I.S. Outsourcing: High Anxiety

It's May day 2000, and the county of san diego is just six months into its landmark, full-scale IT outsourcing contract with the Pennant Alliance, a four-vendor partnership led by Los Angeles-based Computer Sciences Corp. (CSC). It's the beginning of the end of the deal's 180-day transition period, and the eyes of the outsourcing world are watching. But frankly, some of the early sights are scary. Staffing is down. Before the seven-year, US$644 million pact was approved by the county's board of Supervisors on Oct. 26, 1999, the county had 350 employees and 100 contractors providing IT services. When the deal was done, the county expected that about 275 IT employees included within the deal's scope would pick up tools and transfer. But instead, only 220 made the move. Of those left, 42 employees quit early in the outsourcing discussion, 25 transferred to other county jobs, and 63 took advantage of a severance/retirement package that gave employees 20 percent of their annual salary or credit for two additional years of service toward retirement. The contractors all found work elsewhere--some of them with the Pennant Alliance partners. But this instant staffing shortage left the Alliance in the position of hiring roughly 100 replacement workers unfamiliar with the county and its antiquated systems. With this higher-than-expected turnover came a huge loss of institutional knowledge.

Service levels have dipped. County and Pennant executives expected system support and response times to slip during the transition, then pick up quickly. But voice, WAN and video system uptimes remain poor--well below the 99.8 percent uptime stipulated in the contract. In fact, they're below pre-outsourcing levels.

Culture shock abounds on both sides of the county and Alliance partnership. Consider the county perspective: Suddenly, employees from throughout the county's dozens of agencies have to formally request and pay for IT assistance they used to get for free. And then consider the Pennant Alliance partners--CSC, Lucent Technologies, Pacific Bell and SAIC--which are used to conducting their business in relative privacy. Now every term of their multivolume contract is open for public inspection, and every misstep is a potential newspaper headline.

Make no mistake, there's a great deal of public interest in this project. It's not just another full-scale, soup-to-nuts outsourcing agreement. It's the biggest, broadest IT privatization pact ever entered into by a U.S. state or local government. Within the county's 4,261 acres, elected officials, agency employees and citizens have a vested interest in seeing whether outsourcing will transform San Diego County from a legacy-laden IT laggard to an efficient, effective e-government. Outside California, where no state or county has ever outsourced technology on this scale, IT executives and vendors nationwide have pegged San Diego County as the beta site for whether the regional government marketplace is a potential boom or bust.

"Typically, there are problems at the start [of an outsourcing engagement] during implementation," says Peter Bendor-Samuel, president of the Everest Group, a Dallas-based outsourcing consultancy, which has no stake in the San Diego deal. To get over the hump, he says, the Pennant Alliance must throw all available resources at the problem, and the county must continue to hold the vendors' feet to the fire--and not just to meet the contracted service levels. "If [Pennant doesn't] turn things around," Bendor-Samuel says, "then [the county and vendors] are going to be in a world of hurt."

Trying to mitigate the hurt for san diego is tom boardman, the county's new CTO. "My job is to keep things from getting out of proportion," says Boardman, who was hired in August 1999, two months prior to the deal's approval. Formerly the director of applications development at AAA of Northern California, Boardman also used to work for MCI/Systemhouse, which was acquired by EDS. He has significant outsourcing experience; that's why he was hired to manage the contract in place of former San Diego CIO Graham Lynch, a longtime county employee who opted for early retirement when the deal was struck, then accepted a non-county position with Pennant vendor SAIC. "We've got to keep service levels above intolerable," Boardman says, aiming low. "Generally, service levels have not been as good as they were before [outsourcing], but they've not been below tolerable. The question we always ask is, 'Were we in the paper?,' and so far we haven't been."

Richard Jennings, the CSC vice president who heads the Pennant Alliance, knows what's at stake: "This is one of the most aggressive outsourcing engagements we've ever taken on." A longtime CSC executive who serves as vice president and general manager of the company's entire western region, Jennings appreciates the potential rewards of this deal. "We're very interested in the state and local government marketplace," he says. "We think it's going to be big." But Jennings also appreciates the risk, which he sums up quickly and coolly as, "having one of the most public outsourcing contracts fail."

Boardman has 20 senior managers and 10 project managers countywide overseeing the contract, which spells out 101 different service levels (for example, Pennant Alliance has four hours to fix and repair a broken PC once it's reported), 44 of which have financial penalties if they're not met. The maximum penalty is $675,000 per month--"enough to get anybody's attention," Boardman says. The contract also has built-in checkpoints so that the county and Pennant Alliance alike can review and renew the contract at the end of each year or opt out (with penalties) if the deal looks undoable.

These first six months have been the honeymoon; no one expected any revolutionary changes during the transition period. But the next six will be the test of the marriage. No more transitional excuses.

San Diego County has a three-phase vision for how its deal with Pennant should work.

Phase 1. By December 2000, replace the IT infrastructure, including telephones, desktop PCs, data network and disparate software applications. Implement the first countywide e-mail and voice-mail systems.

Phase 2. During Year 2, replace outdated administrative systems with two new ERP applications (PeopleSoft for HR, Oracle for finance), with the goal of creating a single data entry point for information that can be shared across all county agencies.

Phase 3. By Year 3, provide an Internet delivery channel for county services. Currently, the county does offer some online permit issuing, property tax payment and park reservations, but the plan is to put every possible county service online.

Now is when systems must be replaced, software standardized and two new ERP systems rolled out to improve financial and personnel processes. By mid-December 2000, the end of the contract's first year, San Diego County, the Pennant Alliance and all observers will have a good sense of where this deal is headed. If service levels improve and milestones are met, then everybody will be happy. If things don't get better, then it'll likely be the beginning of the end--a messy, public divorce that will shortchange the county, embarrass the vendors and potentially put a stake in the heart of the local government outsourcing marketplace. Boardman, for one, isn't worried. "I lose no sleep over whether this [deal] will fail," he says. "This is not going to fail."

To appreciate the scope of this work, understand the county's starting point. When Boardman was hired, he inherited a 15-year-old phone system that suffered frequent outages; a ragtag army of 286 and 386 PCs that ran on 15-year-old legacy applications (some bought, some built--none standardized); a patched-together LAN that had been developed incrementally over time; and a veteran staff with little experience in leading-edge technologies. "We had basically mainframe people," Boardman says. "Our systems were written in the '70s and '80s and maintained by the people who created them."

The county Board of Supervisors was willing to spend money to update these antiquated systems, but not the estimated $250 million it would have cost for a total IT makeover. As for staff, the county faced the classic government challenge: How do we compete with private industry? "Our salaries were 20 percent to 30 percent below the marketplace, and there was really no hope of getting better," Boardman says. "We were treading water very well, but treading water doesn't help an aging system or infrastructure."

Outsourcing was first discussed in 1996, when the county was entangled with bad debt similar to that which bankrupted Orange County. To get out of the hole, the county recruited a new chief administrative officer (CAO), Larry Prior, from TRW, the Cleveland-based global IT company. Prior believed in privatization. He initiated a managed competition program in which county agencies would compete with private industry for the right to perform certain public services. Prior's first target was the county's trash collection system, which was privatized in 1997 for $180 million, saving the county roughly $56 million, or enough to help balance the books. Soon after, Prior hired TRW colleague Helen Robbins-Meyer, who is currently the county's assistant CAO, to head a managed competition committee to seek out other privatization targets. That group quickly realized that IT was a great outsourcing candidate.

"We were looking at a future that did not have a technology base to sustain it," says Robbins-Meyer. "What kind of IT expert wanted to come work for the county? What was the career potential, the earning potential? We had some of the best [IT employees], but not 500 of the best."

In November 1998, Robbins-Meyer's team secured the Board of Supervisors' permission to study IT outsourcing. The group then retained the services of the Warner Group consultancy and Gordon & Glickson, a Chicago-based law firm that specializes in outsourcing. County officials knew where they wanted to go; the consultants knew how they could get there. Problem was, no state or county government had ever pulled off such an ambitious outsourcing plan. There had been attempts--Connecticut's being the most recent try--but they all fell victim to politics or labor unions.

But San Diego County was different from Connecticut in several key ways--at least, that's what Prior and Robbins-Meyer believed. In Connecticut, the Democrat-controlled legislature opposed the Republican governor and his handpicked CIO at every turn. In San Diego, the county's five-member, nonpartisan Board of Supervisors was behind the outsourcing concept from the start. And, unlike Connecticut, where virtually all of the IT employees belonged to unions that opposed outsourcing on principle, only about 40 of the county's 500 IT employees belonged to the Service Employees International Union (SEIU).

The biggest hurdle Robbins-Meyer's team had to overcome was the skepticism of the various county agencies--Community Services, Health and Human Services, and dozens of others--whose employees didn't understand how paying an external supplier for IT services could ever result in cost savings. Mary Grillo, executive director of SEIU Local 2028, told The San Diego Union-Tribune last fall that she believed the Pennant proposal was too large and too risky. "We are the guinea pigs on this type of project, and everybody freely admits nothing has been done on this scale before," Grillo told the newspaper. "The county hasn't been able to effectively monitor its contracts thus far, and we don't believe it will be able to handle a project of this scope."

The key to securing the agencies' support was to sell outsourcing by promising improved service to the agencies. To gain public support, the county brought its case to the San Diego County Taxpayers Association, a politically influential group with 1,800 members. Taxpayers generally support privatization efforts, believing they cut costs and reduce the public payroll. But because a deal like this had never been done before, citizens had every reason to be suspicious of this plan. "There was no constituency out there saying, 'You should outsource IT,'" says Scott Barnett, executive director of the association. "Most people don't even know what IT is; they just care about the level of services they receive." Upon reviewing the county's plan and decision-making process, the taxpayers association endorsed outsourcing as a risk worth taking. "I feel fairly confident that what they're doing will be better than the old system and that the taxpayers will get better quality of services," Barnett says. Certainly, his group is concerned about the initial service-level dips, but Barnett still supports the outsourcing initiative. "We'll be waiting to see if [services] improve as expected."

The pennant alliance wasn't the only vendor partnership to bid for the San Diego County job. IBM and EDS also fielded impressive teams. And at first, the CSC-led Pennant team didn't stand out among its competitors. "All three vendors could do the job," says Lana Willingham, the deputy CAO who helped negotiate the contract with Pennant. "In the end, the Pennant Alliance seemed to want [the job] the most. They were more flexible in coming to terms [that is, willing to commit to tougher service-level agreements], and they also were able to create a good understanding of the path for us to move to e-government."

When the board gave the OK for signing a contract with the Pennant Alliance, opposition turned to outrage from employees who wanted nothing to do with being outsourced. "We had people who were used to county government and dedicated to public service," Robbins-Meyer says. "They were not interested in making some big company richer."

Boardman joined the county on Aug. 28, 1999, the day after the county selected the Pennant Alliance. He recalls vividly the anger directed his way at his introductory meeting with IS staff. "It was one hour and 45 minutes of hostility--one cynical, emotional, negative question after the next," Boardman says. Fueling the emotion, of course, was fear of the unknown--what did outsourcing mean to individual employees?

Between that meeting and late October, when a final pact was submitted for board approval, several things happened to allay people's fears. First, CAO Prior, who had developed a bitter relationship with county employees, returned to private industry. His successor, Walt Ekard, has a softer style and engendered far more trust from workers. Next, Boardman and his managers worked hard to educate county staffers on the benefits of working for a big-time IT services company: better pay, training, career options and a chance to work with bleeding-edge technologies. The Pennant Alliance, meanwhile, pledged to give all IT employees a 7 percent raise on Day 1, and then committed to keeping these people in San Diego for a minimum of two years. And those who didn't want to transfer could opt for the severance package or reassignment to other county offices.

By the time the board approved the outsourcing deal last October, only three people testified against the plan. "Since then there have been no lawsuits, no sabotage," Boardman says.

Despite the setbacks, the pennant alliance has met some signifi-cant milestones. As of July 1, more than 2,000 new state-of-the-art PCs have been rolled out, and more than 1,000 phones have been replaced in four locations. The county's Internet communication speed has been increased 140-fold. An assessment of the county's 533 applications has been completed, and data hub tools have been installed to allow Web applications to access data from core applications. A countywide information security assessment has been completed, and major security vulnerabilities have been corrected. A release strategy for the new ERP systems has been developed, and 22 different help desks have been consolidated into one.

Still, the glitches haven't gone unnoticed by this contract's biggest critics. "This deal has pretty much been living up to our expectations," says the SEIU's Grillo. "It hasn't been smooth sailing at all." The former county workers who transitioned to Pennant Alliance employment have been treated well, Grillo says--all of her former union members now belong to a machinists union within CSC--but she's concerned about how the transitional setbacks are affecting the county's ability to function. "We think [outsourcing] is actually making employees less productive at this point," she says. And if so, then that productivity loss only adds to the union's argument against outsourcing. "We've thought all along that this deal would end up costing the county a lot more than anyone initially thought," Grillo says.

No question, the Pennant Alliance must deliver. Now. Systems must be replaced, service levels must be met, and county employees and citizens must start seeing some of these new e-government services they've heard about for so long.

On the outside looking in, outsourcing consultant Bendor-Samuel is rooting for success. "This deal has tremendous ability to bring value to government," he says. "If it works, it will work for the people of San Diego County, for the government and for the vendor. It could be a huge win-win-win." But he also knows that if the partners can't ease out of this transition period and start delivering on their promises, then they run the risk of losing all credibility with county employees and citizens alike. If that happens, Bendor-Samuel says, "Someone will get strung up."

Can outsourcing work in local government? Share your thoughts with Senior Editor Tom Field at tfield@cio.com.

CSC and SAIC call the shots in four-vendor pennant alliance Computer Sciences Corp. (CSC) is the lead dog in San Diego County's seven-year, $644 million IT outsourcing contract. But the Pennant Alliance, the CSC-led team that won the job, is actually a four-vendor partnership. Here are the players:

CSC (www.csc.com): Based in Los Angeles, CSC is a full-service outsourcing vendor with more than 700 offices and 54,000 employees worldwide. CSC had revenues of $8.2 billion in 1999. CSC is the co-owner and contract manager of the Pennant Alliance.

SAIC (www.saic.com): San Diego-based SAIC is the largest employee-owned research and engineering company in the United States. With annual revenues of $4.7 billion, SAIC has more than 38,000 employees in 150 global offices. SAIC provides technology products and systems integration services to many commercial and government customers. SAIC co-owns the Pennant Alliance.

Pacific Bell (www.sbc.com): A subsidiary of Texas-based SBC Communications, PacBell is San Diego County's third-largest employer (more than 5,500 local employees) and offers a variety of telephone, wireless and Internet services. PacBell is a Pennant Alliance subcontractor brought in for its telecommunications expertise.

Lucent Technologies (www.lucent.com): Spun off from AT&T, Murray Hill, N.J.-based Lucent builds and integrates a wide range of public and private data networks. Supported by Bell Labs, its R&D arm, Lucent is a Pennant Alliance subcontractor brought in for its networking expertise. -T. Field Between a rock and a hard place: A year after his outsourcing deal fell flat, Connecticut's CIO is rebuilding the state's I.T. organization.

A year ago, Rock Regan hit rock bottom. June 28, 1999, is the day Regan, Connecticut's CIO, abandoned his three-year effort to outsource the state's IT investment. There are a lot of reasons why outsourcing failed--too much labor opposition, not enough legislative support, residual bad feeling after the state won and then lost the NFL's New England Patriots. And in the end, Regan simply couldn't strike an equitable contract with EDS. Regan thought then, on a recuperative vacation after the ordeal, that his days were numbered.

Today Regan sits in a new high-rise office, presiding over a rebuilt, revitalized IT organization that strives to achieve everything that outsourcing was supposed to bring. He's got more staff, more money than he had a year ago, and he's starting to believe that, more than a checkered past, he actually has a future as the state's CIO. He even advised San Diego County on its outsourcing decision, warning county leaders to stay vigilant. "Don't hand over the keys and walk away," Regan counseled. "I'm not down on outsourcing; I think it can work--it does work. But it needs help from all sides to be successful."

Reflecting on his experience, Regan says, "It was never about outsourcing. The goal wasn't to outsource but rather to achieve our core objective--to improve public service."

The same old problems remained when Regan returned from his post-outsourcing vacation. The state's outdated systems still needed replacing, the old-school staff needed new skill sets, and the central IT group needed to get out of its dilapidated downtown headquarters. What changed was Regan's approach to these problems.

First, Regan dealt with his facilities and staffing issues. He asked legislature for a new building, 30 new staffers and direct reporting relationships with the 58 IT managers throughout the state agencies. Surprisingly, the legislature said yes--a shock to Regan, who was accustomed to hearing no. "It was nice for a change to not be grilled for five hours," says Regan.

Properly funded, Regan set about securing a new headquarters, a high-rise building in East Hartford that used to house the local branch of FDIC. Next, Regan reorganized his staff, centralizing all state IT services around his core executive management group. In addition to the 58 IT managers who joined Regan's group on July 1, next year he is taking over management of an additional 300 IT workers, giving him control of a central IT group numbering around 600. With this bigger, buffer central IT group, Regan is changing the service delivery model to look more like a vendor now, writing and meeting service-level agreements with each of the state agencies.

The state's Y2K remediation replaced much of the outdated technology infrastructure, but Regan still has a skills gap. To deal with this, he's budgeted for more staff training, and he's even bringing in a few consultants to provide new skills. But even when dealing with the vendors, the goal is to transfer those skill sets to state IT workers so that all external relationships are temporary.

Looking back, Regan says his biggest mistake was underestimating the opposition. "We had battles on every front--the unions, the employees, the legislature--and we just didn't have time to spend fighting those battles," Regan says. His second biggest mistake was misunderstanding the shades of differences between such vendor-speak words as commitment, promise and goal. (Hint: Commitments come with penalties, goals don't.) No doubt, when outsourcing history is written, Connecticut will appear among the early failures, but Regan rejects the "loser" label. "It's only a failure if we fail to do anything to resolve our problems," Regan says. "We're showing progress." -T. Field

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