Texas Consolidation Saves Money Despite Delays, Report Says

Statewide consolidation plan has reduced costs by $11 million over past two years, accounting firm finds.

by / June 16, 2009

Consolidating and privatizing data centers in Texas state government has saved $11 million over the past two years, according to an independent review of the state's massive outsourcing initiative.

Texas hired IBM in 2007 to provide data center and disaster recovery services for 27 state agencies. The seven-year, $863 million deal is replacing 31 independent state data centers with two IBM-operated facilities. At the time the contract was signed, Texas officials estimated the arrangement would deliver $159 million in savings over its seven-year term.

Real Savings

A report released late last week by the Texas Department of Information Resources (DIR) shows the ambitious statewide consolidation is delivering savings, despite the fact that transformation efforts are behind schedule. Accounting firm Grant Thornton compared pre- and post-contract costs for a baseline set of enterprise data center services and found that Texas agencies paid $9.7 million less for identical services since the new contract began. In addition, agencies cut their cost of launching new services or handling growing caseloads by nearly 14 percent, saving another $1.3 million.

"I think the most significant thing at this point is that a third-party, an independent accounting firm, has used a repeatable methodology and determined that there's been a real cost savings as a result of the project," said David Duncan, director of communications and strategic partnerships for the Texas DIR. "Before the contract was in place, there were estimated savings. But they were just estimates. So it's reassuring to see the reality of it."

Tough Transition

Duncan said moving agencies to the new data centers has taken longer than expected. State officials initially projected that all 27 participating agencies would make the transition in about two years, but the process is not yet complete. Just two agencies have finished the move: the Texas Veterans Commission and the Texas State Library and Archives Commission. Mainframe computers and print and mail services for eight other agencies also have made the switch, however.

Duncan attributed the delays to several sources.

"One of the most difficult aspects was gaining support from the agencies, and for IBM to understand the scope of the project -- where all agencies were with the hardware and software," he said. "There have been a lot of software and hardware upgrades that were needed that we just didn't recognize before we got started."

The report notes that IBM has paid Texas more than $6 million in credits for missing performance targets since the contract began. That money was not factored into the savings figures.

More Resources

Duncan said all participating agencies should be transferred to the consolidated data centers within the next year, and that savings numbers would climb once that transition is complete.

"I think all the agencies realize that they need to put more resources into it, and they have committed to doing that. Over the next year, that will be the focus -- getting back on schedule," he said. "This kind of consolidation is clearly warranted, but it's taken some time for everybody to realize the value of it."

Over the period covered by the data center contract -- April 2007 to February 2009 -- Texas agencies spent $256.3 million on data center services, according to Grant Thornton. Those services would have cost $266 million before the consolidation began, the firm said.

"We're making progress," Duncan said, "but there's obviously a lot of work that has to be done."

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