Offshoring in Six Human Services Programs: Offshoring Occurs in Most States, Primarily in Customer Service and Software Development
Published: 2006-03-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: As states and the federal government have sought to streamline and improve administrative processes and take advantage of technological advances, both have outsourced certain functions to private firms. In some cases, these firms have used offshore resources to perform these functions. As a result, questions have been raised about the prevalence of offshoring in federal human services programs. In response to widespread congressional interest, we conducted work under the Comptroller General's authority to determine (1) the occurrence and nature of offshoring, (2) the benefits state agencies have achieved through offshoring and problems they have encountered, and (3) the actions, if any, states and the federal government have taken to limit offshoring and why. We examined four federally-funded state-administered programs--Child Support Enforcement, Food Stamp, Temporary Assistance for Needy Families (TANF), and Unemployment Insurance--and two federally-administered programs that provide student financial aid--Pell Grant and Federal Family Education Loan (FFEL). The Departments of Agriculture, Education, Health and Human Services, and Labor did not have comments on this report.
section_title: What GAO Found
paragraphs: Some work is performed offshore in the majority of states for the four state-administered programs we reviewed, but no work is performed offshore for the two federally-administered student aid programs. Offshoring occurred in one or more programs in 43 of 50 states and the District of Columbia, most frequently in the Food Stamp and TANF programs. However, expenditures for services performed offshore in the four state-administered programs appear to be relatively small. The services states most frequently reported as being performed offshore in the Food Stamp and TANF programs were functions related to customer service, such as call centers, and in the Unemployment Insurance and Child Support Enforcement programs functions were related to software development. India was the most prevalent offshore location, followed by Mexico. We did not find any occurrences of offshoring in the Pell Grant and FFEL programs and the Department of Education's U.S. residency requirement for contractors performing high-risk work has the effect of limiting offshoring. State officials reported that lower costs are a benefit of having services performed offshore and few officials identified problems with offshore service providers in their contracts. Fifteen state program directors reported having performed cost comparisons for their current contracts, based on differences in the location of services, and all reported that they would achieve cost savings if some of the work were performed offshore. On average, these comparisons showed that with some services performed offshore, contract costs would be between 0.3 and 24 percent less than if all the services in the contracts were to be performed in the United States. The few state officials that reported any problems with the quality of services provided by offshore contractors said that they involved difficulties in understanding the English of software programmers or customer service representatives. While numerous actions have been proposed at the state and federal levels to limit offshoring by government agencies, few restrictions exist with respect to the six programs we reviewed. Two states--New Jersey and Arizona--have prohibited offshoring in state contracts. Some states have also taken other actions, such as requiring state agencies to disclose when state-contracted work is performed offshore or to report on the implications of offshoring. The federal government does not have regulations specifically related to the offshoring of services in the six programs we reviewed.

section_title: Letter
paragraphs: Advances in information technology and communications, coupled with a  large pool of educated workers in some countries, have allowed private  companies to move services work outside of the United States in such  areas as call centers, back-office functions, and software programming.  While some maintain that the services offshoring phenomenon is  widespread, others say that the extent is limited. Media reports in 2004  that call centers providing customer service to Food Stamp recipients  were based in India inspired proposals at the federal and state levels to  restrict “offshoring” in public programs or the practice of performing  contracted work outside of the United States. Offshoring generally refers  to the import from abroad of goods or services that were previously  produced domestically. As states and the federal government have sought  to streamline and improve administrative processes and take advantage of  technological advances, both have outsourced certain functions to private  firms. In some cases, these firms have used offshore resources to perform  these functions. Questions have been raised about the prevalence of  offshoring and the potential consequences when federally-funded human  services programs procure services from companies that offshore.  However, as we reported in 2004, no comprehensive data or studies show  the extent of services offshoring by state governments and data for the  federal government are limited.
In response to widespread congressional interest in this area, we  conducted work under the Comptroller General’s authority to determine  the occurrence and nature of offshoring in six federally-funded human  services programs. Specifically, we examined (1) the occurrence and  nature of offshoring in each of these six programs, (2) the benefits  government agencies have achieved through offshoring in these programs  and the problems they encountered in offshoring work, and (3) the  actions, if any, states and the federal government have taken to limit  offshoring in these programs and why. The six federally-funded programs  we examined include four state-administered human services programs— Child Support Enforcement, Food Stamp, Temporary Assistance for Needy  Families (TANF), and Unemployment Insurance—and two federally- administered programs that provide student financial aid—Pell Grant and  Federal Family Education Loan (FFEL). We selected these programs  because they receive a substantial amount of federal funding for program  administration, contract out some administrative functions, and are not  administered solely at the local level.
To determine the occurrence and nature of offshoring in the four state- administered programs, we administered two separate Web-based surveys:    First, we surveyed directors of the Child Support Enforcement, Food  Stamp, TANF, and Unemployment Insurance programs in all 50 states and  the District of Columbia—a total of 204 directors. We asked each program  director to provide information on up to three contracts held by the  program: the contracts with known offshoring or, if there were fewer than  three contracts with offshoring or no offshoring, the largest contracts (in  dollars). We also requested information from each program director on the  total number of contracts and total spending on contracted-out services. In  addition, we reviewed contracts from state officials that reported no  offshoring. We obtained a 93 percent response rate to our survey of state  program directors.
To supplement the survey of state officials, we surveyed the contractors  whose names were provided by state officials to obtain additional  information on the types of services provided to state programs and where  these services are performed. We obtained a 54 percent response rate to  our survey of contractors.
It is likely that our two surveys did not identify all instances of offshoring  in the four state-administered programs. Therefore, the figures we cite for  the four programs on the number of contracts in which some services  were offshored and the total expenditures for these contracts should be  viewed as minimum levels. To further understand the nature of  contracting in these programs, we conducted site visits to Florida, Utah,  and New York. We selected these states based on the presence of  offshoring in multiple programs or in multiple contracts within a program.
At these site visits, we interviewed state program officials and reviewed  contract-related documents.
To determine whether any services are performed outside of the United  States in the two federal student aid programs, we interviewed officials  from the U.S. Department of Education’s Office of Federal Student Aid  (Student Aid) and reviewed departmental directives and contracting  documents. While the Department of Education is responsible for overall  administration of the Federal Family Education Loan program, loans are  financed by commercial lenders such as banks and credit unions and non- profit lenders such as postsecondary institutions. State and national non- profit guaranty agencies administer the federal insurance that protects  these lenders against losses and perform a variety of administrative  functions. We did not include commercial and non-profit lenders or the  guaranty agencies in this review. Rather, we focused on cases in which the  Department of Education entered into direct contracts for services related  to program administration.
To determine what actions states and the federal government have taken  to limit offshore work in these programs, we reviewed laws, policies, and  executive actions, including those identified through our state survey.  Appendix I provides further details about our scope and methodology. Our  work was conducted between January 2005 and February 2006 in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: No commonly accepted definition of offshoring currently exists, and the  term includes a wide range of business activities. Generally, services  offshoring is used to describe the replacement of domestically supplied  service functions with imported services produced offshore. This  definition focuses on a business’s decision to contract out: should it  produce the services internally, contract with a company located in the  United States (outsourcing), or contract out with companies based  offshore? Offshoring has also been used to describe the movement of  domestic production (and the related jobs) offshore. In this case, the  definition focuses not on imports of services from abroad, but on U.S.  companies investing offshore. Business and professional services such as  accounting, bookkeeping, and software programming and design do not  have to be performed on site, and, therefore, can be outsourced offshore  to any location. For example, a U.S.-based company can stop producing  certain services in-house and instead purchase them from a company with  foreign-based staff or a state government could contract out its software  programming to a company with foreign-based staff.
While limited, U.S. government data provide some insight into trends in  offshoring of services. Trade data from the Department of Commerce  show that, generally, imports of services associated with offshoring are  growing. Federal procurement data show that the total dollar value of the  federal government’s services contracts with offshoring increased  between 1997 and 2002. However, when compared to all federal contracts  with services, the proportion showed little change during that time.
subsections: section_title: State and Federal Programs We Examined
paragraphs: The federal government provides benefits (for example, food, child care,  or income subsidies) through human services programs. Table 1 provides  information on the state and federal human services programs we  examined. The four state-administered programs spent about $15.7 billion  dollars in state and federal funds on program administration in fiscal year  2004 (the most recent year for which expenditure data were available for  all four of the programs).
section_title: Federal Mandates May Influence Outsourcing
paragraphs: The federal government and some states have outsourced in response to  federal mandates to automate or centralize certain functions of human  services programs. For example, the Personal Responsibility and Work  Opportunity Reconciliation Act (PRWORA) of 1996 required states to  establish a central unit for receipt and disbursement of child support  payments from non-custodial parents and employers. According to data  reported by the federal program office in March 2005, 27 state programs  for child support enforcement have contracted with private companies to  handle all or some of these functions. The federal government provides a  66 percent match to state spending for most of the administration of child  support enforcement.
PRWORA also required states to implement electronic benefits transfer  (EBT) systems for the reimbursement of food stamp benefits. EBT allows  food stamp recipients to use a plastic card, much like a debit card, to pay  for their food from authorized retailers and have the benefit deducted  from the household’s allocation. EBT contracts generally include a range  of programs and support functions, including customer service. It is this  complete group of services, often referred to as “bundled,” that are  included under the term “EBT” and for which states contract out. All   50 states and the District of Columbia provide Food Stamp benefits  through EBT. Forty-eight states and the District of Columbia have  contracts with private companies to provide all or some of these EBT  services. The federal government provides a 50 percent match for most  EBT and other administrative functions for states. Some states combine  the distribution of benefits for Food Stamps with cash assistance under  TANF. As such, some states spend TANF funds for the administration of  their EBT systems. Thirty-six states distribute TANF benefits via EBT in  combination with Food Stamps and other programs. While not mandated  to do so, some Unemployment Insurance programs are redesigning their  benefits systems to provide efficient and cost-effective services to  unemployment insurance customers through electronic submission of  applications and wage and tax data. Through federal unemployment taxes,  the federal government provides all of the funding for the administration  of Unemployment Insurance programs at the state level.
The 1998 reauthorization of the Higher Education Act of 1965 mandated  the Office of Federal Student Aid (Student Aid) to integrate its separate  computer systems, improve service to its customers and employees, and  reduce its operational costs. Through the use of contractors, Student Aid  is replacing these separate computer systems that aid the office in  performing business operations such as determining eligibility, processing  aid applications, and disbursing grants and loans with integrated computer  systems. Through integrated computer systems, Student Aid will be able to  streamline data sharing among schools, lenders, and its offices and  eliminate system redundancies. The Higher Education Act also requires  Student Aid to establish appropriate administrative, technical, and  physical safeguards to ensure the security and confidentiality of privacy- protected information used in these systems. In 2004 and 2005, Student  Aid spent about $500 million annually on information technology related  to its programs.
section_title: Most States Perform Some Functions Offshore in Four State-Administered Programs, but No Offshoring Is Occurring in Two Federally- Administered Student Aid Programs
paragraphs: In the four state-administered programs we reviewed, 43 of 50 states and  the District of Columbia have offshoring in one or more programs, but we  did not find occurrences of offshoring in the two federally-administered  programs. Offshoring occurs most often in the Food Stamp and TANF  programs. We also found offshoring in Unemployment Insurance and  Child Support Enforcement programs, but in fewer states. While the  magnitude of expenditures on offshored services appears to be relatively  small, we could not determine the specific amount of these expenditures  for several reasons. Services most frequently reported as being performed  offshore include customer service for the Food Stamp and TANF  programs, and software development for the Unemployment Insurance  and Child Support Enforcement programs. In all four programs, state  officials rarely contracted directly with foreign companies to perform  these services. Rather, state officials used U.S. contractors that either used  subcontractors that performed the work offshore or used their own  workers located offshore. In the federal student aid programs we  examined—the Pell Grant and FFEL—we found no occurrence of  offshoring. Education’s efforts to safeguard high-risk work in these  programs, through security screenings for contractor employees, has the  effect of limiting the extent to which services can be performed offshore.
subsections: section_title: Most Offshoring Occurs in the Food Stamp and TANF Programs
paragraphs: Forty-three of 50 states and the District of Columbia have offshoring in  one or more of the four state-administered programs. Offshoring was most  often cited by state program directors and contractors in the Food Stamp  (31 of 51) and TANF programs (16 of 51). Occurrences of offshoring were  less frequently reported by state program directors and contractors in the  Child Support Enforcement (12 of 51) and Unemployment Insurance  programs (8 of 51). Of the state program directors we surveyed, most  reported that they knew where services are performed and reported no  offshoring in their contracts, but several state officials said they were  uncertain about offshoring in their contracts. State officials most  frequently reported that there was no offshoring in their contracts because  they closely monitor contracts and know where the services are  performed. However, our survey of contractors uncovered additional  occurrences of offshoring in all four programs in some contracts for which  state officials had reported either that no offshoring was occurring or that  they were uncertain whether offshoring was occurring. In 16 states, we  found offshoring in certain contracts where state officials had reported  that the contractor performed all services within the United States. Figure  1 shows the states and programs in which state officials and contractors  reported offshoring in one or more contracts (including the 16 states) and  also provides information on the total number of reported occurrences of  offshoring in each of the four programs.
section_title: Magnitude of Spending on Offshored Services Appears to Be Relatively Small, but Is Difficult to Determine
paragraphs: The magnitude of spending on offshored services in the four state- administered programs appears to be relatively small with respect to total  spending on outsourced services, but is difficult to quantify. In total,  administrative spending across the four programs was about $15.7 billion  in fiscal year 2004. At the time of our review, the four programs had about  5,606 contracts valued at approximately $1.8 billion (or 12 percent of total  administrative spending). The total value of the 83 contracts where some  offshoring occurred was at least $335 million. For nine of these contracts,  state officials did not report total contract costs. The contracts with  reported offshoring comprised 2 percent of the total number of contracts  and about 18 percent of the total spending for all contracted-out services  across the four programs. However, the magnitude of actual spending on  the offshored services we identified is likely considerably lower than   $335 million because for many of the contracts with some offshoring, the  bulk of services are performed in the United States. For example, the U.S.  company that holds the majority of state contracts with some offshoring in  the Food Stamp and TANF programs estimated that services performed  offshore constituted less than 3 percent of the total services provided  through these contracts. Similarly, a contractor providing services to  several child support enforcement programs stated that offshored  computer software programming comprised less than 1 percent of the  total package of services provided to states. Figure 2 shows the estimated  spending on contracts with some offshoring out of the total spending on  administration across the four state-administered programs.
The level of spending on contracts with some offshored services varies  considerably among the four state-administered programs. As shown in  figure 3, spending on contracts with some offshored services constituted  30 percent or more of total spending on outsourced contracts in the Food  Stamp and Child Support Enforcement programs. The comparable  percentages for the TANF and Unemployment Insurance programs are  considerably lower.
State officials in seven states provided estimates for their Food Stamp or  TANF contracts of the percent of contract spending represented by  offshore services and these estimates ranged from 3 to 39 percent of the  total expenditures for each contract. However, it is unclear whether this  range of estimates reflects levels of offshore spending in the other  contracts with offshoring. The state officials who provided these spending  estimates did not report expenditure data for each service in their  contracts. For example, officials in New York told us that they do not  receive itemized lists of costs for each service from their contractors who,  in some cases, consider the information proprietary. The contractors  providing services to states also reported that prices were not itemized,  that companies sometimes use the same resources for many states or for  private clients, and that the costs for specific services cannot be calculated  for any one contract.
section_title: Services Most Frequently Reported as Being Performed Offshore Include Customer Service and Software Development
paragraphs: In the Food Stamp and TANF programs, state officials reported that  contractors most frequently offshored certain customer service functions  related to EBT systems. EBT systems encompass a wide a range of  services and state officials reported that call centers with human operators  and staff help desks were the services EBT contractors most frequently  performed offshore. EBT call centers were offshored in 24 states.  Typically, the offshoring scenario for call centers is when a food stamp  recipient calls into the automated system to report a lost or stolen EBT  card, inquire about balances, or obtain other assistance for example. The  recipient can choose an option to be connected to a customer service  representative. The telephone call is then routed to an offshore location,  such as India if they are an English speaker or Mexico if they wish to  speak to someone in Spanish, where a person in a call center handles the  call. Staff help desks work much like call centers with human operators,  but are typically available to help state program staff solve administrative  problems such as accessing data from the EBT system. Staff help desks  were offshored in 10 states. Figure 4 provides more details on the extent to  which various types of EBT system services are performed offshore.
EBT contracts include a range of programs and support functions. EBT  contractors told us that customer service is considered a support function.  Contractors also said that certain other services may be performed  offshore, including claims investigations when an EBT cardholder  suspects a problem, supplemental software programming, and data entry.  Contractors that provide some EBT services offshore said that even when  the majority of a service is performed in the United States, backup  services can operate offshore. For example, an offshore call center can  assume the overflow workload of a U.S.-based call center in responding to  benefit recipients.
In the Unemployment Insurance and Child Support Enforcement  programs, the services most frequently performed offshore are software  development and related services. The services contractors performed  offshore for Unemployment Insurance fell into three general areas:  development of software for a computer system (e.g., a case management  system), development of Web-interfaces (the actual systems the public  would use), and computer system maintenance. In four of the five states  in which program directors reported offshoring in the Unemployment  Insurance program, the offshoring occurred in contracts to convert all or  some of a mainframe computer system to a Web-based system. In child  support enforcement programs, the service contractors most often  performed offshore was software development. State program directors  provided examples of services performed offshore in their contracts in the  areas of software programming, Web development, and computer  maintenance. The following examples illustrate the services that particular  states have offshored in these programs:    Software Programming: In South Carolina, the contractor hired to  update the state’s system for managing employer taxes is using software  programmers in India to develop the new system. In Wisconsin, while the  actual software programming was conducted in the United States, the  contractors used an offshore help desk to obtain technical assistance in  conducting software programming services. In several child support  enforcement programs, the software designed for payment machines used  in handling the receipt and disbursement of child support payments was  created offshore. While the payment machines are housed and operated  within the United States, the company that produces the software that  runs a part of the machine’s operating system creates the software in  India.
Web Development: In New Mexico the contractor performed Web  development services in India as part of the development of the front-end  system to allow the public to file on-line claims.
Maintenance: Contractors for Washington and Montana offshored the  periodic maintenance work required when the state needs assistance with  a particular machine or for periodic testing on a system. Contractors for  Washington conducted the offshored maintenance work from a variety of  locations depending on the time of day the request was initiated.  Contractors for Montana conducted the maintenance work in Poland for  any upgrades to the system.
section_title: Contractors Most Often Perform Offshore Services through Subcontractors that Operate in India and Mexico
paragraphs: Offshoring in the four state-administered programs almost always  occurred when U.S. companies subcontracted with companies that  performed work offshore. Generally, states did not directly contract with  foreign companies. As such, contractors, not state officials, made the  decision to offshore in delivering the services the state requires. In  addition, some contractors that use offshore subcontractors provide  services to a large number of states. For example, one company holds the  EBT contracts with offshoring in 28 of the 31 states where we identified  offshoring in the Food Stamp and TANF programs. In 11 of the 31 states,  the Food Stamp and TANF programs were covered under the same EBT  contract that state officials or contractors identified as having some  services performed offshore.
In the states where we identified offshoring, offshored services were most  often performed by subcontractors. Offshore subcontractors provided  services for states on both a continual and intermittent basis. In some  cases such as EBT call centers, the subcontractor performed a variety of  services on a consistent basis over the life of the contract, including the  operation of the call center. In other cases, subcontractors work on an as- needed basis. For example, a contractor building a new computer system  may use software or hardware from various companies. The  subcontractors would be the companies that produced these various  software and hardware parts and would be called upon as needed to  provide maintenance or assist in resolving problems with their products.  In certain cases, services are performed offshore within short time frames  or in response to unexpected deadlines. For example, an EBT contractor  told us that during a peak period in the company’s workload, it may use an  overseas source to expedite the development of Internet-based  information portals used by state officials.
India and Mexico were the most frequently cited locations where  contractors and subcontractors performed offshored services in the four  state-administered programs, as shown in figure 5. Other locations where  services were offshored include Canada, France, Ireland, and Poland. In  the Food Stamp and TANF programs, EBT call centers operated in India  for English-speaking callers and Mexico for Spanish-speaking callers. In  the Unemployment Insurance and Child Support Enforcement programs,  most contractors performed services related to software programming in  India. We also found examples of software programming work in France  and Poland. State officials in Washington, while unable to identify the  countries where services were performed, said contractors offshored so  that customers can reach a customer service representative or technician  24 hours a day, 7 days a week.
section_title: Mandatory Security Screenings of Contractors Limit Offshoring in the FFEL and Pell Grant Programs
paragraphs: Education officials did not report—and we did not find—any occurrences  of offshoring in the two contracts for Information Technology (IT)  development and 21 contracts for debt collection services for the FFEL  and Pell Grant programs. Education officials in the Office of Federal  Student Aid (Student Aid), the office within Education that administers the  FFEL and Pell Grant programs, reported that the locations where  contractors and subcontractors performed work were all within the  United States and that some contractors worked on-site at Education  facilities. Student Aid officials told us that they are certain about the  location where contracted services are performed because in some cases  contractors provide the information and in other cases they require all  contractors to disclose the locations where they will perform all  contracted services. However, with the exception of debt collection  contracts, Student Aid does not have specific requirements to monitor  whether contractors are performing work within the United States or  offshore after the contract is signed. Student Aid officials stated that  contracting officials monitor the location where contractors perform  services for the programs through the office’s general contract monitoring  efforts. These efforts include reviewing financial and performance audits,  inspecting agreed-upon products, reviewing invoices, and conducting site  visits. For debt collection contracts, Student Aid requires contractors and  their subcontractors to provide bi-annual updates of the locations where  they perform services.
Student Aid officials told us that a departmental requirement for  contractor employees to be U.S. citizens or lawful permanent residents has  the effect of preventing contractors from performing some services  offshore in the FFEL and Pell Grant programs. Education has varying  levels of security screenings for contractors based on the risk level  associated with the work being performed. Before proceeding with  appropriate security screenings for contractor employees working in high  risk positions, Education requires employees to be either U.S. citizens or  lawful permanent residents who have resided continuously in the United  States for a minimum of 3 years. The residency requirement is associated  with the security screening and it was not established to limit offshoring;  however, it has the effect of ensuring that departmental contractors are in  fact performing their services in the United States. The residency  requirement applies to all high-risk contractor employees, including those  working on the FFEL and Pell Grant contracts. We did not find anything in  the department’s policy that restricted U.S. citizens from performing  contracted work offshore.
Similar to Education, the federal agencies that administer the TANF, Child  Support Enforcement, Food Stamp, and Unemployment Insurance  programs also have processes for ensuring that federal contractors  undergo the appropriate OPM background investigations. Like the  Department of Education, they have department-level requirements that  contractor employees be U.S. citizens or legally permitted to work in the  United States in order to perform high-risk work. However, these agencies  have not established any requirements that would mandate either U.S.  citizenship or a minimum period of residence in the United States (for  lawful permanent residents) for state governments that are employing  contractors for state administration of the TANF, Child Support  Enforcement, Food Stamp, and Unemployment Insurance programs.
While the federal agencies have established requirements for the four  state-administered programs to protect private information and  information systems, states determine how to implement the protections  and can establish their own policies and requirements. In some cases, such  as in New Jersey and Arizona, state requirements are stricter than those  passed down from the federal offices. For example, the federal office that  administers the Food Stamp program requires that states ensure the  privacy of household data and provide benefit and data security in state  EBT systems. The federal office does not prescribe the specific measures  states should take in protecting private information and states can take a  range of measures including encryption, password protection, physical  security measures, and requiring contractors to sign confidentiality  statements.
The federal Office of Child Support Enforcement requires states to apply a  range of minimum physical and system security measures concerning their  child support enforcement systems. New York, for example, also requires  subcontractors working on child support enforcement contracts to sign  confidentiality statements. In addition, New York also requires contractors  and subcontractors to complete a background questionnaire that asks  questions related to criminal or civil investigations, adherence to labor  laws and other regulations, and the number of employees based outside of  the United States.
section_title: State Officials Cited Cost Savings as a Benefit of Contracting with Companies That Offshore Services and Few Officials Reported Any Problems with Offshored Services
paragraphs: State officials reported that contracts with some services performed  offshore cost less than contracts with all services performed within the  United States and the magnitude of cost savings varied across states. The  cost savings associated with their contracts with offshoring tend to be  higher when the alternative is performing all the contracted services  within their own state, versus somewhere within the United States. While  state program directors recognized lower costs as a benefit of contracts  with some offshoring, most program officials we interviewed did not  report any problems with the quality of services performed by offshore  providers.
subsections: section_title: Magnitude of Cost Savings for Contracts in Which Some Services Are Performed Offshore Varies by State
paragraphs: All 15 state program directors that reported having performed cost  comparisons for their contracts, based on differences in the location of  services, reported that cost savings are associated with having some of the  work performed offshore. The cost savings associated with their  contracts that have some offshored services tend to be higher when the  alternative is performing all the contracted services within their own state,  versus somewhere within the United States. For example, these  comparisons showed that their contracts, with some services performed  offshore, would cost from about 15 to 32 percent less than if all the  services in these contracts were to be performed in-state. Their contracts,  with some services performed offshore, would cost from about 0.3 to   24 percent less than if all the services in these contracts were to be  performed somewhere within the United States. State program directors  obtained these comparative cost data from contractors through bids or  through the process of relocating or considering the relocation of an  offshored service to the United States. The contract prices across the  states varied, in part, because of differences in the contracts themselves or  the different companies that provided services.  These cost savings  figures likely understate the cost savings associated with performing a  specific service offshore versus in the United States because the figures  represent savings in the cost of a total contract, and we know that in many  cases only a few services are offshored in these contracts. Table 2  provides more detailed information by state and program for the cost  comparisons.
The contractors we interviewed confirmed that performing services  offshore would typically cost states less than performing services within  the United States or within a specific state, and the average cost savings  figures they provided mirrored those reported by state officials.  Contractors providing EBT services, for example, said that reasons for  offshoring call centers to India were to reduce operating costs, improve  the quality of customer service, and find people who were willing to work  overnight. Contractors we interviewed also told us that they consider  multiple factors, including state requirements, volume of work, and  competitive pricing, in pricing services performed within and outside of  the United States. These contractors also consider the methods for  determining a price to be a trade secret. When calculating the price  increase to move services from an offshore location to the United States,  contractors generally take into account the planning of resources to  manage the transition, install equipment, train staff, evaluate the need for  subcontracting, and manage quality assurance.
section_title: Few State Officials Identified Problems Associated with Offshoring
paragraphs: Most state officials we interviewed did not report any problems with the  quality of services by offshore contractors. However, it is unclear how  much these reports reflect the actual extent of performance problems of  offshore providers in these programs. While some state officials may be  knowledgeable of the performance of their offshore subcontractors,  others may rely on their primary contractors to monitor these  subcontractors.
Few of the 38 state program directors with either current contracts with  offshoring or contracts where services were recently performed offshore  but were relocated to the United States identified any problems with  offshore service providers. The three officials that indicated problems with  offshored services in their contracts said that those problems were related  to difficulties in understanding the English of software programmers and  customer service representatives in India. Other state officials offered  positive reactions to the work of their offshore service providers. For  example, six officials with contracts where EBT call centers were located  in India said that the offshore call centers posed no challenges and  reported specifically that customer service representatives performed  well. Two of these six officials said that the call centers were of high  quality based on their monitoring of calls between customer service  representatives in India and benefit recipients in the United States. One  official said that a benefit of having software programming contractors  based in Poland was that the contractors conducted work overnight and  had products ready for state staff the next day.
All but four state officials that reported some services in their contracts  were offshored also reported that the contracted services had never been  performed by state employees. In some cases, such as with EBT, the  services were new to states, while in other cases, the services were not  new but had previously been outsourced. In some contracts with  offshoring, state officials reported that the decision to outsource services  stemmed, in part, from a lack of state employees with the needed  expertise. For example, officials in New York stated that they had  difficulty finding persons with the skill set for a certain software  programming language. The salaries offered by the state government could  not meet the higher salaries demanded by persons with the required skills,  according to state officials.
section_title: Few States Have Taken Actions to Ban Offshoring and No Federal Provisions Specifically Restrict Offshoring of Services in the Six Human Services Programs We Reviewed
paragraphs: While numerous actions have been proposed at the state and federal levels  to limit offshoring by government agencies, few restrictions have been  enacted—and only at the state level—with respect to the six programs we  reviewed. In addition, eight state programs have required contractors to  relocate previously offshored services to U.S. locations. There are no  federal prohibitions specifically relating to the offshoring of services in the  six programs we reviewed.
subsections: section_title: State Actions Affecting Offshoring Vary from Bans to Reporting Requirements
paragraphs: Actions have been proposed in many states to limit offshoring but few  states have actually taken actions to limit offshoring. State actions  pertaining to offshoring range from outright bans on offshoring, to  requirements for contractors to disclose the locations where they will  perform work, to requirements for state officials to report periodically on  the extent of offshoring. These actions have been taken through various  mechanisms, including executive orders, state laws, and agency rules.
Two states—New Jersey and Arizona—have banned offshoring in state  contracts. Through a state law, New Jersey has prohibited offshoring in all  state contracts for services. In a procurement agency directive, Arizona  prohibited offshoring in state contracts and required state agencies to  include a specific clause in contracts and future requests for proposals  that specifies that work must be performed in the United States. Arizona’s  prohibition does not apply to indirect services, back up services, or  services deemed incidental to the performance of the contract. Kansas  prohibited offshoring related to its EBT services and work performed by  one agency for a limited time in a state appropriations act, but as of June  2005, this provision was no longer in effect.
At least five states—Alaska, Colorado, Illinois, Minnesota, and Missouri— have taken actions that do not directly limit offshoring but require that  information be provided on the location where contracted work is  performed. For example, Missouri requires contractors to provide  information in bids for state contracts about the location where work will  be performed. Missouri allows offshoring if the contractor or  subcontractor has what the state considers a significant business presence  in the state and performs a small portion of work under the contract  outside of the United States or the cost is significantly lower than what it  would cost to have all of the services provided within the United States. In  Illinois, contractors are required to disclose the location where services  will be performed prior to signing a contract. Illinois also allows the state  to make the requirement for disclosure a part of an agency’s request for  proposals and gives the chief procurement officer authority to consider  the location where services will be performed in making award decisions.  In addition to requiring contractors to disclose where they will perform  work, Minnesota and Illinois also require periodic reports on the extent of  offshoring in state contracts.
Varied perspectives on the potential effects of services offshoring have  influenced states’ decisions about offshoring. For example, executive  orders requiring disclosures by prospective contractors in Alaska,  Minnesota, and Missouri cited concerns over aggravating unemployment,  the possible detriment to state economies, and a potential reduction in  protections for private and personal information. In contrast, legislators  and elected officials in other states have expressed concerns about  legislation that would seek to restrict contracting outside the United  States. For example, in vetoing a bill seeking to prohibit offshoring in 2004,  California’s governor cited a possible increase in prices paid by the state  for goods and services and the potential violation of international trade  agreements. Other concerns expressed by states that did not pass  proposed legislation restricting offshoring include increased  administrative costs for agencies required to enforce the restrictions,  added layers of contract approval processes, and the impediment of  missions of certain agencies, such as tourism boards and economic  development agencies.
section_title: State Actions on Offshoring Include Relocating Offshored Services to the United States
paragraphs: State actions on offshoring also include the relocation of services to the  United States from their previously offshored locations in some cases. For  example, in the four state-administered programs we examined, eight  states have relocated offshored EBT call center services to U.S locations.  State program directors said that these moves were not required because  of problems associated with the quality of the services performed  offshore. Rather, the moves were undertaken by state governments to  promote local employment and because of concerns raised about  protections of private client information. One of these states—North  Carolina—converted the EBT call center into a state-run operation and  hired local residents to work as customer service representatives. These  moves often mean that the states will incur increased costs. For example,  North Carolina now pays an additional $1 million per year to operate its  own EBT call center. A state official in Arizona estimated that it costs an  additional $1.2 million annually to have its EBT call center operated within  the United States; and state officials in some other states indicated that,  while certain services are currently performed offshore, there were plans  for relocating these services to the United States. Three states—Nebraska,  Utah, and West Virginia—chose not to relocate offshored services because  of the increased costs that they would have incurred.
section_title: No Specific Federal Restrictions Exist on Offshoring of Services in the Six Programs We Reviewed
paragraphs: Actions have been proposed at the federal level to restrict offshoring in  government programs, but there are no current federal restrictions on  offshoring in the six programs we reviewed. Federal proposals to limit  offshoring have targeted the Food Stamp and TANF programs. For  example, proposed legislation to restrict federal funding in a 2004  appropriations bill would have withheld the federal Food Stamp funding  match for any state with offshoring in its Food Stamp program, but the  provision was not passed. Similarly, the House version of the Deficit  Reduction Act of 2005 would have prohibited the use of federal TANF  funds for contracts with companies that offshore directly or through  subcontractors, but this prohibition was also not enacted.
section_title: Concluding Observations
paragraphs: Our work provides insights into the occurrence and nature of offshoring in  six human services programs. Despite the widespread media attention, our  findings show that offshoring of services in state level contracts is not a  major practice in the four state-administered programs we reviewed.  Looking forward, there are various factors that could influence offshoring  in these state programs. As some state legislatures move to restrict  offshoring, the private sector continues to increase the use of offshore  resources—often seen as a good business practice. Tighter budgets have  demanded that states find ways to effectively and efficiently perform their  administrative work for lower costs. As such, some states will continue to  see a need to outsource program functions to companies that offshore in  order to achieve such savings. Other states, concerned about the impact of  offshoring on their local economies or workforce, will see a need to  restrict the occurrence of offshoring in state contracts. Differences in  federal agencies’ security-related policies for contractors also have  implications for offshoring in federal human services programs. As we  have seen, Education’s security-related policies for contractors in the  FFEL and Pell Grant programs restrict the ability to perform work  offshore in these programs, whereas the security-related policies of the  federal agencies for the state-administered programs we examined do not  have this effect on state-level contracting. Such differences in policies may  stimulate further debate about the most appropriate balance of policies  pertaining to security and offshoring in various federal human services  programs.
section_title: Agency Comments and Our Evaluation
paragraphs: The Departments of Agriculture, Education, Health and Human Services,  and Labor did not have comments on this report. The Departments of  Education and Labor provided technical comments that have been  incorporated as appropriate.
Copies of this report are being sent to the Departments of Agriculture,  Education, HHS, and Labor; appropriate congressional committees; and  other interested parties. Copies will be made available to others upon  request. The report is also available at no charge on the GAO Web site at  http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-7215 or at nilsens@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Other contacts and staff acknowledgments are listed in  appendix III.
section_title: Appendix I: Objectives, Scope and Methodology
paragraphs: To obtain information to address our objectives for the four state  programs, we administered two separate Web-based surveys. First, we  surveyed 204 directors for the Child Support Enforcement, Food Stamp,  Temporary Assistance for Needy Families, and Unemployment Insurance  programs in all 50 states and the District of Columbia. We received  responses from 190 of the directors, for a 93 percent response rate. Five  state directors of Unemployment Insurance programs, one state director  of Child Support Enforcement programs, three state directors of Food  Stamp programs, and five state directors of TANF programs did not  respond to our survey. We asked the directors about contracting policies  and practices, as well as work performed outside of the United States. We  also asked each program director to provide us with information on up to  three contracts held by the program: the largest contracts with known  offshoring or—if there were fewer than three contracts with offshoring,  contracts where officials were uncertain, or there were no contracts with  offshore—the largest contracts (in dollars). We then surveyed the  contractors whose names were provided to determine the types of  services provided to state programs and where these services are  performed. Of the 469 contracts covered by the survey, contractors gave  responses for 251 of them, for a response rate of 54 percent. The survey  data was collected from May 2005 to November 2005.
We worked with social science survey specialists to develop the  questionnaires. However, the practical difficulties of conducting any  survey may introduce errors. For example, differences in how a particular  question is interpreted, in the sources of information that are available to  respondents, or how the data are entered into a database can introduce  unwanted variability into the survey results. We took steps in the  development of the questionnaires, the data collection, and the data  analysis to minimize these errors. For example, prior to administering the  survey, we tested the content and format of the questionnaires with  several state officials and contractors to determine whether (1) the survey  questions were clear, (2) the terms used were precise, (3) respondents  were able to provide the information we were seeking, and (4) the  questions were unbiased. We made changes to the content and format of  the final questionnaires based on the results of these tests. In that these  were Web-based surveys whereby respondents entered their responses  directly into our database, the possibility of data entry error was  minimized. We also performed computer analyses to identify errors such  as inconsistencies in responses and contacted survey respondents as  needed to correct errors and verify responses. In addition, a second  independent analyst verified that the computer programs used to analyze  the data were written correctly.
To further examine how state officials knew there was no offshoring in  their contracts, we reviewed contracts. We selected contracts where state  officials responded that there was no offshoring and that all services were  listed in the contract. We requested 48 contracts. We contacted the state  officials responsible for the contracts in our sample and requested a copy  of the contracts. We received all but 1 of the 48 contracts.
To further understand the nature of contracting for these programs, we  visited the states of Florida, Utah, and New York, where we interviewed  state program officials and contractors and reviewed documents  pertaining to program contracts. We selected these states because  program directors stated that there were services offshored for at least  two programs or multiple contracts with offshoring in one program. In  addition, we conducted follow-up interviews with selected state program  directors and contractors.
To examine work performed outside of the United States in two federal  student aid programs, we interviewed officials from the Office of Federal  Student Aid and the Office of Management at the U.S. Department of  Education. We reviewed U.S. Department of Education departmental  directives concerning contractor employee personnel security screenings  and contract monitoring and contracting documents. We also examined  previous GAO reports, Congressional Research Service reports, and  reports from the Office of the Inspector General at the U.S. Department of  Education.
To determine what legal actions state governments have taken related to  offshoring in these programs, we reviewed current laws and executive  orders identified by states through our survey. We also reviewed  legislation proposed in 2005 and reports from legal experts and databases  from policy and trade organizations. To determine what federal  requirements exist that relate to offshoring, we reviewed applicable  federal laws and regulations, including the Federal Acquisition Regulations  and other policies and guidance.
Our work was conducted between January 2005 and February 2006 in  accordance with generally accepted government auditing standards.  Information that we gathered through our surveys, on our site visits, and  during our interviews represent only the conditions present in the states  and with contractors at the time of our review. We cannot comment on  any changes that may have occurred after our fieldwork was completed.  Furthermore, our interviews and site visits focused on in-depth analysis of  only a few selected states, contractors and contracts. Based on our  interviews, we cannot generalize our findings beyond the states and  contractors we contacted.
section_title: Appendix II: GAO Contacts and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Andrew Sherrill, Assistant  Director; Tahra Nichols, Analyst-in-Charge; Deborah Owolabi; Amy Sweet;  Margaret Armen; Carolyn Boyce; Jay Smale; Robert Alarapon; and   Tovah Rom made significant contributions to this report.
section_title: GAO Related Products
paragraphs: International Trade: Current Government Data Provide Limited Insight  into Offshoring of Services. GAO-04-932. Washington, D.C.: September 22,  2004.
Higher Education: Federal Science, Technology, Engineering, and  Mathematics Programs and Related Trends. GAO-06-114. Washington,  D.C.: Oct. 12, 2005.
International Trade: U.S. and India Data on Offshoring Show  Significant Differences. GAO-06-116. Washington, D.C.: October 27, 2005.
Offshoring of Services: An Overview of the Issues. GAO-06-5. Washington,  D.C.: November 28, 2005.