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When the City of Minneapolis' new CIO came on board in 2000, he found an internal IT group focused on technology for its own sake, rather than on business goals and customers. He also discovered that 60 percent of the budget and management energy went into infrastructure instead of strategic and value-add initiatives.

The city faced enormous IT investments at the time, too. Karl Kaiser, the city's CIO, says the State of Minnesota State Auditor had criticized the city's lack of disaster recovery capability - an investment of at least $4.5 million. In addition, the county, which had been leasing its data center to Minneapolis, wanted its space back - necessitating another investment in the range of $4 million. And yet another capital investment loomed to augment the IT staff so it could provide 24x7 support to the city. As a local government with salary constraints, the city would be forced to use contractors in order to get the higher-end talent; the investment would be another $4 to $5 million. By outsourcing, the city avoided all those costs.

But the primary reason for outsourcing, says Kaiser, was the need for change. After all, installing and maintaining computer systems is not a government function. He recommended to the Mayor, City Council, and City Coordinator that they outsource to provide IT infrastructure services on a utility basis and transform the city's IT group into more of a consulting unit focused on leveraging technology to meet customer expectations. Outsourcing would leave the city's IT group free to re-focus its energies and skill sets on becoming solution providers, looking at IT needs from a business perspective. "But it really was a very drastic culture change," recalls Kaiser, who was tapped by the city's leadership to drive the enormous change.

Positioning for Success

Good stewards of the city's capital investments, they began a comprehensive investigation of outsourcing relationships that have been successful and those that have failed. "We took a very hard look at what was happening in outsourcing, particularly in the public sector, says Kaiser. "We also spoke with consultants about best practices. We wanted to determine what we needed to do to be successful."

For starters, they discovered that retaining control is a pitfall in outsourcing relationships. Determining up front that it is critical for the service provider to have control of the outsourced process, they recognized they would need to find a provider that would have the financial resources to purchase all of the city's IT assets, upgrade all of the equipment, and refresh the assets over the life of the contract.

The city's scrutiny of keys to success also revealed that "the people issue clearly hits relationships all the way through transition if it isn't dealt with up front. So an important provider selection criteria," declares Kaiser, "is that the provider would take care of our 20 people whose positions would be eliminated by outsourcing." It was the number one priority; in fact, the City Council would not allow issuance of the Request for Proposal (RFP) without a requirement that no city employees would lose jobs. They ended up negotiating a three-year job guarantee and a sign-on bonus with Unisys for 14 people; other positions with the city were provided for the remaining six, who were significantly vested and near retirement.

Plugged in to the Vision

Another critical success factor, explains Kaiser, is the fact that the city was transparent about its outsourcing initiative. "One of the things we discovered from our research up front is that the people who had the most difficulty are the ones who tried to hide what they were doing until the last minute, for fear of backlash, and then sprang outsourcing on the organization. We spent a significant amount of time communicating with people on a regular basis all the way through the process, making sure everyone was up to date on what was going on."

They employed Gartner to assist with developing the provider evaluation criteria, validate their thought processes, and ensure there would not be any bias in the process from the city's people. All stakeholder groups were assigned specific tasks in developing the RFP; the human resources and people transition team even involved union folks. "With everyone involved in developing the RFP, it wasn't so much of a selling effort anymore," the city CIO states.

Ten RFP respondents were quickly narrowed to two because of the necessary capital investment and the requirement that the provider's data center be located within Minnesota and, preferably, in the Minneapolis metropolitan area.

In the beginning, Unisys stood out because of lower price; but in the second phase of the RFP process, price was eliminated as a competitive advantage. Both finalists had to give proposals within a fixed price. Unisys still won; in addition to offering a more innovative and value-driven solution, it had a new data center in the Twin Cities area.

Moreover, Unisys took to heart the city's request that the outsourcing company engage local, small, minority-owned businesses for a portion of the work. "Unisys made this an integral part of its proposal," says Kaiser." It has been a major contribution to the city. They went out of their way right in the beginning to conduct a seminar for 100 small, minority-owned businesses and minority groups. That really got very high marks by our civil rights group."

Twosome Tests

Their transition phase - involving moving the city's data center and 100 midrange servers to the Unisys center - was a logistical and operational challenge. Nevertheless, transition was accomplished in a record 10 months instead of the projected 18-24 months.

Their relationship has been a stunning success so far, by all accounts. They attribute their success to effective communications and to mutual flexibility. After contract signing, the city was hit with several unanticipated budget cuts. Unisys stepped up and took on additional responsibilities without additional compensation to ensure the city receives the services it needs to become a world-class virtual city. Unisys, as well, has significant opportunities for increased business opportunities. The city, for example, recently restructured its planning and building function, creating a new agency whose IT infrastructure Unisys now handles.

The relationship has required major change on both sides, they report -- change at Unisys in terms of the service delivery model, and change at the city in terms of responding with a totally restructured and reengineered organization. "We're moving out of a free-form, reactive-mode service model into a structured, planned and controlled service delivery," says Kaiser. "And it takes time to move through the process of change. But the good news is that we have a growing body of people who recognize that it's better since we outsourced."

Part of this attitude is due to their relationship approach. "The business focus -- looking at what is the business consequence if we take a particular action -- is our mutual focus," reports Kaiser. "Unisys has done well at this; other outsourcers are more SLA-focused, rather than relationship-focused."

He reports that their relationship is setting a trend within the public sector. "We have gotten nationwide recognition for our outsourcing model - divesting ourselves of the entire IT element of our business. Unique in the public sector, this model is being recognized as an exemplary step forward and a paradigm shift in the way to handle an internal IS operation."

View on Relationship-Building:

• "Unisys did an exceptional job of recognizing the things that were critical in our RFP and demonstrating how they would align their resources to our needs."
• "For all practical purposes, the city is no longer involved in a hands-on way for the services - the goal is to let Unisys do what they have to do as long as it meets Minneapolis' business needs, our service levels, and performance measures. We are substantially involved, though, in building this relationship and taking things to the next level."
• "The biggest challenge - the transition phase - and yet the biggest reason for our success - is operating together in a new relationship. The greatest challenges and frustrations also hold the greatest rewards in the long run because we get to see the relationship coming together."
• "It comes down to people - not the letter of the law or contract. We cannot sit across the table and pull out contracts and point to SLAs every day. There has to be a give-and-take process involved. It's like a marriage. And we are getting to know each other every day a little better, and we're learning how to work with each other every day a little better."

Publish Date: June 2004

Copyright © 2004 - Everest Partners, L.P.

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