The Decline of the Big Deal

There are tremendous hurdles that must be overcome to make huge, enterprise-wide IT outsourcings work out.
October 2002

For many states and localities, turning over the day-to-day operations of the IT enterprise to the private sector is the Holy Grail--and a pretty high-profile Grail. In the recent past, big outsourcing initiatives by Connecticut and San Diego County generated significant buzz and a national following. This year, all eyes are on Georgia.

Mega-sized outsourcings are not your run-of-the-mill contracts. Typically, they exceed $500 million in total contract value, with some, such as Georgia's (which is being re-bid), actually exceeding the $1 billion mark.

It's not just size that makes these deals unusual. The contracts typically involve shifting some IT assets--people, hardware and software--to the contractor's premises. In some cases, the ownership of these assets will also transfer to the contractor. And the scope of these contracts is often enterprise-wide, covering most of the IT operations in agencies and departments.

Unfortunately, the track record for these contracts has been less than stellar so far. Either the deals have been cancelled before an agreement is reached--as in Connecticut--or they have not delivered the expected results--as in San Diego.

There are tremendous hurdles that must be overcome to make these deals work. Sheer size is one. The undertakings are so large that they can collapse under their own weight. A tremendous amount of energy, resources and focus is required to sustain the effort throughout the months, in some cases years, before any benefits are realized. The Connecticut deal grew so large that it took several years just to conduct the procurement.

Then there is the opposition to change. Enterprise-wide IT outsourcing has a way of shaking things up. People's careers, agendas and livelihoods are often irreversibly affected. As a result, these mega-outsourcing initiatives stretch the change-management skills of even the most seasoned leadership team.

Unless the IT operation is "in the ditch," the tangible business benefits from outsourcing, such as real cost savings and service- delivery improvements, are often not immediate. The initial improvements that are likely to take place once a contract is executed represent low-hanging fruit, such as an infusion of newer technology. Only with time can the deeper problems that led to the outsourcing be addressed. But typically these improvements occur far into the future. A future administration--not the present one--often realizes the benefits.

The complexity of a major IT outsourcing initiative is another significant barrier. Defining and specifying the requirements, creating inventories of IT assets, structuring the business arrangement, negotiating acceptable contract terms, gaining the necessary political support and maintaining constant communications-- in the face of opposition--can be overwhelming.

If the outsourcing hasn't been derailed by these hurdles, there are always the surprises that emerge during the extended procurement cycle. A bidder's financial difficulties could suddenly prevent it from being a qualified bidder. This is what happened with one of the two qualified bidders in Georgia's telecommunications procurement. There could be last-minute changes in critical requirements at a late stage, such as during contract negotiations. Or the leadership that backed the project could evaporate because of a change in the political landscape.

None of these hurdles are necessarily fatal. Take the respective challenges of size and complexity. Very large business processing outsourcing arrangements, such as Medicaid health care claims processing, are as complicated as any in the technology field. Two of these--one in Texas, the other in California--are being re-competed for this year and both states have a long history of successful claims-processing procurements. Georgia awarded an equally complex health care outsourcing contract last year. Although comparable in size to enterprise-wide IT outsourcings, these contracts have not suffered the same fate.

One reason may be that, too often, enterprise-wide outsourcing becomes an end unto itself. The vision is centered too narrowly on IT and not on what the outsourcing can do for the mission of government. IT outsourcing should first and foremost be a business strategy. A compelling case for outsourcing needs to be tightly coupled to an overall vision for the government enterprise and for improving services to citizens and business. Sponsoring public hearings across the state to sell an outsourcing vision to citizens would help cure some of the inward thinking.

This is the missing link: clear, direct, tangible and meaningful connections between the IT outsourcing and the health and welfare of citizens and business. For huge IT outsourcing initiatives to have a promising future--and the jury is still out on whether they do-- government leaders need to keep that link in mind as they pursue the Holy Grail.