Explore Opportunities for Consolidating and Contracting for Information Systems Functions

Consolidating and contracting for information systems functions should be considered by the state.


Background
The State of Texas, through its respective state agencies, conducts a range of information systems functions including the management and planning of information systems, network services, software development, maintenance management, technical services, e nd-user support and data center operations. The Legislature, in the Information Resources Manageme nt Act establishing the Department of Information Resources (DIR), has acknowledged that the information and the information resources residing in the various agencies of state government are strategic assets belonging to the people of Texas that must be m anaged as valuable state resources. 1~ The Legislature established DIR to coordinate these resources to ensure their maximum cost-effectiveness and use. DIR is charged by state law to provide information resources training and technical or managerial assist ance to state agencies. DIR is also charged with providing for all interagency use of information resources technologies by state agencies except for telecommunications services. A computer service facility and certain computer services are also provided t o agencies that choose to subscribe. In another recommendation in this report, a major planning function of DIR would be transferred to the General Services Commission to enable the state to unify the functions of state information resources procurement wi th other state procurement activities.

DIR is a service provider to state agencies in much the same way that private contractors are. DIR generally provides those non-mission critical functions that can be performed by qualified outsourcing vendors with little risk to the core business of the agency, while the agency retains the mission critical functions in-house. Agencies enter into interagency contracts to receive such services as training, technology evaluation, management of data processing faciliti es, remote device installation and services, computer operations and other services. In this role of service provider, DIR is a competitor with the private sector because state agencies may choose when to use these services. This competitive environment is favorable in that DIR has an interest in providing cost effective services that meet customer needs. DIR may experience conflicts, however, in consulting with state agencies about information services options because of the competitive environment. More over, DIR does not have the statutory authority to mandate the consolidation of services when this would be in the state s best interests.

Texas does not yet have a system for evaluating the use and performance of information resources as a whole within state government and may therefore be losing opportunities for cost savings, increased productivity or improved customer service. Studies hav e not yet been done, for example, to determine if the state is operating numerous separate data centers at less than full capacity, at a higher cost than would be necessary if such centers were consolidated. The state has at least 15 data centers with budgets greater than $5 million per year at agencies such as the Texas Department of Health, the Office of the Attorney General, the Central Education Agency, the Workers Compensation Commission, the Texas Water Commission and others.

At one time, it was virtually essential for certain information services to be decentralized to be sure the customers could control and ac cess the information in the format and time frame needed. Technology has now made it possible, however, for users to access the same information with the flexibility they need, even though the information may be consolidated elsewhere in a centralized data base. Only the information and data are centralized; the user retains control over the applications and development of the in-house programs. The users do most of the processing on personal computers (PCs) and transmit the information to a centralized main frame where it is consolidated with information from other units and made available to other users. This technological infrastructure provides the best of both worlds the cost savings and productivity gains that come from centralization and the flexibility and responsiveness of decentralization.

The benefits that can be received from consolidation of state computer centers can be likened to the benefits of consolidating any like state functions. Whenever the state operates two like operations, it pays two sets of staff, occupies space in two areas and has two sets of equipment. Generally, by buying more powerful equipment, opportunities exist in the computer arena to offer the same level of service at less cost.

Data center consolidation is a trend that is likely to continue through the 1990s. Over a year ago, a Gartner Group, Inc. study showed that more than 30 percent of Fortune 500 companies were consolidating data centers and within another year, 60 percent wi ll have become involved in such activity. 2~ The reason for this is that large data centers offer economies of scale that cannot be matched even by efficiently run smaller centers. In early 1992, a Gartner Group survey of 80 Fortune 200 companies indicated that consolidation efforts would result in a reduction from 208 data centers within these organizations to 130 by the end of 1995, a reduction of 38 percent. 3~ The savings come from reducing the cost of licensing software at multiple sites, reducing the maintenance and operations personnel associated with the larger numbers of centers, reducing facilities costs including real estate and leasing expenditures and hardware. According to Real Decisions, a research and consulting firm in Darien, Connecticut, doubling the size of a data center, typical o f merging several smaller sites into one, yields only about a 5 percent savings on hardware costs. Reductions in personnel can save as much as 25 to 30 percent. Kodak indicated that $300 million of the savings from the total outsourcing deal will come from consolidation of five data centers into one. 4~ Merrill Lynch cut costs by $30 million when it consolidated seven data centers into two. 5~ It took the approach of centralizing data center functions while leaving the responsibility for application development and support with the organizational business units. The states of Florida and South Carolina have also taken significant steps to study data center consolidation opportunities.

Data center consolidation is just one opportunity where the state could rea lize savings from examining its information resources as a whole. The state also needs to examine the extent to which private companies could manage existing state facilities and whether savings could be achieved from contracting out, or outsourcing, any p ortion of the state s activities. While single agencies may consider outsourcing certain portions of their information services (IS) activities, it is rare that agencies will come together and seek outsourcing opportunities for their combined IS activities . Since outsourcing services and activities could bring savings, this could be another missed opportunity for the state. Eastman Kodak has recently outsourced its entire IS operation to IBM. The federal Department of Defense is soon expected to approve a p olicy recommendation which will result in the transfer of all military branches information systems infrastructure to a central authority, the Defense Information Systems Agency (DISA). 6~ Under this agency, 288 facilities are now being consolidated into 4 3, with the long term goal of consolidating installations at roughly 1,700 sites into about 20 megacenters. These efforts would result in IS staff reductions of about 30,000, save as much as $13.7 billion and keep the annual information resources budget es sentially flat through the end of the decade, including costs for the consolidation.

Savings are not the only reason to consider outsourcing or consolidation of multiple state IS functions. A shortage of qualified technical talent in the United States is predicted for the coming decades. The public sector is more likely to suffer from this shortage than the private sector. 7~ The U.S. Bureau of Labor Statistics reports that private sector salaries are 15 to 28 percent higher for computer programmers and systems analysts than public sector salaries for comparable positions. The need to attract and retain professional IS staff i s encouraging centralization, as a consolidated center is more likely to attract high quality personnel. Such a center would offer a more attractive career path and opportunities for advancement.


Recommendation
State law should require the General Services Commission, through the Texas Performance Review s proposed new Council on Competitive Government, to initiate a competitive cost review of state information services to identify cost-saving opportunities for c onsolidating data centers or other services, outsourcing services or contracting for the management of computer facilities.

Another recommendation in this report establishes a Council on Competitive Government, comprised of the Speaker of the House of Representatives, the Lieutenant Governor, the Comptroller, the Governor and the Chair of the General Services Commission. This council would have the authority to conduct any stud ies necessary to allow the council to obtain any necessary data to make business decisions in the best interests of the state with regard to the consolidation, outsourcing or private management of state information services. Private vendors or state agenci es could request particular information service studies to take place. State law would authorize the council to obtain any baseline data from DIR or affected agencies. State agencies would be required to cooperate with the council in any study undertaken. The council would be authorized to study or contract for the study of any state information service and its current costs. The council would be authorized to define the scope of the study in any manner it deems appropriate. For example, it could, after rec eiving input from affected agencies and vendors, determine that only a select number of agencies should be involved in the study and only specific information services would be studied. One approach the council might use would be to go after low hanging fruit. In other words, the council might identify agencies that all use IBM-MVS-CICS applications. Since all of these applications could be operated out of one machine with no visible change to the end user, the council could study these operations and bri ng about a consolidation if indicated. If the council determines that affected agencies need to use standard performance measures, standard cost factors or other reporting methodologies to enable a valid study to take place, the council would be authorized to mandate such reporting.

After the study is completed, the council would be authorized to solicit bids for the provision of the activities. The council would have the authority to solicit bids for the consolidated provision of services of more than on e agency. The council would also be authorized to determine if a state agency, including DIR, should be allowed to bid to provide the service. Finally, the council would be authorized to mandate, after completion of a study, that the studied services be co ntracted, consolidated or otherwise modified so that the state could achieve cost savings and improved productivity and service.


Implications
Under this recommendation, the state would have, for the first time, a mechanism to consolidate state informatio n services or contract for the provision of a grouping of state agency information services when research indicates that such action would be in the best interests of the state. This recommendation does not take any existing authority away from DIR. Rather , DIR may have additional opportunities to bid against private vendors to provide services to state agencies. Private vendors would view this change as offering increased opportunities for their businesses. Some state agencies would view this change as a t hreat to their ability to control their operations and would oppose any change to the status quo. Giving the council the level of power it needs to make tough decisions in the best interests of the state will help to ensure that consolidation or contractin g occurs when this would be best for the state.


Fiscal Impact
Existing GSC staff would support the council and therefore, no additional staff costs are anticipated from this recommendation. However, if the council determines that it would be necessary to contract for a study of certain state information services, consulting fees could range from $75,000 to $100,000. The State of Texas spent close to $700 million on information technology and services in fiscal 1992. A one percent reduction in costs could yield about a $6.9 million fiscal benefit to the state after taking into consideration the costs of a study.



Endnotes
1 Article 4413(32j) sec. 1. (1) V.A.C.S.
2 Gartner Group, Inc., Data Center Consolidation, What are You Waiting For?, File: Key Issues, K-925-812, May 24, 1992.
3 Gartner Group, Inc., The Changing Landscape in Large Systems, File: Markets, M-550-1225, February 24, 1992.
4 Gartner Group, Inc., Data Center Consolidation.
5 Colon, Merrill Lynch Consolidates Seven Mainframe Data Centers into Two, MIS Week, June 11, 1990, p. 2.
6 A Central Command for IT?, Information Week, August 10, 1992, p. 51.
7 Integration Strategies Group, Organizing for Effective Management, IDC Washington Report #1084, November 27, 1989, p. 8.