we went to the market, it was, ‘Here is what we want to achieve. Help us get there.’ So we didn’t spell out the solution; we spelled out the outcome we wanted. It was a vision, and it was really an end state.”

Instead of using a conventional RFP, Garg asked the outsourcing providers to find the answers that would achieve his vision of IT 2.0. The city then went through an aggressive 90-day transition to its new vendor. Garg said the switch to Unisys felt similar to a SWAT team descending on the IT department, but the approach has garnered success for the city.

Sarah Rich, Staff Writer Sarah Rich  |  Staff Writer

In 2008, Sarah Rich graduated from California State University, Chico, where she majored in news-editorial journalism and minored in sociology. Since 2010, Sarah has written for Government Technology magazine and covers a spectrum of public-sector IT topics, including cloud computing, transparency, broadband, and other innovative projects and trends. She currently lives in Sacramento, Calif.