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Outsourcing Government: Minneapolis's IT Experiment
Jill Gambon
City officials say its deal with Unisys to outsource key IT elements has led to budget savings and a better focus on constituent service.
When Karl Kaiser stepped in as CIO of the city of Minneapolis four years ago, he found a staff of "technicians focusing on technology for its own sake." What he didn't find was an IT organization that understood the needs of its "customers" - the employees and citizens who relied on the city's technology infrastructure for services and information.
"They talked feeds, speeds, bits and bytes to the customers," Kaiser says of the technology staff. "Customers don't care about that." Kaiser was determined to reorient the IT organization to instead understand how the city agencies functioned, how well citizens were served, and how technology could improve things.
His efforts came at a time when the city's budget was tightening and its technology needs were growing. Its aging PCs and servers needed upgrading and the lease on the building that housed its data center was approaching expiration, which meant big capital costs were looming. Minneapolis was also trying to move more of its services to the Internet, which would require round-the-clock support, and the city wasn't positioned to handle that.
Faced with what amounted to a perfect storm of political, financial, and technology challenges, Kaiser proposed outsourcing the city's technology infrastructure-its PCs, servers, networks, and system software. Selling off the assets and paying someone to manage them would let the city shift its limited IT resources into developing new applications that would boost productivity and improve city services.
After a lengthy evaluation and approval process, Minneapolis awarded a $56 million, 7-year outsourcing contract to Unisys Corp. in December 2002. The deal is expected to save the city an estimated $20 million over the life of the contract. Under the agreement, Unisys has taken ownership of all the city's technology assets, including its PCs, laptops, handheld devices, servers, network infrastructure, and system software, and handles all upgrading. Unisys provides help-desk support for the city's 4,000 employees, network and database monitoring and management, and disaster recovery services, which the city was lacking. The city has retained responsibility for application development, strategic technology planning, and business and application support.
"If I owned the technology assets, I'd still be in the business of managing the technology. If I sell it all off, I can divert all my energies into becoming a consultancy organization that spends time on business analysis and business-process reengineering," Kaiser says.
Getting To Yes
The decision to outsource was not a sure thing. Kaiser needed support from a majority of the 13-member city council to move ahead. That required a lot of one-on-one meetings with each councilor to make a business case for outsourcing. Kaiser expected the entire process, from evaluating the idea to awarding a contract, to last 12 months; it took 18.
Complicating the process was the fact that the city's IT workers were unionized and opposed the idea. "It was a huge battle in the beginning," Kaiser says. As a result, a top concern in developing the request for proposal (RFP) was making sure that city workers did not end up unemployed, says Minneapolis City Council president Paul Ostrow, an outsourcing supporter. Written into the RFP were the conditions that the outsourcing company had to offer jobs to any displaced city workers at equal or better benefits and pay, a three-year job guarantee, as well as a signing bonus. City police also added another unique requirement to the RFP: The outsourcer had to have a data center in Minnesota because of concerns about sending sensitive information out-of-state. Despite the union opposition, the council eventually backed issuance of the RFP by a vote of 12-1.
Unisys hired 14 members of the city's IT staff. Currently, many of them are working on projects for other Unisys clients, says Everett Dyer, vice president of Infrastructure Managed Services and Customer Program Management for the company. About 14 Unisys employees work on-site at city facilities, with another 10 at the Unisys service center in Eagan, Minn., a Minneapolis suburb. Network monitoring operations are conducted at Unisys headquarters in Blue Bell, Pa., and help-desk services are run out of Salt Lake City. The city's IT staff has shrunk from 145 full-time and contract workers in 2002 to 81 employees today.
With the IT department out of what Kaiser refers to as the "break-fix" business, it has turned its attention to overhauling some of the city's business processes and developing the technology required to support them. For instance, a project involving the planning and zoning departments helped reduce the number of steps for getting a permit from 12 to 4, Kaiser says. Another project now under development is a CRM-based constituent relations program called 311 that aims to streamline contact between citizens and city agencies, whether it's a pothole compliant or a request for a block-party permit.
The IT staff is also trying to leverage technology investments across city departments. For example, if both the Fire Department and the city's Inspections Divisions conduct building inspections, the two departments may be able to use the same software applications. To bring such efficiencies to fruition, however, the IT staff has to understand and analyze each department's business processes, which requires retraining and coaching workers. "We do have a mismatch of skills right now," Kaiser acknowledges.
Government By Outsourcing
Dyer describes the Minneapolis deal as "more on the front edge of the trend" for public sector outsourcing. Most of the company's local government clients to date have outsourced IT services and retained ownership of the technology assets, he says. Another unusual feature of the Minneapolis contract covers technology upgrades, including new Dell PCs and new servers, which are covered by a monthly service fee. By moving the cost of technology equipment into the operating budget instead of a capital expense, the city has gained some budget stability, Dyer says. Typically, capital expenses are funded through borrowing and getting government approval for the money can be difficult and unpredictable.
The deal has had a positive impact on the city's IT budget, which has shrunk from $25 million in operating expenses and more than $10 million in capital costs in 2000 to $18 million in operating expenses and more than $3 million in capital spending this year, according to Kaiser. Four years ago, technology spending made up about 2.1 percent of the city's total budget; today, it represents 1.8 percent of the budget. The decline is a result of both the outsourcing arrangement and cuts in IT spending resulting from the city's budget problems.
Local governments are increasingly looking at outsourcing as a way to help manage costs, says Jim Krouse, manager of state and local market analysis for Input, a research firm in Reston, Va. that tracks government IT spending. With the increasing demand, Krouse estimates the local government outsourcing market will grow from $10 billion in fiscal year 2003 to $23 billion by 2008. In addition to the need for better cost-management, a shortage of skilled technology employees among city and state governments will also drive the demand for outsourcing services, Krouse predicts.
Unisys, whose local government clients also include Chicago and Charlotte, N.C., expects more states and cities will pursue outsourcing given the financial binds they are facing. Dyer maintains that federal tax cuts have caused less money to trickle down to local governments, which is putting the squeeze on their finances. "Cities are at the bottom of the food chain and they have nowhere to go. There is enormous interest in how to do more with less," he says. "IT is needed to deliver services at a cost that is affordable."
Many of those involved with Minneapolis' outsourcing project agree that things have gotten off to a strong start. Still, much remains to be done. "We still aren't rolling in money by any stretch, but this gives us more flexibility to move ahead," says Ostrow. "We would have been hamstrung, absent this outsourcing."
Lessons Learned
People involved in the Minneapolis-Unisys outsourcing deal offer the following advice to local governments considering IT outsourcing:
- Before making the decision to outsource, map out what is required of IT to support current and future needs of government operations and citizens.
- Clearly define what will be outsourced and how that fits the city or state's mission.
- Make the process an exercise in open communication to avoid rumors and possible morale problems.
- Carefully consider the potential impact on employees and address ways to mitigate any fallout.
- Create a model that identifies interdependencies and contact points between the outsourcer and the government. This will help define expectations and responsibilities.
- Consider hiring a consultant with expertise in public-sector outsourcing to review the RFP to make sure it adheres to industry best practices.
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