Outsourcing: Handwriting's on the Wall

t a June press conference to release a report from the federal Chief Information Officers Council on the shortage of information technology workers, one of the first questions reporters asked was about outsourcing. Does the dearth of skilled workers mean that the government will be turning more of its IT work over to the private sector?

Ira L. Hobbs, deputy CIO of the Agriculture Department, bristled at the suggestion. He made it clear that he doesn't favor handing federal IT operations over to contractors and that he wants to keep the federal IT workforce robust.

Hobbs' fellow IT executives tend to agree. For example, in a separate report on the IT workforce that he issued in February, Treasury Department CIO James J. Flyzik took note of outsourcing as one strategy but said it is not a panacea. Flyzik's document cited two news reports that described corporations' dissatisfaction with their IT outsourcing arrangements.

But those federal IT executives and their allies who believe federal IT should remain in-house are swimming against a tide of "best commercial practices" models, human resources constraints, government reinvention and their own agencies' poor performance in the past. A study being released this month confirms that the push to outsource government IT functions is a trend not only in the United States, but worldwide.

Worldwide Survey

The study, "Vision 2010: Forging Tomorrow's Public-Private Partnerships," was done by the intelligence unit of The Economist magazine in cooperation with Andersen Consulting. The Economist's researchers surveyed 700 senior civil servants and politicians from the United States, six major European nations, Australia, Japan, South Africa, Canada and New Zealand.

Ninety-four percent of those surveyed said advanced information technology will be a very important driver of government change by 2010. That figure is even more dramatic when compared with the 55 percent who believe IT is an important driver of change today. The respondents said citizens will expect better government services as they become accustomed to the enhanced commercial services that the Internet and other IT make possible.

Keeping up with advances in technology can be expensive, and it requires employees with the latest technical skills. But the government workforce is aging and shrinking, making it harder to ensure that federal workers have up-to-date skills. For these reasons, 47 percent of the U.S. respondents to the survey expect outsourcing to become a major element of government service delivery by 2010, Andersen Consulting officials report.

"I'm aware of multiple agencies that feel their backs are against the wall" when it comes to keeping up, says Steven J. Rohleder, who heads Andersen Consulting's federal government practice. Top officials in those agencies feel they "have no choice but to rely on the private sector" to deliver the technology they need, he says.

Motivated to Change

Moreover, resource limitations are becoming less of a factor in government decisions, they say. "The motivation for change is shifting from cost-cutting to service-level improvements," says Eric Stange, an Andersen Consulting partner specializing in process improvement for government.

There's also some outside pressure on federal agencies. Both the Clinton administration and many members of Congress have been pressuring the agencies to inventory their activities and identify those that are not inherently governmental and could be contracted out. Under a law taking effect this year that had support from both ends of Pennsylvania Avenue, agencies were required to submit lists of these activities to the Office of Management and Budget by June 30.

What happens next under the Federal Activities Inventory Reform Act, or FAIR, is not entirely clear, but FAIR "could be a giant step toward outsourcing," says Thomas L. Hewitt, chief executive officer of Federal Sources Inc., an IT market-watching firm in McLean, Va. Although the IT contracting industry pushed for FAIR, the law was watered down to the point where it may not have much effect, some industry leaders acknowledge.

The administration has not officially taken a position favoring outsourcing. Instead, OMB officials talk about the benefits of public-private competition in achieving cost reductions and efficiencies. But their true colors may have been revealed when they objected to a provision in the House version of the fiscal 2000 Defense authorization bill that would limit the amount the Defense Department could spend on contract consulting and assistance services. "Growth in [services acquisitions] is the natural outcome of administration
efforts to contract for services that can be performed more efficiently in the private sector," OMB's official statement said.

When decision-makers consider what functions might be outsourced, IT often is high on their lists because of the personnel crunch and their recognition that effective IT is important to improving performance and efficiency. "IT is the backbone of most agency activity today," says Federal Sources' Hewitt, and agencies are looking for technology applications or solutions, rather than the raw capability of computers.

What's at the Core?

One of the most often-raised arguments for outsourcing is that agencies should concentrate on their missions and not expend management attention and energy on the peripheral challenges, including IT. Operation of information systems, this argument goes, is not a "core competency" of federal agencies. When downsizing is occurring, organizations are expected to protect their core functions and let the others go.

But if IT is indeed the backbone of the federal government, should it be outsourced? One school of thought holds that in a society driven by information, IT is a central competency, not simply a support function. An agency that loses control of its IT or even just makes some mistakes in selecting its outsourcing contractor may be hampered. Without first-rate information systems and services, it could function less effectively and lose public support.

Thomas Buchsbaum, who heads Dell Computer Corp.'s federal unit, is one of those who question whether outsourcing is a wise move for the many agencies where IT is a strategic competency. "That one step of saying, 'We're not in the information management business' is a tough one" for many federal organizations, Buchsbaum says.

Federal employee unions also are fighting the trend to outsource. Union opposition is helping to delay, if not scuttle, the Army Materiel Command's huge effort to outsource the development and operation of a new wholesale logistics system.

Union opposition contributed to the collapse of the nation's most ambitious public-sector outsourcing program to date, the state of Connecticut's $1.5 billion plan to turn all of its IT operations over to Electronic Data Systems Corp. After selecting EDS as its contractor, Connecticut was unable to agree with EDS on terms that would minimize risks on both sides.

Gov. John Rowland explained that the parties could not pin down the state's requirements and budgets for the duration of the seven-year contract, according to the Reuters news service. "The hard part is to say, what are our needs five years from now, and what technology do we want, and what price and service guarantees are there?" the governor said.

Costs in Dispute

In May, Terry Rogers, a vice president of the American Federation of Government Employees, told a Senate Appropriations subcommittee there's no evidence that outsourcing reduces government costs. In fact, Rogers said, the scanty available evidence suggests that outsourcing increases agencies' costs by 25 percent or more.

That directly contradicts the Clinton administration's claim, in fiscal 2000 budget documents, that contracting out "has shown savings of 30 to 40 percent." But agency officials who outsource IT work rarely assert these days that they are doing it to save money.

Instead, outsourcing is a way to acquire the expertise they can't hire, hampered as they are by an inflexible federal personnel system and low federal pay. For example, USDA's Hobbs says, to be hired at a competitive level of pay, federal programmers need six years of experience. But if their expertise is in the Java language, which is used on advanced World Wide Web sites, that's an impossibility; Java wasn't introduced until 1995.

Federal starting salaries for computer professionals almost never exceed $36,000, while the private sector is paying close to $50,000, Hobbs says. (At higher levels, the gap is smaller.)

The managers are running up against personnel ceilings, as well. Downsizing may have leveled off, but some managers still have difficulty getting approval to replace departing IT employees.

Many Meanings

Relying on contractors to get IT work done is nothing new for federal agencies, of course. They've been spending more each year for professional and technical services. Although total federal spending on IT acquisitions is growing at 6 percent a year, according to market researchers at the Vienna, Va., research firm INPUT, the services component of the market is growing even faster, by one or two percentage points.

A broad definition of outsourcing would cover many of the services the government buys, such as technical support for PCs or operation of data centers. But the growth of outsourcing is expected to come in areas that to date have not been contracted out extensively.

The Andersen Consulting-Economist survey found that telecommunications is the most heavily outsourced IT function today, but by 2010 those surveyed expect a category called "applications" to be the most heavily outsourced. These are functions such as human resources management, financial management and program operations, rather than work handled mainly by the IT shop. Even though these applications are not, strictly speaking, IT functions, they are IT-intensive and will be even more so by 2010, whether or not they are outsourced.

These also are the areas where re-engineering and knowledgeable application of current technology can generate the greatest rewards for the agency, Andersen's Stange says. And they are the areas where it can be most difficult to assemble the ingredients required for dramatic improvement: program expertise and technical skills, political support within and outside the agency, up-front funding, leadership.

As a consequence, look for more projects where an entire function is contracted out. For example, the General Services Administration's Public Buildings Service this year contracted with Affiliated Computer Services Inc.'s Government Solutions Group to establish and operate its software development center. The Census Bureau has retained a team of contractors headed by TRW Inc. to build and operate three of the four processing centers for the massive decennial census next year.

Of course, the Census outsourcing strategy has few political downsides because federal jobs aren't in jeopardy and the ramp-up for the once-a-decade program will be reversed in 2001. When a program envisions turning work now done by federal employees over to contractors, however, the opposition can be intense, as the Army logistics and Connecticut examples show. That's why some knowledgeable federal executives say much of the growth in outsourcing is occurring in small increments that attract less attention.

A carefully designed outsourcing program allows agencies to focus more on the output or results achieved and less on how the work is done. As difficult as outsourcing can be, it may be less difficult than the alternatives of doing nothing or of trying to get the same results with in-house resources.