CIO — Two weeks ago, the CIO of Texas penned a seven-page letter outlining the "chronic failures"of the state's nearly four-year outsourcing relationship—a deal the Texas governor had briefly suspended in 2008 citing service delivery problems that he said put the state's agencies in danger.

In May, Indiana sued its former IT services provider for $1.3 billion for breach of contract, following the 2009 gubernatorial cancellation of a deal to streamline the state's welfare system.

Last summer, the CIO of Virginia was fired after criticism by state officials that the 10-year, $2.3 billion outsourcing deal he signed to transform the state's IT systems was costly and inefficient and he withheld payments to the vendor.

Such public disputes could be seen as signs that the public sector and private outsourcing simply don't mix. After all, the mega-deals signed by Texas and Virginia in 2006 were hailed as a bellwether for future public outsourcing growth.

But, industry watchers say, these tussles between outsourcers and their state customers are less an indicator that public sector outsourcing is doomed to fail than they are a peek at the current state of IT services.

"The rate of issues in public sector deals is no different than the rate of issues in private sector deals," says Robert M. Finkel, head of the U.S. technology, communications, and outsourcing practice for law firm Milbank, Tweed, Hadley & McCloy, who has worked on outsourcing deals for AT&T, Tyco (TYC), and Unilever. "When deals do go sideways in the private sector, you never hear about them. In the public sector, everyone's dirty laundry is out there for everyone else to see."

Unlike corporate IT contracts, with their attendant non-disclosure agreements and confidentiality clauses, state outsourcing customers are required by law to air their grievances. As a result, these troubled or failed state IT services deals offer a rare glimpse at what really happens when an outsourcing relationship goes south and suggest some lessons for all IT services providers and their customers.

1. You Get What You Pay For

When it comes to IT services—particularly IT transformation efforts—the "cheapest hammer" can prove rather expensive in the long run.

"Price is always a focus in any outsourcing selection process, but government procurement is hyper-focused on it," says Adam Strichman, founder of outsourcing consultancy Sanda Partners, based in Mechanicsville, Va. "They say that they are looking for the 'best partner' and that they want the 'right fit,' but the lowest bidder always wins. Governments can get sued if they don't choose the lowest bidder."

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