Lessons Learned from State Outsourcing Failures

Ann All

Not quite a year ago I wrote about what sounded like a pretty big outsourcing failure, involving a contract for IBM to take over IT and procurement services for 27 state government agencies in Texas. Most of the agencies were complaining about Big Blue and the state had fined it $900,000 for failure to complete timely data backups, a condition of the seven-year, $863 million contract. (It's not entirely clear if all is now well in Texas, but I did find the project later cited as a successful case study on IBM's Web site.)


Now IBM is experiencing similar problems in Indiana. The state has ordered the company to fix problems causing lengthy delays in distributing welfare and Medicaid benefits, a duty IBM and Affiliated Computer Services are performing for Indiana under a 10-year, $1.34 billion agreement. The Wall Street Journal article about the deal cites several instances of similar state government outsourcing arrangements, some successful and some not.


Here's a clue to Indiana's problems: Gov. Mitch McDaniels refers to the system as a "monstrous bureaucracy." Perhaps Indiana thought it could bring in outsiders to fix its broken processes without expending much effort to help. Outsourcing is a hands-on process, and organizations that take a hands-off approach invariably suffer.


That was one of the points I tried to convey in a post sharing insights gleaned from two successful outsourcing initiatives, one of them the British government's introduction of biometric fingerprinting on visas issued through its embassies and consulates. The leader of that government agency said:


Make sure you understand all the business processes -- work though the detail. We made sure we understood the minutiae of the technology we were buying.


Are you listening, Indiana? Other suggestions from that post:


  • Get the "best people possible" to manage the project, even if they come from outside the organization.
  • Don't let a single department write outsourcing specifications. Get feedback from all units that will be affected by the project.
  • Get support for the initiative at the board level.
  • Employ project managers with communications and relationship skills, as well as broad knowledge across multiple functions.


I dug up more helpful advice in a Governing piece about that IBM deal in Texas. That piece, written about two months after I blogged about it, said problems were "compounded by hostility from state employees," a situation that I suspect isn't uncommon. Also according to the piece, "despite everything, Texas is better off now than it was before." It emphasizes the importance of coming up with an effective knowledge transfer plan at the outset of an outsourcing project.


State governments may face increasing pressure to get outsourcing right. The Wall Street Journal article quotes Tim Dowd, CEO of Input, a market-research company, who predicts outsourcing by state governments will grow from some $8.8 billion this year to $11.2 billion in 2014.

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Add Comment      Leave a comment on this blog post
Sep 6, 2009 6:07 PM Marc Murphy Marc Murphy  says:

The next big IBM outsourcing deal that will go bad is the one they negotiated and signed up with ServiceMaster Inc. in Dec/08.  ServiceMaster, since going private with CD&R, have been reducing head count to keep up with their junk bond interest payments that partially funded the privatization initiative and place them with a huge debt load.  CD&R/ServiceMaster tossed the keys to their IT kingdom to IBM's low contract bid.  IBM USA in turn tossed the contract to IBM India who then came to Memphis to take over all operations (Development, Help Desk Support, Maintenance, User Training, etc.)  Virtually everyone in IT was let go within 6 months.  Our Terminix IT system was custom built over 8 years.  The system is now being maintained by IBM Indians who barely look over 30, have limited knowledge of our programming language and most importantly, have no real fundamental knowledge of our business.

During the 6 month 'knowledge transfer' phase of handing over our system to IBM India, a few of our staff members complained about IBM's limited knowledge of basic Accounting fundamentals.  These people were subsequently fired by ServiceMaster for being uncooperative.

Can things get any worse?  You bet!  ServiceMaster, being so focused on cutting expenses, will soon be outsourcing their Accounting Department ... to be followed by Human Resources... to be followed by ???

ServiceMaster, I must admit, so far have made great strides in reducing expense, but what has management perplexed is revenue is now trailing behind their lowered expenses.  The whole premise behind the CD&R / ServiceMaster strategic cost cutting initiative was revenue would remain flat or constant.  Could the revenue reduction be IT related?  Perhaps it's the Recession we're in?  I'd give it 3 more months before executive management connect the dots.  I would venture to guess that executive management will have to start giving up their equity ownership of ServiceMaster once they realize they can't keep up with the junk bond interest payments.  However, they will continue making their best effort in cannibalizing the company via outsourcing for the sake of cutting expenses. 



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