Privatization.org Policy Issue - Local Services

1. Trends

Between 1987 and 1995, the percentage of cities contracting out for data processing services increased by about 15 percent, bringing the total percentage of cities outsourcing this service to 32 percent.

A 1992 survey by Apogee Research revealed a 20 percent increase in privatization in this area in just three years.

Although outsourcing, or "contracting out," an organization’s entire computer operations hasn’t progressed as far in the public sector as the private sector, there has been a considerable increase in information services privatization activity in state and local governments. Services such as payroll and financial management, ticket and court records processing, traffic controls and municipal records management are contracted out. Companies such as EDS, Martin Marrietta, and CMSI have begun the transition from corporate accounts into managing municipal systems. Banks and other institutions quickly are becoming important service providers by reducing the need for municipal processing of such records as payroll and municipal checks.

Local governments, such as the counties of Orange and Los Angeles, and the cities of Long Beach and Orange, have contracted with private firms for maintaining and upgrading internal systems. Advantages to this type of service include reduced cost of equipment purchase and maintenance (because the systems are leased from the private company), and the enhancement of software and hardware.

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2. Cost Savings Potential

Cost savings from outsourcing information technology systems typically range from 10 to 20 percent.

The Illinois Department of Central Management Services began contracting with IBM in 1987 to handle computer maintenance for all state agencies. By reducing paperwork and administration costs and persuading IBM to give a 10 percent annual discount off maintenance fees, the state has saved over $12 million since 1987.

Other benefits include:

Access to the latest technology without major capital expenses;
More time dedicated to core business functions;
More highly trained expertise (because career paths in government generally are very limited for technology specialists);
More flexibility; and
Increased user satisfaction (from other departments of government).

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3. Best Practices/Case Studies

Most examples of contracting out information services generally fall into one of three categories: bill collection and processing, re-engineering and applications development, and general data processing needs.

Case Study: Michigan Court System — Competitive Contracting/Outsourcing

The Michigan Court system has taken advantage of more sophisticated technology in the private sector to cut costs and improve service. A private firm call Quad Tran has created an integrated case management system of more than 700 terminals throughout the state. The system handles more than 300,000 case abstracts, 85,000 driver’s license suspensions, and 55 percent of all Michigan District Court cases.

Quad Tran’s results have been impressive. By contracting with Quad Tran, the courts saved 25 percent in clerical costs, and uncollected revenues increased by 25-100 percent. Service quality also has improved. The accuracy of Quad Tran transactions is 99.4 percent, much higher than state levels. Moreover, processing a driver’s license suspension takes only 60 seconds compared to four to six weeks for the state system.

Case Study: Indianapolis, Indiana — Competitive Contracting/Outsourcing

In one of its more complex transactions, Indianapolis contracted out its city and county information systems in December 1995. After more than a year of study and deliberation, a review committee made up of city-county officials, agencies and Information Services Agency (ISA) staff voted to outsource information services to the private management firm of Systems and Computer Technology Corporation (SCT) for a seven-year period with options for three, one-year extensions. The city expects to save as much as $26 million over the seven-year contract period.

SCT provides services that include network management, LAN/Desktop/Server management, disaster recovery and security, help desk management, education and training, management of the ISA data center, and technological consulting for the city and county frameworks. A new position, city-county Chief Information Officer, was instituted to manage the contract and perform the duties of the former ISA director. A core ISA staff is maintained to perform strategic planning services.

Of the four companies in the final bidding process, SCT offered the best bid, committing to operate an on-site, seven-day-a-week, 24-hour-a-day help desk, hire all existing information services employees, and provide salaries equal or better than their current pay. City employees were offered the opportunity to compete in the bidding, but opted to become a part of the review process instead.

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4. How-to-Tips

Applicable Techniques
- Competitive Contracting/Outsourcing
- Internal Markets

Before outsourcing, you should:

Clearly define problems.
Develop a comprehensive strategic and technology vision.
Hire an able contract administrator with authority to manage the IT function.
Maintain a competent core in-house staff of IT professionals.
Carefully consider retaining ownership of IT hardware, and if you do, commit to periodic and necessary upgrades.
Maximize efficiency by including most (if not all) IT operations in the contract.
Develop a request for proposals that specifies needs and outcomes, rather than solutions.
Identify in the contract qualifications of outsourced employees in key positions.
Build into the contract incentives for the contractor to be cost-effective and efficient.
Allow flexibility in the contract for day-to-day, or even year-to-year, changes in the scope of work.
Develop your IT plan together with the contractor.
Work at building a win-win partnership with the contractor; expect the contractor to make money while fulfilling the contract to your satisfaction.
Empower the contractor to work freely within carefully developed parameters and guidelines.

[See: Outsourcing Your Information Technology: Making It Work]

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5. Contact Information

Practitioners	Robert W. Hawkinson Special Projects Coordinator City of Indianapolis, Enterprise Development Suite 2460 City-County Building 200 E. Washington Street Indianapolis, IN 46204-3332 (317) 327-7854
Experts	Bill Crowe Business Records Corporation 5901 Warner Avenue Huntington Beach, CA 92649 (714) 846-7030
Experts	Tom Olsen Pragmatik 7470 Noel Forest Court Indianapolis, IN 46278 (317) 297-1283

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