Public Sector Outsourcing: Events and Lessons from 2013

by Pillsbury Global Sourcing Practice
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"How does a large software project get to be one year late?  One day at a time!"  

-Fred Brooks, former IBM employee and OS/360 developer

2013 was not a stellar year for public sector outsourcing. As we reported in an earlier blog article, Indiana is appealing judgment in an ongoing court battle with IBM over a troubled welfare claims processing project.  Agencies in Pennsylvania, Massachusetts and Australia also hit the news.

To be sure, implementing any large IT project is difficult and risky. Publicity and politics further complicate contracting in the public sector.  And, as IBM quickly pointed out in response to Pennsylvania's announcement, "there is accountability on both sides for system performance and service delivery." In other words, it takes two to mess up this badly.

In spite of these challenges, there are many successful public sector IT programs that benefit the government and their constituents as well as the service provider. As we explained in an earlier report, outsourcing can help state and local governments reduce costs, improve services, and free up funds otherwise locked in IT assets. Successful programs are reported on as frequently as are safe on-time flight arrivals.

As the following examples show, public sector IT projects face unique challenges. If unmitigated, these projects can prove disastrous to the government and taxpayers.  

Pennsylvania Unemployment Claims Processing Program

On July 31, 2013 Pennsylvania decided not to renew its contract with IBM to modernize the state's unemployment compensation computer system, a project 42 months behind schedule and 56% over budget. A report by Carnegie Mellon's Software Engineering Institute concluded that even after spending nearly $170 million there "is no high confidence estimate for when the [system] will demonstrate the level of performance necessary." For the immediate term Pennsylvania will revert back to an extremely inefficient, yet functional, 40-year old unemployment compensation processing system.

Queensland Health Payroll Project

The State of Queensland, Australia released a scathing report in July 2013 detailing a multitude of failures that afflicted IBM's program to replace Queensland Health's payroll system. This project has even been called "one of the worst IT projects ever." When the under-tested system was put in place in 2010, 80,000 staff went unpaid, or received the wrong amount. In response, Queensland's Premier Campbell Newman issued a broad ban preventing IBM from entering into any new contracts with the State "until it improves its governance and contracting practices," and declared that IBM "took the State of Queensland for a ride." The ride, quoted at A$6.19 million, will reportedly cost the State A$1.2 billion, almost 200 times the original budget.

Massachusetts Unemployment and Revenue Programs

Last fall the Commonwealth of Massachusetts held a hearing to examine Deloitte's handling of projects for the Department of Unemployment Assistance and the Department of Revenue. The unemployment benefits system was delivered two years late and, at a total cost of $52 million, ran 13% over budget. The resulting software was reportedly unusable. Earlier in 2013, Massachusetts cancelled a separate Department of Revenue project with Deloitte, a project on which the Commonwealth had already spent $114 million, because a test run of the software revealed no fewer than 1,000 glitches. These examples from Massachusetts represent just a few of numerous disputes Deloitte is facing with public sector customers.

How can public agencies avoid these failures?  Here are some features of successful projects that all agencies should keep in mind:

  • Devote sufficient resources and care to the procurement process. Successful projects focus intently on identifying and clarifying the functional, technical and business requirements for the solution, and building the procurement process around those requirements. The Queensland report found that the original system scope "was seriously deficient and remained highly unstable for the duration of the Project." Similarly, Carnegie Mellon's Pennsylvania report pointed out major weakness in the procurement process, including "unprioritized and often ambiguous requirements." Lacking sufficient experience, many government agencies fail to fully comprehend what "it's really going to take to get a project done right" until halfway through contract completion. Devoting sufficient resources and attention to scope and requirements definition, and leveraging the experience of outside advisors early in the process can prevent costly disasters down the road.
  • Leverage best practices of the commercial sector. State and local governments are subject to unique requirements (e.g., strict competitive procurement procedures) and budget limitations, yet many of the lessons from the commercial world still apply. Examples from the private sector and outside advisors can help bring cutting edge best practices to public sector projects. The schedule and budget for the projects in Pennsylvania and Queensland were allowed to escalate without apparent governance controls. Consider employing a governance and incentive structure that will monitor and respond to delays and cost overruns sooner than later.
  • Prepare for significant internal and external changes. Unforeseen changes can quickly derail a project. Specific events, such as an economic crisis and resulting increase in unemployment claims, may be unforeseeable. But, by ensuring that the contract accounts for change these events will not ruin the intent of the parties. The agreement should include a method to incorporate change into the contract that requires the service provider to meet their obligations through the change and have a mechanism that allows for redirection and/or expansion of the scope as necessary.
  • Negotiate contractual provisions that allow for termination if necessary. Ensure that the contract can be terminated for cause in response to a range of performance failures. Termination rights provide a means of exit. Perhaps just as importantly, the threat of termination gives a customer additional contract renegotiation and/or enforcement leverage. For more information on how a state or local government can protect against poor performance through explicit performance based termination rights, a meaningful service level credit mechanism, and a right of election, see our earlier article on Indiana vs. IBM.
  • Seek protection from high turnover within the service provider's workforce. The Carnegie Mellon report on Pennsylvania's failed project concluded that high turnover in IBM's workforce created instability and knowledge gaps at critical stages in the process. Consider negotiating provisions that prevent the unauthorized removal from the project of certain key personnel, and including a requirement that a certain percentage of overall personnel within a given timeframe must remain on the account.
  • Devote sufficient internal resources to governance, management, and performance of retained functions. According to the Carnegie Mellon report, insufficient management by the state meant that no one "was accountable and responsible for the administration of the program." It is critical to remember that not all costs and responsibilities can or should be delegated to the service provider. The program will only be successful if the customer devotes sufficient resources to governing the project, and performing any retained functions on which service provider's performance depends. The customer should be prepared to have (and budget for) a retained organization to oversee the relationship. Towards this end, the customer and the service provider should each assign an executive-level primary representative to manage the relationship, efficiently address disputes, and generally serve as the principal point of contact for all matters pertaining to the Agreement.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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