Industry: Spend innovatively

Nine twists on traditional IT spending

1. Leasing and financing: Purchasing hardware, software or services through a lease-purchase agreement or straight financing arrangement. Both methods allow agencies to spread costs over time. Fifteen states use it.

2. Bonds: Using state bonding authority to fund IT procurements. Seven states use it.

3. Certificates of participation: Financing in which investors purchase a share of the lease revenues of a program. One state uses it.

4. Performance-based contracting: A contract in which the agency defines its objectives and lets the contractor decide how best to meet them. Together, the agency and contractor choose performance measurements to gauge a solution's effectiveness with rewards for superior performance and penalties for poor performance. Seven states use it.

5. Outsourcing and managed services: Contracting out IT activities or functions. This approach is used generally to acquire expertise or services that are hard to obtain and retain in-house, achieve level funding and lower costs. Often paid for as used instead of as a capital investment. Fifteen states use it.

6. Investment funds: Monies set aside for funding pilot programs, trying new technologies and approaches and supporting projects with short payback. Investment funds often are replenished from the savings generated by funded projects or other IT projects. Four states use it.

7. Benefits funding: Agencies pay for new systems and services as their benefits are realized. Funds usually come from additional revenues, but sometimes from savings the project produces. These are used in tax and other revenue generation systems in which the added revenue can be measured against a base line. Four states use it.

8. Budget and appropriation strategies: Used either to gain additional funding for IT projects or to add flexibility in using existing funds. These methods include the ability to carry over funds, use uncommitted year-end funds, use pay-as-you-go capital funds, and reallocating savings. Eighteen states use it.

9. Purchasing and procurement strategies: Using budgeting and procurement strategies to achieve volume discounts, encourage performance-based contracting and benefits funding, and streamline the process by leveraging the buying power of the public entity as an enterprise. Fifteen states use it.

"We want to work closely with the CIOs to expand the number of examples and to push out best practices" of innovative fundng models that can help states cut costs and generate revenue.? Holli Ploog, Unisys Corp. and vice chairwoman of NASCIO's Corporate Leadership Council

Henrik G. de Gyor

Meta Group's John Goggin said state CIOs asked industry to recommend not only new technology solutions, but also ideas for funding those solutions.

Henrik G. de Gyor

Report claims states need new planning for IT projects in tight budget times

A new industry report recommends states adopt innovative ways for funding information technology projects to offset the steep budget cuts that threaten new programs.

A draft report distributed this month by the National Association of State Chief Information Officers identifies nine alternative funding models that states have used to cut costs and generate revenue for public coffers.

The report, "Trends and New Approaches in Funding Technology," is the latest in a series of efforts by NASCIO's Corporate Leadership Council, a committee comprising industry representatives who belong to the association, to assist state CIOs. The draft report was released Sept. 9 at NASCIO's annual meeting in Scottsdale, Ariz.

"[NASCIO] hopes that the report will provide a starting point for disseminating information on how states can use nontraditional funding models to result in cost savings and, in some cases, increased revenue streams," said P.K. Agarwal, vice president of state and local solutions with Affiliated Computer Services Inc. of Dallas, and chairman of the council.

The combined budget shortfall for the 50 states may increase from $50 billion this year to $70 billion next year, and could last another three to five years, according to state budget experts. Because of the two-year-old budget crisis, many states have been unable to finance large-scale, multiyear IT projects that have not traditionally been part of their annual budgets.

"We want to continue to work closely with the CIOs to expand the number of examples and to push out best practices, so that they have as much ammunition as possible, particularly going into the next legislative session," said Holli Ploog, vice president and managing partner with Unisys Corp., Blue Bell, Pa., and vice chairwoman of the council.

NASCIO leadership is reviewing the report, Agarwal said. No date has been set for the release of the final version, he said.

The council studied the various methods that states use to fund IT projects other than through general funds amassed through taxes. The findings are based on responses from 23 states.

The most widely used alternative funding models are leasing and financing, outsourcing and managed services, purchasing and procurement strategies, and budgeting and appropriation strategies, such as cross-boundary funding, according to NASCIO.

In Texas, for example, the Department of Information Resources entered into a large, performance-based outsourcing contract with BearingPoint Inc. of McLean, Va., to develop and operate the state's portal, known as TexasOnline.

Under this benefits-funded approach, BearingPoint is responsible for all costs associated with portal development and operation.

The company also has exclusive rights to sell TexasOnline services to state agencies, so they may use the portal's infrastructure for conducting Internet-based business with citizens. The state and BearingPoint share the revenue generated by TexasOnline.

Texas took the benefits-funded approach because it allows the state to obtain technology and services without an initial financial expenditure. The state expects TexasOnline to generate more revenue as its use expands.

Because of the state's success with the performance-based, benefits-funded approach, it is planning to replicate it in slightly modified form for the development of Texas' electronic procurement system, state officials said.

[IMGCAP(2)]The TexasOnline project embodies the kind of innovative funding approach that state CIOs want from the private sector, said John Goggin, vice president and director of government strategies for the market research firm Meta Group Inc., Stamford, Conn.

The report essentially should be seen as industry's response to an appeal by state CIOs to come to the table not only with technology solutions, but also with ideas for funding those solutions, he said.

Steve Kolodney, vice president of public-sector services at American Management Systems Inc. of Fairfax, Va., and a past chairman of the council, said most of the alternate funding methods covered in the report require budget action by state legislatures.

Even when change or approval from lawmakers is not needed, state officials should seek "legislative involvement and concurrence," Utah CIO Val Oveson said.

NASCIO hopes the report also will foster greater cooperation among CIOs, procurement officials and budget officials. "We want to build bridges between those groups," Ploog said.

Staff writer William Welsh can be reached at wwelsh@postnewsweektech.com.

About the Author

William Welsh is a freelance writer covering IT and defense technology.

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