Human Resources: Outsource With Care

ere's how not to outsource a human resources computer system: Hire a contractor with no experience to install an untested system; pay more than double the expected amount for setup; establish a contract without performance measures that would determine whether the job got done; spend months upgrading to a software version that will never be used, then upgrade hastily to a version that causes major problems and let the contractor operate the system for two years without a contract.

The Federal Energy Regulatory Commission learned those don'ts of HR outsourcing the hard way when it contracted to get a new payroll system through the Veterans Affairs Department's franchise fund program, which encompasses a number of fee-for-service operations that sell services to other agencies. In the end, FERC ended up transferring maintenance of its payroll software to a HR technology firm, and the VA ended up $2.6 million in the hole with a healthy list of lessons learned as an outsourcing provider.

Like many technology companies during the recession, human resources firms are training their sights on the federal government as a potential new market. Long considered an impenetrable maze of computer systems developed in house to administer horribly complex civil service rules, the federal government is starting to look like the place to be for the human resources industry. In fact, the Bush administration has begun to push agencies to outsource more and more work to the private sector. "The federal government is the big dog, the ultimate HR outsourcing play, the Holy Grail," says Jay Whitehead, publisher of Human Resources Outsourcing Today, a monthly trade magazine. "Everybody who wants to be on the map in human resources outsourcing has a federal government strategy."

Compared with businesses, federal agencies have done little HR outsourcing. Most agencies either use their own staff to manage systems they developed themselves, or they use consulting firms to help install and maintain commercial, off-the-shelf systems. Federal officials have tended to hire other agencies-such as the VA franchise fund-as middlemen between themselves and private contractors. They worry that outsiders won't understand the needs of government customers.

But as agencies move to commercial systems or those of other agencies, contractors are handling more of the work. The energy commission and the Transportation Security Administration are leading the way toward extensive HR outsourcing. But they also offer cautionary tales to government executives who think outsourcing will solve their human resources woes.

ONE-SHOT DEAL

The Veterans Affairs Department got its first and last payroll client in 1997.

The Federal Energy Regulatory Commission outsourced its payroll operations to the VA in December 1997. According to a September 2002 audit by the VA inspector general's office (01-00256-157), the outsourcing did not go well.

VA and FERC decided to purchase PeopleSoft software to manage payroll for the commission's 1,200 employees. VA officials hadn't worked much with PeopleSoft products and no federal agency had ever installed the PeopleSoft payroll system, VA officials reported. To make up for its inexperience, VA hired Andersen Consulting (now Accenture). "VA did not anticipate the additional difficulties and resource needs that were ultimately required to operate FERC's payroll," the IG found.

VA and Andersen Consulting developed the payroll system by December 1998. Despite a year of work, the system required manual workarounds for functions such as computing life insurance premiums and processing deductions for U.S. Savings Bonds. VA's contracts with Andersen Consulting didn't specify expected results; the agency instead pledged to pay the firm for its time and materials expended. In fact, VA paid the firm fully even though it didn't provide full documentation of the new system.

FERC ended up paying VA $2.6 million for system development-well above the original estimate of $1.2 million. Then VA began running the payroll system for FERC, but the two sides could not agree on a contract. So VA operated the FERC system for two years without one.

One reason contract negotiations failed was that VA kept passing the contract on to new managers, none of whom had authority over the employees who actually performed payroll servicing for FERC. VA lost four key executives involved in the FERC work between February and November 2000, forcing FERC to develop relationships with new VA officials repeatedly.

In the meantime, VA started upgrading the payroll software four months after it had been installed. PeopleSoft had a new version of its payroll software with additional features that FERC wanted. From March 1999 to August 1999, VA, now working with consulting firm Litton PRC, worked on the upgrade. But VA and Litton PRC kept finding errors in the software. The work was wasted, since in August, PeopleSoft announced an even newer version of the software was available. PeopleSoft advised VA that the version the agency was working on no longer would be supported.

When PeopleSoft released its new version in October 1999, VA and Litton PRC installed it in a month. But that was too fast. FERC managers told the inspector general's office that insufficient testing caused numerous problems. Personnel actions couldn't be processed for three months, and fouled-up leave records took eight months to fix.

FERC paid VA only $4.9 million of the $7.5 million that it cost VA to develop and maintain FERC's payroll system from 1998 to 2000. In 2001, FERC transferred management of the software to Accenture and Usinternetworking, an Annapolis, Md.-based application services provider. VA continued to provide some services.

But VA official William Campbell conceded to the inspector general's office that the agency had made some key outsourcing mistakes. For example, the VA:

• Failed to vest project authority in one leader.
• Didn't document agreements.
• Used software that wasn't up to the task.
• Neglected to set performance measures.
• Had less than open communication with the client.

OUTSOURCE EVERYTHING

Most federal agencies have only dipped their toes in the HR outsourcing waters. Like the energy commission, the Transportation Security Administration took a total plunge. In 2002, its first full year of operation, TSA contracted out the job of hiring 60,000 passenger and baggage screeners to NCS Pearson, an Eden Prairie, Minn.-based firm, and then contracted out training and deployment of the screeners to Bethesda, Md.-based Lockheed Martin. In 2003, the agency handed over the hiring contract to Sacramento-based CPS, a California government agency that does human resources work for other governments. The agency awarded day-to-day human resources work, including processing personnel data, to Accenture.

Retired Coast Guard Adm. James Loy, head of TSA, told Congress this winter that the outsourcing model should be considered for the new Homeland Security Department, TSA's parent agency. "Our HR contract is in the private sector. We're not going to build a federal bureaucracy of HR experts in the TSA shop," Loy said.

Despite Loy's endorsement, several concerns about the extensive outsourcing have come to light. For example, the cost of the NCS Pearson contract, originally estimated at $103 million, ballooned to $700 million by the end of 2002. TSA used a time and materials contract similar to VA's. Several audits still under way already have revealed that an unidentified NCS Pearson subcontractor charged the company between $6 million and $9 million in wasteful or inappropriate expenses.

Also, NCS Pearson didn't properly process personnel information for the screeners hired last year. As a result, TSA's new contractors are poring over every personnel file to correct information that was improperly entered in the agency's personnel system, or not entered at all. TSA officials couldn't say in February how many veterans had been hired, a sign that the system is missing key information required under federal government standards.

More lessons are likely to be learned from TSA's outsourcing efforts, but the agency is tight-lipped. In March 2002, Transportation Department officials held a news conference announcing NCS Pearson as its contractor. In February 2003, the department didn't even issue a news release announcing the CPS and Accenture contracts. The contracts tightly control the companies' ability to discuss their work for TSA.

BETTER DAYS

The higher-than-expected costs for FERC and TSA human resources outsourcing don't surprise many people with experience in the field. Though contractors generally promise savings, they often don't materialize.

Part of the problem is that human resources outsourcing is in its infancy in the federal government. Software products must be tailored to government requirements, pushing up development costs, which ostensibly will go down in the future. Another problem is inexperience; federal human resources officials and contractors haven't had much opportunity to learn how to forge successful relationships. Time-and-materials contracts also tend to be more expensive than initial estimates.

Contractors eyeing the federal market have high hopes for the future.

Corio, a San Carlos, Calif.-based HR technology outsourcer, and Raba Technologies, a Columbia, Md.-based consulting firm, are taking over the Coast Guard's human resources system. Matt Keegan, head of government sales for Corio, says the Coast Guard and other agencies are moving toward outsourcing in part because their HR systems are becoming outdated. Agencies also are having trouble hiring people with expertise in PeopleSoft, Oracle, and other human resources applications. Because outsourcers specialize in managing such systems, as well as handling security, privacy and other concerns, the quality of HR work will go up as more agencies outsource, Keegan says.

Ron Sullivan, director of PeopleSoft's federal division, says agencies are likely to take a number of approaches as they upgrade, with many opting to maintain ownership of the systems but seek outside help with development and maintenance. "The outcome is probably evolutionary as opposed to revolutionary," Sullivan says.