In January, San Diego awarded a seven-year outsourcing contract
worth approximately US$650 million to Northrop Grumman Information
Technology to run the county's IT operations.
It's the second such deal for San Diego.
The first -- a 1999 deal with Computer Sciences Corp. -- was
heralded as a test of whether wholesale outsourcing would work for
local government but is mostly remembered for the controversy it
generated over costs, service levels and a problematic ERP rollout.
At the height of the troubles, the county threatened to hold CSC in
breach of contract.
This time, it's going to be different. Or will it?
David Perara, an independent analyst who previously led Meta
Group's price benchmarking group, says commercial companies also
struggle with large outsourcing deals, and the second experience is
usually better than the first. A problem with the first San Diego
deal was a lack of sufficient detail in the contract regarding
prices, responsibilities and service levels.
The county appears to have corrected that problem, according to
outsourcing experts who reviewed the Northrop Grumman contract.
"They clearly learned the importance of defining the service
responsibilities between themselves and the service provider," says
Perara.
For instance, the county has created 59 line items to delineate
responsibilities for running the help desk. Among those
responsibilities, Northrop Grumman must produce and submit help
desk solutions and service-level requirements, and the county has
responsibility for reviewing and approving them.
Consistent with commercial best practices, the contract also
breaks out pricing for services into components. Desktop
maintenance costs, for example, are broken out into hardware,
software and printer maintenance, among other line items. The first
contract included only a lump sum annual service charge, Perara
says.
But while it's generally better to provide more detail than
less, the county may have overcorrected in some spots, particularly
in the voluminous details concerning service-level definitions. A
152-page document defines the operational services and 76 minimum
acceptable service levels, each with its own penalty (transaction
response time has nine service levels associated with it, and
desktop repair has 15).
"You should only define the service levels that are truly
important and provide sufficient incentive for the vendor not to
miss them," says Adam Strichman, vice president of outsourcing
advisory firm Nautilus Advisors. With so many service levels in the
new contract, he says, the contractor would have to miss many
service levels at the same time before a major financial deterrent
would become evident.
Another red flag: The contract with Northrop Grumman stipulates
flat unit pricing for the duration of the relationship. Fixed
prices make the customer happy early on, says Strichman, when
they're paying less than market rates. But as the deal is
renegotiated over time, service delivery can suffer. Most
commercial customers avoid lengthy fixed-price deals, says Perara.
But many government entities, which value predictable costs more,
still gravitate toward them.
For a Canadian perspective on this deal
http://www.intergovworld.com/article/f69b6ab10a01040800577d9589267d59/pg1.htm
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