How Outsourcing Can Help
When it comes to government’s work force, time is not on its side. This year 50 percent of the federal government’s 70,000 IT workers will become eligible for retirement, according to a 1999 study put out by the federal CIO Council. According to Jim Krouse, Manager of Market Analysis, INPUT, a government-oriented IT consultancy, new blood to take their place is hard to find. “People aren’t looking for government jobs because of lower pay and dated technology that would make their jobs harder,” he explains.
This is complicated by the fact that government legacy IT systems have also aged. Therefore, he says even when young workers join government they are not trained on the older, custom systems that predominate. These factors are creating a great opportunity for suppliers offering outsourced IT services.
For instance, upgrading agency systems will fall mostly to outsourcers. Even if legacy back-end systems don’t get replaced, Krouse contends that agencies will at least have to Web-enable them to leverage the Internet for mission-critical processes.
In addition to their expertise vacuum, agencies are hamstringed by long procurement cycles. “Procurement cycles can run 18-to-24 months for large systems because every supplier has to have a fair and equal chance of bidding,” adds Krouse. By the time an in-house solution is approved, he says, often its technology has obsolesced. By comparison, he notes, government can purchase outsourced services quicker — procurement cycles cannot be longer than 12 months — and hold outsourcers to longer contracts with fixed prices that guard against incurring future unknown costs.
Of course, he says, outsourcing is also being driven by the Bush administration’s mandate in OMB Circular A-76 to outsource work unless an agency can prove it can do the job better. In most cases, the private sector can do the work better, which, says Krouse, leaves agencies to “do policy, program administration, and regulation, and divorce themselves from technology operations which are not their strength.”
Problems With Administration-Mandated Outsourcing
While it would seem that making agencies operate more cost-effectively like the private sector would be universally lauded, OMB Circular A-76 has met with resistance from many Democrats and labor unions who accuse Bush of setting quotas for how many government jobs would be outsourced to the private sector. The administration has set the goal of as much as half of government work can be outsourced.
Ironically, resistance has also come from suppliers. According to Ray Bjorklund, Senior Vice President and Chief Knowledge Officer, Federal Sources, another government consultancy, “It’s become difficult for industry to compete effectively under the A-76 process.” He explains that suppliers “are conducting extended competitions for the right to outsource the work, so they have to make significant investments not only to write bids but also to develop [what are known as]MEOs (Most Effective Organization) to show how they can operate head-to-head with the government.” The problem, he says, is that suppliers are winning only about half of the competitions and that’s not a high enough win rate to make them want to invest to compete in the future. Overall, he thinks, A-76 has not been as effective as the administration desired.
Whereas the traditional contracting process involved an agency developing a Request for Proposal (RFP) telling suppliers the work to be done, methods of doing it, and the time period in which was to be done, Krouse maintains that more agencies are moving to performance-based contracting (PBC), where the supplier develops a solution on its own to achieve the agency’s stated goal and, if it doesn’t hit performance milestones, doesn’t get paid. Whereas the old type of bidding sometimes led to fingerpointing among suppliers doing interrelated work, he says PBC promotes accountability because one supplier is judged strictly on whether or not it meets the agency’s goals. While he estimates no more than five percent of state and local and ten percent of federal contracts are now performance-based, he predicts that the number will dramatically increase in coming years.
Bjorklund is less sanguine. He says PBC involves a lot of work up-front for the agency in quantifying the performance and savings goals it will measure for the services provided, while also allowing the supplier enough flexibility in delivering a service so that it can turn a reasonable profit. The catch is, agencies have never measured services before, so they aren’t good at it and suppliers simply negotiate contracts that let them get paid for the work they accomplish while being penalized only for bonuses they might earn if they achieve the goals. The result, he says, is that suppliers rarely achieve the buyers’ goals.
Bjorklund says by far the most popular form of outsourcing in government is business process outsourcing (BPO), where the supplier takes over from agencies routine business processes like visa and student loan processing. Conventional IT professional services still also comprise a large percentage of the market.
And a large market it is. Bjorklund estimates that well over half of federal as well as state and local IT spending is on outsourcing, which brings the total spending for the two sectors to in excess of $100 billion each. That’s plenty to go around, he says, especially for suppliers willing to “focus on those areas where they can provide professional services like advice to government and help it manage its day to day operations or, if they’re going to do BPO, study an agency in depth and understand how they operate and spend their money on existing people services.”
Offshore Is Off Limits
Krouse and Bjorklund agree that politics has confused outsourcing with offshore outsourcing, but even if the stigma on offshore lifts, few suppliers will take the chance of offshoring security-sensitive work like processing Health Care Finance Administsration (HCFA ) forms or take the risk of having a project fail because of poor quality work. At present, says Krouse, about “three percent of technical work is done offshore — and it’s all non-sensitive work like call centers.” He feels that a significant amount of agency work will never go offshore, though offshoring will slowly but inevitably grow despite obstacles, a large one of which, says Bjorklund, is that “state legislatures are in the process of passing legislation that prevents offshore outsourcing so they can protect the state work force.”