Despite a bumpy first ride, San Diego goes for a second-generation outsourcing deal

Three years ago, San Diego County’s massive IT outsourcing program teetered on the verge of collapse.

The county claimed that prime contractor Computer Sciences Corp. was not meeting numerous service-level agreements stipulated in the seven year, $644 million contract. CSC countered that San Diego officials had set the bar too high on the performance standards.

The dispute resulted in large part from ambiguities in the contract language, said Michael Moore, the county’s CIO. The two sides couldn’t find common ground on dozens of requirements in the performance-based contract, and in April 2002, the county sent a default letter to the systems integrator, threatening to hold it in breach of contract.

“Our remedy at that point was for one or both parties to take the thing to court,” Moore said.
But instead of going to court, the two continued discussions and finally resolved their differences by defining more clearly the responsibilities of the contractor and the county in the outsourcing project.

Since then, the county has been satisfied with CSC’s performance on the IT infrastructure portion of the contract, Moore said.

San Diego County intends to use the hard-won lessons from this dispute as it prepares to recompete the outsourcing contract, which expires in December 2006.

Moore said the county is removing “every ambiguity in the contract so that it is very clear what we are expecting” from the contractor.

In addition, the county is giving contractors that have expressed interest in the project ample time to familiarize themselves with both the county and the contract’s requirements.

“We want to allow adequate time for transition,” Moore said. “In the first few years of the contract, no one understood how it worked. The due diligence period was too short.”

Moore emphasized that CSC is performing well. “We’re not going out to market [with a new contract] because we are unhappy with the current performance,” he said.

Still, the county has been less satisfied with CSC’s ability to handle the applications side of the project.

“We were hoping that the outsourcing providers would bring new skill sets and application capabilities to our deal. But we haven’t gotten to where we wanted to get yet,” Moore said.
CSC officials declined to be interviewed for this story.

The county’s three-step process in awarding the new contract began Feb. 18 when it released a request for information. It will continue with a request for qualifications this week, followed by a request for proposals May 11.

An award is expected before the end of the year, giving the new prime contractor about a year to transition into the contract.

More than a half dozen integrators have expressed interest in bidding on the new contract, valued at more than $800 million over seven years, including CGI Group Inc. of Montreal. Mike Keating, vice president for the U.S. west and state and local group with CGI-AMS of Fairfax, Va., praised San Diego’s plan.

“This a proactive way of going about the transition that you don’t see in every type of outsourcing recompete,” he said. “It doesn’t seem to be a number-crunching exercise for them. They want to really optimize their outsourcing, and they appreciate that it takes time to do it right.”

San Diego County’s Pennant Alliance project, as it is known, may be the largest IT infrastructure-outsourcing contract of its kind in the state and local market. The outsourcing contract called for replacing San Diego County’s telecommunications and IT infrastructure, including replacing the obsolete telecommunications system with a WAN and refreshing all aspects of its IT infrastructure, including network equipment, desktop PCs, printers and other peripherals.

Local governments such as San Diego have succeeded where states that embarked on similar IT outsourcing efforts failed. Connecticut killed a deal with EDS Corp. in 1999 because the two sides couldn’t agree on price. Florida last year canceled the MyFlorida Alliance, an IT outsourcing contract with Accenture Ltd. and BearingPoint Inc. of McLean, Va., because the state said the program wasn’t meeting its needs.

More than support

For the new contract, San Diego County wants an integrator to provide not only infrastructure support but also software applications capable of transforming key business processes, Moore said. The county wants new applications for mobile computing, land-use management and certain back-office functions.

The value of the new outsourcing contract won’t be determined until final negotiations are completed and the winner is selected, Moore said.

But he said the county is spending about $125 million annually on the current outsourcing contract, and he expects that rate of investment to continue.

In addition to CGI Group, other integrators that have expressed an interest in the project are Accenture, Affiliated Computer Services Inc. of Dallas, EDS, IBM Corp., Northrop Grumman Corp. and Science Applications International Corp. of San Diego, Moore said. SAIC is a key subcontractor on CSC’s Pennant Alliance.

Notably absent from that list is CSC. Asked whether the company would bid on the contract again, CSC spokesman Mike Dickerson said, “It would be premature to speculate at this time.”

Moore cited two indications that CSC is not likely to bid on the new contract. First, the company freed SAIC from an obligation to bid only with it on the new contract.

“SAIC said it wanted to stay teamed with CSC, [but] they have been cut loose from that obligation,” he said.

Second, the CSC team did not bid on a major application outsourcing opportunity that complemented its existing work, Moore said. The county awarded the property tax project, which is worth $32 million over three years, to BearingPoint last month.

The county won’t know for sure whether CSC is bidding until the request for a statement of qualifications is issued.

“We don’t think, right now, that they are going to bid, but we don’t know for sure,” Moore said. “We would like to see them bid.”

John Kost, managing vice president of worldwide public-sector research for research and consulting firm Gartner Inc. of Stamford, Conn., said CSC had hoped the San Diego County project would be a springboard to other large-scale state and local outsourcing projects.

But that strategy fizzled because so few governments have tried what San Diego County is doing, he said.

The emphasis the county is placing on software applications for the follow-on new contract could be one reason that CSC decides to walk away, Kost said.

He said that some federal contractors have found it difficult to achieve desired profit margins in the state and local market if they have not built highly repeatable applications that can be sold across multiple jurisdictions.

The companies interested in the project are gearing up for a fight.

“We have a whole team of people focused on it right now,” said Cheryl Janey, vice president of business development with Northrop Grumman Information Technology’s commercial, state and local solutions business unit.

San Diego County’s emphasis on applications development in the new contract signals that it’s ready to change contractors, Janey said. The county “worked out some of the infrastructure challenges that it had early on and thinks that it has hit a more even keel, but it is not as comfortable with the progress it has made on enterprise applications,” she said.

The new outsourcing contract is a shift in state and local outsourcing from infrastructure overhaul to enterprise software applications, Janey said.

Although the contract is a recompete, it signals an important change in government outsourcing, CGI-AMS’ Keating said.

During the next seven years, when the popularity of outsourcing is expected to grow considerably in the government sector, many other state and local governments will be looking to the way this project is done, Keating said.

“They are going to look at this as a signal of whether this type of work could succeed or fail,” he said. “The willingness of the rest of the market to open up will be determined in large part by this contract award.”


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