An Unusual Outsourcing

Virginia partners for technology overhaul.
by | January 2006

Virginia has shaped a deal for a 10-year, $2 billion information technology contract without ever putting out a request for proposals. Nor is the state investing any money in technology up front. And it stands to gain 400 technology jobs in one of its neediest counties. "We've put in place something we believe is extremely innovative," says Eugene Huang, secretary of technology for the commonwealth.

That said, the deal, which is an interim contract at this point-- either side could still back out--is not without its downsides and risks.

Virginia has done the reverse of a traditional outsourcing. Usually, a state figures out what it wants and hires a vendor to take over and do the job. In this case, the state decided not to try to work out what its technology needs were--that's not its area of expertise. "That assumes you, as a government entity, have all the answers," says Lem Stewart, Virginia's chief information officer.

Instead, Virginia invited technology companies to propose different ways of modernizing the state's technology infrastructure, which is more than 25 years old and has some 90 state agencies running different versions of technology--often duplicating what others are doing. The idea was to have technology companies offer competing ideas and approaches for curing the problem and moving the state forward.

Virginia ended up working with several companies and exploring the market jointly to come up with a composite of what it would need and the best path to follow to get there. The technology department could take this course since, under Virginia law, the deal is considered a public-private partnership rather than a procurement. The state is buying the services of a company, not equipment.

In what is considered a shared-savings plan, the winner of that exercise, Northrop Grumman, will be investing $270 million during the next three years to bring Virginia's technology into the 21st century. It will build new data centers, reconstruct the telecommunications network and redesign and modernize desktops, software and other pieces of the infrastructure. The company promises to do this by spending no more than $200 million a year, the state's current spending level. It will realize a profit eventually by sharing in the savings achieved using technology that will make the government run more efficiently. Virginia could have kept IT going with the $200 million it was spending, but the IT infrastructure would have continued to deteriorate over time. And it would have cost the state an extra $30 million-plus over 10 years to do what Northrop Grumman is doing.

There's also an economic development twist to the deal. The company will invest hundreds of millions of dollars and bring technology jobs to distressed Russell County, in the southwestern pocket of the state and to Chesterfield County near Richmond. Meanwhile, the 950 state employees affected by the deal are not being forced to switch over to the private sector. For those that do, Northrop Grumman says it will carry over the years of service the employee had with the state for employee-benefit purposes. The down side for Virginia, however, is that the technology institutional memory leaves state government along with the employees that choose to go to the private sector.

It's important that state government employees see improved services and value with the new arrangement. If not, "there's going to be pain related to the organizational change," says Huang. "If they don't see benefits, there will be the negative buzz you begin to hear in an organization."


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