Technology

An Indelicate Balance

This is not your father's procurement process. When Virginia wants to overhaul its aging IT infrastructure, its information technology officials don't gather together to make...
by | December 31, 2006
 

This is not your father's procurement process.

When Virginia wants to overhaul its aging IT infrastructure, its information technology officials don't gather together to make a wish list and then wait to see which company will give them the best deal. They can't afford to. There's no money in the budget for big IT projects, no matter how in need of an update the state's systems are.

Instead of the time-tested purchasing process, commonwealth officials are experimenting with a different business model -- one the legislature introduced a decade ago but limited to transportation and school construction projects: letting the private sector become a partner. With that limit lifted in 2002, IT officials have been freed to tap private companies for their technical expertise and their deep pockets. Company representatives can be invited in the front door -- before a project takes shape -- to make suggestions about how the state could best improve a system. In return, the company whose suggestion wins is not only awarded the contract, it also gains the opportunity to reap revenue rewards in exchange for risking its own money on the success of the project.

While there is a lot of buzz in IT circles about the partnership approach, Virginia has only used it on two IT projects so far -- to build a facility for data backup and modernize desktop services and to build an ERP system. Since the awards were made within the past year, it's not yet clear how advantageous -- beyond the financial assistance -- the approach will be for the commonwealth's IT infrastructure and what the state stands to lose by taking on a private partner who gets a piece of the action.

The Workout

The new approach nears its close with representatives from a winnowed-down pool of tech companies cloistered in a state office building with IT officials to hash out the overall information technology needs of the commonwealth. The private IT experts spend hours tapping the brains of the state's IT officials and vice versa, even traipsing together to the cafeteria to grab a bite of lunch.

It is intense, say those who participated in a recent experience. But the companies involved -- who were vying for contracts -- were privy to a high level of transparency in what is normally a very secretive government bidding process. "There are so many restrictions under the RFP process," says Aneesh Chopra, Virginia's secretary of technology. Under that system, "if I talk to you in the hallway, I'm giving you some kind of an edge. In some bizarre way, I'm not even allowed to explain what I meant by my RFP." But with the new model, the commonwealth can explain its needs and divulge its weaknesses. And the companies can help reinterpret the problems presented, even shed light on things the state hasn't perceived.

In the early go-round, Virginia asked the companies to consider several things beyond technology improvements: the future of Virginia's technology employees, economic development in hard-pressed regions, and keeping Virginia IT spending at its current annual level. Without the state specifying how to meet those needs and goals, the companies sent in proposals detailing what they would do to improve the system as well as how they planned to take on the risk -- what they were willing to do up front on their own dime -- and where their rewards would come from.

So far, two contracts have been awarded based on the new process. One is to Northrop Grumman to build a data-backup center and a facility for the Virginia IT agency. The company is investing $272 million up front to put the state-of-the-art facilities in place, under a services agreement worth $1.98 billion over 10 years. The state will be the primary tenant but Northrop Grumman can bring in other businesses to recoup its investment.

Since Virginia told companies that economic development ideas were a priority, Northrop Grumman addressed the point by targeting one of the sites in a rural part of the state that has been stagnating economically. The data-backup center and help desk service center is being built in rural Russell County. It should be completed by the fall. The facility to house the state's IT agency headquarters in a high-security data and network operations center is going up in Chesterfield County, near the state capital of Richmond, and is scheduled to be finished this summer.

Chopra likens this deal to a Christmas present for the state. Nearly 67 percent of the state's IT workforce is going to be employed by Northrop Grumman -- 566 employees out of the 846 who received offer letters. A struggling rural part of the state is getting an economic boost. And Virginia will have a modernized infrastructure with upgraded security without, Chopra notes, "the state spending a single penny in extra funds."

The second contract awarded under Virginia's Public Private Enterprise Act went to CGI to build an enterprise resource planning system. The company is planning to fund the ERP project by being more efficient in collecting revenues owed to the state in accounts receivable in various departments and by maximizing the funds collected from the federal government for services that the state performs on behalf of the federal government, such as education and health care. Technology will be refreshed as needed to maintain service-level agreements, but the commonwealth doesn't have to worry about getting more funding from the legislature each year for updating computers.

Taking Stock

While the track record is short, the experiment so far has surprised people in and out of government. Many were expecting proposals to sputter and die, given that the approach was being used for complex and highly sophisticated procurements. Instead, the companies moved quickly to present their ideas. The governor, for one, was taken aback when he was presented with a deal within the time line he set. He had to scramble to do his part to review the proposals and inform the legislature.

More to the point, Virginia was able to move ahead to revamp technology without spending any more than it had been to maintain its outdated 1980's infrastructure. And, when it asked for help with state policy goals on economic development, its partners were forthcoming.

So far, so good. But there is no free lunch. One concern is that the state is losing some control over some of its services. And Virginia will not be able to reinvest the fiscal savings that the upsides of new and more efficient technology bring -- the captured savings will go to the companies to pay for the deal and will go to them for many years. The state had to commit to its partners for a greater length of time than it normally is comfortable with. There were overtones of apprehension internally about that aspect of the new approach. And there were questions about whether the state was getting a good deal and could live with the company it chose for a decade or more.

Few other states are likely to follow Virginia's lead anytime soon. Many states don't have a structure that would allow it, says Teri Takai, Michigan's chief information officer. It took Virginia years to get legislative approval for the Public Private Enterprise Act.

Moreover, the traditional RFP process is in place for many reasons, including maintaining state control of systems and making sure procurement processes are fair. The public-private partnership process would seem to be most appropriate in areas of risk and when public financial resources are limited. In the area of transportation, which has had more than a decade of experience with it, Secretary of Transportation Pierce Homer says it's not for "bread and butter projects like secondary roads." The process didn't work very well for Homer's agency until about two years ago. Companies didn't seem to get it, he says. They would propose a project and then suggest the state pay for it, which was missing the point. The idea behind the public-private partnerships is for the private sector to put up its own resources at a time when the state doesn't have the funds to do so.

Virginia has to be careful with this procurement method, says James Regimbal, principal of Fiscal Analytics, a public policy consulting firm that studied the original transportation law. It has to be sure that it doesn't "sidestep normal controls and leapfrog other projects" to get the big public-private deals done. "Big projects get a momentum of their own and kick everything over that's in their way. Virginia has to be careful what it's giving away." That is, Regimbal suggests, when a state no longer has full control over projects, those projects can steamroll over "the little guys," who are the ones that the state usually uses its strict procurement processes to try to include.

All of which gives Eugene Huang pause. Huang, secretary of technology under former Governor Mark Warner, was part of the team that was around when the approach was put in place. "When you hand over some control of resource direction to an outside firm," he says, "the initial gut check is, 'Is this the right thing to do for the commonwealth?' "

That said, Huang acknowledges that change encompasses compromise and that there's a need to make the best of a less-than-perfect world. "At first blush, it was not something I'd be in favor of," he says. "Given no other options -- the resources aren't there -- it was the best option on the table for state government."

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