Getting good IT funded is a huge problem for many governments. Some of the best projects require multiple years of effort and/or cooperation among many agencies -- an all-too-apt description of the kind of opportunity the annual budget process usually ignores.

In response, many governments are turning to creative funding that relies less on traditional tax-levy budgets. One of the most attractive options is performance contracting, or shared-risk, public/private ventures. According to JD Williams, the Idaho state controller: "In this day of tight budgets and the need to have smaller but smarter government, performance contracts offer another arrow in the quiver to serve our people."

This is the third in a series of four articles drawn from the forthcoming Government Technology guidebook on funding information technology projects in the public sector.

The California Franchise Tax Board has written a report about its financing project entitled "Performance Based Procurement: Another Model for California." The report is available on the Internet at .


Performance contracting is based on the principle that incentives should focus attention on valued outputs (service levels or efficiencies, as in total revenues collected by a revenue agency or administrative costs per dollar collected), not merely on needed inputs (worker hours, needed hardware or software, etc.). The key idea is this: Keep your eyes on the prize and some of the contractor's skin in the game.

Under traditional contracts, IT vendors are asked to supply tightly specified inputs. They are not asked to apply their in-depth and often proprietary technology expertise to creatively improve government outputs. In fact, they are discouraged from offering anything other than narrowly solicited advice, since they would not gain much themselves (the government would typically turn the vendors' ideas into bid specs for broadcast to competitors), and/or they would become vulnerable to charges of tampering with the bidding process. As a result, there are far too many cases where vendors have kept silent as government blithely proceeded to ask for the wrong technologies.

By their nature, performance contracts give vendors better incentives to address broader problems and offer their full range of expertise. To the extent that the desired output is a revenue increase or a cost decrease, the contractor may be willing to be paid out of "found" money, and worthy projects may proceed even though funding is not in hand at contract time. When this happens, it clearly helps solve the funding problem.


California's Franchise Tax Board (FTB) found itself with a problem: As collector of corporate taxes, its workflow -- manual and paper-intensive -- detracted from its ability to close the gap between taxes owed and taxes paid. Uncollected taxes amounted to some $700 million. Decision-makers at the FTB knew they needed the kind of breakthrough that could only be accomplished by a complete redesign of their tax accounting and business systems. Yet this would require new technology and expertise, and the FTB lacked many of the skills and resources needed. Further, technology procurement had become increasingly inefficient. The period between requesting and receiving equipment often extended nearly two years -- an eternity in the rapidly changing field of technology.

To solve these problems, the FTB turned to performance contracting, characterized by three primary features: partnerships with vendors, the conceptual proposal and risk sharing.

* Partnerships -- The FTB first developed "Strategic Partnership Alliances" with a number of interested vendors by prequalifying them to compete for certain proposals. By forming a pool of vendors, the FTB sought to develop long-term, mutually beneficial relationships characterized by trust, cooperation and mutual learning, while still preserving discipline by keeping a number of vendors in the hunt. The partnership approach is particularly valuable for complex projects, since complexity requires in-depth cooperation

Jerry Mechling  |  Contributing Writer