Salvage, Don't Scrap

How Florida officials saved a dysfunctional outsourcing agreement and relaunched the state’s HR information system to rave reviews.

By Bill Leonard Jun 1, 2011
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Business professionals understand that most outsourcing arrangements involve risks. But the risks that Florida state officials took to outsource administration of their human resource functions and place the state’s HR information system online would make most HR executives blanch.

In one of the most ambitious HR initiatives attempted by a public- or private-sector employer, Florida created a web-based HR information system and outsourced administration of most HR functions for approximately 240,000 state employees and retirees. The idea was conceived in 2000, when then-Gov. Jeb Bush asked state officials to submit proposals using the best practices in the private and public sectors to cut spending and reduce overhead.

The outsourcing proposal made the business case that the move would save millions of dollars by cutting jobs and consolidating HR functions. Yet political pressure and a false sense of urgency led state officials down a path that resulted in a project that overpromised and underdelivered on products and services.

Hard Lessons

The revival and massive scope of Florida's outsourcing agreement has received notice from political and HR leaders in other states who are examining ways to cut costs. The revamped and upgraded HR information system features 135 technical enhancements and upgrades to payroll, attendance and leave, recruiting, benefits administration, HR management, and organizational management modules.

David DiSalvo, director of the Florida Department of Management Services' People First team, offers five tips to leaders of any organization considering a large outsourcing project:

Build support from HR staff. Don't develop the arrangement in a vacuum. The HR department is a stakeholder, so seek HR's advice. If you don't have support from HR managers, you will lose their positive influence and necessary support.

Create operational accountability. Early in the process, outline lines of accountability and clearly communicate them to all parties. Select a strong contract manager who understands the standards and expectations.

Seek the appropriate level of advice. With a project as large as People First, it would be impossible to regularly solicit and review comments from 240,000 users. However, surveying segments of the user population and asking for comments is useful. Ensure that users are comfortable and don't feel excluded from the process of creating a new system. Seek buy-in from all stakeholders.

Set a realistic time frame. Executives commonly make the mistake of setting unrealistic deadlines for project completion. In many cases, political pressure can create a false sense of urgency and create unworkable deadlines that compound problems. Having a realistic and manageable time frame pays off. Inflexible and rigid deadlines based on unrealistic expectations can doom a project.

Don't oversell. Don't promise the moon and fail to deliver. Be clear about expectations and what products and services will be delivered. "Don't say you can build a Mercedes but then deliver a Chevy," DiSalvo advises.

Often, when an outsourcing agreement starts to fail, executives are inclined to cut their losses and start over. However, when officials with the Florida Department of Management Services decided to act, they chose to learn from their mistakes and salvage what appeared at the time to be a losing proposition. Although the effort took more than two years, the result has been an improved and cost-efficient system. Analysts in the Florida Office of Program Policy Analysis and Government Accountability have projected that the revamped outsourcing arrangement and upgraded technology will reduce the state’s costs by $45 million during the life of the contract, set to end in 2016.

In July 2010, Florida launched a complete reboot of People First, its web-based HR information system. The improved technology and outsourcing agreement has hit a few bumps, such as software glitches and political pressure to push the process forward faster—impediments that are not unusual for a project this big and complex. However, initial feedback from state employees, agency heads and HR managers has been positive.

"Because of the bad experiences with the first incarnation of People First, I don’t think expectations for the relaunch were too optimistic," says David DiSalvo, director of the management services department’s People First team. The reaction "has moved from skepticism, which had many people thinking ‘Not this again,’ to a growing appreciation that this time the system really works—and works well."

DiSalvo treasures a voice mail message from a state employee who called just a few days after the relaunch to praise the system.

"I wanted to congratulate whoever is responsible for the redesign and tell them ‘good job,’ " the caller said.

The outlook didn’t appear so rosy when DiSalvo took over as project director in September 2006. About that time, the outsourcing agreement and the online system had reached its nadir, according to DiSalvo and other members of the management services staff. DiSalvo’s former boss and former Department of Management Services Secretary Linda H. South may have put it best:

"In 2007, we launched a review of the contract and outsourcing agreement and we found that the situation was quite dysfunctional and much worse than we first expected," says South, whose appointment ended Jan. 3. "We had reached a decision point, and something had to be done and done quickly."

Recipe for Disaster

In August 2002, officials signed a seven-year contract making Convergys Customer Management Group Inc. in Jacksonville, Fla., the state’s outsourcing service provider. The contract stated that Convergys would deliver recruiting, payroll and HR administration services within nine months. A fourth service—benefits administration—was set to go online in January 2004. State officials now admit that the 18-month time frame to develop and deliver an online system for nearly a quarter-million users was "overly optimistic." The project immediately ran into problems. The recruiting module was released on time, but the other three releases faced delays of up to 12 months.

In January 2005, all four modules were online but not many people were happy with them. Simply put, the new technology was confusing and not user-friendly. Hours worked were misreported, paychecks were issued incorrectly, and health insurance claims were incorrectly denied or not reimbursed at all.

During the 28 months it took to implement these services, state agencies eliminated 862 HR positions from a total of approximately 1,250, or nearly 70 percent. At the same time, Florida’s self-service system was not fully operational. In short, Florida state employees and HR staff alike were frustrated. This created a bad atmosphere in which to negotiate another outsourcing arrangement.

When DiSalvo became the project’s director, discussions centered on three options:

  • Ditching the system and outsourcing arrangement and bringing administration of the technology and outsourced HR functions back in-house.
  • Looking for another outsourcing vendor.
  • Salvaging the existing arrangement.

By September 2006, the existing contract with Convergys had been extended to August 2011, at an estimated cost of $350 million—$72 million above the original contract.

However, the time and resources invested in creating the software and a platform to operate the system were huge factors and would be lost if the agreement was dissolved. Therefore, salvaging the existing outsourcing arrangement and remodeling the technology appeared to be the least expensive option.

"We had a lot of work to do," DiSalvo says. "It would take a lot of time to fix the problems."

Since the contract was set to expire in 2011, he had almost five years to rebuild the system and outsourcing agreement. DiSalvo and his team worked long hours and beat that deadline, launching the upgraded version in July 2010, a month after Convergys was acquired by NorthgateArinso Inc., with U.S. headquarters in Jacksonville, Fla. The contract with NorthgateArinso was renegotiated and extended until August 2016. Officials with NorthgateArinso say that they are happy to partner with the state of Florida on the outsourcing project and that problems and issues with the original outsourcing agreement are now in the past.

An Outsourcing Phoenix

The headaches, hard work and triumph of rescuing the project from the ashes of a dysfunctional partnership inspired DiSalvo to write a 13-page white paper on resurrecting what appeared to be a doomed outsourcing arrangement.

Governance, or proper oversight, was key to rebuilding the arrangement and to ensuring that the system functions correctly.

Governance, or proper oversight, was key to rebuilding the arrangement and to ensuring that the system functions correctly. It became clear to DiSalvo and his team that a lack of oversight and governance controls led to many of the problems—and controversy.

In late 2005, state officials learned that a subcontractor was copying sensitive personnel records on CD-ROMs and shipping the disks to a company in India that was then storing the information on a database for record retrieval. The CDs were filled with confidential information such as employees’ Social Security numbers, home addresses and health insurance records. Stories about the handling of the data began appearing in newspapers throughout Florida. The ensuing media frenzy regarding data security severely damaged any remaining trust in the outsourcing partnership. A subsequent review of the case by state investigators found that no sensitive information had been compromised or lost, but by then the damage was done.

According to DiSalvo, the incident brought home the value of oversight, controls and standards for providers. He says all parties must be accountable for meeting and upholding those standards. One of the first steps was to ensure that all parties, including subcontractors, understood they were accountable and what was expected of them. The outsourcing to India ended, and all sensitive data is now stored on secure servers within the United States.

Renegotiating the arrangement required developing a new understanding and building in much-needed improvements, which were rolled into the contract and called Amendment 10. The amendment, agreed to by the parties, gives the state license to intellectual property and adds security improvements.

The intellectual property license was essential, according to DiSalvo. Without it, Florida would be back to square one and would have to create software and systems from scratch if the state ever changed vendors. The security improvements add teeth to audit trails and help ensure that all parties adhere to the contract—or face financial penalties or possible cancellation. The security processes require stringent background checks for any individual or subcontractor that has access to sensitive employee information.

This governance and oversight model remains "key to the survival of this outsourcing partnership," says David Faulkenberry, the management services department’s deputy secretary. It’s "something that we will continue to work on."

The author is a senior writer for HR Magazine.

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