PUBLIC SECTOR OUTSOURCING: Issues & Observations

VIEW FROM THE OTHER SIDE:
Public Sector Perspectives 

Public Sector Outsourcing:
Issues & Observations
How is Outsourcing Perceived in the Public Sector?

Outsourcing in the public sector is little understood and feared by many within government. Past outsourcing failures and loss of control are normally cited by many government employees as reasons why outsourcing should not be pursued. The real fear by employees is job loss. This in turn drives fierce opposition.

Senior government executives are less concerned about job loss and more interested in cost savings and improved performance.  However, they routinely reach into their information technology (IT) organization on technology matters and seek input.  Fear, uncertainty and doubt (FUD Factor) expressed by the mid- and lower-level “IT” employees quickly tempers any enthusiasm for outsourcing.  Without external influences to mitigate the FUD factor (like vendors armed with empirical data about successful outsourcing projects) there is little hope for outsourcing to expand quickly in government. Obviously there are exceptions to the rule.  Some government leaders have come from the private sector and experienced outsourced services.  If positive, they are less likely to be deterred by the FUD factor.

Part of the challenge with government outsourcing is awareness.  Few are familiar with the facts about outsourcing and even fewer know about success stories.  Most likely, any knowledge about outsourcing will be negative; namely, the publicized failures. Connecticut and San Diego are cited as examples of why outsourcing doesn’t work. The national press does not help with the negative perception. An article written by Tom Field in CIO magazine (June 15, 2002) quotes Rock Regan, CIO of Connecticut, as saying there is a fatal flaw with wholesale outsourcing; “Too much change, too many politics, too many battles.”  The article was entitled “Why You Can’t Outsource City Hall.”  The success of Pennsylvania’s outsourcing was mentioned in passing.  In order to balance the message and revive the concept of outsourcing within government an outsourcing/managed services vendor will need to proactively generate the positive press showcasing successes.

What are the Challenges to Building a Business Case?
If outsourcing could definitely deliver significant cost savings many senior administration officials would be very open to a discussion about outsourcing. Typically outsourcing in the private sector is done for economic reasons; namely, cost reduction.  However, building the financial business case in government is not easy.  The primary source of cost savings is elimination of employee jobs. Government is reluctant many times to displace significant numbers of employees. Even if there is desire to outsource, employee unions, civil service rules and legislative intervention usually pressures administration officials to change course.

The second challenge is getting good and reliable cost information from governmental accounting systems. It is further complicated when the information technology (IT) funding is spread among multiple departments and programs. Determining total cost of ownership is nearly impossible. Even governors find it difficult to accurately define the cost of “IT”, as well as other functions of government. As an example, in July 2003 Governor Warner of Virginia publicly commented that he asked how much “IT” was costing in his state government. He said it took staff 9 months to get the answer.  Those hoping to scuttle outsourcing will make every effort to hide, disguise or interpret financial data of existing operations.  In turn, it is challenging to yield a valid and thus favorable cost-benefit analysis.

Also complicating the calculation of economic metrics is the comparison of pre- and post- outsourcing value.  Usually outsourcing involves upgrades in technology and other value adds that increases current costs. Government employees wish to ignore the increased value and point to the increased cost.  Bottom line: unless you have a bulletproof cost-benefit analysis do not use cost savings as the primary or only justification for outsourcing.
Some vendors may try to justify outsourcing based strictly on service improvements.  Again, easier said then done. It has been my experience that few government organizations collect and maintain accurate performance metrics. Without valid benchmark data, the argument for improved service is difficult to make.

Given all the challenges how can vendors increase opportunities in its outsourcing business?

Help Build the Business Case:
Government is risk adverse.  Therefore, there is safety in numbers.  Having examples of others who have successfully outsourced provides a level of comfort to senior officials and provides the needed political cover if the project fails. To that end I recommend vendors compile a list of successful outsourcing engagements with emphasis on those in the public sector.  Each engagement should have a documented case study showing empirically the benefits achieved by the entity. Unbiased assessments from Gartner Group or others viewed separate from the vendor will add to the credibility of the metrics. Do not limit the business case to economic value. In fact, some non-economic justifications are extremely important in post-9/11 environments. Security and redundancy need to be paramount in a discussion about outsourcing. No senior government official wants the operational and political fallout of a major security breach or collapse of mission critical services due to technology failures.

There are other valid justifications as well.  The increasing complexity of the technical environment; the graying public service workforce; the difficulty hiring qualified candidates, particularly for mainframe operations; and the lengthy procurement cycle to upgrade technology are all valid reasons to consider outsourcing and should be exploited as part of any business case. Where appropriate, examples like the major Northeast power outages and major virus attacks should be cited as added risks to the current environment.

Target Those Most Likely to Outsource:
Concurrent with documenting successes, analyze the current structures within each state and large municipality.  Target those public sector organizations that have recently changed administrations in which the incoming chief executive was from the private sector, hopefully from a company which successfully used outsourcing. Also, determine if the state routinely furloughs employees for budget or other reasons.  A justification for a financial business case is difficult, at best, if incumbent employees stay on the state payroll.  Other qualification criteria would include entities that have multiple infrastructures like decentralized data centers.  Usually this will provide an opportunity for economy of scale if consolidated.  Another criterion would be documented performance problems, especially those appearing in the press, in state auditor reports or post 9/11 emergency management assessment reports.  When problems reach the public domain there is greater interest in finding solutions.
Showcase Outsourcing Successes:
The next step is to tell the story. Outsourcing vendors should seek speaking opportunities at national conferences attended not only by CIOs but also senior executives responsible for government operations.  Also, convene meetings with targeted state and local officials to present the “business” benefits and success stories of outsourcing.  If possible seek those clients who have successfully outsourced to tell their (your) story. Consider some type of recognition ceremony for the entities who make the list. This positive experience should make them ambassadors for your service offerings.  Ask them to do presentations and conference calls with clients to explain their success. There is nothing better than a government peer providing positive comments about your product.

Be Patient But Persistent:
Government’s embracing of outsourcing will not be immediate.  But unless you begin laying a foundation of awareness, the opportunities in outsourcing will be limited.
What Are Other Potential Opportunities?
I believe any vendor in this marketplace should view outsourcing as just one of a continuum of services.  There are many services that can either be a prelude to outsourcing or help justify it. These services range from assessments, to helping with consolidations, to supplementing staff at government-operated facilities, to traditional outsourcing.  Graphically the continuum appears as follows:

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Assessments
Consolidations
Targeted
Outsourcing
Wholesale
Outsourcing
Assessments:
Develop or find a partner than can conduct an Infrastructure Protection Assessment (IPA) practice specific to the public sector.  The focus would be security, reliability, redundancy, and backup/recovery of critical infrastructure. The offering could be targeted to all levels of government, from first responders to federal agencies. However, I would start first with state and large municipal governments. Technology supporting emergency management and Homeland Security would fall within the purview of this offering. This represents most technology within a government entity. The vendor may be able to convince the Office of Homeland Security of the value of these assessments. Homeland security grants could be a potential source of funding government IPAs.  Power outages in the Northeast a few years ago and harmful virus attacks (like the one that disabled the Maryland DMV and other critical systems) further justify the value of this offering.

Either as part of the IPA or as a separate service offering, vendors should consider performance assessments to measure the efficiency and effectiveness of current data center or infrastructure operations. Partnering with Gartner Group, or other firms viewed as being independent to perform performance benchmarking could provide unbiased assessments and thus increase government confidence in the outcome.

Performing assessments can provide vendors value beyond the initial engagement. Follow-on work such as remedial services is typical once assessments reveal problems. If the problems are over-whelming, there may be justification to consider supplementing client’s staff or even outsourcing.

Consolidations:
Some public sector clients will not outsource for philosophical or other reasons. But these clients clearly understand the economy of scale if duplicative infrastructure is consolidated.  Outsourcing vendors typically have significant experience with the planning and physical transition of technology, as well as the technology support services of a consolidated model.  A specific practice targeting the consolidation of infrastructure could be a specific service offering.  Debt financing or performance based contracting (e.g. sharing of savings) could be potential sources of funding to consolidate infrastructure.  Longer term the entity may elect to outsource the infrastructure.

Targeted Outsourcing:
Pennsylvania successfully followed the targeted outsourcing model. Only data center operations were outsourced.  Application development, data base administration, and logical security administration was retained for state employees. Therefore the focus was narrow, privacy issues were reduced and the impact did not reach all “IT” staff.  The displaced workers were retrained for other “IT” jobs within state government. In my opinion, the more focused the outsourcing proposal the higher probability of success.

Managed services for desktop technology seem to be growing in popularity.  Again, it is targeted outsourcing and not viewed as a tremendous threat to employment. I would continue marketing this offering.  However, given the difficulty collecting accurate cost data from government agencies, I would consider using national metrics collected by Gartner or others for the typical cost of a government entity to maintain their desktop technology.

Many states are discussing or implementing ERP.  The technical environment to host ERP software is enormously complex.  Outsourcing vendors may want to develop an offering to host at the client site or at their own site, ERP software for government entities. They may want to form an alliance with major systems integrators like BearingPoint, Delliotte or Accenture to be the technical solution for SAP or Oracle/People Soft ERP implementations.

Wholesale Outsourcing:
The failure in Connecticut was, in my opinion, related to wholesale outsourcing. Most governments are not equipped to deal with such large and complex issues. Eliminating an entire vertical of government like IT is a major challenge for any governor.  There are too many moving parts and too many points of attack from the anti-outsourcing forces. Only those potential engagements that have extremely strong, committed leadership and a solid business case should be attempted.

Should Our Efforts Be Local or National?
Whether it is awareness programs or developing new practices, there are significant advantages developing these programs at a national level.  Consistency of message, branding the offering, and drawing on nationally recognized expertise will collectively add to the value.  Consider forming a national team to visit states and other public sector organizations. These national efforts should be customized by the local account representatives to meet individual needs. All of these efforts should be aimed at driving interest and demand for these services.

Summary:
In my opinion, public sector outsourcing will not expand rapidly unless and until vendors proactively change the negative perception of outsourcing through showcasing success stories. Government is risk adverse and needs political cover, like success stories, to justify such a contentious and risky endeavor.  Focus your marketing efforts on senior government staff, not mid- or lower-level staff. Support for assessments, consolidations, and outsourcing needs to be pushed from the top, not pushed from the bottom.

Concurrent with an awareness program, outsourcing vendors should develop public sector specific service offerings that allow public sector organizations to move along a continuum of services at a pace and to the degree with which they feel comfortable.

©2007, Gerhards Consulting Group. All rights reserved.
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