Privatizing technology a bad bet

Posted: Monday, July 03, 2000

As the Alaska Department of Administration continues to prepare a Request for Proposal to turn over Information Technology (IT) functions to privateers, perhaps it would be helpful to look at what happened when the same thing was tried in the state of Connecticut. There, in February of 1997, the state opened bidding on its computer systems.

Three large IT firms submitted bids, along with a bid by the state's employee union. That contract, expected to be worth more than $1 billion, would run from seven to 10 years, according to Republican Gov. John G. Rowland, who expected annual savings of $50 million. Connecticut State Employee's Association spokesman, Rick Melita, was quoted as saying, ``This is the first time a state has tried this and there's a reason why it won't work. The state is going to get hosed on this deal, and the governor won't be around to see it blow up.''

Both Michigan and Iowa have considered IT privatization, but found they were able to achieve economies of scale that vendors were unable to beat by working with employees to maximize what the state already had. And in the case of Iowa, the proposal had an unexpected effect on the state's IT work force - causing a good number of talented IT employees to seek jobs elsewhere - and putting the state in a technology manpower bind.

The Alaska RFP due to be released soon is ``bundled'' - putting all telecom and related functions into groups that must be bid as a whole - assuring that only a very few big campaign contributors will qualify for consideration. Initially the integrated ``Help Center,'' which has been touted as a model for customer service, was to be maintained with state employees. That soon changed on the advice of the Outside consultants.

When asked whether the state would guarantee that employees here were held harmless in the RFP for IT operations, DOA Commissioner Bob Poe replied during a briefing on the subject that he didn't want to preclude potential bidders from offering a better deal to current state employees. Response from employees was an open snicker. We asked the question because Poe had previously stated that it was his intent to not have current employees adversely impacted. If he is not consistent in this aspect of the partnering plan, how can he be expected to be consistent with other aspects of such a complicated deal?

By June of 1999, the Connecticut proposal started to unravel. Investigation by The Hartford Courant newspaper discovered that the cost would likely be more than $1.5 billion and still would probably not allow for sufficient modernization as technology continues to change. Additionally, the Department of Information Technology, a new agency set up to implement the move from public resource to privately-operated cash cow, could not get a handle on what the state was already spending for IT given all the piecemeal acquisitions within all of the departments.

Going into a contract before the state has a firm grasp on what it is already spending on information technology is ``the classic mistake,'' according to Richard Nahmias, reportedly a management consultant quoted in the Hartford newspaper as having 25 years experience advising companies on the costs and benefits of technology investments.

In Connecticut, the Texas-based firm, Electronic Data Systems, expected to conclude negotiations with the state to take over IT operations in June of 1999. It had promised to move some 500 unionized state workers off the state payroll and provide comparable salaries and benefits. These employees had key knowledge of the system and they would be hard to replace, so to persuade them to take the deal each was to get a raise, a signing bonus and two years guaranteed employment.

Critics argued that it would be dangerous to give a private company personal information about Connecticut's residents; a poll conducted the previous May had shown that 33 percent of residents strongly opposed the plan, 18 percent opposed it but not strongly; 13 percent strongly favored privatization and 20 percent favored it but not strongly. As the deal was reaching a deadline for being completed, and Gov. Rowland became ever more aware of how flexibility and control would be lost, the proposal crashed. Plans to privatize were canceled and state workers given the opportunity to participate in rebuilding a system in the public service.

``Governor Rowland admitted Tuesday that his ambitious plan to privatize the state's information-technology operation did not compute,'' wrote Courant Staff Writer Matthew Daly in a June 30, 1999 article. ``It's almost impossible to guarantee savings...five or six or seven years from now.'' Gov. Rowland was quoted as saying.

Gov. Knowles: Exactly how much does the state of Alaska now spend, and how much does it expect to save if IT functions are sold out?

Steve Seymour was a 13-year employee at the state Department of Administration's Central Duplication office that was shut down in March 1999. For violation of the Bargaining Agreement between ASEA/AFSCME Local 52 and the state, Mr. Seymour was paid time and benefits lost and placed in a position at DOA's Information Technology Division as part of the Arbitration Settlement award in that case.

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