by Stephanie Overby

Public sector embraces bigger, longer outsourcing deals

News Analysis
May 10, 2016
Managed Cloud ServicesOutsourcingTechnology Industry

Public sector outsourcing deals are growing as the U.S. government seeks shared services efficiencies.

outsourcing thinkstock
Credit: Thinkstock

Over the past five years, as outsourcing in the commercial sector has grown steadily but modestly, the annual contract value of outsourcing deals in the public sector has more than doubled, according to analysis by outsourcing consultancy ISG. Today, public sector outsourcing deals account for two-thirds of the annual contract value in the market overall.

Much of the activity is happening in the U.S., which consists almost entirely of information technology work and driven in large part by Department of Defense spending, according to ISG. The Department of Homeland Security and the Department of Health and Human Services, contending with the changes mandated by the Affordable Care Act, are also significant users of third-party IT services.

These federal agencies are also poised to add on more business process services in the future as well “as technology improves and the workforce ages,” says John Keppel, president EMEA and Asia with ISG. Public sector agencies in the U.K. and Australia have already adopted business process outsourcing on a much wider basis, according to ISG. Both countries have increased their BPO activity over the past year in areas such as taxation, pensions, asset registration, e-governance and benefits administration.

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In recent years, public sector outsourcing contracts have gotten longer in duration as well at a time when private sector deals have gotten shorter. Both have converged to average of about 3.2 years. “The federal government is pursuing outsourcing in a number of areas where agencies had traditionally created in-house technology functions in the past,” says Keppel. “Private sector terms have been growing shorter, driven by specialization and the flexibility that those deals provide to clients.”

Shared services environments drive longer outsourcing deals

A new push from the U.S. government for shared services environments (particularly in back-office functions like IT, accounting and finance) is another contributing factor to the longer deals. “Shared services offers the possibility of substantial budget savings. This dynamic drew private sector companies toward outsourcing and government managers, faced with growing pressure to increase efficiency, are being encouraged — even forced — to look at shared services as a smart way to approach this,” Keppel says.

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But the shared services mandate has ruffled feathers and introduced significant technological challenges. “The move to shared services hasn’t been easy, as it runs counter to a long history of each agency establishing its own IT functions,” says Keppel. “Implementing shared services requires significant system integration and data migrations. In addition, many agencies have had to maintain legacy systems they thought they would be able to retire. Agencies have been successful in identifying the lowest hanging fruit, such as consolidating systems within their own agency.”

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At the same time, federal CIOs are working aggressively to adopt cloud applications, roll out mobile technologies and support big data projects, for which they’ll need the experience, efficiency, and capabilities of private sector providers. “Many agencies’ budgets remain flat, they are understaffed, and face a skills gap to pursue cloud, mobile and big data technologies,” says Keppel. “Outsourcing providers possess the expertise, unique skill sets, and service delivery capabilities to help agencies launch these projects quickly and cost effectively.”