Hot-potato report advises DOD to outsource all its processing

T he Defense Department would save at least $1 billion over 10
years by consolidating its data processing at six industry-run megacenters, according to
drafts of an independent study now circulating among senior Pentagon systems officials.

The study, conducted by Coopers & Lybrand, was commissioned last May by Emmett
Paige Jr., assistant secretary of Defense for command, control, communications and
computers. He asked for the study after suggesting to Congress that DOD would consider
outsourcing some of the work handled by its 16 hub data centers.

Industry sources said the report would introduce hard numbers into what has become a
passionate debate over who is best qualified to handle DOD's data processing.

On one side is the Defense Information Systems Agency, which is consolidating hundreds
of smaller data operations run by the services at the 16 megacenters and is reluctant to
hand over what it terms "military-critical" jobs to industry.

On the other side: Some lawmakers and vendors, such as Computer Sciences Corp. and
Electronic Data Systems Corp., that claim outsourcing would save DOD millions through more
efficient management.

The debate also appears to be pitting Paige, who retired from the military and ran an
information services company before accepting his current post, against DISA's director,
Lt. Gen. Albert Edmonds.

Paige weighed in on industry's side. "I'm convinced we could achieve significant
savings by outsourcing megacenter operations," he said at a recent industry
breakfast. "There are many companies out there with a reputation for providing
excellent information processing services in a reliable manner. So I'm for getting on with
it."

Paige also has repeatedly dismissed the argument that certain megacenter activities
would become too critical during a military deployment to risk relying on contractors.

On the few occasions that Edmonds has spoken publicly on the issue, he has tended to
emphasize the critical military need, along with the political sensitivity of further
consolidations.

At an industry luncheon last spring, Edmonds followed up a presentation on megacenter
consolidations by Anthony Valletta, Paige's deputy, by joking that Valletta "had
better not go tell any congressmen that we'll be shutting down megacenters in their
districts" [GCN, April 17, 1995, Page 1].

Home district politics already have emerged at the center of the outsourcing debate.
Last June, the House National Security Committee recommended that DOD immediately
outsource three megacenters in a pilot program to reduce DISA costs by at least 35 percent
[GCN, June 19, 1995, Page 8].

But in its report accompanying the 1996 Defense appropriations bill, the House
Appropriations Committee scratched that proposal, dismissing it as premature and ordering
DOD to merely study the issue instead. The committee also requested a $16.5 million
increase for the DISA Continuity of Operations and Test Facility in Sliddell, La., a
backup data center opened last summer, and also urged DOD to use the National Finance
Center in New Orleans to support additional data processing needs.

The Sliddell site and the National Finance Center are both in the home district of Rep.
Bob Livingston (R-La.), Appropriations Committee chairman. Livingston's press secretary
said the congressman was indeed responsible for the appropriations bill language. But the
spokesman added that Livingston's last word on the subject was included in the conference
report on the 1996 Defense authorization bill.

That bill, vetoed by President Clinton late last year for reasons unrelated to
outsourcing, directs the secretary of Defense to issue a report by May 31 on the
feasibility of outsourcing only those megacenter functions that are not
"military-essential."

No one has defined what those functions are, but in the meantime, a spokeswoman for
Paige's office said the Coopers & Lybrand study might be used as the basis for such a
report to Congress.

Industry sources who have read drafts of the study said it would turn a spotlight on
congressional efforts to postpone outsourcing.

"In the tight budget climate at DOD these days, a $1 billion-plus savings is
impossible to ignore," said one executive of a company that takes on large
outsourcing projects. Any savings would be attractive to the armed services, which must
pay megacenter user fees from their own budgets, he said.

Deputy Defense Secretary John White also is expected to support such an initiative. The
Commission on Roles and Missions of the Armed Services, which White chaired before his
current appointment, recommended outsourcing many DOD support services including data
processing.

Now Paul Kaminski, undersecretary of Defense for acquisition and technology, has
instructed the Defense Science Board to report by May 1 on "what specific actions DOD
[should] take over the next year to accelerate the shift to privatization and
outsourcing."

Given this momentum, some vendor sources said they are concerned that DISA might
attempt to massage the data in the final version of the Coopers & Lybrand study, due
out in late February, to diminish the estimated savings.

The concerns were voiced after Paige, at an industry breakfast in mid-December, said
DISA was taking longer than expected to brief his staff on the preliminary results of the
study.

"They are trying to change some of the assumptions in the Coopers study,"
said one industry executive.

In a written reply to questions, a DISA spokesman denied that the agency would tweak
the savings estimates. The statement said the agency had worked with Coopers to develop
"options to be examined in a detailed cost comparison" of industry-run vs.
government-run megacenters.

"The assumptions used underlying each option were not explicit in all cases, so we
have met on occasion to clarify some of those assumptions," the spokesman said.
"C&L was commissioned to do an independent and objective review, and that's what
we expect the final report to be."