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.

By Stephanie Overby
Thu, March 22, 2012

CIO — 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."

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