Systems Integration/Outsourcing

April 1996


Systems Integration/Outsourcing

Outside professionals help agencies cope with downsizing.

The year got off to a bad start for federal systems integrators and outsourcers. Government shutdowns forced many agencies to scale back, delay and even cancel planned information technology initiatives. And dozens of existing projects are being funded at 1995 levels.

The shutdowns cost companies thousands of dollars a day in lost revenues and forced many firms to furlough employees. Computer Sciences Corp., DynCorp, Hughes and Science Applications International Corp. each had to put more than 400 workers on leave.

With the budget future uncertain at many agencies, continued consolidation is expected in the industry. The last year has seen a record number of mergers and acquisitions. The largest deal was Lockheed Martin's $10 billion purchase of Loral's defense electronics and systems integration businesses. Northrop Grumman bought Westinghouse's defense electronics unit for $3 billion while Litton Industries picked up PRC for $425 million.

In an effort to provide more systems integration services to its customers, MCI acquired SHL Systemhouse for $1 billion. And General Motors may soon spin off its Electronic Data Systems unit.

Systems Integrators. But all is not bleak for service providers. The government will continue to need outside professionals to help it design, build and implement complex computer and communications systems. Technology is changing too rapidly for short-staffed agencies to keep up to date on the latest products and methodologies.

That's where systems integrators come in. These companies analyze agency problems and come up with cost-effective solutions. They pull together appropriate hardware, software and telecommunications equipment-sometimes hundreds of different products from dozens of vendors. Once the systems are installed and tested, companies follow up with training sessions and support.

Systems integrators enable agencies to concentrate scarce in-house resources on mission-critical applications. The expertise they bring to projects generally ensures that systems will be delivered on time and within budget. But, as the IRS recently discovered, projects still can run into problems if they are not properly managed.

The National Research Council recently issued a report asserting that the IRS lacked technical expertise in managing its 10-year, $8 billion Tax Systems Modernization (TSM) program, which involves more than a dozen systems integrators. In addition, the General Accounting Office accused the IRS of installing one of the TSM components-Northrop Grumman's Service Center Recognition/Image Processing System-without ensuring it met service requirements.

The IRS says it now has corrected glitches that caused extensive downtime and slow processing rates, but certainly not without learning an expensive lesson about monitoring contractors. Before embarking on systems integration deals, agencies must clearly outline expectations and responsibilities. Performance measurements must be established and problems anticipated. In addition, contracts should be structured to provide maximum flexibility in case missions change or technology shifts.

Agencies are expected to spend about $3 billion this year on systems integration projects, according to Input Inc., a market-research firm in Vienna, Va. The trend will be toward smaller, shorter-term contracts that are easier to manage. Helping to drive the market will be law enforcement programs, such as the FBI's Integrated Automated Fingerprint Identification System, that may be funded by sources other than federal appropriations.

Other popular categories will be health care, such as the Defense Medical Information Systems/Systems Integration, Design, Development, Operation and Maintenance Services contract, and any systems dealing with client-servers, imaging or electronic commerce.

Outsourcing. The Defense Department could save about $1 billion over the next 10 years by farming out all its data processing, according to a recent Coopers & Lybrand study commissioned by the Pentagon. The analysis prompted Paul Kaminski, undersecretary of Defense for acquisition and technology, to request a report on how DoD can accelerate its shift to outsourcing. The report is due next month.

After many years in disgrace, outsourcing is back in fashion. Past scandals have been overshadowed by the Clinton Administration's privatization initiatives and dozens of outsourcing pilot projects. The federal outsourcing market is expected to grow at a compound annual rate of 5 percent over the next five years, from $1.6 billion this year to $2 billion in 2001, according to Input.

Outsourcing is simply the only way to go for many cash-strapped, technology-poor organizations. By contracting out work that they otherwise would do themselves, agencies can save time and money while gaining flexibility to deal with future growth or decline.

In the past, information technology outsourcing was generally confined to mainframe maintenance at data centers or administrative functions such as payroll. But now agencies are farming out everything from software development and client-server migration to the operation of training programs and computer help desks.

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