Learning from IT contracting mistakes in the public sector

Government outsourcing became popular in the 1980s as a means of improving service delivery and cost-efficiency. Outsourcing promised the following benefits through the provision of services:

  • Increased productivity
  • Cost savings through competition amongst contractors
  • Strengthening the public budget by protecting against wasteful practices
  • Creating a smaller, more efficient government
  • Better performance measurement and management
  • Better insulation from political pressures

However, outsourcing has not been the solution to all of government’s problems. In fact, it has become a source of substantial waste and fraud.

For many governmental agencies, outsourcing has been a longstanding headache for numerous reasons. The most prevalent is the non-performance or poor performance of contractors’ duties that can result in unfinished projects or budgets and timelines stretched beyond allocated funds. Perhaps the most recent and well-known outsourcing failure has been the work on The site was contracted to over 50 contractors and subcontractors who were responsible for building segments of the website that would eventually need to be integrated for full operation. Work was not completed and could not be integrated, which resulted in the resounding failure of on its release date. Although a large failure, this type of outsourcing relationship between the government and contractors is not unique, and definitely not new.

One area where outsourcing is particularly troubling is in information technology (IT). As many governmental agencies are seeking to modernize their systems and streamline their services, they are overwhelmingly entering into contracts with vendors who underperform and, ultimately, do not deliver. The State of Virginia entered into a 10-year, $2.3 billion contract with Northrop Grumman to assume full responsibility for the operation and maintenance of Virginia’s IT in addition to modernization efforts for a number of state services. The contract was seen as a groundbreaking method of managing state IT infrastructure. However, the project was inundated with cost overruns, technical problems, and missed deadlines. The technical problems impacted several of the state’s agencies with numerous outages at the same time.

Failed or problematic outsourcing can be a product of development and management failures. The development of an outsourcing plan requires forethought on the type and scope of the contract. First, agencies should consider if the service they are attempting to outsource is appropriate to outsource. Appropriateness can range from the type of service, the level of outsourcing (i.e., complete privatization, privatization of operations, open competition, contracting), whom to contract with (i.e., for-profit, nonprofit, intergovernmental), the cost of service, performance goals, performance measures, and contract rules. Since each government entity has its own rules and regulations, a lack of uniformity makes it difficult to use other agencies’ templates for outsourcing. Without careful upfront outsourcing considerations, the outsourcing relationship begins at a disadvantage.

Much of this can be solved with a thorough analysis of the cost and benefits. A common mistake that agencies make is focusing on cost reduction and not on associated or fixed costs. The fixed nature of contracts can mean that contracts established today could impact projects initiated tomorrow, which may include new potential costs. Further, a cost-benefit analysis considers various factors such as complexity, vendor reputation, and pool of competition, which can all help make clear if outsourcing is most appropriate.

Once contracts are executed and the work begins, agencies begin to fail miserably due to the management of the contract. For outsourcing to work there needs to be a ‘cop on beat’ that can monitor the performance of the work and bills being paid. Without this, contractors are left to their own devices. Improper oversight of work being performed is a key factor of failure.

Government outsourcing has been nightmarish for several governmental agencies. Lessons learned and new practices should be adopted for governmental agencies to prevent the types of missteps discussed here. Undoubtedly, all agencies must establish dedicated positions for employees to oversee and scrutinize contract operations to ensure performance goals are being met. Without them, the perceived benefits of outsourcing will be lost, and waste will continue.