San Diego tries to learn from contract mistakes

In January, San Diego awarded a seven-year outsourcing contractworth approximately US$650 million to Northrop Grumman InformationTechnology 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. — washeralded as a test of whether wholesale outsourcing would work forlocal government but is mostly remembered for the controversy itgenerated over costs, service levels and a problematic ERP rollout.At the height of the troubles, the county threatened to hold CSC inbreach of contract.

This time, it’s going to be different. Or will it?

David Perara, an independent analyst who previously led MetaGroup’s price benchmarking group, says commercial companies alsostruggle with large outsourcing deals, and the second experience isusually better than the first. A problem with the first San Diegodeal was a lack of sufficient detail in the contract regardingprices, responsibilities and service levels.

The county appears to have corrected that problem, according tooutsourcing experts who reviewed the Northrop Grumman contract.”They clearly learned the importance of defining the serviceresponsibilities between themselves and the service provider,” saysPerara.

For instance, the county has created 59 line items to delineateresponsibilities for running the help desk. Among thoseresponsibilities, Northrop Grumman must produce and submit helpdesk solutions and service-level requirements, and the county hasresponsibility for reviewing and approving them.

Consistent with commercial best practices, the contract alsobreaks out pricing for services into components. Desktopmaintenance costs, for example, are broken out into hardware,software and printer maintenance, among other line items. The firstcontract included only a lump sum annual service charge, Perarasays.

But while it’s generally better to provide more detail thanless, the county may have overcorrected in some spots, particularlyin the voluminous details concerning service-level definitions. A152-page document defines the operational services and 76 minimumacceptable service levels, each with its own penalty (transactionresponse time has nine service levels associated with it, anddesktop repair has 15).

“You should only define the service levels that are trulyimportant and provide sufficient incentive for the vendor not tomiss them,” says Adam Strichman, vice president of outsourcingadvisory firm Nautilus Advisors. With so many service levels in thenew contract, he says, the contractor would have to miss manyservice levels at the same time before a major financial deterrentwould become evident.

Another red flag: The contract with Northrop Grumman stipulatesflat unit pricing for the duration of the relationship. Fixedprices make the customer happy early on, says Strichman, whenthey’re paying less than market rates. But as the deal isrenegotiated over time, service delivery can suffer. Mostcommercial customers avoid lengthy fixed-price deals, says Perara.But many government entities, which value predictable costs more,still gravitate toward them.

For a Canadian perspective on this deal

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