New buying strategy creates risks, rewards

Robert J. Sherry

No matter where you turn you stumble across another innovative procurement technique suited to the age of electronic government.

In last month's column, I discussed a variety of e-government procurement strategies. Recently I had the opportunity to attend an
e-government finance and investment summit in Washington.

An exciting development discussed at the summit is the use of share-in-savings programs to implement e-government services. These programs are not new at the federal level, but they are just coming into vogue in the information technology realm.

The share-in-savings strategy relies on the ability of contractors to identify outmoded government systems and the processes they support, and then develop new systems to replace them.

The strategy requires creating a cost baseline and a method of calculating savings that will appeal to both agency and oversight bodies. It also calls for a firm schedule for replacing a system and monitoring savings.

But there's a catch: In a pure share-in-savings program, the government pays little or nothing up front for implementation. The contractor funds the replacement and implementation phase, and recoups its investment'and profit, if the plan works'from the savings generated by the new system.

Let's take an example that's more than theoretical. An agency decides to replace its outmoded telecommunications system for resolving citizens' questions. A potential share-in-savings contractor reviews the existing system and identifies superfluous components.

The contractor replaces the old system and pays for the new one. It also sets up a system on the Web for fielding and responding to many of the concerns that the agency previously addressed via telephone or fax. The contractor and the agency then share the savings associated with the new system based on a predetermined formula.

This approach sounds simple, but it carries risks, both practical and legal. Agency officials must be confident that the contractor has adequately assessed the risks of performance and that a fair measure of savings and compensation can be established. They must review applicable procurement laws and regulations to determine whether a share-in-savings program can be implemented within the rules. And they cannot overlook statutory, even constitutional, provisions governing the funding of state or municipal projects.

I'd like to report in future columns on state and local share-in-savings programs. If you have a story to tell, drop me a line at

Robert J. Sherry is a partner in the San Francisco office of Kirkpatrick & Lockhart LLP, representing information technology clients in dealings with government agencies.

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