The Next Big Deal
- By Caron Golden
- Feb 28, 1999
For one San Diego team, the ultimate symbol of success won't be a World Series trophy or a Super Bowl ring. Instead, for San Diego County's information technology "Tiger Team," victory will be a 10-year contract with a leading IT services firm to economize, modernize and manage the county's IT and telecommunications systems and services.
Like Connecticut, which in January picked Electronic Data Systems Corp. to manage its computer services, San Diego County plans this year to outsource its computer and communications systems to a private company. The deal, valued at $500 million to $1 billion, is second only to Connecticut's in value, making the deal the biggest outsourcing project ever attempted by a county government.
By any measure, the scope of the work is broad: Eight data centers would be consolidated, and 118 agency-operated networks would be folded into one "virtual" network. The county also wants to turn over the development and management of all software for programs ranging from human resources to procurement. It will ask bidders to manage, maintain and support desktop computers, local-area networks and telephone services. The county's goal is to have a streamlined, state-of-the-art service infrastructure that not only will avoid duplication and inconsistent interfaces between agencies but also will set the stage for state-of-the-art electronic-commerce-based applications, such as online property tax payments and licensing via secure World Wide Web sites.
Since setting its sights on outsourcing, the Tiger Team has been preparing for a bruising vendor competition and is arguing its case to the county board of supervisors, county employees and the public. Its case is simple: The best way to manage IT costs and improve service delivery is to outsource to firms in areas where the county government has no "core competency."
"Whining for dollars is out," said Larry Prior, the county's chief administrative officer. "It doesn't work anymore. Instead, government has to ask, 'How do we manage our costs and improve services for citizens? What kind of overhead costs do we have, and can we move money from them to front services?' "
Tiger Team leader Bob Copper, the deputy chief administrative officer of the county's land use and environment group, said, "It's business process re-engineering. We reduce our overhead and put more nurses on the street to see to childhood immunizations. We hire more probation officers and more sheriff's deputies."
The Road to Outsourcing
Learning a lesson from its neighbor to the north, San Diego County moved to prevent a financial disaster similar to the one that hit Orange County in the mid-1990s. The board of supervisors decided it would be a good idea to introduce more financial discipline into the county's business affairs.
To help, the board hired Prior as county administrator. Prior, previously with TRW Inc., had spent more than a decade as a Marine Corps intelligence officer, followed by a job as staff adviser to the U.S. House Permanent Select Committee on Intelligence. After being hired by San Diego County, he set about introducing standard business practices to improve efficiency and accountability.
"When we brought Larry aboard, we specifically wanted to change the culture and look at government services in a different way," county supervisor Ron Roberts said. "We wanted to bring a more businesslike approach to providing services."
To stabilize county finances, Prior introduced a system of reserves, zero-based budgets, and regular reporting and management of revenues, expenditures, cash flow and risks. The changes have resulted in a dramatic improvement in the county's bond ratings, Prior said. And citizens are regarded as "customers."
The team also recognized that there were problems with the county's computer and telecommunications systems. "We took a look and saw that in addition to leaky roofs and worn-out vehicles, there was a technology system in disarray," the Tiger Team's Copper said. So the county commissioned a study to determine "where we were weak and where we needed to make some investments," Copper said.
The assessment, by The Warner Group, Los Angeles, concluded that wholesale outsourcing of IT would be the most efficient course of action. For one thing, a number of separate services already were quasi-privatized. "Telecommunications already are contracted out, as are data networks," said The Warner Group partner Bill Kumagai. "So what we were recommending was that rather than do it piecemeal, that the county explore the possibility of a prime contractor because of the advantages that provides, and, of course, a prime contractor has the ability to work with selected contractors who are expert providers in their field."
Meanwhile, the county had formed its Tiger Team to pursue a solution to the problem. The idea was to "convey that bright-eyed and aggressive people are working on the project," Copper said. What the team learned was that while the county probably could make some improvements by going it alone, "we could get a better deal because of the economies of scale" of contracting out, he said.
That made sense to Prior, who believed that the solution involved consolidating service points and injecting the latest technology. "As we look at IT, we see how fast technology is moving," he said. "We need to keep pace with both technology and training. We want to bundle all our contracts into one long-term relationship with a partner and, by doing that, be more efficient, capture savings and move that to the front end to recapitalize and refresh the technology."
That plan also appealed to the board of supervisors. "We're looking at the long term-at performance," Roberts said. "Having a major capital investment up front to improve the technology as well as to be able to acquire the services of some very skilled people starts to present some real beneficial outcomes for San Diego County."
Since Prior initiated the project, the board has approved a contract with The Warner Group to evaluate system needs, to help prepare a request for proposals and to offer systems engineering and technical assistance. The board also has authorized the county to hire the Chicago law firm Gordon & Glickson to assist in contracting and accounting giant PricewaterhouseCoopers to sort out accounting issues. An initial $2.5 million has been approved to pay consulting and preparatory fees.
To the consultants, one of the biggest challenges was assessing the needs of a county that manages services ranging from welfare payments to libraries to land planning to public safety. Kumagai said, "We did some level-setting sessions where we asked management to think about the questions we thought were important: 'Was this a core competency? Do you do it well enough that others would buy it? If not, why are you doing it?' We asked them to think about those things. It's important because we're talking about large dollar amounts."
Meanwhile, the Tiger Team was doing its homework. Team members sifted through the county's existing contracts to inventory county systems in order to identify customer requirements. They conducted an analysis of the vendor market, and they issued a request for information to further refine the county's needs and determine what was available in the market.
From the barrage of information that poured in, the team concluded that the county needed a contractor with deep pockets and broad experience managing IT programs. In a request for statements of qualification, issued in November, the county asked three questions:
- Had the company been a prime contractor in at least one contract with a value exceeding $50 million?
- Did the company have average gross annual revenues in excess of $1 billion over the last three years?
- Would the company offer to act as the prime contractor?
"They basically limited the competition to the big boys, but since this is such an unbelievably huge deal, it's not a big surprise," said Michael Yoder, vice president of McLean, Va.-based FSI State and Local Services Group. Yoder was chief of staff to Indianapolis Mayor Stephen Goldsmith when that city outsourced its systems.
In the end, eight companies qualified, but as Prior and Copper toured the country to meet with candidates and confirm their commitment to the project, three dropped out, leaving five vendors to compete for the final contract: IBM Corp., EDS, Lockheed Martin Corp. and a partnership of Computer Sciences Corp. and San Diego-based Science Applications International Corp.
How Do We Make Money?
In structuring the deal, the county will ask the contractor to make a sizable up-front investment to help upgrade the infrastructure, equipment, computer systems and applications. To maintain a performance incentive, the contractor would be able to recoup the investment, which could run as much as $250 million, from the annual contract expenditures over the term of the contract.
"The county's expectation is that the successful contractor is going to make a capital investment of something up to $250 million in the first couple years of the contract, which they'll need to recover over the life of the contract," said Holli Ploog, senior vice president and managing director of information and resources management for Lockheed Martin.
Of course, Copper said, the incentives will be there. "If they can come in and say, 'Here's a system where we can save time and money,' the county would pay the vendor for part of the savings for a period of time. This is becoming more common in deals now," he said. "We've seen a number of examples of gainsharing over a period of time. It's a technique used to make sure the company doesn't rest on its laurels and has an incentive to keep moving."
Most industry players give the county high marks for attention to detail in handling the competition. "One of the reasons we're so interested in San Diego is we see a very smart group of people who are taking the time to learn and do their job well," said Sharon
O'Malley, senior vice president for EDS' government industry group. "San Diego has done a very good job of due diligence. We want to make sure we align with customers who are doing their homework."
To avoid potential problems, San Diego must be careful how it defines its goals, observers said. "The biggest issue is the procurement process," said John Kost, vice president of marketing and business development for TRW Public Sector Solutions, who, as Michigan's chief information officer, spearheaded one of the first sweeping state outsourcing projects. "You have to figure out that as a customer, you should not specify every solution, so you can pick the right firm without being tied down."
Also, Kost said, "it's not just the cost of the phone line or the PC. It's measuring the intrinsic value of the deal in terms of how it improves how you do business. If it's done right, you're focusing not just on IT but on government as a whole."
Another mistake Kost said public agencies tend to make is that they try to convince everyone that the deal they make will be cheaper than what they currently have. "But the problem is that government doesn't measure its current costs right now, and even that amount of money doesn't reflect that they haven't made the major investments they need to make. San Diego, to its credit, admits that it will have to spend $250 million," he said.
For its part, the county believes it has a vision for a deal that can survive the unexpected. "We have quite a bit of flexibility," said Helen
Robbins-Meyer, deputy chief administrative officer for San Diego's community services group and chairwoman of the Information Technology Management Committee, an internal organization that reports to Prior. "We've tried to build that into the RFP, and our negotiations will determine that also. We are trying to be specific about the applications we see needing to be upgraded over 10 years. Other applications we'll look at annually. We'll talk to the vendor; we'll trade things out."
To help keep the county on the straight and narrow, Prior has established the County Committee for Information Technology, to be made up of two supervisors, two business community members and the chief administrative officer. This ad hoc committee will oversee strategic technology decisions, said Robbins-Meyer, who will report to the committee quarterly.
The contract will be awarded in late spring or early summer, so the waiting game continues. County officials are optimistic that their homework will yield a new era for local government IT outsourcing. "The net result is that we're going to have systems that will serve people in the county far more competently than they are now," Roberts said. "We're going to have improvements in our ability to conduct business, which will, in turn, translate into savings, but more importantly into better service to our customers, the residents of San Diego County.
"If not, there's no reason to be doing this."
Caron Golden is a free-lance writer based in San Diego. She can be reached at [email protected]