White House makes federal case of IT outsourcing

Yes, there is growth in the IT outsourcing market. But it isn’t coming from Silicon Valley, or even from the business leaders in New York. It’s coming from Washington, D.C.

The White House last week requested a $59 billion IT budget from Congress for fiscal 2004, an increase of 12% over the year before. A 12% spending increase is considered very large in most IT circles, even in good economic times, but the Bush administration says it needs the funds to expand cybersecurity and continue its cross-agency systems integration effort.

The new budget does not specifically break out the expected outsourcing expenditures for the federal government in fiscal 2004. But Input, a government IT market-research firm, earlier this month predicted that federal spending on IT outsourcing will skyrocket over the next several years. According to Input, the federal government spent $6.6 billion on IT outsourcing in fiscal 2002, but that figure will soar to $15 billion in fiscal 2007, for an annual growth rate of 18%.

Why is the federal government putting so many dollars into IT? The natural answer is to point at Defense and Homeland Security spending, which are both up significantly in preparation for future actions or conflicts. The proposed budget for cybersecurity is $4.7 billion, up 10% over last year.

Interestingly, however, the bulk of the spending is targeted not at system expansion or high-tech security technology, but at simple cost cutting through system consolidation. In coming years, the federal government will invest heavily in integration technology and outsourcing services that will help pull together its disparate IT activities to lower overall costs. In essence, the government is spending now in an effort to save money later.

The payroll process was one example cited by federal officials. Currently, the government supports some 22 payroll processes and spends about $77 per employee to generate paychecks. A consolidation effort could cut payroll costs by $1 billion and help the federal government to achieve a payroll cost closer to the commercial average, which is around $39 per employee.

There are many other areas where consolidation could yield major benefits, according to officials. For example, federal agencies previously supported some 22,000 Web sites, and those sites already are being consolidated to save resources. Federal IT officials also are looking for ways to consolidate their software licenses across agencies to help eliminate unnecessary expenditures. Outsourcing services will help with these consolidation efforts.

It may seem counterintuitive, but the federal government’s near-term investment in outsourcing services may indeed yield real cost savings in the long term. Many government agencies, like business units in a large enterprise, operate independently and do not cooperate as much as they should. An outside entity, such as a consultant or systems integration firm, often can serve as a bridge between autonomous groups, helping multiple entities to pool resources and share information in a way that they would never do without third-party intervention.

Similarly, an outside organization may help federal government agencies to rethink entire business processes, rather than just automating current practices that may be outmoded. In large government organizations, as in large and long-established enterprises, it can be difficult to get users and IT staffers to break from old habits and processes. An outsourcing provider can help such organizations to break their old routines.

Whatever their relative success, it seems that outsourcing providers will be playing a greater role in federal IT processes in coming years than they ever have played before. These providers will need clear goals and strong IT oversight if they are to achieve their objective of cost reduction. In the largest enterprises, it is sometimes easier for an outsourcing vendor to become part of the problem than part of the solution.