Government Outsourcing: San Diego Tries to Learn from Contract Mistakes

In January, San Diego awarded a seven-year outsourcing contract worth approximately $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. (To find out more about San Diego’s past outsourcing troubles, see www.cio.com/050106.)

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.