Although they took a circuitous path for many years, state, local, and federal government agencies in the US have now seized the opportunity to operate from new levels of thinking when it comes to outsourcing. The change is reflected in several trends today–the motivations for outsourcing, scope of deals, types of contracts, relationship and deal management, and use of advisors.
The Perfect Storm
With a large number of workers set to retire in the next five years, the federal government has a human capital crisis. Add to that the fact that some agencies don’t have enough money to support their infrastructure as they grow and are required to do more things. At the same time, they’re getting a lot of pressure from Congress and the Office of Management and Budget (OMB), which has the power to restrict funding if an agency doesn’t improve its efficiency, and run its business proactively and more like a commercial company.
Jim Ballard, President of Perot Systems Government Services, calls it the perfect storm. He says the combination of these three challenges has caused agencies to take a much broader and more engaged perspective about outsourcing than ever before.
He says that this is changing government Requests for Proposal (RFPs), shifting away from the former style of RFPs dictating how the supplier would perform the work. “We’re seeing RFPs that say: ‘Here’s the business we currently perform that we want to outsource and here are some things that are important to us; tell us how you’d run the operation. Tell us what measurements you would use to indicate success and indicate what efficiencies we’d gain. Based on our business case, tell us the things we need to do in order to be successful as an agency.'”
“Some are also asking for incentives and disincentives for a performance-based contract,” Ballard adds. “It’s fair to say this is not pervasive throughout the government yet, but it is, in fact, starting to occur more and more frequently.”
“Performance-based contracting in the government is very real these days,” agrees Phil Smith, Vice President of Solutions Management for Global Outsourcing and Infrastructure Services at Unisys. “People are talking about it on both the federal and state levels.”
Due to headlines of major failed deals (IRS, NSA, Navy-Marine Intranet) in the last five years, the government has also shifted away from its former large contracts to large providers. “The government began to look at how they were going after the work and how to get better value,” explains Ballard. “The focus now is on best value. The proposal may not be for the lowest cost, but it’s the best solution for the government at a reasonable cost.”
The fact that notable large outsourcing deals didn’t go well has led to a shift toward outsourcing midsized, non-bundled deals. “The folks thinking this way are becoming more prevalent in the government,” Ballard states. “They do some staff augmentation where there are holes in core mission work, and they outsource non-mission work for a particular function on a performance-based contract.”
Outsourcing…By Any Other Name
Efforts to provide best practices and best value naturally impact government budgeting for IT infrastructure. As Smith at Unisys explains, “A different type of appropriation is required for equipment, and it often gets cut from the budget later on. Conversely, operations and maintenance dollars rarely get cut.”
Outsourcing to a managed services provider solves this challenge. “It provides the government the opportunity to buy a managed service with the assets and technology refresh built in as part of the service,” says Smith.
“Managed services” is not the only contract vehicle term batted around the federal government these days in connection with outsourcing. Variations on the MACs (Multiple-Award contracts) theme include Indefinite Delivery, Indefinite Quantity contracts (IDIQs), and Government-Wide Acquisition Contracts (GWACs).
MACs basically qualify a set of providers and award them a contract. Each time there is a new task under that contract, the government goes only to those providers, who must then compete for the task work. It ensures a competitive rate and set of solutions. In addition, task awards are usually for one year, thus enabling the government to avoid the high cost of early termination.
State and Local Government Trends
Smith at Unisys says local governments are attracted by outsourcing solutions for IT as a utility. It eliminates infrastructure costs and allows the agency to focus on more strategic things.
Business process outsourcing (BPO) is the main activity on the state level, reports Bruce Caswell, President and General Manager, MAXIMUS. “The drivers for BPO are about the same as the large IT deals in Pennsylvania, Virginia, and San Diego County,” says Caswell. “What fuels the interest in both is the antiquated systems that the states are using and the need to perform a technology refresh–not just in terms of the application environment but the whole enterprise architecture.”
Outsourcing to providers such as MAXIMUS, a provider of such services as Medicaid enrollment programs, welfare-to-work services, the Children’s Health Insurance Program, and child support enforcement programs, drives significant efficiencies in a government program and reduces errors and fraud.
Efficiencies–driven by a blend of enabling and supporting technology, performance metrics and accountability, as well as business process transformation–are a crucial objective today. As Caswell points out, “Even though states are not in the fiscal crisis they were in just a few years ago, they are definitely looking at every incremental dollar that comes in and where it can best be spent. There are demanding areas of spend for Medicaid and education programs, which take a massive portion of state budgets. There is also continuous pressure on the administration of government for reducing the amount of unnecessary programmatic spending.”
Another driver for outsourcing is tougher programmatic requirements for TANF (Temporary Assistance to Needy Families) legislation. “It raises the bar for states in how they go about achieving participation rates and avoiding sanctions. In times like this, states look for alternative solutions such as outsourcing,” says Caswell.
So the state government market for outsourcing is robust and continues to strengthen. “We’re seeing more outsourcing than two years ago,” says Caswell, “but we’re seeing it more in some states than others. Outsourcing still largely cleaves along political lines.”
Texas, for example, has a huge integrated eligibility outsourcing contract with multiple programs and services bundled together as a step toward transforming the way the state provides services to its public-assistance population. The Republican party sponsored H.B. 2292, the legislation that led to the creation of that program; and Texas has a Republican governor.
Government agencies are still concerned about their loss of control when it comes to outsourcing. Software vendors with sophisticated management tools have found a significant market
For the same reason, Smith says government agencies like Unisys’ proprietary business process analysis approach and solution blueprinting methodology–3D Visible Enterprise (3DVE). It provides a clear, layered approach to tracking the touch points of software applications, infrastructure, business processes and the executives’ strategic vision. 3DVE helps to determine what agencies should outsource and who will manage the critical process and infrastructure components, providing a comfort level for the government regarding control.
Joe Vales, founder of NY-based Vales Consulting Group, LLC, which provides proposal advisory services to ITO or BPO providers, says the government has become much more sophisticated in its outsourcing procurement. Some federal and state agencies use a variety of small firms as trusted advisors, he reports.
“Some state agencies bring in Gartner to evaluate proposals and technology solutions proposed by a provider on large state Medicaid deals,” says Vales. Other agencies use Gartner or Virginia-headquartered INPUT Research for benchmarking purposes.
The government also retains Gartner to advise which providers are the best-in-class for particular services and then issues RFPs to only those recommended providers, says Ballard of Perot Systems Government Services.
“But the government itself is still writing the RFP and structuring the deal,” continues Ballard. “A third-party advisory firm can’t both advise and then help draw up the RFP. That conflict of interest is strictly prohibited in government.”
Not Just a Vendor
Government attitudes toward governing outsourcing deals have also changed, shifting away from commodity and what the government has always referred to as vendor-customer deals. “The government now recognizes that it’s about business outcomes,” explains Smith at Unisys. “And they are finding that it requires a partnership-oriented relationship.”
Ballard at Perot Systems Government Services says, “A lot of agencies are finding out that if they don’t treat the relationship like a partnership, they won’t be able to find providers with the domain expertise that will want to partner with them.” He adds that more and more agencies are willing to create a partnership because they recognize the provider is helping the agency perform its mission with commercial best practices.
Ballard at Perot Systems Government Services (who was a major program manager in the US Navy until 1997) cites another phenomenon in the changing landscape of government outsourcing deals. “In those days, all of the domain knowledge and expertise in the design of submarines, for example, resided in the Navy. I had contractors doing administrative functions and maybe taking over some IT services. It was very much of a staff augmentation strategy,” he says.
Today, it’s vastly different because many areas of the government no longer have the strong domain expertise in-house, so are not fully capable of running the business of government without external help. Thus, they are looking for mission and domain expertise as well as enterprise-wide solutions, and they want a provider to tell the government how it will get to the end result the government wants to buy.
“That’s a big difference,” says Ballard. “Now you’re talking about a knowledge-based solution, proven program-management skills, bringing in commercial best practices, and the ability to translate mission functions into performance measurement and innovation.”
Today’s trends in motivations for outsourcing, scope of deals, types of contracts, relationship management, and use of advisors signal far-reaching impacts in government outsourcing. In some ways–especially the use of performance-based contracts and viewing the relationship as a partnership–the government has stepped out ahead of midsize commercial businesses, many of which are just now entering the outsourcing arena.
Lessons from Outsourcing Journal:
- Pressure from Congress and OMB, which has the power to restrict funding if an agency does not improve it’s efficiency, is driving agencies to run their business proactively and more like a commercial company.
- Government RFPs are shifting away from the former style of dictating how suppliers should perform their work. Today’s RFPs include requests for incentives and disincentives and for a performance-based contract.
- Outsourcing to a managed services provider allows the government to buy a managed service with the assets and technology refresh built in as part of the service.
- Efficiencies are a crucial objective for state agencies today. Even though states are not in the fiscal crisis they were in just a few years ago, they are definitely looking at every incremental dollar that comes in and where they can spend it best.
- The government now recognizes that outsourcing success is about business outcomes, and they are finding that it requires a partnership-oriented relationship to achieve those outcomes.