Overcoming obstacles in IT outsourcing

Perhaps the most daunting task in a public sector outsourcing deal is managing the process. Private sector transactions are generally conducted behind closed doors with a small group of key decision makers, while government sector transactions are often publicly debated.

The public sector bidding process makes it more difficult to respond to the dynamic nature of an outsourcing transaction, and public sector transactions may require several levels of authorization, making quick approval and implementation more difficult. Thus, more preparatory groundwork must be undertaken to achieve a consensus for action. Also, the changing face of government may make it difficult to keep decision-makers involved.

As each new administration is elected, a new set of key decision makers may be appointed. Thus, in public sector outsourcing agreements, it is important to establish stable points of contact.

Additionally, employee reaction to government outsourcing may be negative, with many employees concerned about how agreements may affect them. Some individuals believe only government employees should provide government services, and private industry should not control or profit from public assets. However, outsourcing can lead to job growth and economic expansion, and the public sector can benefit from regional development and employment. Government officials can factor these benefits into the overall value of an IT-outsourcing agreement.

Issues related to intellectual property and trade practices are a concern as well, and they are often under-managed during the course of an IT outsourcing transaction. Contract provisions addressing organization-owned software, third-party software and provider software are necessary to retain flexibility and to allocate costs. For example, when an organization grants a license to the provider for organization owned software, the license may only allow the provider to use the software on behalf of the organization for the life of the contract, and third-party software will often require the consent of the licensor for assignment or even for use. A well-drafted agreement can specify who is responsible for obtaining consent, who is responsible for license fees and what will happen if consent is not given.

In addition, risk shifting is a complicated factor in public sector outsourcing agreements, which should include detailed indemnification provisions. However, laws may prohibit or restrict indemnification, limiting the efficacy of the provision, and further restrictions may be placed upon contractual provisions. For instance, indemnification provisions often allow the indemnifying party to assume complete control of the defense. Yet, many states allow only the state attorney general to represent the state in litigation. A provider that wants to use its own attorneys must have these attorneys appointed by the state as special assistant attorneys general.

Public sector outsourcing may raise antitrust concerns as well. Public and quasi-public entities (e.g., utilities, cable franchises and water companies) tend to be monopolies or oligopolies. Placing these public “monopolies” under the control of a private, unregulated entity may generate public concern that the private entity will exploit the situation for its own gain. These concerns can be eased because the public institution still has continuing obligations under its contract with the provider and remains involved in the outsourcing process throughout the duration of the contract.

Although the motivations for outsourcing are similar in the public and private sectors, municipalities must consider what is best for their citizens. Outsourcing of IT functions can streamline facilities and provide economic opportunities.

Mark Gordon is a partner and Timothy Walsh is an associate at Gordon & Glickson P.C., a Chicago-based law firm.