Shared Services Growth Puts Pressure on Software Sales Model

Government and industry know the current IT sharing model is broken, but who will make the first move to fix it?

by / August 31, 2011

About This Report

This report is based on the activities of the Digital Communities program, a network of public- and private-sector IT professionals who are working to improve local governments’ delivery of public service through the use of digital technology. The program — a partnership between Government Technology and e.Republic’s Center for Digital Government — consists of task forces that meet online and in person to exchange information on important issues local government IT professionals face.

More than 1,000 government and industry members participate in Digital Communities task forces focused on digital infrastructure, law enforcement and big city/county leadership. The Digital Communities program also conducts the annual Digital Cities and Digital Counties surveys, which track technology trends and identify and promote best practices in local government.

Digital Communities quarterly reports appear in Government Technology magazine in March, June, September and December.


By Todd Sander, Director of Digital Communities

There is a classic vaudeville routine that begins with a patient visiting his doctor. The doctor asks, “What seems to be the problem?” The patient says, “It hurts when I do this” and the doctor replies, “Well then, don’t do that!”   

The ongoing discussion between government and industry has often taken the form of that doctor/patient conversation, with each alternating between the role of doctor and patient. Government tells industry that the traditional structure of contracts and licenses no longer works. Pressures to downsize and consolidate organizations — and to operate with significantly smaller and often uncertain budgets — make the rigidity of historical agreements unworkable. Government is looking for industry to propose a new, more flexible relationship based on greater collaboration.

Industry tells government that regimented and rigid procurement rules prevent companies from proposing their best and most creative solutions. Why? Because industry fears being judged noncompliant. Or, even worse, they fear being disqualified for violating procurement rules — rules that severely limit interaction and information exchange if companies attempt to engage and work with government outside the bonds of the procurement process. They are left with no option but to propose the traditional, specified, familiar and rigid.

Industry is looking for government to open the door to a new relationship with new and more flexible procurement processes.  

In essence, both government and industry are saying that the pain and frustration they feel is the other’s responsibility, and each entity is waiting for the other to act with more certainty to clear the path to shared success.

This quarterly report chronicles emerging ideas for improving the acquisition and use of technology, and it presents some of the options for moving forward.

The content is informed by continuing discussions taking place within the Digital Communities program, a joint initiative of Government Technology and e.Republic’s Center for Digital Government that’s focused on local government. The program operates several task forces comprising members from leading-edge cities and counties across the United States and industry executives representing some of the world’s leading information and communication technology companies.

Each year, Digital Communities convenes face-to-face meetings for task force members. In addition, members have access to an online collaboration and information sharing site to facilitate discussion and the exchange of ideas. These venues provide a safe place for both government and industry to speak and to listen. The following pages capture some of the ideas arising from these discussions.

Shared Services Growth Puts Pressure on Software Sales Model

By Andy Opsahl, Features Editor

The question of how multiple municipalities can share applications, IT services and hosting infrastructure to reduce government costs dominates discussion on both the Digital Communities CIO Leadership Task Force and the Digital Infrastructure Task Force. Sharing these resources is hardly a new idea: Since 1972, Minnesota municipalities have shared applications through the Local Government Information Systems Association. Pueblo County, Colo., hosts county assessor and treasurer software for six neighboring counties. And other examples can be found across the U.S. However, sharing isn’t the norm. Most local governments prefer to host their own software, buy their own IT services and control their own IT destinies.

Until now, local governments have been able to afford that luxury, and IT vendors have structured their incentives for salespeople around that preference. But those days appear to be ending, and the transition to sharing won’t be seamless. More sharing will demand changes from government and industry — and both are waiting for the other to make the first move.



“Pueblo County now has six other counties connected to our virtual infrastructure. They use our assessment and taxation systems as well as our GIS systems, allowing them the kind of technology that a smaller county would not be able to establish – financially or technologically — on their own.”


— Dan Mauro, information systems director, Pueblo County, Colo., winner, e.Republic’s 2011 Digital Counties Survey


Vendors on both Digital Communities task forces say they’re open to devising new sales models for multiple agencies and governments to share their products. Those vendors, however, want more specifics from governments about what sharing models they’d likely buy. CIOs usually respond that they’re not sure what those new models should be. They contend that vendors should develop a few new prototypes for CIOs to accept or reject. This is a reasonable expectation, CIOs insist, because vendors have research and development dollars for creating new sales models. Some CIOs argue that they aren’t equipped to suggest new sales models to vendors. But vendors, they say, know what new approaches are economically sustainable.

Without well developed specifics from government, though, vendors are left with the financially risky option of creating new sales models for sharing applications and services that local governments may not want. This is particularly unattractive to vendors, given that their current sales models are already profitable — and new ones may not be. Indeed, an obvious difficulty for vendors is that new sales models will almost certainly result in lower revenues.

Still, the degree to which vendor revenues would drop is uncertain, and some argue that changes to sales models would open new markets. Task force member Catherine Maras, CIO of Bexar County, Texas, said vendors should see new IT sharing models as opportunities to hook new customers. For example, she would like to host applications for several neighboring local governments that can’t afford to buy them on their own. Maras suggested that while governments would be paying vendors less individually on some shared models, vendors could recoup some of that revenue by gaining smaller governments that previously couldn’t purchase their products.   

“These vendors need to be open-minded,” Maras said. “They’re not going to make all of the money at once, but they’re going to have a very loyal customer base — and they might broaden that base.”           

Lowering Liability

One thing governments could do to help vendors create more flexible sales models is ease up on the amount of liability they require contractors to accept, said Jodi Chapin, director of public-sector marketing for AT&T. She contends that too often, local governments mandate indemnity clauses that make vendors liable for damage amounts that don’t align with what the contracts are worth. Those amounts can far exceed the risk posed by the contracts, Chapin said, adding that contracts also often require vendors to assume liability for problems beyond their control.

“Vendors want to exclude liability that arises from acts not within their control or acts committed by the purchasing body,” she explained.

Luckily the situation is improving. Chapin said state agencies are switching to less demanding alternatives at the urging of industry groups like the National Association of State Chief Information Officers and the National Association of State Procurement Officials. Chapin suggested that local governments consider using some of those same formulas to determine reasonable vendor liability.

“At the end of the day, business is still getting done, and both the public and private sector work together toward resolution to accomplish shared goals,” she said. “Yet the current procurement challenges do not cultivate an innovative environment to look at different models, especially if there is no flexibility in the terms and conditions.”

Liability concerns also limit the pool of vendors willing to take on government projects, potentially closing the door on innovative multivendor offerings. Part of the problem is that the same indemnity requirements often are applied to all vendors on multivendor projects, even if the blanket indemnity amount is out of proportion to the risk posed by a particular vendor’s piece of the project. Instead, Chapin wants to see governments assign indemnity amounts individually to the different players in a multivendor project based on the risk each vendor poses. This, she said, would attract a wider crop of vendors, which could lead to more shared IT solutions.     

Task force member Steve Emanuel, CIO of Montgomery County, Md., is sympathetic to some of Chapin’s liability concerns.

“I’m not a procurement expert, but I think AT&T is right about contract terms and conditions being very harsh,” Emanuel said. “Many of my IT colleagues, working with good legal colleagues, are changing that and getting procurement folks on board with what we must accept in terms and conditions.”  

Nevertheless, he added that governments must be careful not to loosen regulations in ways that expose themselves to undue risk.

Cost of Complexity

Another obstacle to regional IT sharing is the inconsistency in local procurement rules, Chapin said, which often restricts vendors and governments in terms of what new models they think they can accept.

“This environment causes duplication of effort across all areas of purchasing and adds layers of complexity by having unique terms and conditions, product specifications and service level agreements from one contract to the next,” she said. The situation drives up costs, and introduces product availability delays and contracting delays due to the resultant administrative and legal work for both sides.  

If governments could adopt standard practices for IT contracting — perhaps through collaborative activities driven by trade or industry associations — regional shared services would become much easier to create, Chapin said.

But the current procurement landscape is rooted in years past, Emanuel said, when governments had more resources and pricing from vendors wasn’t great. “To ensure effective competition, many procurement rules were put in place to make sure that price, quality and contract expectations were the best possible to give the public clear visibility on the use of tax dollars,” he said, adding that he’s committed to working with vendors toward a better approach.

“Vendors need to take an active role in enterprise discussions, pointing out particular challenges and working with progressive IT organizations to work out — from lessons learned — new templates,” Emanuel said. “I think procurement and legal groups [in government] will resist, but the real movers and shakers will make it happen.”

Likelihood of Change

For all of the talk regarding openness to change on both the government and vendor sides, the onus for putting it into action will likely be on governments, said Glenn Davidson, managing director for KPMG LLP, a firm that advises governments and businesses on risk and compliance issues. Davidson said vendors have little incentive to change their models, absent reliable commitments from governments to share control of IT among themselves.

“Very seldom are [government] organizations willing to share power or give up any sort of control of their internal operations to another entity, whether that’s an adjoining county or some jointly established authority,” Davidson said.

Task force member Robert Patterson, CIO of Allegheny County, Pa., acknowledged the issue. “The biggest problem our local government has with consolidation or sharing is politics,” he said. “We can’t even agree to share resources internally, because no one wants to give up control.”

The harsh budget situation facing most public entities still hasn’t pressured most governments into shared IT models, Davidson said. But that day might be fast approaching. He contends that as stimulus money from the American Recovery and Reinvestment Act dries up and states struggling with their own budget problems continue to cut local funding, many local governments will be forced to sacrifice at least some IT control.  

Government members on the Digital Communities task forces say the reality of long-term revenue shortages in the public sector offers a compelling business case for vendors to create new sales models that fit the environment. An IT sharing model that helps governments reduce technology costs would be so undeniably helpful, these government officials contend, that it’s bound to be successful for vendors.

Shared, Yet Customized

Turf wars may be one reason that sharing hasn’t taken hold — but they’re not the only one. Agencies also shy away from multigovernment IT proposals because they’re afraid their individual requirements won’t be met. Both government and vendor members on the task force are brainstorming ways to get around that obstacle.

Especially vocal on this topic is Adriana Umberger, project manager for the Office of Information Technology and Communications in Prince George’s County, Md. She is affiliated with the Metropolitan Washington Council of Governments, which recently held a joint meeting with the Digital Communities Digital Infrastructure Task Force. Umberger cautions that any IT deal joining governments will need to take into account the participants’ varying computing platforms and in-house IT capabilities. For example, she said, the differences in staffing levels mean some governments will need to contract for services that other governments can handle in-house.

Umberger offered two approaches to that issue. First, local governments interested in sharing an IT product could determine what needs they all share. Those shared needs would be the basis for the joint contract. After that, governments requiring further services could negotiate those “extras” individually with the same vendor or another provider. A second option is including enough service offerings in the joint contract to meet the needs of all group members. To keep things simple for the vendor, Umberger said governments would determine the total demand for services across all participants and translate that into a specific number of service hours. This would be somewhat analogous to when a business buys an aggregate number of minutes from a cellular provider to meet the varying phone needs of employees. But Umberger’s idea would be a bit more granular than that.

“It would be like X number of engineering hours for consulting, X number of engineering hours for technical design or software development,” Umberger said. Those hours would be consumed by group members as needed.

Critical to this approach’s success, she insisted, would be for participating CIOs to elect someone to be the group’s single point of contact for the vendor. This person would administrate the different service requests from participants and deliver them to the vendor. Umberger said without someone doing that job, the vendor would get stuck in the proverbial weeds, trying to prioritize and respond to requests from several governments. Administrating the service requests would likely be a full-time task, she said, adding that one of the participating governments would probably volunteer a staffer to do it. Formulating the governance processes for this administrator to follow would be a group effort among the governments, possibly with help from the vendors involved.

Umberger may find common ground on some of her ideas with vendor task force member Paul Christman, Quest Software’s vice president for state and local government and education sales. Christman said he liked her suggestion that governments in a shared contract could pool their service needs into an aggregate of service hours. The upfront commitment to buy a specified number of service hours, he said, would reassure the vendor that staff paid to perform those services would be kept busy.

“If the supplier can count on a higher utilization, they probably would give a price break on the hour or in the aggregate of what that [employee] is going to cost because they know [the employee] won’t have any downtime,” Christman said.    

Defining Fair Access

But if governments are truly going to offer specifics that help vendors create new sales models, they might need new legislation first, said Ed White, senior director of civilian business development for McAfee Public Sector, another Digital Communities task force member. White acknowledged the need to make sure a diverse crop of vendors had access to government procurement opportunities. He suggested, however, that governments rethink how they ensure that happens. They could start by releasing a request for information to all interested parties. From those submissions, the governments could select a smaller group for consultation gatherings and set a quota for small businesses’ participation in those gatherings. The consultations may need to be one-on-one with vendors, he added, so the vendors wouldn’t worry about exposing their strategies to competitors. After that, governments could release a formal RFP featuring enough specifics for vendors to justify a move from their already-profitable sales models.

“I don’t know if that’s the right answer,” White said. “I’m just saying there could be ways to achieve the goal while saying, ‘We did everything humanly possible to have [a variety of] people participate. If they didn’t participate because they were late to the game and didn’t know how, I’m sorry. They’ll have to try the next time, and here is how they can do it.’”

Another task force member, Michele Hovet, executive director of IT for Arvada, Colo., said she was open to scheduling one-on-one meetings with vendors to work toward new business models. She cautioned, however, that the meetings couldn’t result in RFPs that required something that only one vendor offered.

Selling Collaboration

Greater use of upfront discussions with vendors also could help CIOs sell collaboration proposals to fellow governments, said task force member Terri Jones, industry marketing manager for Hyland Software. “I think government agencies need to begin their research earlier and not mistake the RFP process for research,” she said, adding that such research could result in pricing estimates and other valuable feedback.  

Without that research, Jones said, governments often write RFPs that are too vague. Since vendors are experienced at setting up their own systems, they can educate governments on common best practices, the latest features on the market and other information that results in RFPs that respond more specifically to government needs. In turn, knowing those specifics makes the CIO more effective at convincing other agencies to join the endeavor, Jones said.

“It’s really important to do this research in advance so you can more appropriately articulate the cost of the solution and figure out if you can share that cost,” she said.

Also, if cost-cutting is a primary goal of sharing IT, Jones noted that early chats with vendors are especially useful. Without specificity, vendors usually try to hedge their bets in order to minimize their risk, and that tends to inflate the price in an RFP response.

At a time of reduced staff and heavier workloads, CIOs may think they can’t spare the extra time that early discussions would require. But Jones argues that the discussions would save time by preventing scope creep that occurs when governments develop clearer visions of what they want after awarding the contract and begin requesting additional capabilities.

“They say to the vendor, ‘But can you do this? Can you do that?’ The vendor will probably give you one or two of those at first, and then it’ll have to start charging you because you’re adding hours to the project,” Jones said. “Scope creep is such bad news in government. The first thing is the price goes up, and that makes everybody cranky. Next, the project does not meet its deadline, so it’s not on time and it’s overbudget, which leads to a very bad headline for government.”

End-users also typically become disenchanted as the project stays in flux — and that problem is multiplied on large regional or multigovernment projects.

While government task force members vary on what assistance they should provide vendors in order to change their sales models, most seem to agree that more feedback for vendors is necessary.  

“Vendors are our partners,” Hovet said. “I can’t do my job without those partners. They’re how I get things done and provide the services I provide. I think we need to come to the table and start sorting this out.”

And that, perhaps, is the most encouraging aspect of these conversations: the realization from industry and government that the current IT model must change. Sure, details must be worked out and loose ends tied up, but ultimately, greater IT sharing needs to take place among governments. And it’ll take both sides at the table to make it happen.