that can only be fully achieved over a reasonably long period of time.

* Conceptual proposals -- As it identifies organizational problems, the FTB solicits its prequalified vendors for "conceptual proposals." As replacements for the traditional request for proposal, the request for conceptual proposals defines the problem and desired results (where the FTB has the most knowledge), not the details of technological solutions (where the vendors have the most knowledge). Vendors are free to propose whatever solutions they feel are best, but they must specify anticipated benefits, costs, and results. The FTB then works with the bidding vendors throughout a period of critique and evaluation to develop the best solution overall. While this process is competitive among the prequalified vendors, it is not adversarial between the vendors and the FTB. Openness guides the process and is extended to bidders who don't win contracts; in all cases the FTB explains its decision-making without revealing proprietary information.

* Risk sharing -- Perhaps the most attractive feature of performance contracting is that risks don't fall so heavily on government but are shared more equitably between the agency and winning vendor. The vendor can be paid if and when the contracted-for objectives are achieved (e.g., more efficient revenue collections, lower unit service costs). Because of this, vendors are motivated to work closely with the agency to develop solutions that most quickly and feasibly deliver the outputs and outcomes sought. When both parties pursue the same goal and face risks together, they can work better together to create success.

The FTB found that performance contracting reduced the time required to bring a project to fruition and has yielded high-quality solutions. A $5 million contract was made operational within nine months instead of the 24 months normally considered "reasonable" in the California contracting environment. Working closely together throughout design and implementation, the FTB and the vendor created new systems and procedures that were adopted without the major glitches and finger pointing that had marred other highly visible California IT projects. Perhaps most important, the project proceeded without high up-front budget set-asides, since funding came from taxes left uncollected under previous systems and procedures. For the FTB, the vendor and the citizens of California, this has been a win-win-win.

POTENTIAL PROBLEMS

The FTB's experience demonstrates that performance contracting can work well in some cases. The key is to identify settings where organizational outputs and/or social outcomes can be adequately measured and controlled by the agency and contractor working together. Revenue collection offers many such opportunities, but many others exist in education, social services, health care, environmental protection, and almost any service where good IT could improve productivity.

Along with the upside potential, however, performance contracting also brings some notable downside risks:

* Cost-accounting difficulties -- Key productivity targets typically involve a reduction in the unit costs of service delivery. But governments often don't know their true costs, and the activity-based costing required to get workable figures can be difficult and sometimes arbitrary, especially when agencies produce many services with complex overhead relationships. For example, if the service involved is "providing motor vehicle data to corporations," how much of the cost of data collection should be allocated to that service as opposed to the related service of "protecting highway safety," which collects the same data in the course of licensing vehicles? And what costs from the governor's office or statewide budget office should be allocated as overhead to either of these services?

* Internal power struggles -- Replacing input specifications with output specifications can be viewed as taking control away from some people -- especially those in charge of the procurement process -- and giving it to others. Note that the FTB story is primarily about agency managers, not about procurement officials or the state CIO.

* Vendor reluctance -- Vendors often see performance contracts

Jerry Mechling  |  Contributing Writer