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11/18/2005
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Virginia Is For Outsourcing

The state hopes an outsourcing deal will modernize its IT infrastructure, save jobs, and spur development. All this, and the work stays local.

Outside Interest
The deal has attracted the attention of other state CIOs. "Virginia is an interesting experiment we're all watching very closely," New York CIO Jim Dillon says. "We face an aging workforce, many of whom are ready to retire, and rapidly changing skill needs. Legacy systems combined with an aging staff are increasingly making us look to outsourcing to satisfy those needs and skills."

Virginia's Big Deal

The 10-year outsourcing pact calls for Northrop Grumman to:

  • Receive more than $2 billion along with partners HP and Gateway


  • Take over the state's mainframe, server, desktop, voice, and data networks


  • Spend more than $55 million building two data centers


  • Fund IT education at the University of Virginia


  • Provide state IT employees with 4% raises and signing bonuses upon transferring to the company


  • Retain transferred employees for at least a year

  • But many remain wary of outsourcing. Michigan consolidated 20 data centers into three and launched a number of other efficiency programs designed to save about $100 million. "We're doing an effective infrastructure consolidation with our own state employees," CIO Teri Takai says.

    Yet Takai acknowledges there's constant pressure to deliver more. "Citizens are demanding online involvement more than they ever have," she says. "In order to provide that service, we really have to address some issues around statewide broadband, security, and ways to reach those citizens." While Michigan may never turn to outsourcing, Takai says Virginia's move might generate new approaches for IT management, efficiency, and keeping people happy.

    Some argue that the only lesson here is that Virginia taxpayers will end up paying more than they should because certain choices--specifically offshore outsourcing--weren't considered. States could save "astronomical amounts of money" by placing their IT work offshore, says Andy Keyser, who heads the state government practice for India's largest outsourcing vendor, Tata Consultancy Services Ltd. Yet, because of political sensitivities, virtually all of Tata's state government work is performed in the United States, Keyser says.

    Virginia has plenty of reasons to keep the work under domestic control. The state is home to sensitive federal-government institutions, including the Central Intelligence Agency, and few contractors can match Northrop Grumman's experience working in such environments. Also, offshoring wouldn't have provided the state with the kind of economic benefits it was looking for. "We have rural areas where the work can be done for significantly less money than in the metropolitan area," Huang says. "We don't need to go offshore."

    It's No IBM
    For Northrop Grumman, which has a small but growing nonmilitary outsourcing business, the challenge is to win enough additional work for its new data and operations centers from other customers to justify the cost of the inherited state IT workers, with their raises and bonuses. The company, which didn't return calls to discuss the deal, provides IT services to state and federal agencies and a number of other nonmilitary customers. It's no IBM, however. The company's Information Technology unit posted sales of $4.75 billion in the most recent fiscal year, up 12% from the previous year but still only about 10% of what IBM rakes in from IT services.


    ''We're all going to learn'' from Virginia, Michigan CIO Takai says.

    "We're all going to learn" from Virginia, Michigan CIO Takai says.
    The deal "has the added benefit of being financially sound," Huang says, noting that the project, while needing legislative approval, won't require new funding.

    Still, large government IT projects have a spotty track record, and managing outsourced suppliers is trickier than dealing with in-house IT employees. So it remains to be seen whether Virginia will realize all the sought-after benefits: a revamped IT infrastructure, new services for state workers and residents, private-sector jobs, and a boost in tax revenue.

    And, even if Virginia succeeds, it's uncertain that a similar deal could be replicated elsewhere. Virginia, with its proximity to Washington, D.C., can attract a company like Northrop Grumman more easily than most other states. "It's going to be very interesting for us to watch what Virginia is doing," Michigan's Takai says. "We're all going to learn from it."

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