Florida IT Contract Draws Scrutiny

FL State Sen. J.D. Alexander is questioning the Florida Department of Management Services (DMS) for its decision to consider extending a contract with the current operator of its human resources functions:

The state’s decision to consider a no-bid contract extension for a controversial human-resources company has renewed criticism from a leading state senator who says privatization initiatives have cost taxpayers $200 million with little to show for the money. Senate budget chairman J.D. Alexander persuaded fellow lawmakers during the spring legislative session to increase scrutiny of large state contracts — only to see Gov. Charlie Crist veto the proposal last week.

When Alexander got word Tuesday that the state’s Department of Management Services might offer a five-year extension on a contract for state human resources services to Ohio-based Convergys, the Lake Wales Republican urged Crist to solicit bids for the contract. “There have been problems with this vendor before, so I’m not sure it’s a good idea to give them $44 million more a year without seeing if there’s a better option out there,” Alexander said.

Convergys stands by its work and issued a statement that said: “The Legislature itself hired a third-party consultant to review the . . . contract and that consultant recommended the contract be renewed.”

But Crist agreed with Alexander, saying the project should be rebid. “I think we always need open bids, good competition,” Crist said. “I think he’s right on point. I agree with the senator.” Still, Crist vetoed Alexander’s contracting oversight bill, saying it went too far by requiring too much legislative oversight. Under one interpretation of the legislation, lawmakers would have had to sign off on some state agency purchases of items as insignificant as office furniture.

The contract to centralize and consolidate the state’s massive payroll system was one of the first large-scale privatization efforts to draw fire in Florida, in 2002. Paychecks came late, cost savings were lower than anticipated, and some state employees worried about identity theft after personal data was released to a subcontractor in India.

It is indeed true that the human resources privatization, known as People First, came under fire early in its rollout. However, having read the Council on Efficient Government’s (CEG) 2008 report on this and other major IT initiatives (as reported in Reason’s Annual Privatization Report 2008), it’s pretty clear that the major problems with People First were in large part centered on the state’s poor planning and its inability to rein in the demands of its agency staff for customization of the new systems. But let’s go back to the beginning.

People First was developed to streamline and automate the state’s human resource, payroll administration, staffing and benefits functions by consolidating the seven different legacy IT systems into one. In 2002, DMS entered into a seven-year contract with Convergys Customer Management Group, Inc. valued at $278.6 million. The contract term was subsequently amended to extend through 2011, increasing the total contract value to $350 million. Since 2005, the People First project team has deployed 330 system modules and releases. Today over 50 state agencies and entities, including 132,120 active employees, 48,261 benefits-only employees and 47,809 retired employees, use People First in some way.

Here’s a snapshot of the CEG’s findings that all parties in the current debate should refresh themselves on:

  • People First was “a successful migration from the state’s legacy system” and “provided a functional interactive platform with little initial capital outlay.” The state saved $12 million from staff reductions, $80 million from the cost avoidance of rebuilding its own system and other efficiencies through the elimination of duplicative services between agencies.
  • The initial expectations were to reduce the human resources workforce by over 1,200 full time positions, contributing to a total savings of $173 million over the original seven-year contract term. DMS subsequently revised the projection to reduce the state’s HR-related workforce by 971.5 positions. Thus far, 862 positions have been eliminated, resulting in a 70% reduction in the state’s HR-related workforce.
  • One of the biggest challenges with People First is lack of standardization of business practices across agencies, requiring “excessive” customization to the off-the-shelf software (over 200 customized interfaces). Implementing a standardized, statewide business process “would alleviate some of the trouble of software customization and additional workload issues associated with the divergent business processes.”
  • An internal assessment of hardware and software at each agency was not conducted prior to launching People First, resulting in incompatibilities between the various infrastructures. Implementation and performance issues arose as a result of not establishing this initial equipment baseline.
  • Most agencies went live with People First in 2004 but were instructed to make staff reductions prior to that. Consequently, due to system-related limitations and the elimination of most HR staff, agencies saw an increase in workload which negatively impacted them. DMS reports, however, that the People First program is stabilizing.
  • The People First contract was written such that the state turned over its entire HR operations to the vendor; hence, the state will not control or own the software or hardware at the end of the nine-year contract.
  • DMS recently conducted the first survey of the People First system and found that 59% of the employees surveyed said that People First met or exceeded expectations. Overall, the service center received the best reviews with 70% of the respondents saying they were satisfied or extremely satisfied and 82% saying staff were friendly.
  • Project management has been a challenge. A full-time project team was not established for People First until 2005 and it has already had three project managers. Some early implementation problems “may potentially be attributed to the lack of a dedicated team to ensure success.” However, the CEG report finds that “[t]he current People First team at the DMS is well organized, employee focused and committed to continual improvement.”

The report concludes that in the end, the transition was difficult but the privatization is working, which is something that certainly isn’t made clear in the article above.

Regarding the central question of re-bidding the contract, I’m obviously a fan of subjecting services to regular bidding as a general rule. Competition keeps all parties honest and on their toes and drives down prices. But what, when and how you do it matters, and there’s no doubt that this isn’t your typical state landscaping contract—its a complex, statewide technological system that serves over 200,000 people—and the new system is just getting settled, so to speak.

The obvious difference is that standard operational contracts involve operating something, not building and operating something. As you dial up the contractor’s responsibilities with the design and development of infrastructure systems, you generally tend to dial up the length of the contracts and the complexity. While I can only offer conjecture, I’m assuming that the state and its advisors view re-competing the contract at this point in time as potentially undermining the progress made on rolling out the system thus far and potentially taking on the risk of high transition costs at a terrible time for the state budget. This isn’t a simple decisionmaking process and will be interesting to watch.