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State And Local Governments Want To Keep The Jobs, But Still Outsource The IT

They want to have it both ways. However, the latest deals show there's still a lot to prove.

Georgia is looking for a way to consolidate and possibly outsource its E-mail. But would it ever consider hiring the state of Texas? That's right, Texas soon will try to sell E-mail, collaboration, and identity management services to other state and local governments across the country as part of an outsourcing contract it just signed with IBM. The deal will let Texas consolidate its own E-mail systems, but it's also hoping to generate revenue by reselling services to other government groups, while at the same time keeping jobs in the state, a critical factor in successful public sector outsourcing.

It's a growing trend for cash-strapped states that look to outsourcing to lower costs but are loath to cut jobs or move them out of state. In the past, pressure from unions has kept some state and local governments from pursuing outsourcing even when there was a strong business case for it. In 1999, Connecticut scrapped what would have been a comprehensive deal with EDS worth up to

$1.5 billion when labor protests, combined with public scrutiny, put too much pressure on the deal. "A strong union is a strong negative for outsourcing," says Robert Bowell, VP of state and local government at EquaTerra, a consulting company that helps governments assess outsourcing deals.

Texas doesn't have a public sector union contingent with which to deal. But it isn't the only state looking to outsourcing to solve an array of IT problems, including seriously outdated infrastructures and limited funding to do anything about them, along with a generation of baby boomer workers who are getting ready to retire. State and local outsourcing is expected to increase 80% by 2010, from $10 billion today to $18 billion, according to government IT research firm Input.

Everyone Can't Win

We need to modernize the infrastructure and do it without any money. Virginia CIO Stewart

"We need to modernize the infrastructure and do it without any money." Virginia CIO Stewart
Texas follows Virginia, which in November became the first state to hand over the bulk of its IT operations to one vendor when it signed the largest state IT outsourcing contract ever, a 10-year, $2 billion deal with Northrop Grumman. Like Texas, Virginia pulled off the outsourcing deal in part by coming up with a formula that would keep jobs in the state and then going further, committing its outsourcer to creating new jobs in Virginia.

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The state contracted with Northrop Grumman to completely refresh its mainframes, servers, and desktop and laptop computers, as well as its voice and data networks, E-mail, security, and operating systems. But Virginia won't spend any more than what it spends now on IT--$270 million to $300 million a year--with about $198 million of its annual budget going to Northrop Grumman.

When state CIO Lem Stewart started to look at outsourcing, he knew that the modernization effort would cost several hundred million dollars and that he didn't have a chance of getting that money from the state Assembly. "IT never really rises to the top level of spending ... so I told the vendors, 'We need to modernize the infrastructure and do it without any money,'" Stewart says.

To win the contract, Northrop committed to invest about $270 million over the first 36 months to modernize the state's IT infrastructure. The company will consolidate Virginia's 72 help desks into one and replace voice and video networks. It also will combine 50 data centers into two new ones, a move Stewart hopes will significantly improve IT security. "We've got 90 agencies doing their own security, and that produces the weakest link you can think of," he says.

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