Oct 29 2009   7:02PM GMT

An IT outsourcing contract without penalties? A state pays the price

Rachel Lebeaux Rachel Lebeaux Profile: Rachel Lebeaux

You hear a lot of analysts, clients and, of course, vendors touting the benefits of IT outsourcing, especially as the U.S. emerges from this economic recession, which the latest government numbers show is over. In larger organizations, outsourcing can help globalize operations, and proponents inevitably point to the bottom line: It usually saves organizations money.

But if you follow the news, you might have also heard about what must be considered an IT outsourcing failure in the state of Virginia, which is currently embroiled in controversy over its $2 billion IT outsourcing contract with security firm Northrop Grumman. Although there have been a number of missed deadlines and service failures, as we reported this week, breaking the current contract could cost the state hundreds of millions of dollars in taxpayer money – that’s no pocket change! It leaves the state with little choice but to get this deal back on track.

So what went wrong? Perhaps most importantly, there was a poor governance framework in place for overseeing this deal. I wasn’t so surprised to hear that – a lot of organizations struggle before successfully implementing a governance framework for IT outsourcing contracts. But I’m still wondering how the state could not include penalties for any missed deadlines and service levels below those specified in SLAs. Isn’t that the entire basis of a contract — to hammer out those details? It’s mind-boggling.

(And, just so you know I’m not new to such failures: As a community journalist, I covered the construction of a new high school with a budget that’s ballooned to nearly $200 million, almost double the initial estimates. So, trust me, I know government incompetence.)

I’m scheduled to speak to Virginia CIO George Coulter Friday about the corrective action plan proposed by Northrop Grumman and how the state intends to straighten this mess out. Do you have questions regarding IT outsourcing contracts or what went wrong here? I’d love your input.

Also, for those who view Virginia’s mess as a cautionary tale, remember to check out, where we have information on IT outsourcing governance, outsourcing trends going into next year, and more.

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  • Markjtoomey
    Those involved in establishing and improving outsourcing arrangements would do well to observe the recommendaitons in the international standard for corporate governance of IT. Its principles, if understood and followed, would have prevented this situaiton from arising. A new book, Waltzing wth the Elephant (look for it with your search engine) provides a comprehensive explanation of ISO 38500, and plaain language guidance for directors and executives who need not know IT detail in order to exert effectve control. The book includes some explicit discussion of outsourcing.
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  • Corinthia
    The reason state and federal governments outsource tends to fail is due to thier inability to put together good IT shops (lower salaries, non-IT management) and lobbying . They just don't have enough inhouse talent to run modern IT systems. They also don't have IT management talent. I firmly believe that companies/governments who don't have IT management at the table for these contracts always fail. I worked at a company that had out sourced development on a new system, the contract paid if they delievered x amount of code each month -- but there was nothing in the contract that said it had to work. The IT department found this funny, also tons of bad purchases, contracts -- because IT wasn't invite to be part of the negotiations -- just Business folks who "know" what they are doing. SLA's, comments that code has to work, that is all IT management type of thinking that management of other types doesn't think about, and they don't include in contracts. And lets face it, if the organization is so bad it can't put together a decent IT department, what make you think they can put together a project management group (specializing in IT) that can run an outsource contract? They don't have the talent pool needed to outsource IT, it is not like a construction contract.... I would bet they used project managers who were use to physical construction projects.
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