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Conscientious Objector: The U.S. Military is Busily Outsourcing Its Core IT Services, but Would a Really Disciplined Outfit Like Wal-Mart Do the Same?

Status: [CLOSED]
By Robert X. Cringely

I must have hit a nerve with last week's column on the travails of EDS and the Navy and Marine Corp Intranet (NMCI). Reader response was not only great -- a lot of new information came to light that puts me in a much better position to link this example back to the whole idea of outsourcing, which appears to have changed its fundamental intent over the years in a way that hasn't been noticed and isn't good. In this case, NMCI is just one example of a trend that is both pervasive and sad, not just for the military, but for all of us. Once again, there are no bad guys here (well, there is one, but he's gone), but plenty of lessons stand to be learned about when it is right (or not right) to hand over a job to someone else.

In case you didn't read last week's column, the Department of the Navy decided to outsource most of its shore-based IT activities in an effort to standardize a broad array of systems and to get costs under control. NMCI was a competitive bid eventually won by EDS, which hasn't done either a very good job of pleasing the Navy or making money on the deal.

Part of the problem is standardization, which looks great if you are part of a command that hasn't had much in the way of IT resources, but looks terrible if you are with a leading-edge unit that had all sorts of toys, only to have NMCI take most of them away. One size definitely does not fit everyone, and it was a grave mistake on the part of the Navy to even pretend that it could.

EDS -- at least the inside parts of EDS that communicate with me -- acknowledges that NMCI is a mess and a lot of it comes down to how the bidding process was handled. "This contract was [former EDS CEO] Dick Brown's baby," writes a reader who works for EDS. "He was gobbling up contract after contract on the way to making EDS a $80 Billion company by the end of 2002. Remember that? Secure the contract. Worry about the details later. Now, it's later. He's gone on with his $50 plus million solid gold parachute, drinking mai tais in the Bahamas. Nobody, and I mean nobody, misses the guy. This culture of bid first, ask questions later is prevalent all over the corporation and even on little podunk accounts like mine. And it's not just EDS. But at least some sectors are wising up. We've been fighting that culture with some success. We're doing okay."

Other parts of EDS feel betrayed by the way the Navy handled the bidding. "The most blatant flaw in the contract," writes an EDS techie, "was the number of applications (i.e. single servers) that the Navy clamed they had was about 2,000. We are now hosting numerous applications (i.e. hundreds of servers) and the Navy is holding EDS to the 2,000 stated in the contract. Also, we have to take every “legacy” application through the DOD Ditscap process. To date, this has been about 30,000 applications. Oh don’t get me wrong, the Navy did state that they "estimated" the 2,000 apps, and it was up to the award winner to find out how many really existed. Even today, the Navy denies that the RFP was misleading."

So EDS blindly signed-on to support at a fixed price an estimated 2,000 applications only to later find the actual number was 30,000. Everybody's guilty here, from the Navy bureaucrat who grabbed that 2,000 number out of the air to the EDS executives who didn't feel bothered to question it. This lack of accountability is astounding, and I could go on and on with examples, but what's the point? The fact is that this kind of behavior is pervasive -- not just with EDS and not just with the U.S. Navy, but with many providers and consumers of outsourced IT services.

"I believe that EDS underbid the contract without realizing the complexity of the Navy’s network, and they did not show up at our site or any other site during the due diligence phase of the bidding process," said another Navy IT person. "The contract as it was written was unrealistic in scope and the people who wrote it did not know the network. EDS has cut staff to the bone -- recently they tried to force subcontractors to take a 25 percent pay cut, and they generally hire people who are trying to quit as soon as they show up (of the four Exchange admins they brought in, two have quit). What is happening now, at most sites, is that shadow helpdesks are being created to fill in the gaps that EDS has created, so now there is a duplication of effort and more money is being wasted. The best thing about the contract for EDS is that they do not have to meet any Service Level Agreements until they can demonstrate for 90 days that they can accomplish what is laid out in the contract. So in other words, they have no incentive to get the network up to speed, because then they are actually responsible for a certain level of competence."

NMCI is not an aberration. Right now, the U.S. Army and U.S. Air Force have similar programs and are suffering similar experiences. Much the same thing is going on in industry as well as government, and is happening everywhere from Washington, DC, to India. What it comes down to, in the end, is a horrible failure to communicate between and within organizations against the backdrop of a critical change in the definition of outsourcing that took place back in the 1980s.

"This is a great example of the (Colin) Powell principles," writes a reader from the U.S. Army. "In the pentagon you're "trained" to reduce complex reality to three bullets because the senior leadership is too busy to understand anything outside of five four-word phrases and they all must say "good" ... no risks... all the issues are taken care of. Vendors like Oracle and EDS know this and hire folks like ex generals who know how to use strategic talk in executive sessions with their chums. Applications or a basket of fruit.... makes no difference.. as long as the vendor gets paid. The problem is that Pentagon folks have not discovered that briefing charts are not reality, they are just briefing charts about whatever the briefing was about... single sign on is a techno nightmare. More than 50 percent of DOD's applications � have built in hierarchies, roles and permissions that the single sign on has to take control of. The briefers at DISA (DOD IT empire HQ) think that because the briefing charts say it's possible.... that it is possible. So a chaos and jungle of plans, hopes and initiatives are hatched because the briefing charts become policy... but please, please don't worry... there is no reason to be terrified... the vendor will get paid."

Customers and contractors alike are unhappy and at the top of both organizations there is massive denial.

There is this amazing disconnect on the part of most bidders between their actions and the health of their company. It's that "get the contract at any cost" attitude. Some bidders just try to break even, figuring they'll make their profit on moves and changes not covered in the original contract. Some don't even think that far, figuring they'll somehow make it up on volume. Part of this I attributed last week to salespeople who are paid on commission, only to have the sales contingent howl in response that pricing comes from the pricing department, not from the sales department. Well that's just plain wrong because all this departmental finger pointing indicates that the real issue -- the overall financial health of the company -- isn't on anybody's mind. If the sales department feels that the price from the pricing department is too low for the company to even survive, much less make a profit, then the sales department should fight for a different price. I don't think that's what happened at EDS on this contract or, possibly, on ANY contract.

Then something surprising happened. Last week, a consortium led by Lockheed Martin pulled out of bidding on a £4 billion ($7.33 billion) British military information technology program that is remarkably similar to NMCI. "As we moved through the bid process and learned more about the Ministry of Defence's commercial model, we came to the regrettable conclusion that we would not be able to submit a bid that was both compliant with the MoD's requirements and acceptable to our shareholders," a Lockheed Martin spokesman said.

Lockheed couldn't find a way to do the job without endangering the company. Good for Lockheed Martin for taking a responsible approach to its business. The remaining bidders for the MoD contract are Computer Sciences Corp. and (of course) EDS.

How did we get in so much trouble? Part of the problem here has to do with the way outsourcing has changed over the years. The business was invented back in 1962 by Ross Perot when he founded EDS, then called Electronic Data systems, to buy unused time on corporate mainframe computers and resell that time as a computing service to customers lacking computers of their own. The EDS people would show up at night, their car trunks filled with computer tapes, and until dawn the XYZCo computer would be used to run jobs for any number of smaller companies. Eventually EDS got its own mainframes, but the job remained essentially the same -- to do data processing for organizations unequipped to do it for themselves.

What has changed since then is the decline of mainframes. I know, I know, there are plenty of mainframes still in operation, but the NMCI contract is workstation-centric. NMCI and similar arrangements aren't contracts to bring new technology to organizations that lack the internal capability to provide that technology for themselves. They are pure cost-saving plays, or at least that's what they are intended to be. The sales pitch -- and yes it is a SALES pitch, not a pricing pitch -- is that integrating all this activity under a single contractor will eliminate duplication, standardize services, improve efficiency, and save money. Only it doesn't work that way in practice.

Somewhere in the mid-1980s, just as PCs and networks were beginning to have their way with corporate America, the definition of outsourcing changed from buying outside services that you couldn't afford to do inside to buying outside services that you ALREADY WERE doing inside only outsourcing would save money. Maybe it was Gartner, maybe Andersen Consulting, certainly some outfit was the first to add this slide to their presentation deck, and while it makes some sense in theory IT IS VERY DIFFICULT TO MAKE WORK IN PRACTICE.

Most outsourcing contracts don't live up to their service promises and the only ones that live up to their pricing and profitability promises are those that have an artificially-low labor component, which is why we're suddenly shipping so much work to India and China. And as I have shown in earlier columns, foreign outsourcing brings new problems of its own.

Trying to put this all in a useful context, I wondered whether contracts like NMCI would take place at all in a profit-driven environment, rather than in the loosey-goosey world of the military where there is so much talk of discipline yet so little history of it actually being consistently implemented in areas like procurement and IT? Would Wal-Mart, the world's largest company and one of the world's largest consumers of Information Technology even consider a deal like NMCI, which ostensibly would make all IT costs and performance predictable on a multi-year basis?

The comparison is an apt one, though Wal-Mart is actually about three times the size of the U.S. Navy. Obviously the Navy has more firepower, though in a protracted conflict I think I'd put my money on Wal-Mart's supply lines. But what about this IT question? To find my answer I began calling people in Bentonville, Arkansas, where Wal-Mart has its intergalactic HQ and where my Mom lives next door to the former CEO and head of Wal-Mart's Executive Committee. I have my sources you see.

And those sources were clear: there is no way Wal-Mart would entrust its IT services to an outside contractor or even to several outside contractors. Doing so would threaten the entire organization. If costs are out of control and services are inconsistent, that's something to be dealt with internally, not by hoping some outside organization is smarter or more disciplined. "We have suppliers, sure, but the ultimate responsibility always remains here in Bentonville," said my Ozark IT guy. "We centralize it, we control it, we know what we are buying and what we are doing with it. Anything less is just too much of a risk."

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