The big reboot
A rapidly shifting industry forces Virginia to shake up its IT services again
After a long-term, high-tech relationship, Virginia’s state government and Falls Church-based Northrop Grumman Corp. are moving toward divorce.
Like many separating couples, the two sides are trying to keep things amicable while they resolve thorny issues with the help of a mediator.
Despite the impending split, Virginia officials say the relationship did not fail. They say it succeeded in meeting goals set more than a decade ago. The problem is the IT industry has vastly changed since the commonwealth and the company signed a contract in 2005.
“The Northrop Grumman contract was signed almost a year and a half before the first iPhone was released,” says Nelson Moe, the head of Virginia Information Technologies Agency (VITA) and the commonwealth’s chief information officer. “[The contract] did what it was supposed to do. Northrop Grumman stepped up and helped us consolidate our assets and modernize our IT infrastructure, but there are better service frameworks now.”
The resulting changes will affect not only state agencies and Northrop Grumman but also technology hubs in Central and Southwest Virginia.
Northrop Grumman currently provides IT for most state agencies under an almost $3 billion contract that ends in mid-2019.
When the original contract was signed, it was seen as a revolutionary way for a state government to provide IT services. Only two other states, Georgia and Texas, currently outsource their IT services.
Virginia now plans to switch to a multi-vendor model, a move designed to give VITA — the agency charged with management of the state’s IT — the ability to respond to rapid changes in the industry with shorter contracts involving several companies.
But as Virginia begins the delicate and complex task of moving to a new model, which is scheduled to take place over the next 2½ years, the difficulties posed by the transition have quickly become apparent.
First, Northrop Grumman argues that VITA’s new approach will make the state’s IT infrastructure less secure, threaten Virginia jobs and increase costs to the state.
In addition, Northrop Grumman and VITA disagree on a number of important issues related to the transition to a new system. Disputes include how much information Northrop Grumman must share with Virginia during the new procurement process. The company also has balked at providing infrastructure for messaging services supplied by another company. Those services originally were scheduled to transfer to another provider in September.
VITA and Northrop Grumman also disagree about unexpected increases in service charges from Northrop Grumman. Northrop Grumman has charged the state an additional $5.5 million for Unisys mainframe services. In addition, the company says Virginia owes $4.2 million more in Microsoft licensing and fees than VITA believes it owes.
In response to these disagreements, Northrop Grumman, VITA and the Virginia Attorney General’s Office have agreed to work together in a nonbinding mediation process. Those discussions were scheduled to start in January.
Still, Moe says, such disputes are not unusual. “It is normal for a contract of this size and complexity to have these types of issues, especially toward the end,” he says.
Resolutions to these disagreements are vital to a smooth transition process. Unless resolved, these disagreements “could harm the state’s effort to transition duties and ongoing service obligations,” the Joint Legislative Audit and Review Commission (JLARC), the Virginia legislature’s watchdog, concluded in a September memorandum. JLARC also warns the disputes “could negatively impact the much larger and more complicated transitions that are planned in the years to come.”
Northrop Grumman, in response to questions for this story, said it plans to work with the commonwealth to ensure a smooth transition.
“For more than a decade, Northrop Grumman and the Commonwealth of Virginia have been partners in providing award-winning improvements to the state’s IT infrastructure,” said Brandon R. “Randy” Belote III, vice president of strategic communications for Northrop Grumman, in an emailed statement.
“The commonwealth has announced it is going in a different direction and will work to disentangle the VITA program.
“As the commonwealth goes through this process, Northrop Grumman will continue its efforts to protect the citizens of the commonwealth and enable the services that are used every day. We are committed to adhering to the terms of the Comprehensive Infrastructure Agreement with VITA to facilitate an effective transition of IT services.”
Warner administration idea
In 2005, Virginia signed a 10-year, $2.4 billion contract with Northrop Grumman to revamp and modernize the commonwealth’s antiquated IT infrastructure. The deal was the largest contract the state had ever awarded to a private contractor.
The idea was the brainchild of then-Gov. Mark Warner, who had made it a priority to consolidate and modernize the state’s aging, outdated IT infrastructure. George Newstrom, Warner’s secretary of technology, determined that state agencies were spending $800 million to $1.3 billion a year on software, computers and other technology, according to a Virginia Business interview in June 2002. The fragmented process led to wasteful spending.
In 2002, the commonwealth consolidated its technology agencies into VITA and began looking for a contractor to overhaul and modernize IT services.
“If we go back in time … the state, I think, was in the place many organizations found themselves,” says Fred Norman, head of Commonwealth of Virginia Consulting in Richmond, which helps clients navigate the state’s procurement system. “They had investments in assets that were aging, and to maintain or improve those assets, they were going to spend a great deal of money. They wished to explore the opportunity to spend it in a different way that would get them modernized capabilities and assets. That process resulted in the award to Northrop Grumman after a lengthy competition with the industry’s finest.”
Since the contract was implemented, the relationship between the state and Northrop Grumman at times has been rocky. In 2009, disputes erupted over deadlines, payments and the level of service being provided.
In 2010, Gov. Bob McDonnell’s administration signed contract modifications designed to improve service and resolve conflicts. The length of the contract was extended three years and kept the annual cap of $236 million paid to Northrop Grumman.
Then, earlier this year, headlines documented new disagreements between VITA and the company. Letters revealed VITA’s disappointment with the performance of some IT services and the company’s failure to save emails related to a court case. Then, after VITA informed Northrop Grumman of its decision to move to a multi-vendor model, the company warned of problems inherent in such a system.
Despite the disputes, Moe argues that the Northrop Grumman contract accomplished what it was meant to do. “The goal was a consolidation of the commonwealth’s assets and the creation of centralized governance,” says Moe. “It did that. It did that very well. Northrop Grumman upfront provided an investment of almost $300 million to accomplish this and build us two data centers [one in Chesterfield County] and one in Southwest Virginia.”
With two high-tech data centers and a centralized IT system, Moe, who was previously chief information officer for the U.S. House of Representatives, says Virginia is in a much better position than it was in 2005.
“IT systems we use daily now are standardized,” says Moe. “The data trusted to the commonwealth is more secure than when the contract was put into place. We are in a much more advantaged position now than we were in 2005.”
Moving to multiple vendors
Using a multi-vendor model will allow Virginia to get lower prices, better meet state agencies’ needs and respond more quickly to the rapidly changing IT industry, according to an analysis by Integris Applied. It’s the consultant VITA hired in 2015 to determine the best way for Virginia to supply IT services to state agencies.
“Shorter contracts going forward are going to provide the contract framework and the services framework to adapt more often,” says Moe. “Look how fast phones change. Technology changes in six months, and the contract we have now can’t keep up with that.”
Integris Applied concluded that the current contract could not keep pace with the IT marketplace, resulting in higher prices and fees than the state could obtain under present market conditions. The current structure also prevents state agencies from getting the flexibility and service changes they need.
The consultant’s findings, detailed in a December 2015 memorandum, said that the current contract was not in line with current market conditions in part because it was designed to allow Northrop Grumman to recoup its upfront investment in Virginia’s IT infrastructure.
“We’ll be able to go out more frequently, obtain the latest IT services at market competitive prices,” says Moe. “That’s the goal of the multi-service provider.”
Integris Applied also said that VITA should begin transitioning services away from the Northrop Grumman contract in phases, or “waves,” rather than waiting until the contract expires in 2019.
The report concluded that approach would require upfront investment but most likely would be cost-neutral because of savings recouped in new contracts.
When notified of the state’s new approach, Northrop Grumman said it would not apply to be a prime contractor under that system. The company also warned that the wave approach could cost Virginia $135 million to $200 million and threaten the jobs of its 600 employees working on the VITA contract.
Northrop Grumman points out in a letter dated May 12 that the new system also does not offer a competitive advantage to suppliers that agree to provide jobs in Virginia.
In addition, Northrop Grumman argues that Virginia’s IT infrastructure will be less secure under multiple vendors. “There is significant risk in this plan since there are few instances of mature [multi-source service integrators] models in the market, and the current architecture is not designed to be disaggregated to multiple providers,” Christopher T. Jones, president of Northrop Grumman Technology Services, said in the letter.
Under the state’s new approach, one new vendor will serve as a multi-source services integrator, whose responsibilities will include coordinating the services under the new IT model.
Northrop Grumman also contends the new model will transfer performance risk to Virginia and make the state’s IT system more vulnerable to cybersecurity attacks. “This creates an architecture where security becomes only as strong as the service with the weakest posture,” Jones writes.
The wave approach
Transitioning Virginia’s IT is a massive undertaking.
Virginia’s infrastructure provides IT for 63 state agencies, which have 55,500 computers, 59,000 email accounts, 27,000 printers, about 95,000 desk and cell phones and 1.75 petabytes of data. (A petabyte of data is equal to 1 million gigabytes.)
The new framework includes at least seven contracts for IT services, with separate vendors providing services ranging from email messaging to data and voice networks.
VITA plans to move IT services to new vendors in three waves (see chart on this page). Procurement already has been completed for the first wave: HP Enterprise Services was awarded a $34.7 million contract over five years to provide an IBM mainframe system, and Tempus Nova, a Denver-based company specializing in Google enterprise solutions, has received a $5.3 million award over five years to provide messaging, including email and related services.
As the first part of the second wave, VITA is reviewing candidates for the multi-source services integrator, or MSI. Requests for proposals (RFPs) were scheduled to go out in December for a security provider and January for a server and storage provider.
RFPs for the third wave, which includes a purchaser of PCs, laptops and tablets and the provider of voice and data networks, are scheduled to be issued in late 2017 and early 2018. That wave would be implemented when the Northrop Grumman contract ends in 2019.
First-wave plans, however, already have hit snags.
Mainframe services are scheduled to begin switching to HP next January. During the procurement process, however, Northrop Grumman declined to release some information about subcontracts with other companies, saying it was proprietary information. JLARC says not having that information could result in higher costs for Virginia.
Disagreements over information sharing could have an even greater effect on higher-cost services, such as server and data storage, according to JLARC’s September memorandum.
While the mainframe is still scheduled to transfer from Northrop Grumman to HP in January, the switchover of messaging services has been delayed. “Because we’ve had some challenges, we’re going to delay its implementation until after the General Assembly [session this year],” says Moe.
Disagreements that have erupted during the first wave were partially expected and a reason behind the consultant’s recommendations to start the transition before the contract’s expiration.
“Starting disentanglement early would allow the state to gradually transition to new services and better manage risks,” according to the Integris Applied report. “The state could begin by disentangling smaller services and use the lessons learned to disentangle larger and more complicated services at the end of the contract.”
Despite the setbacks and upcoming mediation, Moe remains confident that services will be transferred by the end of the contract in 2019.
Data centers’ future
Northrop Grumman’s most visible contributions to the state’s IT system were the construction of two data centers in Virginia. They are the Commonwealth Enterprise Solutions Center in Chesterfield County, which employs 291 workers, and the Southwest Enterprise Solutions Center in Russell County, with 171 employees.
Both have been major economic development drivers in their regions.
“When the [Commonwealth Enterprise] data center was built, it was the first facility to go into the Meadowville Technology Park. So that was a big deal for us,” says Garrett Hart, Chesterfield’s economic development director. “It really started opening the park up. Additionally there are really good jobs there, and it’s a data center, so it pays a pretty good tax bill.”
Meadowville, a 900-acre business park, is now home to some of Chesterfield’s biggest economic development projects, including an Amazon distribution center, Capital One’s biggest data center and a Medline medical device distribution facility. In addition, Niagara Bottling is building a 450,000-square-foot distribution facility in the technology park.
The Southwest Enterprise Solutions Center likewise boosted economic development in the far west corner of Virginia. “It’s one of our top five employers in the region, so their impact has been pretty tremendous,” says Becki Joyce, chairwoman of the Russell County Industrial Development Authority.
In addition to providing well-paid jobs and benefits, the data center also has been heavily involved in the community. “[Data center employees]help coach the local robotics team, and they participate in the annual school backpack program. They also participate in food drives and much more,” Joyce says. “For a small community like us, that type of community involvement is very significant.”
Creation of the Southwest Enterprise Solutions Center and CGI Group’s decision to open another data center around the same time were instrumental in helping the region establish itself as a technology hub. The Southwest Enterprise Solutions Center was the first tenant in the Russell Regional Business Technology Park in Lebanon. “We have such a great broadband infrastructure … here in Southwest Virginia, which is one of the biggest hidden assets that we have in the region,” says Joyce.
While the employment future for Northrop Grumman employees at the data centers remains murky, Joyce and Hart hope impacts will be minimal.
Joyce points out that many employees in the Southwest Enterprise Solutions Center work on other Northrop Grumman projects. Hart also hopes Chesterfield remains Virginia’s choice location in consolidating IT services.
The next couple of years will be telling in Virginia’s IT transition efforts and its abilities to adapt to rapidly changing technologies and cybersecurity threats.
“It will be interesting to see what this next decade brings,” says Norman, who plans to work with vendors applying for contracts under the new model. “Can we respond to technology and its capabilities quickly, efficiently, transparently and economically? I commend the commonwealth for stepping up to this and taking a good hard look at it and saying, ‘Let’s turn the page and write the next chapter.’”