Spend and Spend-Alike

Spend and Spend-Alike

In various guises, both in Australia and overseas, the use of performance-based partnerships - where organisations and vendors collaborate in sharing risks and rewards - is growing apace, particularly in the public sector.

Flat and shrinking budgets are causing organisations everywhere - whether commercial or government - to look for creative answers to accomplish and fund their business objectives.

When the Texas Legislature directed the State of Texas Department of Information Resources (DIR) to test the feasibility of making state agency and local government services available online, it was presenting the DIR with a major challenge.

With the area and infrastructure of a medium-sized country, Texas has 22 million citizens, 254 state agencies and 3000 local governments. Clearly the ability to improve public access to government information, programs and services would be a boon to its citizens. Yet Texas lawmakers insisted any new service must be self-supporting, and hence made no money available to fund the project.

The DIR's answer was to adopt a business model, which may point the way for some cash-strapped organisations around the world as they seek creative ways to fund IT projects. Under the model, the TexasOnline services generate user fees, subscription fees and hosting fees that go directly to business consulting firm BearingPoint to reimburse the cost of the systems development. That allows agencies to take part without having to allocate any funds for the program up front.

"As a result there were no costs to the State of Texas," BearingPoint's senior vice president for public services global operations, Jim Geiger, told CIO on a recent visit to Australia. " . . . And we try and keep it cost neutral to the state, and expand the services for the citizens of Texas."

By some measures the approach has worked brilliantly. Since the system "went live" to the public on January 1, 2001 it has completed well over 15 million transactions, and generated at least half a billion dollars in revenue to the general fund of the State of Texas. And officials of that state profess to be very pleased with the outcome.

"One of the chief things that contributed to BearingPoint's team making it as a finalist [in the Outsourcing Centre's 2003 Editor's Choice Awards] was the adaptability of their funding and infrastructure models. They offered a great deal of flexibility on how to fund e-government as well as a comprehensive infrastructure model that was detailed on the security side, the development side, and the outreach side," Phil Barrett, the Texas e-government framework's project director, is quoted as saying at the BearingPoint Web site.

"We're getting enormous interest from agencies because BearingPoint built the framework so that there's a benefit to joining - we have not had to mandate participation."

However, former CIO for the US State of Georgia Larry Singer does not buy it. Singer, also in Australia recently in his new role as Sun Microsystems' vice president global information systems strategy office, says he spurned this particular funding model during his stint as Georgia's CIO, seeing it as a sign of desperation on a CIO's part and a tool mainly for "disempowered CIOs".

"I didn't like BearingPoint's model very much, because why would you want to discourage the citizen from using your online system by charging more, when it actually saves us a fortune if they use the online service instead of coming to the office?" Singer says. "That was a problem that the CIO of Texas Carolyn Purcell - whom I admire and who was one of my mentors - had to face. She simply didn't have the authority to control the budget, so she had to find third parties to fund it, even though it actually ended up costing the citizens more." [Purcell retired last August. - Ed]

Singer asserts most American states with an "empowered CIO" have rejected Texas's approach, while still seeking creative ways to fund their IT projects. For instance, the legislation that created Singer's authority as Georgia's CIO made him the sole agent for the state for the sale of Georgia's information asset resources to the private sector. That meant he was able to pay for Georgia's interoperability infrastructure through the $US30 million a year he made for the state through the sale of data.

"So we were implementing a model that . . . was to build a system and pay for it through the increased revenue. So when the vendors bid, they had a stake in the game: they wouldn't get paid until the system worked to actually deliver the revenue. We actually paid them a premium for their risk, but even with that, the premium we paid them for risk was well within our cost of capital," Singer explains.

As fixed or shrinking budgets force organisations to seek out creative ways to accomplish and fund their business objectives, more and more will have to weigh up the merits of such competing approaches against their own organisational business models, goals and aims. Some are starting to find a great deal of attraction in a new breed of innovative funding models that can let the organisation implement IT-based business solutions without having to make large, up-front investments.

"Necessity is proving once again to be the mother of innovation," says BearingPoint's national director for state and local e-government services Gary Miglicco. "As a result of the ongoing budget crisis, [US] state and local governments are utilising creative strategies to pay for new IT projects that otherwise would go without funds. For example, some are launching self-funded projects that require no up-front costs on behalf of the government. Rather, IT vendors are paid with moneys generated from fees paid by users of the new system."

In various guises, both in Australia and overseas, the use of performance-based partnerships - where organisations and vendors collaborate in sharing risks and rewards - is growing apace, particularly in the public sector. In a typical performance-based partnership, a private business partner shoulders the up-front costs associated with initiating a project, and receives compensation only when a project brings in revenue. The partner also provides the systems, consulting and implementation expertise to get the project off the ground.

"Performance-based partnerships can work well in organisations facing budget constraints," says Chris Ambrose, research director at Gartner. However, Ambrose notes that the method is only effective in situations where the benefits to both parties are mutually agreed to and are clearly measurable.

Australian organisations tend to be reticent about the way they fund their IT projects, and analysts say many of those who have entered into such deals have chosen not to make them public knowledge. However, Peter Hind, manager of IDC's user programs and InTEP forum, says many organisations began paying close heed to such alternative funding models when major cost cutting drives got under way towards the end of 2001, with alliance relationships and risk sharing arrangements holding particular appeal.

"I certainly think there's interest in those sorts of things," Hind says. "The trouble up to now has been [that], when people talk about partnership, the risk has all been on the CIO side because they have had to pay the money. When you've got some risk sharing arrangement, then obviously you've got the opportunity to have a much more equal partnership because both have a vested interest in the thing working."

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