Virginia Governor Warner Opts for Onshore Outsourcing

The state of Virginia seems to have found a unique way to procure IT services economically without sending the bulk of the work offshore. Under a deal that's worth up to $2 billion over the next ten years, Virginia has hired Northrop Grumman to provide mainframe, server, desktop maintenance and application development services. But there's a catch.To fulfill the contract, Northrop Grumman has to spend more than $55 million of its own money to build new data centers in Virginia to house the operations. Northrop Grumman will also fund IT education programs at the University of Virginia as part of the deal.

That's a win-win for Virginia. Not only can outgoing Democratic Governor Mark Warner--who harbors 2008 presidential aspirations--hold himself up as a protector of jobs within the state, Virginia also gets-gratis--additional infrastructure that could help attract more IT work to the area through Northrop Grumman. Virginia is agreeing to pay more than would be the case if some of the 900 outsourced state jobs were placed in, say, India, but it's getting a good bit in return from the contractor.

My sense is that this may have been a deal breaker for IBM, which bid aggressively on the Virginia contract. IBM is spending big money to beef up its facilities in India, and I doubt the company had much interest in pouring new concrete in Virginia.

The question now is whether this deal becomes a model for other states-most of which are facing increased demands for IT-driven services--from Homeland Security initiatives to e-health projects--while trying to balance budget deficits. The politically smart message to services vendors from other governors and state CIOs might be this: Sure, we'll pay a premium to keep our jobs here, but if you want our business you can pick up some of the tab.