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Guide To Contracting: The Art of Re-Doing The Deal

Whether it's renegotiating, renewing or rebidding, state and local governments are looking for IT savings.

Iowa officials don't just cross their fingers and hope that technology outsourcing contracts will work out. The state keeps a close eye on what it purchases to see whether prices can be renegotiated and reduced or whether all or some of the services are still needed.

The bleak economy is just one of the reasons to pull the reins tight. It's also a good management practice to watch the spending on IT to squeeze out whatever savings one can. "Even small amounts matter to us," says Paul Carlson, the chief financial officer with Iowa's Department of Information Technology.

The penny-pinching comes at a time when there is a pick-up in the pace of contract renegotiations. A number of outsourcing contracts in a variety of fields are up for renewal or extension, and with their backs against a financial wall, IT officials and project managers are getting better at opening up what had been signed and sealed, and asking for changes and better deals. It's also a more realistic way to view the contracting process. A contract is "a living thing," says Bill Kumagai, a managing vice president for state and local issues at Gartner. "It provides a framework for how business entities relate, coordinate, interact. And, in fact, business circumstances change."

BACK TO THE BARGAINING TABLE

The way Kumagai sees it, renegotiations on big outsourcing contracts should be going on all the time, reflecting the accrual of incremental changes as well as the introduction of new technologies or efficiencies. The contracts, after all, are usually huge--contracts for, say, electronic services for Medicaid or child welfare programs could be the size of telephone books--and long term, encompassing a period of seven years or so. That means that the vision for a contract signed, say, six years ago, is not likely to be the same, nor is the technology underneath likely to be as up to date as it was half a decade ago. New technologies that bring greater efficiencies may be available. "To think things aren't going to change is pretty weird," Kumagai says.

He suggests government agencies approach renegotiations with a dealmaker mentality and not wait for contracts to expire. There are all kinds of potential triggers in contracts that can prompt discussions. When governments enter into deals with vendors, there are underlying assumptions in the contract. If those assumptions no longer hold true, the parties need to be back at the table. From what Kumagai has seen, everything is negotiable, regardless of the terms of the contract. Many times, circumstances have changed in a way that is adverse to both vendor and agency, and it's worth coming to the table for a conversation.

RENEW AND REFRESH

Iowa takes an eagle-eyed look at its contract renewal process, based on the notion that officials need to identify first of all what the real needs of the state are versus what its "desires" are. According to Carlson, there are three levels of priorities: the "bare bones, can't do without" of level one; the "borderline have to have" of level two; and the discretionary items of level three. The state locks down level one funding and then monitors revenues that will be available for the rest.

As part of that, the state tries to anticipate well in advance when a contract for a project is scheduled to expire and then leverages a favorable renewal rate. For instance, Iowa had a contract with a vendor who was providing mainframe operations. Employees analyzed what the state was buying, what it was costing and whether it made sense to continue. With that information in hand, the state undertook head-to- head negotiations with the vendor and won a decrease in annual billing of $200,000 to $300,000. In return, the state offered to include a one-year extension on the contract--if the vendor would help out with price in the current year.

Iowa did something similar with its contract for mainframe storage. As the renewal period approached, the state asked for a "no-nonsense, no-frills deal" from its existing vendor and from another one. The new bidder made a better offer and won.

On an ongoing basis, Iowa looks at contracted discretionary services and talks to vendors as annual contracts come due. "They've got two choices," Carlson says. "Make a material reduction in the contract or quit." He defines a material reduction as 20 percent to 50 percent.

If the services are discretionary, by definition it means the state can do without them, or with less of them. For instance, the state had 25 workstations allowing for electronic conferences among people in different locations. The system was set up for brainstorming and strategic planning. After a closer look, the state decided it could make do with only 15 workstations, and with half the personnel it was using to access a consultant's research services online.

UP CLOSE AND PERSONAL

In California, where the looming budget shortfalls are bigger than many state budgets, all aspects of state government are being scrutinized. Take the contract for the state's highly regarded Web portal, which debuted in 2000 when the state was flush with funds. Once the recession hit, the state found that portal too expensive to maintain and renegotiated the contracts associated with it, gaining terms more favorable to the state. But that wasn't all. As part of the contract renegotiation, the state arranged for a "knowledge transfer" process. Consultants and technology experts who had worked on the project were asked to teach state employees the skills to take over the duties the expensive consultants had performed.

California also saved money by cutting back on some of the activities related to the portal. Previously there was 24/7 support for any problems with the portal. Now staff must be called in if something goes wrong outside of business hours. (The exception is in the area of security, which still has 24/7 support.) Also cut back is the amount of analytic activity, such as looking at usage patterns to fine-tune services, and for information to help with the development of new products and services. "The goal was to preserve the portal and basic functionality," says Kevin Terpstra, special adviser to the chief information officer, Clark Kelso. "We removed bells and whistles to reduce costs."

CONTRACT CONTROL

States are doing everything possible to make sure their contracting processes produce efficiencies. In particular, many are now controlling for "project creep," the phenomenon of services being added to the original contract and costs rising with each addition.

Missouri's major contracting concern is along those lines: A big, long-term project could end up with huge cost overruns. The state thinks it has found a way around that. Negotiators now write contracts within contracts, says Jim Miluski, director of purchasing.

Technology officials found that expecting bidders on complex projects to be able to identify upfront what they were going to do and when they were going to do it was close to impossible, what with rapidly changing technology, shrinking resources and time constraints. In addition, certain pieces of an IT project couldn't be defined well until the first phase or phases were put into place. For vendors, these variables could be a threat to the bottom line. To protect themselves, bidders often responded with higher prices to take into account the risk of the unknown. For both the vendor and the state, it was difficult to work changes into projects when they were inflexibly priced from the beginning.

The solution Missouri came up with involves a "project assessment quotation." Any project expected to take more than 40 hours to complete uses the PAQ to price various tasks within the larger project. "It's a bid within a bid," says Miluski. Instead of agencies and vendors pricing all the details over the life of a project, the state breaks the project down into parts. Vendors give fixed prices for definable products and services such as hardware, software and installation. When it comes to reengineering the business process or redesigning a system, the state asks for hourly pricing. Once some of the hardware and software is in place, it is easier to figure out the potential scope of the rest of the project and price it accordingly.

A project proceeds with a series of proposals and approvals by a project manager, described as "a series of miniature negotiation sessions with the contractor" that can occur throughout the life of the contract. For instance, the vendor details how many hours a certain segment within the larger project will take, and that makes it easier for the agency in charge of the contract to keep costs and time overruns under control. "We're going to get away from the contracts that take seven years to do when they were supposed to take five," Miluski says.

And hopefully, since risks are lower, contractors won't pad their pricing to cover their vulnerabilities, as they might when asked to price an entire project.

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