The state of Virginia has tapped defense and technology services contractor Northrop Grumman to overhaul the bulk of its IT operations under a sweeping outsourcing contract that could be worth up to $2 billion. The deal represents what state officials call the largest commercial partnership by a state government and a private IT vendor.

The 10-year plan calls for Northrop Grumman to take over the operation and maintenance of Virginia's mainframe, server, desktop, and network operations and roll out new applications designed to modernize the delivery of numerous services to Virginia residents. Northrop Grumman says it will partner with Hewlett-Packard and Gateway as part of the implementation.

The agreement obliges Northrop Grumman to spend more than $55 million to build a 130,000-square-foot data center in Lebanon, Va., and a 167,000-square-foot operations center in a long-vacant technology park in Chesterfield County. The contractor also will fund IT education programs at the University of Virginia. "This partnership will provide high-tech jobs with good salaries," said Virginia Governor Mark Warner at a press conference in Lebanon on Monday.

More than 900 state IT workers will be offered jobs at Northrop Grumman with a 4% salary increase and a signing bonus. In the end, the government of Virginia says it expects the initiative will add more than 1,000 private-sector IT jobs in the state.

Northrop Grumman already has about 32,000 employees in Virginia, making it the state's largest, non-retail employer in the private sector.

Virginia Secretary of Technology Eugene Huang said the deal is the largest IT venture between a state government and a private company. "It has the added benefit of being financially sound," said Huang, noting that the project will not require new funding authorizations by the Virginia Legislature. The deal, however, remains subject to legislative review.

The news will likely come as a relief to Virginia's IT workforce, since the state's privatization plans raised fears that their jobs might be moved offshore. In recent months, a number of state governments, including New Jersey and Indiana, have drawn heat from labor advocates over plans to use low-wage IT contractors based in India. By securing a commitment from Northrop Grumman to invest in the state's infrastructure, Virginia officials appear to have found a way to keep jobs at home while receiving a significant economic payback. "This is a watershed event for the Commonwealth [of Virginia]," said James McGuirk, chairman of the state's Information Technology Investment Board, which recommended the partnership to the governor.

Northrop Grumman's groundbreaking deal with Virginia comes as rival Lockheed Martin is in talks to acquire Computer Sciences Corp., the nation's third largest IT outsourcer. As defense systems become more IT dependent, the federal government is expected to increasingly look to contractors to provide sophisticated information systems alongside military hardware. At the same time, a strong IT services arm could help defense systems specialists move beyond the military in securing lucrative government work. "It's a way for them to diversify," says Joseph Vafi, an analyst at Jefferies & Co.

Vafi says "there is a good chance" that Lockheed, along with private equity firms Warburg Pincus, Blackstone Group, and Texas Pacific Group, will complete a deal to acquire CSC. "The talks have moved beyond price and are now more about structure, which is a sign that things are moving forward," he says. On Tuesday, CSC said it had won a $51 million deal to support the United States Transportation Command, which provides distribution services for the Department of Defense.