as risky. While valuable ventures are always somewhat risky, a vendor may feel too vulnerable if, for example, it feels it would have little control over activities the government must perform to reach a given performance target. As a result, some vendors may choose not to participate.

* Adverse selection -- If the best vendors are unwilling to participate, however, the vendors who are willing might be precisely those that the government isn't or shouldn't be interested in working with.

* Political adjustments -- Even when vendors choose to play, there are still potential problems. Vendors who realize a return -- particularly if the government frequently contracts with them -- run the risk of looking too successful, thus giving rise to calls to spread the work around. Further, regardless of how the "ex ante" risk was portioned between government and the vendor, it may be hard to withstand pressures to make adjustments for the politically connected once the "ex post" realities play out. Such long-term adjustments and gaming have taken place in defense contracting, for example, for large weapons systems as well as other technology-related projects.

* "Cozy" relationships -- A vendor who repeatedly wins contracts may either be building a socially valuable working relationship with government and/or a too cozy, ripe-for-abuse relationship, at least in the eyes of elected officials or the public. Indeed, losing firms might make this very charge.

The above pitfalls are not stop signs but warnings to proceed with appropriate care. There are many places where performance contracting is not yet utilized but could be extremely relevant. As Ralph Shoemaker, assistant executive officer of the California FTB said, "It's time government begins paying vendors for solutions that add value to our bottom line, not just for hardware and software."

Jerry Mechling is director of Strategic Computing and Telecommunications in the Public Sector at Harvard University's John F. Kennedy School of Government. Victoria Sweeney is a research affiliate with the same program.

March Table of Contents

Jerry Mechling  |  Contributing Writer