Offshoring in Six Human Services Programs: Offshoring Occurs in  
Most States, Primarily in Customer Service and Software 	 
Development (28-MAR-06, GAO-06-342).				 
                                                                 
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.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-342 					        
    ACCNO:   A50117						        
  TITLE:     Offshoring in Six Human Services Programs: Offshoring    
Occurs in Most States, Primarily in Customer Service and Software
Development							 
     DATE:   03/28/2006 
  SUBJECT:   Contract administration				 
	     Contract costs					 
	     Cost control					 
	     IT outsourcing					 
	     Program management 				 
	     Public assistance programs 			 
	     Service contracts					 
	     State-administered programs			 
	     Surveys						 
	     Offshoring 					 
	     Child Support Enforcement Program			 
	     Federal Family Education Loan Program		 
	     Federal Pell Grant Program 			 
	     Food Stamp Program 				 
	     Temporary Assistance for Needy Families		 
	     Program						 
                                                                 
	     Unemployment Insurance Program			 

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GAO-06-342

     

     * State and Federal Programs We Examined
     * Federal Mandates May Influence Outsourcing
     * Most Offshoring Occurs in the Food Stamp and TANF Programs
     * Magnitude of Spending on Offshored Services Appears to Be Re
     * Services Most Frequently Reported as Being Performed Offshor
     * Contractors Most Often Perform Offshore Services through Sub
     * Mandatory Security Screenings of Contractors Limit Offshorin
     * Magnitude of Cost Savings for Contracts in Which Some Servic
     * Few State Officials Identified Problems Associated with Offs
     * State Actions Affecting Offshoring Vary from Bans to Reporti
     * State Actions on Offshoring Include Relocating Offshored Ser
     * No Specific Federal Restrictions Exist on Offshoring of Serv
     * Order by Mail or Phone

Report to Congressional Committees

United States Government Accountability Office

GAO

March 2006

OFFSHORING IN SIX HUMAN SERVICES PROGRAMS

Offshoring Occurs in Most States, Primarily in Customer Service and
Software Development

GAO-06-342

This report was revised on May 25, 2006, to correct errors in data
reported to us on the occurrence of offshoring in two state programs and
make resulting corrections to certain summary information on the
occurrence of offshoring. See page iii for a list of data changes.

Contents

Letter 1

Results in Brief 3
Background 5
Most States Perform Some Functions Offshore in Four State-Administered
Programs, but No Offshoring Is Occurring in Two Federally-Administered
Student Aid Programs 10
State Officials Cited Cost Savings as a Benefit of Contracting with
Companies That Offshore Services and Few Officials Reported Any Problems
with Offshored Services 25
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 29
Concluding Observations 32
Agency Comments and Our Evaluation 32
Appendix I Objectives, Scope and Methodology 36
Appendix II GAO Contacts and Staff Acknowledgments 39
GAO Related Products 40

Tables

Table 1: State and Federal Programs Included in GAO's Review of Offshoring
7
Table 2: Percent Cost Savings Represented by States' Contracts with Some
Offshored Services 26

Figures

Figure 1: Offshoring in Four State-Administered Programs in 2005, as
Reported by State Program Directors and Contractors 12
Figure 2: Estimated Spending in 2005 on Contracts with Some Offshored
Services in the Four State-Administered Programs, Relative to Spending on
Outsourced State Contracts and Total Administrative Spending 15
Figure 3: Estimated Spending in 2005 on Contracts with Some Offshored
Services in Each State-Administered Program, Relative to Spending on
Outsourced State Contracts and Total Administrative Spending 16
Figure 4: Typical Services Included in EBT Systems Contracts and Extent to
Which the Services Are Performed Offshore in the Food Stamp and TANF
Programs 18
Figure 5: Offshore Locations Most Frequently Reported by State Officials
and Contractors in the Four State-Administered Programs 22

Abbreviations

EBT electronic benefits transfer

FFEL Federal Family Education Loan

PRWORA Personal Responsibility and Work Opportunity Reconciliation Act

TANF Temporary Assistance for Needy Families

TPP Third Party Processor

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separately.

This report was revised to correct data on the occurrence of offshoring in
two state programs due to an error made by a contractor in its survey
response to GAO. There was no reported offshoring in the Illinois
Unemployment Insurance and New York Child Support Enforcement programs. As
a result of these corrections, the report is also being revised to correct
certain summary information on the occurrence of offshoring.

In the figure on the Highlights page, "9" for the Unemployment Insurance
program should read "8" and "13" for the Child Support Enforcement program
should read "12."

On page 3, in lines 9 and 12 of the last paragraph, the expenditures for
contracts with some offshored services should read "$335" million.

On page 4, in line 7 of the first paragraph, the "9" should read "8." On
page 4, in line 8 of the first paragraph, the "13" should read "12." On
page 10, in line 6 of the last paragraph, the "13" should read "12." On
page 10, in line 7 of the last paragraph, the "9 should read "8."

On page 12, in line 14 of Figure 1, the triangle should be deleted for the
Illinois Unemployment Insurance program.

On page 13, in line 4 of Figure 1, the triangle should be deleted for the
New York Child Support Enforcement program.

On page 13, in the total line of Figure 1, the "9" should read "8" under
Unemployment Insurance and the "13" should read "12" under Child Support
Enforcement.

On page 14, in line 7, "85" should read "83." On page 14, in line 8,
"$339" should read "$335." On page 14, in line 14, "$339" should read
"$335."

On page 15, in Figure 2, "$339" should read "$335" and "85" should read
"83."

On page 16, in Figure 3, for the graphic representing Child Support
Enforcement, the "$159" should read "$158."

On page 22, in figure 5, "56" should read "55" for India and "28" should
read "27" for Mexico.

United States Government Accountability Office

Washington, DC 20548

March 28, 2006

Congressional Committees

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.1

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. 2

1GAO, International Trade: Current Government Data Provide Limited Insight
into Offshoring of Services, GAO-04-932 (Washington, D.C.: Sept. 22,
2004).

To determine the occurrence and nature of offshoring in the four
state-administered programs, we administered two separate Web-based
surveys:

           o  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.

           o  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.

           Some work is performed offshore in the majority of states for the
           four federally-funded 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. Expenditures for contracts
           with some offshored services totaled at least $335 million-or
           about 18 percent-of the $1.8 billion in expenditures for all the
           state contracts in the four programs. Moreover, 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. We could not determine the specific
           amounts of spending on offshored services for several reasons,
           including that contractors generally do not provide states with
           the itemized cost of each service that is bundled in their
           contracts. The services states most frequently reported as being
           performed offshore in 31 states in the Food Stamp program and 16
           states in the TANF program were functions related to customer
           service, such as call centers. In contrast, offshored services
           reported in 8 states in the Unemployment Insurance program and 12
           states in the Child Support Enforcement program did not involve
           direct contact with program recipients but were functions related
           to software development. Offshoring in the four programs rarely
           involved state government agencies contracting directly with
           foreign companies; rather, it involved U.S. contractors using
           subcontractors that performed work offshore. India was by far the
           most prevalent offshore location, followed by Mexico, but some
           offshore work was also performed in Canada, Ireland, and Poland.
           We did not find any occurrences of offshoring in the contracts for
           administration of the Pell Grant and FFEL programs. Prior to
           initiating a security screening, Education requires that
           contractor employees who will work on high-risk department
           contracts, including those for the Pell and FFEL programs, be U.S.
           citizens or lawful permanent residents who have resided in the
           United States for at least 3 years. While this requirement is
           intended to facilitate the required background investigations and
           ensure that contractor employees are legally permitted to work in
           the United States, it limits the extent to which Education can
           enter into contracts with companies that perform services
           offshore. In contrast, federal agencies have not established such
           a requirement for state contractors in any of the four
           state-administered programs we reviewed.

           State officials reported that lower costs are a benefit of having
           services performed offshore and few officials identified any
           problems with offshore service providers in their contracts. All
           15 state program directors that reported having performed cost
           comparisons for their contracts based on differences in the
           location of services, reported that there are cost savings
           associated with having some of the work performed offshore. These
           comparisons showed that their contracts, with some services
           performed offshore, would cost from 0.3 percent to 24 percent less
           than if all the services in these 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. However, it is unclear how much these reports
           reflect the actual extent of performance problems with offshore
           providers in these programs. While some state officials may be
           knowledgeable of the performance of their offshore subcontractors,
           other officials rely on their primary contractors to monitor the
           subcontractors.

           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. Reasons cited for these prohibitions include
           concern over a potential increase in local unemployment rates and
           a potential risk to the protection of private information. At
           least five 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. As a
           result of actions taken by some states and concerns by state
           governments, eight states have relocated previously offshored Food
           Stamp or TANF call center services to the United States and one
           state-North Carolina-has converted a previously offshored service
           into a state-run operation. The federal government does not have
           regulations specifically related to the offshoring of services in
           the programs we reviewed.

           We do not make recommendations in this report. 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.

           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.3

           While limited, U.S. government data provide some insight into
           trends in offshoring of services.4 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.

           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).

2In some states, TANF is administered at the local level. Because we did
not examine local TANF contracting, this report does not provide
information about the occurrence of offshoring by local TANF
administrators.

                                Results in Brief

                                   Background

State and Federal Programs We Examined

3For a detailed discussion of the various types of business activities
associated with offshoring, see GAO-04-932 .

4These data do not encompass all of the various business activities
associated with offshoring. See GAO-04-932 for further discussion of what
government data indicate about services offshoring.

Table 1: State and Federal Programs Included in GAO's Review of Offshoring

Dollars in billions
                                                              Expenditures for Program Administration
                                                           Federal        Federal          State          Total 
                                                    administrative administrative administrative administrative 
                                                      expenditures   expenditures   expenditures   expenditures 
Program      Program purpose         Federal agency    for FY 2005    for FY 2004    for FY 2004    for FY 2004 
Programs administered by state governments
Child        To help locate          Department of            $3.6           $3.5           $1.8           $5.3 
Support      non-custodial parents,  Health and                                                  
Enforcement  establish paternity     Human                                                       
             when necessary,         Services,                                                   
             establish orders for    Administration                                              
             support, and collect    for Children                                                
             and distribute child    and Families                                                
             support payments.                                                                   
Unemployment To provide unemployment Department of             2.7            2.7            0.3            3.0 
Insurance    benefits to eligible    Labor,                                                      
             workers who are         Employment and                                              
             unemployed, through no  Training                                                    
             fault of their own, and Administration                                              
             meet other requirements                                                             
             of state law.                                                                       
Food Stamp   To provide basic        Department of             2.4            2.5            2.6            5.1 
             nutrition to low-income Agriculture,                                                
             individuals and         Food and                                                    
             families.               Nutrition                                                   
                                     Service                                                     
TANF         To provide time limited Department of   Not currently           1.5a            0.8            2.3 
             assistance and work     Health and          available                               
             opportunities to needy  Human                                                       
             families.               Services,                                                   
                                     Administration                                              
                                     for Children                                                
                                     and Families                                                
Programs administered by the federal government
FFEL         To provide              U.S.                     0.2b            0.2 Not applicable            0.2 
             below-market,           Department of                                               
             variable-interest-rate, Education,                                                  
             long-term loans to      Office of                                                   
             defray tuition costs    Federal                                                     
             for students enrolled   Student Aid                                                 
             in participating                                                                    
             postsecondary schools.                                                              
Pell Grant   To provide grants (not  U.S.                     0.3c           0.3c Not applicable            0.3 
             required to be repaid)  Department of                                               
             for undergraduate       Education,                                                  
             students.               Office of                                                   
                                     Federal                                                     
                                     Student Aid                                                 

Source: Departments of Health and Human Services, Agriculture, Labor, and
Education; and Office of Management and Budget.

Note: Total expenditures may not equal sum of federal and state
expenditures due to rounding.

aFederal law allows states to spend up to 15 percent of their TANF block
grants on administrative functions, which do not include spending on
systems. The amount presented here represents the total spending for
administrative functions and spending on systems. The most recent
available data are from 2004.

bIn addition to this amount, the Office of Federal Student Aid paid $549
million in administrative funds to guaranty agencies for the FFEL program
in 2005 and $613 million in 2004.

cThis figure represents administrative payments to institutions. In 2004,
the Office for Federal Student Aid spent a total of $117 million for the
administration of all student aid programs and a total of $719 million in
2005 for the administration of all student aid programs.

Federal Mandates May Influence Outsourcing

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.

Most States Perform Some Functions Offshore in Four State-Administered Programs,
    but No Offshoring Is Occurring in Two Federally-Administered Student Aid
                                    Programs

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.

Most Offshoring Occurs in the Food Stamp and TANF Programs

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.5 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.

5We also found offshoring in one of these states in which a state official
was uncertain about the location where contracted work was performed.

Figure 1: Offshoring in Four State-Administered Programs in 2005, as
Reported by State Program Directors and Contractors

aThe sum of the totals for the four state-administered programs exceeds 51
(50 states plus D.C.) because offshoring was reported in more than one
program in some states.

Magnitude of Spending on Offshored Services Appears to Be Relatively Small, but
Is Difficult to Determine

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).6 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.

6There were an additional 201 contracts (for a total of 5,807) for which
we did not receive values.

Figure 2: Estimated Spending in 2005 on Contracts with Some Offshored
Services in the Four State-Administered Programs, Relative to Spending on
Outsourced State Contracts and Total Administrative Spending

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.

Figure 3: Estimated Spending in 2005 on Contracts with Some Offshored
Services in Each State-Administered Program, Relative to Spending on
Outsourced State Contracts and Total Administrative Spending

aBecause of data limitations, the TANF figures for outsourced contracts
and contracts with some offshored services are understated to some extent.
In some cases, EBT contracts were jointly funded with Food Stamp and TANF
dollars, but we were unable to disaggregate the amount of funds provided
by each program. In such cases, we allocated the entire annual contract
amount to the Food Stamp program.

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.

Services Most Frequently Reported as Being Performed Offshore Include Customer
Service and Software Development

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.

Figure 4: Typical Services Included in EBT Systems Contracts and Extent to
Which the Services Are Performed Offshore in the Food Stamp and TANF
Programs

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.7 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.8 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.9 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:

           o  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.

           o  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.

           o  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.

           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.10 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.

           Figure 5: Offshore Locations Most Frequently Reported by State
           Officials and Contractors in the Four State-Administered Programs

           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.11 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.12 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.13 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.

           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.

           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.14 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. 15 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.16

7Across the four programs, state officials less frequently cited services
such as document management, Web site development, and interpretation and
translation as being performed offshore.

8Indiana has created an electronic payment card that Unemployment
Insurance recipients can use for making purchases and withdrawing cash and
will outsource this service to a private company. This new service
suggests that Unemployment Insurance programs may be moving toward
contracting out for services beyond software programming.

9We obtained this information from our survey of contractors. State
officials that responded to our survey did not report software programming
as being performed offshore. One child support enforcement official
reported offshoring in genetic testing. While all states conduct genetic
testing as part of child support enforcement, only one state official
indicated that genetic testing was performed offshore. This official
explained that genetic testing could be performed anywhere within the
United States or outside of the United States, depending on where the
non-custodial parent resides. As such, the company with which the state
contracts could subcontract with foreign private physicians or companies
to perform these tests if the non-custodial parent resided outside the
United States.

Contractors Most Often Perform Offshore Services through Subcontractors that
Operate in India and Mexico

10For three of the contracts with offshoring, states had contracted with
foreign companies that had offices and employees in the United States as
well as offshore operations.

Mandatory Security Screenings of Contractors Limit Offshoring in the FFEL and
Pell Grant Programs

11Federal Family Education Loan 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 or non-profit lenders or guaranty agencies in our
review. Education officials told us that these private lenders most likely
offshore some services.

12High-risk positions include those with access to Education's IT systems
that allow for the bypass of security controls or access. Such high-risk
positions include firewall administrators, data entry team leaders, Web
server administrators, and security administrators. The Department of
Education's policy states that "every effort must be made to minimize and
where possible eliminate, the number of non-U.S. citizens employed in High
Risk level positions; this applies to all contractors and
sub-contractors."

13New Jersey and Arizona have banned offshoring in state contracts for
services. We discuss these bans in more detail in our section of the
report on what actions states and the federal government have taken to
limit offshoring.

 State Officials Cited Cost Savings as a Benefit of Contracting with Companies
 That Offshore Services and Few Officials Reported Any Problems with Offshored
                                    Services

Magnitude of Cost Savings for Contracts in Which Some Services Are Performed
Offshore Varies by State

14India was the offshore location in all but one of these cost
comparisons.

15For EBT contracts in the Food Stamp and TANF programs, caseloads could
also impact the total contract price because EBT pricing is based on the
number of cases in the contractors' systems. EBT contracts are priced by a
unit known as the cost per case month. Companies charge states a cost for
each case in the EBT system. This price fluctuates as the total caseload
increases or decreases. Typically, the larger the caseload, the lower the
cost per case month price will be. Therefore, for some TANF cases the
prices are higher than for Food Stamps, because the TANF caseloads are
relatively small.

Table 2: Percent Cost Savings Represented by States' Contracts with Some
Offshored Services

                                                                  Approximate 
                                            Type of contract for       annual 
                     Food      Unemployment which the comparison     contract 
                    Stamp TANF    insurance was made                   valuea 
Percent Cost Savings for Contracts with Offshoring When Compared to
Performing All Contracted Services In-State
Missouri            15   28 b            EBT                   b           
Mississippi          b    b           32 Software programming   $1,200,000 
Percent Cost Savings for Contracts with Offshoring When Compared to
Performing All Contracted Services Somewhere in the U.S.
Alabama              8   10            b EBT                     3,721,332 
Alaska              18    b            b EBT                       554,000 
Arizona              b   16            b EBT                     6,287,000 
Arkansas             3    3            b EBT                     2,913,905 
Idaho               18    b            b EBT                     1,159,343 
Kansas               5    5            b EBT                       852,251 
Nebraska            13    b            b EBT                     2,027,256 
New York           0.3  0.3            b EBT                    24,000,000 
Oregon              12   12            b EBT                     2,760,000 
Pennsylvania       3.6  3.6            b EBT                             - 
Utah                 5    5            b EBT                     1,720,000 
West Virginia        9    b            b EBT                     4,200,000 
Wisconsin           24    b            b EBT                     3,000,000 

Source: GAO analysis of survey and interview data from state officials.

aThe percentages for TANF and Food Stamps are for the same EBT contract.
We did not receive contract values from Missouri and Pennsylvania.

bIn cases where we did not list a percentage, the programs did not provide
estimates of cost savings.

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.17
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.

16State officials did not report performing any cost comparisons for the
child support enforcement program.

Few State Officials Identified Problems Associated with Offshoring

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.

17According to several business studies, the primary reasons that
organizations engage in offshoring are to reduce costs and to gain access
to a workforce in another country that can enable them to work around the
clock to meet worldwide customer needs. For more discussion on the
incentives for offshoring see GAO, Offshoring of Services: An Overview of
the Issues, GAO-06-5 (Washington, D.C.: Nov. 28, 2005).

All but four18 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.

18The circumstances varied in these four states-Connecticut, District of
Columbia, Florida, and Montana. For example, in Florida, state employees
gradually moved out of the software programming positions through
downsizing, transfers to employment with the contractor, or general
attrition over a 10-year period. In Montana, contractors were not
replacing the state employees, according to a Montana state official. In
Connecticut, state employees had previously performed some of the services
that were outsourced but not the specific service that was
offshored-maintenance on an automated response system.

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

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.19

State Actions Affecting Offshoring Vary from Bans to Reporting Requirements

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.

19The Trade Agreements Act of 1979 (19 U.S.C. 2511) allows the U.S.
government to procure products and services from entities in designated
countries (generally those with which the United States maintains certain
trade agreements). However, it prohibits procurement from entities in
countries that are not "designated countries." (19 U.S.C. 2512.) Neither
this act nor the Buy American Act (41 U.S.C. 10a) nor their implementing
regulations expressly mention procurement of services from contractors
whose employees are located outside the United States.

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.20 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.

20For an overview of expert views of the positive and negative impacts of
services offshoring on the U.S. standard of living, employment and job
loss, income distribution, and security and privacy, as well as the types
of policies that have been proposed in response to offshoring, see GAO,
Offshoring of Services: An Overview of the Issues, GAO-06-5 (Washington,
D.C.: Nov. 28, 2005).

State Actions on Offshoring Include Relocating Offshored Services to the United
States

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.21
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.

No Specific Federal Restrictions Exist on Offshoring of Services in the Six
Programs We Reviewed

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.

21These states are Alaska, Connecticut, Missouri, New Jersey, North
Carolina, Oregon, Pennsylvania, and Wisconsin. This is current as of
October 2005 when we completed our data gathering.

                            Concluding Observations

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.

                       Agency Comments and Our Evaluation

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 [email protected]. 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.

Sigurd R. Nilsen Director, Education, Workforce, and Income Security
Issues

List of Committees

The Honorable Michael B. Enzi Chairman The Honorable Edward M. Kennedy
Ranking Minority Member Committee on Health, Education, Labor, and
Pensions United States Senate

The Honorable Saxby Chambliss Chairman The Honorable Tom Harkin Ranking
Democratic Member Committee on Agriculture, Nutrition and Forestry United
States Senate

The Honorable Susan M. Collins Chairman The Honorable Joseph I. Lieberman
Ranking Minority Member Committee on Homeland Security and Governmental
Affairs United States Senate

The Honorable Charles E. Grassley Chairman The Honorable Max Baucus
Ranking Minority Member Committee on Finance United States Senate

The Honorable Robert W. "Bob" Goodlatte Chairman The Honorable Collin C.
Peterson Ranking Minority Member Committee on Agriculture House of
Representatives

The Honorable Howard P. "Buck" McKeon Chairman The Honorable George Miller
Ranking Minority Member Committee on Education and the Workforce House of
Representatives

The Honorable William M. Thomas Chairman The Honorable Charles B. Rangel
Ranking Minority Member Committee on Ways and Means House of
Representatives

The Honorable Tom Davis Chairman The Honorable Henry A. Waxman Ranking
Minority Member Committee on Government Reform House of Representatives

The Honorable Joe Barton Chairman The Honorable John D. Dingell Ranking
Minority Member Committee on Energy and Commerce House of Representatives

Appendix I: Objectives, Scope and Methodology Appendix I: Objectives,
Scope and Methodology

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.

Appendix II: A Appendix II: GAO Contacts and Staff Acknowledgments

GAO Contacts

Sigurd Nilsen (202) 512-7003 [email protected]

Staff Acknowledgments

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.

GAO Related Products

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.

(130427)

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www.gao.gov/cgi-bin/getrpt? GAO-06-342 .

To view the full product, including the scope

and methodology, click on the link above.

For more information, contact Sigurd Nilsen at (202) 512-7215 or
[email protected].

Highlights of GAO-06-342 , a report to congressional committees

March 2006

OFFSHORING IN SIX HUMAN SERVICES PROGRAMS

Offshoring Occurs in Most States, Primarily in Customer Service and
Software Development

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.

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.

Number of States in Which State Program Directors or Contractors Reported
Offshoring
*** End of document. ***