Across the Digital Nation: Innovative funding can bring great savings -- or disaster

Rishi Sood

Despite a brightening fiscal environment, state and local government organizations still struggle with funding for certain information technology projects. Over the past three years, budget shortfalls have forced these governments to find and expand innovative alternatives to the traditional appropriations and funding processes.

In many respects, Massachusetts has been one of the oldest innovators in closing the funding gap. The state has brought financing mechanisms largely reserved for more traditional public-sector services, such as building state highways, new school development and the like, into the IT arena. State bonds have supported new IT development for more than 10 years and represent a more tangible way of direct financing of technology initiatives.

In contrast, the rush to e-government development spawned another alternative to the traditional funding model: subscription and convenience fee-based development. This method relies on the proposition that vendors could recoup investment in building e-government services through user fees. The significant risk and resulting failures associated with this approach have proven this funding alternative to be unreliable across technology initiatives and unsustainable over various time periods.

Performance- and benefits-based contracts have been another interesting alternative to the traditional funding process. By allowing vendors to share in the upside of new technology deployment, government organizations can mitigate large upfront fees for solutions that provide immediate impacts. Performance-based contracts have been used best in revenue generating functions, which have limited the application of this approach across agency segments and initiatives.

There are other funding alternatives that have brought varying degrees of success: innovation funds to seed technology development, leasing arrangements to stretch payments over time, and shared services to spread costs across a wider user group. These can provide valuable options during tough economic times and can be useful under the right circumstances.

In the end, however, these alternatives have been a mixed bag. Some have proven to be real innovations, such as bonds, shared services and performance-based contracting. Others have bordered on outright disaster or have been fiscally untested, such as convenience fees and leasing arrangements. And still others, such as innovation funds, are effective for small engagements yet lack the ability to transform the overall process.

Consequently, state and local governments again must look to solve some of the basic problems with the current funding process. First, many government organizations have not required agencies to develop robust business cases that prove the value of new technology development. These business cases must be an essential part of budgeting and should lay the foundation for measuring the metrics for successful implementation.

Second, executive leadership has not created incentives to drive agencies toward new purchasing behaviors that encourage collaboration and consolidation. Agencies that tread new paths toward real transformation should be rewarded with the ability to reinvest operational savings.

Third, political leadership must lobby federal decision-makers to provide greater flexibility in federal funding to state and local government programs. Because federal funding plays an integral role in many agency segments and key technology issues, greater latitude to allocate these funds would be a boon to new innovation. State and local government could see immediate benefits by uncoupling funds from rigid program requirements and tying them to specific business outcomes.

As we have seen in the past, however, all of these issues can be silenced by a buoyant economy that adds substantial new tax receipts into government coffers. The real question is whether we can afford to wait for that time to come.

Rishi Sood is a principal analyst with Gartner Dataquest in Mountain View, Calif. His e-mail address is

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