Texas Ousts IBM, Takes New IT Outsourcing Tack

Second-generation IT services deals almost always go better. But after an especially troubled relationship with IBM, Texas is counting on new vendors and an unproven outsourcing model to deliver the second time around.

Over the last decade, public sector IT outsourcing deals have been marked by very public failures—from Indiana suing its vendor over $1.6 billion deal to Virginia firing its CIO for a bad outsourcing relationship to San Diego County's failure to make it work with two providers back-to-back before settling in to a better third contract.

Texas's first IT outsourcing deal was no different, devolving into a very public fight between IBM and the state's Department of Information Resources (DIR) over their $863 million data center consolidation contract.

Last week, Texas DIR announced that it had not only awarded the work to new vendors, but that it was taking a very different tack the second time around. In a deal worth more than $1 billion dollars, Xerox and its IT services division (formerly ACS) will take on the five towers of service delivery while CapGemini will step in as the master service integrator. It's a bold move destined to make a big impact—for better or worse. "It could be a landmark deal or it could be a disaster," says Esteban Herrera, COO of outsourcing analyst firm HfS Research. "So much is unknown."

Testing New IT Service Integrator Role

The service integrator model — whereby one outsourcer oversees end-to-end IT delivery—is unproven. "I think it's weird. You've got one contractor managing another contractor," says Phil Fersht, founder of HfS Research, which has been studying the new model. "And both have to know everything about the other." But if the state is to make a go of it, it may have chosen the right partners to work through the kinks. "I'm confident Xerox can make it work. The firm is so embedded in Texas state government," Fersht says. "[And Capgemini] does very good work with other public sector bodies, especially in Europe."

CapGemini opted to bid for the service integrator role, which per the state's new rules precluded them from providing any of the services themselves, to give the company a platform for similar work in the U.S. "It's the first deal of its kind in state government, at least from an infrastructure perspective," says Mark Stein, CapGemini's vice president of IT services. CapGemini will rely on ITIL version three, which Stein says will have more teeth than it might in a typical vendor implementation. "Because we're not providing the other services, we'll have the ability to enforce policies as a more rigorous level," Stein says. "They can't be circumvented by others in our same organization who could otherwise find a back door around them. There's no back door here."

The state bid out the five towers of service independently with the expectation of bringing in multiple providers, but ultimately awarded it all to Xerox, which began studying the Texas-IBM deal before the state decided to re-procure the services. "The dissatisfaction seemed to center around responsiveness. Agencies felt it was taking far too long for services to be provisioned," says Paul Dorin, vice president and general manager in Xerox's services division. "Secondly, the agencies felt they were left to their own devices when they had issues where they expected a partner to work in collaboration with them."

Xerox developed a dedicated cloud environment with reference architectures that will enable them to provide infrastructure services on a consumption basis as fast as needed. They also set up a dedicated CTO office with a small staff of enterprise architects—a first in its public sector outsourcing according to Dorin.

Each provider is accountable for some unique service levels, but there is joint accountability for many deliverables—a potential source of conflict. "Do we have concerns about it? Sure," says CapGemini's Stern. "We thought long and hard about it. If a server goes down and the reason is that the operating system needs to be patched, I can't snap my fingers and make that happen." The contract contains provisions for situations in which the actions of one provider cause a missed service level for both. But, notes Stern, "there's a rigorous structure around what has to happen before you can put those clauses into effect. In a nutshell, our goal is to manage the other provider to make sure we don't get into those situations."

Against All IT Outsourcing Odds

That may prove difficult. "As far as cooperation between providers in a tandem deal, the evidence is overwhelmingly against the success of the partnership," says Herrera of HfS Research. "I'd say maybe one in 15 of these delivery partnerships succeed."

Right now the two providers are mid-way through the six-month pre-transition transition. CapGemini has focused on the implementation of a service management manual and putting in place operating level agreements between the parties.

In the new deal's favor is the fact that IT outsourcing almost always goes better the second time around, even if the client sticks with the incumbent provider. "The client has learned a lot of lessons regarding how to manage their provider more effectively," says Fersht of HfS Research. "This is especially the case in the public sector where these issues are much more exposed."

But, notes Dorin of Xerox, take twos can also come with heightened expectations and pent-up demand. "The level of expectation is set differently than it was with the outgoing provider," Dorin says. "It needs to be met and met quickly. When the prior relationship was contentious, there's some residual, but healthy skepticism."

Expect IBM to Make a Smooth Exit

Then there's the issue of knowledge transfer from the outgoing vendor; IBM is out the door on July 1. "We have seen some awful exit behaviors in the past, but thank goodness these are much less frequent in recent years," says Fersht. "In general, providers are careful to avoid getting a bad rap for not playing nice."

"This is not our first rodeo, transitioning from an incumbent provider under these circumstances," says Dorin, noting that Xerox's partnership with IBM in other areas helps smooth the way. "Where we have seen bumps in the road, we've reached out to HUB providers [the state's term for historically underutilized business partners who work as subcontractors] with whom we have relationships, and they've helped us broker meetings with the appropriate parties."

And with another next-generation IT outsourcing deal on the books, the state of public sector outsourcing may be improving. "It's really matured over the last five years," says Fersht. "Providers put a lot of resources into transitions to ensure they don't mess up, and most buyers have some experience—with scars to prove it."

Stephanie Overby is regular contributor to CIO.com's IT Outsourcing section.

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