You Can Outsource City Hall, but Not Offshore--Yet

Public sector outsourcing is "in," as state and local IT leaders contend with shrinking budgets, limited human resources, and increasing demand for IT services. "There appears to be a perfect storm for IT outsourcing at the state and local level today," says Jason Khan, chief technology strategist for Washington, D.C.-based Touchstone Consulting Group.

Jim Harvey, partner and co-chair of the global technology, outsourcing and privacy group at law firm Hunton & Williams, agrees. "State and local governments are feeling the same, if not more, economic pressure as everyone else," he says. "Outsourcing is one switch they can throw to accomplish some combination of cost savings, improved performance and reduced fixed cost structures."

Public sector IT outsourcing is nothing new. Government agencies, particularly at the federal level, have outsourced a significant portion of technology services over the years. IT service providers such as Northrop Grumman, SAIC, Computer Services Corporation, Unisys and IBM count on government IT contracts for a significant portion of their annual revenue, points out Sandeep Karoor, managing director for outsourcing consultancy Neo Advisory.

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Public sector outsourcing is "in," as state and local IT leaders contend with shrinking budgets, limited human resources, and increasing demand for IT services. "There appears to be a perfect storm for IT outsourcing at the state and local level today," says Jason Khan, chief technology strategist for Washington, D.C.-based Touchstone Consulting Group.

Jim Harvey, partner and co-chair of the global technology, outsourcing and privacy group at law firm Hunton & Williams, agrees. "State and local governments are feeling the same, if not more, economic pressure as everyone else," he says. "Outsourcing is one switch they can throw to accomplish some combination of cost savings, improved performance and reduced fixed cost structures."

Public sector IT outsourcing is nothing new. Government agencies, particularly at the federal level, have outsourced a significant portion of technology services over the years. IT service providers such as Northrop Grumman, SAIC, Computer Services Corporation, Unisys and IBM count on government IT contracts for a significant portion of their annual revenue, points out Sandeep Karoor, managing director for outsourcing consultancy Neo Advisory.

The major difference today is that local government IT organizations are outsourcing to cut costs. "The primary driver in government outsourcing has been resource flexibility and scalability," says Karoor. "Traditionally, cost containment was not high on the agenda."

Today, it's at the top of the list, and that's pushing an increasing number of state and local IT leaders to turn to third parties for help. "It was probably something that some governments wanted to put off as long as possible," says Harvey. "There are always concerns when any organization changes the model it uses to deliver services, particularly in the government sector. But I think governments are basically saying if we can do this for less some other way, we have to consider it."

Government Outsourcing: The Challenges

The road to outsourcing in the public sector, however paved with good intentions, has been bumpy at best. "Let's face it, outsourcing is not a popular internal option," says Touchstone Consulting Group's Khan. "It shifts jobs and budgets from agency managers to the outsourcing company."

In addition, some early attempts at wholesale IT outsourcing at the state level have come under scrutiny recently. A state audit of Virginia's 10-year, $2.3 billion IT services contract with Northrop Grumman noted that inadequate planning and poor understanding of state agency needs delayed projects and disrupted key services. In Texas, Chief Technology Officer Brian Rawson resigned after an audit accused the state IT organization of mismanaging the $863 million data center consolidation initiative outsourced to IBM.

But, Khan says, "a few non-popular outsourcing projects cannot stop the inevitable." Indeed, government IT organizations from Washington state to Houston are currently considering sending IT out the door.