Virginia Learns How Not To Manage an Outsourcing Project

The new Republican Governor of Virginia, Bob McDonnell, set as one of his priorities after getting elected fixing the massive IT support contract signed by a previous Democratic Governor, Mark Warner, with Northrop Grumman (NOC). The goal of this ten year contract was for Northrop to absorb most of the state's IT support (including the majority of the civil servants in that field), upgrade it, and manage it more efficiently. The contract has had a host of issues and the state was considering canceling it last year.

Northrop's team missed several deadlines and generated huge cost overruns as it struggled to merge existing systems and replace aging equipment with more powerful computers. The independent board set up by the state was accused of not having enough power to manage the contract. Canceling the contract would trigger termination payments of over $300 million to Northrop -- something the cash-strapped state is in no position to do.

After having been given control over the contract by the legislature, Gov. McDonnell decided that rather the canceling the contract, the state will restructure it.The contract will be lengthened three years. Northrop will receive some of the money held back by the state due to disputes, and new milestones will be established. The new contract will also include bigger potential penalties for Northrop and some new requirements. In the end, the total cost will increase due to the extension and the new work.

Local, state, and Federal governments often find themselves in this situation with outsourced service providers: Schedules slip, and costs get out of control. In such situations it might be better to call the whole thing off and and move on, but that too takes time and cost money. By agreeing to these changes, Virginia hopes to salvage this project. Northrop has been able to accomplish some of the goals so far, and a little more effort and money might complete the rest.

The state government was in a bad situation with this contract. It will take two or three years to see if the fix will work, but by law Virginia governors only serve one term. That means McDonnell will not face the voters again, to receive their opinion of the deal. Already, he's the big winner.

Photo: Flickr user mandyxclear