EDS finds challenge in Connecticut

Outsourcing giant EDS is now tackling complaints from an angry union, a long bureaucratic review, and increasingly intense public scrutiny after winning rights to negotiate the $1 billion government contract to upgrade and service nearly all of the state of Connecticut's computer systems.

After all, EDS, the No. 2 computer service firm in the United States, is breaking new ground. While outsourcing is becoming commonplace in corporations, state government outsourcing deals are in their infancy. That's why state officials across the country, eager to streamline their own IT departments, are closely watching for the outcome of the pending Connecticut contract before taking any similar steps.

Analysts say EDS's efforts will be well worth the pain.

"True, there's long sales cycles and approval cycles [in government outsourcing], which are obviously not to EDS's benefit, but when they get it all sorted out, they've won," said Allie Young, analyst at market research firm Dataquest. "I think they're going through with this with very wide, open eyes."

"They're creating a model," added Ellen Zidar, government outsourcing analyst at Dataquest. "This is something they have to learn how to do."

Zidar said that the EDS-Connecticut contract is the broadest a state has ever proposed. If EDS emerges a winner, the firm will have formulated some guidelines and a model for its competitors to follow, she said.

As reported, IBM Global Services and Computer Sciences, who both lost bidding rights to the seven-year Connecticut contract, are up for a rematch against EDS for a $700 million to $1 billion government outsourcing contract bid with San Diego County.

Another major outsourcing player Unisys ruled out a bid for San Diego, though the company did recently win a contract with Pennsylvania to update and manage the state's data centers.

Cathy Sang, an EDS spokeswoman for the San Diego contract, said proposals have been submitted to San Diego and the company that will negotiate with the county should be announced by September.

According to industry analysts, government outsourcing contracts take much longer to negotiate than corporate deals because of a complex political process that involves legislative approval, an auditor's review, union negotiations, and tax payer criticism.

Indeed, state union workers have filed a complain alleging that the contract would violate state law, as the administration has threatened to lay off workers who won't accept private sector jobs with EDS.

In its defense, EDS has said that a painless employee transition process is a high priority, noting that the company has offered Connecticut IT workers an employment package that includes salary increases, signing bonuses, and guaranteed minimum 2-year employment with EDS. Still, some state workers are reluctant to place their trust in the Plano, Texas-based company's hands.

"Our members are concerned about what's going to happen to them," said Rick Melita, political director for the Connecticut State Employees Association (CSEA). "They have seen what has occurred in the past [with other outsourcing contracts]. They have no reason to believe that EDS is more competent than other past vendors, and they see EDS as a company in trouble.

In April, EDS said profit for the first quarter dipped 14 percent to $181.8 million, or 36 cents a share, down from $211.3 million, or 43 cents, a year earlier. Incoming EDS chief executive Dick Brown said the firm is slashing 5,200 jobs, reducing $1 billion in costs.

Melita said the union believes that outsourcing will create more problems while "throwing" away more money.

"The state wants to pay somebody to do all the headache for them, but they [EDS] end up owning the technology after they build the system and when things go sour, you'll end up paying more to fix a problem after EDS has spent years to reengineer the system," Melita added. "Yes, we need the upgrade, but there's no reason to pay somebody premium prices to do work you can do in house."

While change can be difficult to accept, outsourcing benefits customers in the long run, said Steve Person, an EDS spokesman for the Connecticut deal.

Person said that 45 percent of EDS's 120,000 employees have joined the company as a result of similar outsourcing deals and retention rates are high.

Merrill Lynch analyst Steve McClellan said that government outsourcing is the wave of the future--and the state will need to figure out how to get the union to agree to the contract.

"I don't think the state can keep their ostrich heads in the sand on this one," he said. "The state can't avoid it."

Nuala Forde, spokeswoman for the state of Connecticut's Department of Information Technology, which is negotiating the EDS deal, said it's high time to privatize.

"Right now, the state is making do with antiquated, fragmented systems that don't connect with one another and don't communicate," she said. "The bottom line is that there's tremendous potential for the state government to use IT to improve the way it operates. The technology is available. It's being used in the private sector, and now it's time to use it for the state government."

Currently, EDS and the Connecticut administration are involved in negotiating a final contract. Once finalized, the contract will be submitted to state auditors for review within 75 days. The contract will then be passed on to the Legislature, which has 45 days to consider whether the deal is in the overall interest of the state and its tax payers.

Person said that while a lengthier, political process is involved when dealing with government contracts, it's worth taking the time to do the project right. "There are other states watching," Person said. "Connecticut is determined to do it right, and so are we."