HP's Contract with Navy Another Cautionary Tale of Over Reliance on Outsourcers

Ann All

Earlier this year I shared a TechCrunch column by Vivek Wadhwa in which he suggested California's government agencies should get technology startups instead of incumbent vendors like IBM or HP to help them update their outdated IT systems. Wadhwa, by the way, is a senior research associate at Harvard Law School and director of research at the Center for Entrepreneurship and Research Commercialization at Duke University


While I find this idea appealing from a "sticking it to the Man" angle and believe government agencies would derive benefits from working with younger and hungrier companies, it's easier said than done for agencies to extricate themselves from contracts with incumbents.


For example the U.S. Navy just signaled its resolve to end its 10-year relationship with HP -- by signing a five-year, $3.3 billion no-bid contract that both sides say will lead to the Navy becoming less reliant on HP. As a Wired article, points out, "that's what they said the last time, and the time before that.." Yep, it's the third deal between the two parties.


The initial five-year, $4.1 billion contract for the project, called the Navy Marine Corps Intranet, was with Electronic Data Systems, the services provider HP acquired in 2008. EDS agreed to consolidate 15,000 different systems into a single and more manageable network. In theory, the Navy would benefit from EDS' experience in running such systems.


EDS did create a single network, the article points out, one used by more than 700,000 sailors, Marines and civilians on nearly 400,000 computers in 620 locations in three countries. NMCI's 4,100 servers handle more than 2.3 petabytes of data. It's the second-largest network in the world, after the Internet. While the old networks were merged, and the centrally controlled network is far easier to operate and secure than the old system, the Navy didn't gain the flexibility it wanted and the network certainly isn't cost-effective.


Some stats from the article:

  • The Navy pays $2,490.72 per year for a typical workstation on the network. That includes an e-mail inbox with a 50 MB capacity (compared to Gmail's: 7,500 MB), and 700 MB of network storage (compared to Evernote's unlimited, free plan). Anything above that costs extra.
  • The Navy pays $4,085.64 for a year's use of a "high-end graphics" workstation.
  • Extra applications on a laptop or desktop computer cost $1,006.68 to $4,026.72 a year.
  • A classified Ethernet port runs $9,300 to $28,800 per year, depending on where it's located.
  • "Anti-spam services" run the Navy $2.7 million per year under the contract.
  • Cleaning up a "data spillage"-classified information that got placed on an unclassified network-costs $11,800 per incident.


In 2008, the Navy paid some $5 million to wipe the data from 432 compromised computers. As the Washington Times reported, this tab was "almost 10 times the cost of simply destroying the affected machines and replacing them with new ones."


HP touts the network's security, functionality and flexibility, and it says 87.5 percent of NMCI users it surveyed are happy with the service. The article cites anecdotal complaints of lengthy down times and long waits for technical support -- and perhaps there's something to those complaints, since the Navy is now trying to extricate itself from the contract.


The Government Accountability Office said of the program in 2006:

After investing about 6 years and $3.7 billion on NMCI, the Navy has yet to meet the program's two strategic goals -- to provide information superiority and to foster innovation.

A key issue for the Navy is accessing HP's intellectual property. Given that HP designed the network, the Navy will need for the company to share the infrastructure and technical data associated with NMCI when it leaves the project, a factor presumably covered in the latest contract.


The size and complexity of the deal may have been part of the problem. But as I wrote earlier this year, an extended contract with a single outsourcer is often the most logical option for a large-scale business transformation. Still, it makes sense to structure the relationship like a smaller, shorter one, creating a series of smaller "contracts" within the large one. This is a key bit of advice from Danny Jones, a partner at sourcing adviser TPI, which I shared in my post. It's also obviously important to build enough flexibility into longer contracts to address changing business needs and technology options.


Interestingly, Booz Allen Hamilton handled the negotiations with HP for the military. Systems integrators handling complex negotiations could increasingly come under fire, wrote IT Business Edge contributor Loraine Lawson in June, noting Marin County, Calif., sued Deloitte Consulting, claiming it committed fraud and "misrepresented its skills and experience" in an SAP implementation. Also, a UK court ruled that EDS (now HP) must pay 318 million (US$460.3 million) to settle a lawsuit over a failed CRM project. She wrote:

The Marin case ... could make a huge impact, both in terms of demonstrating whether it's fruitful to sue over blotched systems integration projects and in terms of changing the unbalanced dynamic between less-experienced organizations and system integrators, not to mention vendors and consultants.

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