Virginia’s $2 billion IT deal
Under a precedent-setting contract, Northrop Grumman is revamping the commonwealth’s information technology

by Garry Kranz
for Virginia Business
April 2007

You have to spend money to make money. It’s a mantra well understood by Northrop Grumman Corp., a huge global defense and technology company. Construction workers in Chesterfield County have nearly finished Northrop Grumman’s mammoth new data center. Built for nearly $35 million, the facility is the first physical manifestation of the company’s contract with Virginia to modernize the commonwealth’s antiquated IT infrastructure.

With a huge raised floor about the size of a football field, the project will soon be “information central” for 90 executive state agencies. State computer systems will be managed from the site, with the help of a dedicated power grid and a secure telecommunications network. The 192,000-square-foot, two-story building should be ready for some workers by July. Once it is fully operational — perhaps by the end of the year — as many as 630 people could work there. The high-end jobs will pay salaries of $55,000 to $65,000.

Meanwhile, in job-hungry Southwest Virginia, Northrop Grumman is building a $23 million facility in Lebanon. It will provide a help desk and disaster recovery for the Chesterfield data center, creating 430 high-tech jobs that will pay in the $30,000 to $35,000 range — well above the region’s per-capita income. “Having these kinds of jobs here is going to change the face of Lebanon” for the good, says Jim Gillespie, Russell County’s administrator.

It’s not unusual for governments to outsource management of their information technology. But nothing on the scale of the Northrop Grumman-Virginia deal has been undertaken, at least not by a government. In what is billed as the largest public-private IT deal in the country, the contract extends for 10 years, with a total value to Northrop Grumman estimated at $2 billion.

What’s different about this pact, and where the potential advantage to Virginia lies, is the way the deal is structured. Unlike traditional “pay as you go” outsourcing deals, it calls for Northrop Grumman to make all upfront capital investments — an estimated $270 million — for facilities, equipment and personnel needed to replace Virginia’s legacy computer networks. Northrop Grumman won’t recover a penny of its initial investment for several years.

Other states are taking note. Several chief informa­tion officers have already contacted Virginia to inquire how it became the first state to persuade a private-sector company to assume such an enormous financial burden, says Lemuel Stewart. He’s chief information officer for the Virginia Information Technologies Agency (VITA), a 3-year-old agency that manages state IT assets and is overseeing Northrop Grumman’s work. “It requires no additional taxpayer dollars and creates a lot of economic development activity,” says Stewart.

Virginia solicited bids last year from several companies. Stewart says it was clear from the start that the “the commonwealth couldn’t afford to invest the capital needed to modernize our 1980s [IT] environment.” Los Angeles-based Northrop Grumman beat out other technology heavyweights such as IBM Corp., EDS Corp. and Unisys Corp. Performing the overhaul is Northrop Grumman’s information technology division, based in McLean, which will update every aspect of the state’s technology infrastructure: mainframes, desktop computers, laptops, servers, voice and data networks, operating systems, e-mail and messaging, data security and technical support.

Privatization: profitable or perilous?
Theoretically, consolidating technology across departments will make state agencies more efficient, which in turn should yield substantial cost savings. Stewart says it’s too early to say precisely how much money, but savings would be used to pay Virginia’s obligations to Northrop Grumman — estimated to be about $190 million a year when averaged over the life of the contract.
Stewart says those kinds of dollars will be recovered incrementally through reduced operating costs. By year four of the contract, Northrop Grumman should begin recouping its money. No additional state funds are required for the upgrades. “It’s a benefits-funded program,” explains Stewart.

Perhaps, but even some privatization advocates wonder if this singular arrangement will yield the projected payoff. Blue Wooldridge, an associate professor of government at Virginia Commonwealth University, cites one concern often associated with privatizing government services: return on investment. “All too often we assume that turning government services over to the private sector means [private companies] will do a better job. But what if they don’t?” asks Wooldridge.

As with most big contracts of this type, Northrop Grumman has certain timetables to meet the completion of projects. That gives Virginia the authority to revise the agreement if Northrop Grumman doesn’t execute. Given its financial depth and experience doing large integration projects, however, that probably is an unlikely scenario. Yet, because it is the first of its kind, this contract puts enormous pressure on Northrop Grumman — not to mention state lawmakers who approved the deal — to make sure Virginia doesn’t wind up paying tons of money, with little tangible benefits to show for it. Even Stewart sounds a note of caution. “Execution is what it’s all about now,” he says.

Along with roughly $60 million spent for new data centers, Northrop Grumman is putting up another $60 million to install a new statewide telecommunications network. It will tie the facilities together, with Verizon Communications laying the wideband pipe. One major advantage of the new network is the ability to support multi-protocol label switching, or MPLS, a versatile technology that can carry many types of communication traffic.

The MPLS network is an enabling component for other aspects of the IT upgrades. For instance, rather than scheduling a technician for an in-person service call, advanced desktop support will be able to send automated fixes via the network directly to users’ desktops. The network’s huge bandwidth also lays the foundation for higher network security and data backup. “We’ll be able to react [to potential information-security threats] more quickly with the two facilities tied together on a statewide network,” says Joe Fay, a Northrop Grumman project manager in Richmond.

Northrop Grumman is spending $50 million on new mainframes and computer servers, while another $35 million is devoted to purchasing new computer equipment. (See chart on page 58 for a complete breakdown). In addition to Verizon, other subcontractors include Hewlett-Packard Corp., which is helping to consolidate servers and messaging platforms, and McLean-based Booz Allen Hamilton, a consultant on organizational change management.

Shortly after assuming control of Virginia’s IT operations last July, Northrop Grumman offered jobs to about 850 VITA employees to help with the arduous process of streamlining technology platforms and networks. Two-thirds of VITA workers, or about 550 people, chose to leave the state and join the company. They will be among the first wave of employees at the Chesterfield data center. Northrop Grumman also plans to hire for about 125 new positions in Chesterfield. “We’re ecstatic at the number of people that decided to join Northrop Grumman,” says Fay. “It was well above the targets we set” of 40 percent to 50 percent.

Considering the complexity of the work, such sizable institutional memory is no doubt welcomed. The plan is nothing if not ambitious. Northrop Grumman must reduce Virginia’s 3,000 computer servers by one-third, replace up to 70,000 desktop computers with newer models, collapse 40 separate telecom networks onto the MPLS fiber and consolidate nine e-mail and messaging programs onto one platform. The goal, according to Fay, is to use common technology platforms across state agencies.

Minority firms take major role
Small companies, particularly ones owned by women and minorities, are getting in on the action. When the contract was awarded, then-Gov. Mark R. Warner stipulated at least 40 percent of discretionary spending be earmarked for small minority-owned or disadvantaged businesses. Without such a mandate, “companies like ours don’t have the reach to do a contract of this magnitude,” says Adish Jain, president of Leading Edge Systems Richmond Inc., one of nine small minority staffing firms hired by Northrop Grumman as a primary contractor.

Northrop Grumman has plenty of financial incentive to make the deal work. Likewise, Virginia appears to possess the political will necessary to see the contract through to the end. And any initiative that can spawn hundreds of new jobs is always welcome. Nevertheless, 10 years is a long time for a government contract. Partnerships like this are common in the private sector, but state bureaucrats are steering Virginia into uncharted waters. Now they have to hope the project doesn’t sink under its own weight.