Early Government Outsourcing Woes Not Dissuading Public Agencies

Florida officials knew it would be a huge undertaking to outsource personnel services for 219,000 state workers and retirees. But they had no idea just how difficult it would be.

    Announced in 2002, the PeopleFirst initiative was part of Gov. Jeb Bush’s drive to privatize aspects of state government. The idea: Take a hodgepodge of HR practices and systems inside 32 state agencies, streamline them, then move everything to an outsourcing firm to centralize and run on state-of-the-art technology.

    The transformation was expected to save tens of millions of dollars, including $80 million in capital costs the state would avoid because it wouldn’t have to upgrade antiquated HR computer systems. The state hired Convergys, a Cincinnati-based customer services, billing and HR outsourcer, to do the job. The project morphed into a nine-year, $350 million contract—the first of its kind for a public agency and one of the biggest HR business process outsourcing deals of its day.

    But trouble started almost immediately. State officials underestimated how long it would take to pick best practices for the various processes that were to be ported to Convergys, which delayed startup dates. Once in place, Convergys’ systems were buggy, resulting in longer call-waiting times, forgotten payroll deductions and employees erroneously being dropped from their health insurance plans. To add to the problem, every setback was debated by state legislators and chronicled by local media.

    Adding to delays, the state’s Department of Management Services, which administered the contract, changed top managers five times in three years, says Chris Emerick, operations vice president for Convergys’ HR division.

    The entire PeopleFirst system has now been operating for more than a year, and performance indicators like call times and hiring cycles have improved substantially, according to Emerick and state officials. They claim to be satisfied with the project’s progress, though some of Gov. Bush’s Democratic opponents are still dissatisfied, according to local news reports.

    The problems Florida encountered aren’t so different from the tribulations faced by other HR outsourcing pioneers, who sailed uncharted waters with vendors who were just as green as they were, according to industry analysts familiar with the state’s situation.

    Florida’s trials apparently haven’t scared away other government agencies from signing similar agreements. In fact, when Texas officials decided to outsource personnel services for 46,000 Health and Human Services Commission employees last year, they tapped Convergys for the work.

    Like their corporate counterparts, government agencies view outsourcing as a way to provide services more efficiently and economically, says Mark Stelzner, an executive vice president with EquaTerra Public Sector, which advises government agencies on outsourcing deals. Outsourcing also allows public agencies to add features like self-service Web portals for managers and employees without having to assume the financial risk of buying new technology, says Stelzner, who previously worked for Convergys on the Florida contract.

    Though state governments were some of the first to embrace HR outsourcing, local and federal entities are following suit, both in the U.S. and elsewhere. Public agencies that already outsource HR or have plans in the works include NASA, the Federal Office of Personnel Management, the Transportation Security Administration, the Detroit public school system and the Victoria state government in Australia.

    But some public entities have balked at giving government work to corporate partners. That was the case in Ohio, where officials studied the issue but opted not to pursue it after the Ohio Civil Service Employees Association protested, claiming a pro-outsourcing report written by an outside consultant was based on flawed data. The state was already in the middle of a major ERP upgrade, which will address some of the issues HR outsourcing would have, says Peter Wray, the union’s communications director. “It would have been a big step backwards,” he says.

    In May, the city of Copenhagen, Denmark, pulled the plug two years into a seven-year HR BPO contract with Accenture, claiming the company failed to administer payrolls for 55,000 city workers, according to a June news report in CFO Europe. Accenture blames the city’s former contractor for giving it bad data at the beginning of the contract, and the city for setting an unrealistic implementation deadline, according to the report.

    But for every public agency not interested in outsourcing, another one is. Emerick says Convergys is pursuing other public-sector deals, but he won’t elaborate. However, he predicts that two or three states will issue RFPs for outsourcing contracts in 2006.

    Interest “slowed down a bit around election time last year—some states put the brakes on,” he says. “Now we’re starting to see activity crank up again.”

Workforce Management, November 7, 2005, pp. 36-39 — Subscribe Now!