The following is an abbreviated version of an article that appears in the December ’02-February ’03 edition of CSC World.

By Don Brown

Information technology outsourcing has been an important part of the commercial market for more than a decade, and governments at all levels are beginning to adopt the practice to meet their own needs.

The decision to outsource, however, is not a simple one. This is especially true in the public sector, which still is accustomed to very different contractual relationships with vendors.

Several factors are driving governments to consider outsourcing. Among these are an increasing focus on privatization, e-government initiatives, difficulties in attracting and retaining skilled staff, the growing emphasis in interagency collaboration, and pressure to improve financial performance.

Government agencies can reap substantial rewards by deciding to work with an IT services vendor. To get the benefits and minimize the risks, decision makers must be very clear about their management objectives, the business case for outsourcing, and the acquisition approach they will take.

Clear focus on management objectives

Many of the downstream choices around the business case and acquisition approach will be determined by the choice of management objectives. Managers can best frame those objectives around the benefits they are seeking, such as converting fixed costs to variable costs, modernizing systems and infrastructure, and gaining access to specialized and up-to-date skills. Most outsourcing is driven by three closely related factors: cost, technology, and personnel.

Cost Cost usually is the most important driver. Managers often are frustrated at not having control over or clear visibility into the costs of current operations. They know what they are spending, but they do not always know where the money goes. For example, they often do not know how much it costs to support a desktop. At the same time, demands for IT support continue to increase in the face of tighter controls over capital and fierce competition for operating and maintenance funds.

Outsourcing can be a vehicle for resolving the agencies’ cost dilemma. One of the hidden benefits of outsourcing is that having to decide what to turn over to a vendor gives clients a better understanding of their own business. That is because, in asking themselves why they are doing what they are doing and how much it costs, clients give themselves a crash course in how their business operates. The result is a clear relationship between the costs and benefits of IT.

Technology The technology problems for most government agencies result from the inability to keep up with e-government initiatives, demands for greater interagency collaboration, and the need for standardized environments. The modernization requirements imposed by these initiatives fall hardest on agencies that still are working with outdated equipment and patched-together networks. However, even agencies that have been able to invest in new technology to support their traditional missions find they have neither the technology nor the skill mix needed to meet the new requirements.

The driver for outsourcing is the growing awareness of the need for innovative solutions to meet these new requirements. Partnering with an IT services vendor can provide access to necessary technology and personnel without having to get additional capital funds to invest in those resources.

Personnel The typical personnel problem has two aspects. One is an aging workforce that will soon retire, taking their government experience and technical skills with them. Although the skills that will be lost are to a large extent not the same ones needed to meet the requirements of new initiatives, governments have found it very difficult to compete with the private sector to attract personnel with the right skills. Another aspect has to do with non-IT staff. Agencies with outmoded systems find that much of their staff is assigned to work that could be automated. Unlike private sector outsourcing, where the goal is to reduce headcount, the goal of public sector outsourcing typically is to reassign staff to work that better fits their experience and training.

The outsourcing driver here is that private-sector vendors already have won the competition for the skilled personnel governments need. Those vendors’ IT staffs have the skills needed to meet the new demands on government, and agencies that partner with vendors can avail themselves of those skills as needed. The new technology vendors bring to such a partnership can free personnel to work on the core mission. For example, when the US Internal Revenue Service automated the call center it uses to provide tax advice to citizens, it freed nearly 800 people to do the tax analysis and auditing that is closer to the agency’s mission.

Once managers know their objectives, they will have a clearer view of the scope, the performance criteria, and the cost objectives associated with the business case. They also will have given themselves more explicit direction around the acquisition approach, including contracting strategy and the governance of procurement and subsequent operations.

Making a business case

A business case covers three general areas: the scope of service to be included in a contract, the level of performance desired, and cost objectives. Agencies begin to define the scope of services to be covered in an outsourcing agreement when they ask themselves why they are doing something, what benefits it provides, and what it costs.

For a government agency, that means deciding what functions are inherently governmental — part of their core mission — and which are not. Which functions are performed in house only so that other functions can be performed? Which functions can be performed better and more cheaply by someone else? Sending people into space, for example, is the core mission of a space agency. Running the IT systems that support space programs, although essential to mission success, is a non-core function.

Part of deciding what falls within the scope of a contract is deciding performance levels. When clients ask themselves why they are doing something, they are asking how important it is. How important an area is determines the level of service it will receive. Non-core functions still must be done well, and measuring how well they are being done is essential to building a business case. Establishing metrics — for end-user satisfaction, downtime, etc. — will identify areas that need improvement and help determine whether improvements can be achieved in house.

Ranking functions in order of the level of service to be provided is directly related to an agency’s cost objectives. Constructing an outsourcing contract allows clients to, in effect, push the "reset" button and make new decisions about what they will support and how much they will spend.

Acquisition approach

Outsourcing IT services is a major business decision. It also is the kind of decision most government agencies are not accustomed to making. To make the best decision, an agency needs to put the full support of top management behind a team that is empowered to take a non-traditional approach to a non-traditional contract.

That flexibility will enable the team to make the right allocation of risks and control. Managing outsourcing relationships requires different skills on the government side than those needed to manage traditional contracts. In traditional contracts, such as facilities management agreements, the government agency usually acts as a manager of vendor personnel, and the focus usually is on meeting the technical requirements of the contract.

The services provided in an outsourcing contract, however, are important parts of an agency’s mission and the vendor assumes certain financial risks to provide those services. Outsourcing vendors are more like business partners than mere contractors, and managing such agreements requires a focus on relationships and outcomes.

Making outsourcing succeed

Clear accountability on both sides is essential to the success of an outsourcing agreement. One of the major reasons outsourcing contracts fail is a lack of clarity over what the vendor is committed to do and whether the commitment is being met. Open and frequent communication at all levels is necessary to achieve that clarity, and to sustain the relationship over time.

One measure of how well an outsourcing agreement is working is how often the client and the vendor refer to the contract to settle differences in expectations versus performance. The more often they go back to look at the terms of the contract, the greater the likelihood that the relationship is deteriorating. The best outsourcing relationships are between vendors and clients who have frequent, candid communication about how things are going. This trust-based foundation is essential to keeping the relationship on track and heading off problems before they become the focus of a contractual dispute.

Don Brown is a vice president within CSC’s Federal Sector and is the head of CSC’s Strategic Initiatives Office.

This article is based on material presented in the Seminar on Strategic Sourcing, given under the auspices of the Federation of Government Information Processing Councils.

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