In this article in CIO Magazine, Tom Field says:

Outsourcing is a proven business strategy in the private sector, so why can't it work in City Hall?

The article proffers several opinions.  I have my own. 

First, many of the high-profile, failed outsourcing projects I'm aware of tried to outsource the whole thing.   Let's just outsource the whole IT department so we don't have to worry about it.  The problem is that IT is fundamental to business and the vendor may be great at delivering basic services and probably even application development, but they likely won't be great at adding value to agency mission (See my paper on Modular IT Organization).    That has to come from people who are part of the executive team and understand the business.  Sure, a consultant could get there, but not if they're viewed as a mere vendor of services. 

Second, outsourcing works best when its used to augment staff, rather than replace them outright.  I've seen more than one outsourcing contract that was done by people or organizations who really didn't understand the technology and were just praying that something good would happen.  If you've got an tech organization that's healthy, smart, and innovative, then augmenting them with some additional help is great.  If they don't know what's going on, you're just asking for the vendor and the state to be disappointed.