Ties That Bind:
Networked Government

As the world moves into the Internet Age, it inevitably becomes more interde- pendent. The formal and informal networks that bind society together—busi- nesses in national and transnational markets, nonprofit concerns, political parties, and affinity groups of every kind—are taking advantage of the telecommunications revolution to coordinate their efforts, and compete and collaborate with an ease and efficiency most only dreamed about.

In today’s climate of rapid technological change, the term “networking” usually evokes images of the internal and external electronic networks that allow modern organizations to communicate and engage in transactions with others throughout the world. Networking, however, carries another important meaning. A networked organization also revolves around a complex web of working relationships among customers, suppliers, contractors, shareholders, employees and even competitors.

The most successful companies of the Internet Age avoid the expense and effort of creating large in-house capabilities in areas not central to their business goals. Instead, they form strategic partnerships with firms that can deliver the expertise they need. Some of these will be long-standing relationships; others will dissolve after a project is completed. Reengineering guru Michael Hammer calls this new business model the “virtual enterprise;” in such arrangements, it often isn’t easy to see where one company starts and another ends.[1]

Examples of such virtual enterprises are all around us. The Finnish cell-phone giant Nokia, for instance, needed just five employees to run a US-based personal computer display division that registered nine-figure sales in the mid-1990s. Local companies served as Nokia’s sales and customer service representatives, while other firms supplied technical and logistical support, and Silicon Valley specialists were contracted to handle advertising.

The success of such ventures rests on the creation, nurturing and successful management of networks of strategic partners. Cooperation and collaboration are becoming the hallmarks of the Internet Age economy. These linkages are facilitated by the communications revolution. The Internet allows for high-speed, low-cost communications between organizations, while e-commerce applications allow them to seamlessly integrate their internal systems.

The ease of Internet-based collaboration allows organizations to take advantage of economies of scale while avoiding the delays and overhead costs inherent in large, centralized bureaucracies. “Companies organized as traditional, bureaucratic hierarchies simply can’t respond quickly enough, no matter how their bureaucracy is streamlined,” says author Harry Dent. “Networks don’t have sluggish bureaucracy.” Thus, as markets become more efficient and the costs of collaboration with outside partners continue to decline, firms inevitably are becoming smaller and more tightly focused on their own core goals and abilities.

The London Economist has explained the economics behind this change:

[T]he main reason why firms exist...is to minimize transaction costs. Since the Internet reduces such costs, it also reduces the optimal size of firms. Small firms can buy in services from outside more cheaply.[2]

Some business analysts expect the 21^st century economy to be dominated by small teams of independent contractors who will coalesce for specific projects and vanish just as quickly—a scenario that will depend on modern electronic networks to tie the collaborators together. Business Week reports that some experts believe we may soon see a world of enterprises consisting of “tripartite virtual partnerships,” in which one firm develops and engineers products, another handles marketing, and a third manages production.[3] The big auto manufacturers, for instance, will continue to produce vehicles. Many of a car’s subsystems, such as the chassis, will be left to parts suppliers. The automobile manufacturer then will assemble all the parts at the end of the process.[4] Furthermore, even the design of new cars increasingly may fall to specialist design firms.

Austin high-tech entrepreneur Steve Papermaster explained at an e-Texas hearing that networked organization models are not just a matter of choice, but of survival: “The new economy is moving from large, vertically-oriented businesses to adaptive, dynamic organizations that are more virtual in nature,” says Papermaster. “A fluid, networked model of partnerships, alliances and outsourcing is one of the only ways to deal with the need for speed in this age of fast-paced change.”[5] 

Networks have transformed how business is conducted and how businesses are structured. This private sector transformation is blazing a trail that the public sector is sure to follow. Just as big bureaucratic corporations are being replaced by smaller, nimbler networks and partnerships, our large public sector bureaucracies in Texas must inevitably yield to the more efficient, networked model.

Why Organizations are Turning to the Networked Model

Focusing on Core Competencies

Many organizations choose to outsource ancillary services—activities that are necessary but not central to their business goals, such as maintenance, data processing, printing, fleet maintenance, and mail and payment processing. Outsourcing such services to specialist companies can allow public and private organizations alike to save money and focus their resources and managerial attention on their core functions.

Says Sun Microsystems President Edward Zander: “This year, for the first time, every one of my division chiefs has to explain their core competencies to me. They have to defend every person because now there’s the Web and outsourcing.”[6] 

Cisco Systems, one of the most successful companies of the Internet Age, defines its core competencies as two main activities—the development of new products and their sale to customer sales. Cisco accomplishes the other activities needed to support these two functions through outsourcing and partnerships with other companies (see Figure 4-1). Cisco handles 78 percent of its orders over the Internet, but never even touches half of them. The orders go directly to the company’s contract manufacturers—and Cisco owns only two of the 30 plants that produce its routers and switchers.[7] A materials management company then manages the inventory and delivers products to customers. Often, Cisco employees never lay a hand on the product. Cisco claims the process saves the company between $500 million and $800 million a year over the cost of in-house operations.[8] 

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Government-to-Government Networks: Intergovernmental Service Agreements
The Interlocal Cooperation Act (ICA) of 1971 allowed many Texas cities and counties to sign interlocal agreements for the provision of a diverse range of local services including administrative services. The ICA contains a broad authorization for any one or more public agencies to contract with one another to conduct a number of governmental functions. These functions may include tax assessment and collection, personnel services, purchasing, records management services, data processing, warehousing, equipment repair, printing, and others identified by local governments.[9] 

The ICA allows local governments to avoid needless duplication of services and overreliance on state or federal agencies for services expected by their citizens.

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Partnering with “Best of Breed” Organizations

Internet Age organizations are beginning to expand the notion of outsourcing well beyond non-core activities. Increasingly, companies are contracting for critical processes precisely because they are so important to their ultimate goals that they want a seasoned “best-of-breed” specialist firm to handle them.

Such companies realize that if they aren’t industry leaders in a particular process—whether it is the manufacture of a single part or the management of an entire production line—then they can and should obtain these services from someone who is. “No company can hope to be better than all outside specialists in all the elements of its [activities],” writes James Brian Quinn, author of Intelligent Enterprise and a leading proponent of the networked model. “If the company is not the best in the world...at that activity, it is giving up its competitive edge by performing the activity internally.”[10] 

The end result of this trend will be more efficient markets dominated by interlocking alliances, both permanent and temporary, of companies that specialize in relatively few activities—and do them very well. As Michael Hammer explains the trend, in the future “companies will increasingly define themselves in terms of the processes they perform rather than the products or services they produce.”[11] 

For example, Ford Motor Company announced in February 2000 that it was entering into a partnership with Austin-based Trilogy Software, Inc. to develop and operate Ford’s e-commerce Web site and improve the coordination of separate Web sites run by Ford dealers. The system eventually will handle all of Ford’s Internet contacts with its customers. With some 400,000 employees (400 times as many as Trilogy) and billions in annual revenues, Ford clearly could have developed the Web site in-house, but instead believes that Trilogy will bring unique talents and perspectives to the operation, including a track record of successfully building large Internet systems quickly. Moreover, according to Brian Kelley, a Ford vice president: “We want the culture of a startup or a dot-com... We want to take advantage of the resources and size of Ford, but have the mindset and soul of a smaller company.”[12] 

The most ambitious public-private partnership yet attempted by Texas—and perhaps the most ambitious yet attempted by any state—was inaugurated in 1995, when the state embarked on a plan to integrate and privatize eligibility determination functions for all Texas health and human services. This included more than 50 different programs, including welfare, food stamps and Medicaid. A major factor behind the decision to outsource this function was the desire to bring state-of-the-art technology and cutting-edge business management practices to bear on this function. Accordingly, the Texas Department of Human Services partnered with Electronic Data Systems, while the Texas Workforce Commission partnered with Lockheed Martin IMS; each team was prepared to bid against the other to deliver the eligibility services. In the end, however, federal opposition to the plan forced Texas to abandon this innovative project.[13] 

The concept of contracting with “best-of-breed” partners for core services also can be observed in the area of education. Many public schools and school districts across the nation, for instance, are partnering with the private sector to provide core services from educational instruction to school management. Edison Schools, founded in 1992, has developed an innovative school model that has been put into place in 79 public schools in 16 states and the District of Columbia. Edison operates these schools, which serve more than 37,000 students, through contracts with local school districts and charter school boards. Houston and Los Angeles County both contract for remedial education services. “Across the country, we see the private sector bringing creative new ideas to the table in the educational arena,” says e-Texas Education Commissioner Charles Miller.

Achieving Savings

In addition to the above advantages, organizations are embracing the networked model in order to cut costs.

Several years ago, the Comptroller’s Texas School Performance Review (TSPR) team reviewed the Houston Independent School District, a large, urban district facing many problems. The district’s food service operation had the dubious distinction of having been featured on ABC news for its waste and mismanagement. Just before TSPR’s review began, ABC broadcast tapes of employees caught stealing from the kitchens, unsafe and unclean working conditions, and barrels of food waste. The TSPR team convinced the district to open up its food service to competition. The contract was won by a private firm that has produced almost $8 million in savings, better food, and a 16,000-per-day increase in meals served.

The University of Texas Medical Branch (UTMB) expects to experience cost savings from entering into a public-private partnership transferring complete responsibility for its desktop computing resources to a private contractor.[14]  UTMB expects the contract to save the organization 25 percent annually (roughly $3.75 million). UTMB has placed 4,600 desktop computers on the contract and will transfer another 2,600 to 2,900 computers to its new private partner.[15] 

Strategies for Achieving Networked Government

Strategies in Brief Inventory the Commercial Functions Performed by the State Use Performance Incentives to Obtain Results Use Information Technology to Reduce Costs and Facilitate Networks

In the past, being a state government manager was not always easy, but generally it was a pretty straightforward job. After working your way up the ladder, you managed a program or service. The workforce was largely stable. Many of your employees had worked for the state for most of their adult lives. The greater part of each day was spent in managing these career public employees—to you, a contractor was the person who fixed your kitchen floor. The more staff you had and the bigger your budget, the more prestige you had.

While this scenario isn’t dead yet, it’s going the way of typewriters and eight-track tapes. The public manager of the future is more likely to resemble Nancy Hard, director of the Child Care program for the Texas Workforce Commission (TWC), whom we met in the previous chapter. Her program serves about 93,000 children, and Ms. Hard might be expected to have a staff of hundreds. Yet she manages this enormous program with only 14 employees. How is this possible? Because the program was designed as a classic networked model.

The state doesn’t provide the childcare itself, contract with or monitor day care centers, or guide families to the right providers. All of these services are provided by contracts with local workforce development boards and private providers (see Figure 4-2). The state’s main role is to fund the program and to provide policy direction and oversight for a complex network of day care centers, community organizations, local boards, and child care brokers and navigators.

“From a manager’s perspective, the networked, collaborative structure we have is much more challenging and allows far more creativity,” explains Hard. “Compared to the old, hierarchical...approach, the networked structure provides many more opportunities to leverage and build on additional resources, some of which are just knowledge-based.”[16]

Other examples of the networked model are not hard to find in Texas government. The state’s Web portal, discussed earlier, is being designed, built, and operated by a private firm, with the state retaining ownership over the architecture. The portal’s ultimate success will hinge on partnerships and collaboration between the Department of Information Resources, other state agencies, local governments and private applications providers.

Overseas, some governments have gone even further than the US in partnering with the private sector to perform key government functions (see Figure 4-3 for summary of competitive strategies used by the public sector). Australia contracts out its Coast Guard. New Zealand no longer has any government in-house capability to design, build or repair infrastructure. When these services are needed, they are purchased on the open market.

Inventory the Commercial Functions Performed by the State

Many if not most of the services provided by the state are delivered by government monopolies that rarely have to compete with other service providers. And monopolies, whether public or private, usually don’t work very well.

The public, in turn, often must deal with government monopolies to receive the services it needs. By contrast, the private sector has powerful incentives to attract and retain customers. In fact, 91 percent of unhappy customers will never again buy from the offending company, and will communicate their dissatisfaction to at least nine other people, according to studies by the Technical Assistance Research Programs Institute, a Virginia research and consulting firm.[18] 

Former Indianapolis Mayor Stephen Goldsmith, who subjected more than 80 city services to private-sector competition while mayor, describes what would happen if fast-food restaurants faced the same degree of competition as most government departments:

No one says they’re perfect. But imagine what they would be like if there were only one fast food chain. If people had no choice, if there were no competition, if fast food were a monopoly, two things would definitely happen. Prices would go up, and quality would go down. Most of government is run that way.[19]

Comptroller Rylander has a simple solution to this problem that she calls the Yellow Pages Test: “Government should do no job if there is a business in the Yellow Pages that can do that job better and at a lower cost.”

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A Brief History of Texas’ Efforts to Encourage Competitive Government
Competitive Cost Review. One of the first significant efforts to introduce competition into Texas government began in 1987, with the establishment of a “Competitive Cost Review” (CCR) program. This program required selected state agencies to identify commercially available activities, open them to private competition, and outsource them if a competitor could perform the activities for at least 10 percent below the government’s cost. (The agencies also could opt to change their own processes to bring their costs down to the level available from the private sector.)

This initial program, however, yielded little in the way of positive results. No governmental service was ever outsourced under CCR, and agencies found the analysis involved in CCR, which often took more than 18 months, to be cumbersome. Some bids advertised to comply with the program even indicated that the bid was for informational purposes only and that a contract was not likely to result.

Council on Competitive Government. The failure of the CCR program led the 1991 Legislature to establish a new forum for competition: a Council on Competitive Government (CCG) comprising the governor, lieutenant governor, chair of the General Services Commission, state comptroller, Texas Workforce commissioner of labor and speaker of the House. The council is authorized to identify commercially available state services to ensure that the state uses the most cost-effective and efficient method of delivering these services. CCG can require any state agency to participate in any competitive project it identifies. CCG’s decisions and recommendations are exempt from state procurement laws, a provision that helps to ensure its freedom to pursue creative solutions in the best interests of state taxpayers.

The council has been credited with saving the state more than $53 million. Its work began with several projects, including the state’s internal mail system, which had become a sprawling mess. In 1995, CCG contracted with a private company to provide automated presort and barcode mail services for 67 small state agencies, the Texas Department of Human Services, Texas Department of Public Safety and the Texas Department of Transportation. By 1999, more than 114 state agencies were employing private vendors to presort their mail. Since 1995, the state has saved more than $12 million by turning these functions over to the private sector.[20]

Comptroller Rylander’s Yellow Pages Test. Competitive sourcing received renewed attention in Texas in 1998, when Comptroller Carole Keeton Rylander promised during her election campaign to apply a “Yellow Pages Test”—that government should do no job if there is a business in the Yellow Pages that can do that job better and at a lower cost—to government services. The Comptroller established a Competitive Strategies Division to remove impediments to healthy competition and public/private partnerships; develop and implement effective approaches for competitive projects within and outside the Comptroller’s office; and ensure that parties to the competition are treated fairly. Comptroller competition projects completed or under way involve printing services, outgoing mail operations, the maintenance and support of computer hardware, and software, and debt collection.

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Before government monopolies can be opened up to competition on a large scale, policymakers first must know just what is being delivered in-house, what is already being contracted out and what competition opportunities exist. This sounds simple, but right now in Texas, as in most state governments, we don’t have this information. And we need it.

The federal government is conducting the largest analysis of this nature in the world. In 1998, Congress passed the Federal Activities Inventory Reform (FAIR) Act, which requires federal agencies to catalog services they provide that are commercial in nature and consider outsourcing them. The FAIR Act also requires agencies to identify activities offered by private vendors as a first step toward reviewing these activities for their outsourcing potential.[21]

FAIR requires thorough reviews of areas that may offer significant savings, whether the government or private sector ultimately wins the competition. More than 900,000 federal positions already have been identified as being commercial in nature and therefore, potential competition opportunities.[22] If any competition between public and private performance is conducted, the agency involved must employ “realistic and fair” cost comparisons.[23] 

“Interested parties” are allowed to submit protests to the agency about the inclusion or exclusion of a government activity from the FAIR list. An “interested party” may be a potential vendor; a government employee performing an activity on the list; a business or professional association that includes potential vendors; an officer or employee of a government agency that is an actual or potential provider of a service; or a labor union representing such employees.

Federal contracting experts say that the process of simply conducting the inventory itself has spurred agencies to ratchet up their competition efforts.[24] 

ACTION:

Texas should follow the lead of the federal government by conducting a comprehensive, governmentwide inventory of activities that could be performed by the private sector. The Council on Competitive Government (CCG) should be charged with overseeing the completion of this inventory, which would serve as an initial step toward systematically opening state services up to competition and the creation of a true networked government. As with the federal government, public agencies would compete against the private sector on costs and quality for the right to provide the services.

Employee incentives can play a crucial role in the success of competitive government projects. Employees who perform the services best know how to reengineer processes and identify inefficient cost drivers. Few things will help change the culture of Texas government more quickly than financially rewarding employees who contribute to successful competitive projects.

Therefore, agencies or divisions that compete with the private sector to deliver state services should be allowed to distribute a portion of any cost savings that result from winning a competition to the employees that participated in the process. The Texas Incentive and Productivity Commission (TIPC) has a process in place to certify cost savings and distribute financial rewards.

Incentives can help break down bureaucratic habits, reenergize existing staff, improve service quality, save taxpayers’ money, and create an environment that encourages innovation from state employees.

Finally, as a key part of the inventory process, the first question that should be asked of each activity studied is whether government should be doing this in the first place. If the answer is no, the agency should get out of the business.

ACTION:

The large surplus in the Texas Workers Compensation Insurance Fund is an underused state asset. This fund serves as an insurer of last resort for Texas workers, providing assistance for medical expenses and the loss of income resulting from job-related injuries. The state’s expanding economy and changes in the Workers Compensation System have placed the fund’s surplus at more than $600 million. Privatization of the fund’s operations offers the greatest promise for better deployment of this valuable asset.

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Potential Competition Opportunities in Texas Government*

• Building Leasing
• Business Machine Repair
• Call Centers
• Data Mining and Revenue Maximazation Services
• Debt Collection
• Document Imaging
• Energy Savings Contracts at State Facilities
• Fleet Maintenance
• Freight and Shipping Billing and Practices Audits
• Golf Courses
• Grounds Maintenance
• Highway and Bridge Engineering Design
• Highway Maintenance
• Information Systems Management
• Internet-based Spot Purchasing Services
• Janitorial Services
• Job Posting and Hiring Services
• Mail Services
• Marinas and Campgrounds
• Supply Management
• Utility Billing
• Visitor Information Centers
• Warehouse Operations
• Web Site Design and Operation

*This is not intended as a comprehensive list.

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Use Performance Incentives to Obtain Results

Whether it is an outsourcing contract, a joint venture, or a public-private partnership, before entering into a networked relationship, goals and expectations must be set out and mutually agreed upon. There should be no misunderstanding about roles and responsibilities; the partners must have a certain degree of freedom to realize their goals.

In the past, most governments focused on inputs, not outputs and outcomes, and long-term goals were rarely spelled out in contracts. As governments contract for an ever-increasing list of goods and services, however, they are becoming smarter shoppers. This implies outcome-based contracts that contain clear performance standards; the incorporation of financial incentives and penalties; and advanced performance measurement techniques. Such strategies often are collectively called performance-based contracting. Texas’ TEX-AN 2000 telecommunications contract negotiated in 1999 is one example. The contract did not specify the type of telecommunications system Texas desired, but instead defined what the system must accomplish in functional terms, allowing the contractor to determine how best to meet these requirements.[25] 

A 1998 US Office of Management and Budget (OMB) study examined 15 federal agencies that converted 26 contracts to a performance-based approach, and found that the savings and service improvement achieved can be substantial. Agencies reported an average 15 percent reduction in contract prices and an 18 percent increase in satisfaction with the contractor’s work (see Figure 4-4). For example, the Air Force saved 50 percent on cleaning costs by specifying that floors must be clean and free of scuff marks and dirt and have a uniformly glossy finish, rather than requiring that the contractor strip and rewax the floors weekly.

The OMB study also found that 15 of the 26 contracts were awarded to companies that had not previously held the contract, demonstrating that performance-based contracting can stimulate competition.[26] 

Performance incentives can be built into partnership agreements in many different ways. One popular method is to pay only for results. In Compton, California, the school district contracts with Sylvan Learning Systems, a provider of educational services, to provide supplemental math and reading instruction to 1,200 students. If the company fails to meet the contract requirements—including an improvement in students’ reading scores of at least 3 points on a scale of 100—Sylvan receives nothing.[27] 

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Performance Incentives Deliver Results Faster in Rebuilding California Freeway
When the January 1994 Northridge earthquake resulted in the collapse of two bridges on the Santa Monica Freeway—the busiest in the world, some thought it would take up to two years to reopen the road. The estimated cost to the local economy was $1 million–$3 million a day. To speed the process, Governor Pete Wilson gave California’s state transportation agency, extraordinary authority to shorten normal contracting processes. This allowed the agency to advertise jobs for less than the usual two weeks before bid opening and to accept bids from only five prequalified contractors for each job. In addition, the agency offered substantial performance incentives and penalties including a $200,000 per day bonus for completing the project ahead of schedule and a similar penalty for each day the project was behind schedule.

The streamlined contracting process allowed repair work to begin the day after the earthquake. Meanwhile, the financial incentives resulted in the overpasses being replaced in a little over two months, 74 days ahead of the deadline. To complete the project so quickly, the contractor used up to 400 workers a day and kept crews on the job 24 hours a day. The $13.8 million the contractor received in performance bonuses were more than offset by an estimated $74 million in savings to the local economy and $12 million in contract administration savings thanks to the shortened schedule.[28] 

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ACTION:

Texas state government spends about a third of its budget on contracted services and goods.[29] To be a responsible caretaker of this money, the state continually should strive to improve its purchasing procedures. One way is to insist on outcome-based terms when contracting for services. The Office of Federal Procurement Policy has published a guide to assist agencies in the development of performance-based contracts.[30] The guide also relates several success stories indicating savings of 15 percent when performance-based contracts replace existing contracts.

An outcome-based statement of work, rigid quality control guidelines, and appropriate financial incentives are all essential to achieving success with performance-based contracts. Given the state's spending of some $14 billion annually on contracted services and goods, the use of performance-based contracts should result in substantial savings to the state. [31]

Use Information Technology to Reduce Costs and Facilitate Networks

As we have stressed throughout this report, information technology applications, particularly e-commerce, can produce huge savings and productivity improvements for Texas and other governments. We believe these savings could eventually be in the hundreds of millions or even billions of dollars.

Most of the state-of-the-art technology and experience in e-commerce strategies, however, lie in the private sector. This means that, to create a 21st century digital government, Texas’ state and local governments will have to rely on far-reaching public-private partnerships and outsourcing agreements. Texas should use private-sector expertise in three ways:

1) To give the state access to new technology, such as Web-enabled applications, without huge upfront costs;

2) To upgrade existing systems; and

3) To facilitate networks of providers and other partners in service delivery.

When structured properly, outsourcing alliances and strategic partnerships can give the state access to cutting-edge technology without major upfront costs. In the early 1990s, the Texas Parks and Wildlife Department automated its hunting and fishing license system. Today, sportsmen no longer need to visit a state office to obtain a license. Licenses are available in many sporting goods stores through a device similar to an automated teller machine. This technology didn’t cost the state a dime. Instead, a private company agreed to create the entire multi-million-dollar network in exchange for a small percentage of the revenues from each license sold.

A similar funding model is being used to finance the development of Texas’ portal and e-procurement systems.

“Information technology is not a core competency of government,” Mike Sheridan, former executive director of the Texas Workforce Commission told us. “The state can save a lot of money by focusing on its core functions and outsourcing most information technology.”[32] Governments across the country already are doing just that.

San Diego County, California is outsourcing all of its computers and telecommunication operations to a consortium of private companies that is led by Computer Sciences Corporation and includes SAIC, Pacific Bell, and Lucent Technologies. This is the biggest state or local government technology outsourcing project ever. One of the major reasons for the move was to upgrade the county’s technology systems. As part of the agreement, the private contractors will install new, state-of-the-art desktop computers, phones, phone switches, routers, computer networks, and fiber-optic cable. “What we can do as a government versus what a world-class company can do that specializes in this—there’s no comparison,” says Walt Ekard, the county’s chief administrative officer.[33] Within three years every possible county service—both internal and external—will be moved onto the Internet.

The Navy and Marine Corps’ “intranet” outsourcing project will dwarf even San Diego’s. In October 2000, the Navy awarded a $4.1 billion contract to a consortium led by EDS to consolidate all of its existing networks and build and maintain an enterprise-wide intranet that will link all shore commands and ships, providing voice, video, and data services. “The intranet will be built and maintained by the real experts in information technology: commercial industry,” writes Marv Langston, former Deputy Chief Information Officer for the Defense Department. “They’ll upgrade it as new technologies hit the street.”[34] 

Joe Cipriano, the Navy’s program executive officer for information technology, explains why they chose to outsource IT on such a large scale:

Technology also can be used to facilitate contracting relationships. Dell Computer Corporation told us how the company uses information technology to better coordinate its supply chain by exchanging information with suppliers electronically. Dell shares production scheduling, demand forecasts, and a lot of other information via the Web. This has allowed Dell to eliminate its need for massive inventories and respond more quickly to changing customer needs.

Intel is headed in the same direction. “It took us 10 years to integrate our manufacturing systems, accounts-payable systems, and demand systems inside of one company,” says Intel CEO and founder Andrew Grove. “Now we are talking about taking Intel and their 50,000 customers and their 5,000 suppliers and integrating them into it as well.”[36]

The state is years behind the private sector in using technology to become better integrated with its contractors. In fact, in direct contradiction to prevailing private-sector best practices, most governments still maintain an arms-length relationship with their contractors.

Software now exists that can capture the entire life cycle of contracting from negotiation to obligation to renewal. All contracts can be entered into one web-enabled database. For the first time, the state could know the exact number of contracts, who they are with, what types of services are contracted, and a myriad of other valuable pieces of information. This information could allow Texas to truly leverage its buying power across all contracts.

In contrast, today the state’s General Services Commission (GSC) allows all agencies to conduct their own purchases for goods worth less than $25,000 and services under $100,000. While state agencies are required by GSC to report these purchases, many fail to do so.[37] GSC, therefore, lacks reliable purchasing information to provide feedback and guidance to agency purchasing departments.

ACTION:

The federal General Services Administration (GSA) has developed “seat management” (a term coined by GSA), which transfers complete responsibility for personal computers from the government to a private contractor. While seat management is a relatively new outsourcing strategy, it holds great promise for organizations seeking alternative funding sources and savings. A number of federal, state and local government agencies are instituting seat management contracts, with varying degrees of success. To meet the demand for faster, more cost-effective service, Texas state agencies should explore seat management arrangements.

ACTION:

Texas should use modern software to support buying decisions and maintain historical data on all purchases and contract performance. Such a database would allow the state to track all purchases and develop strategies to stretch the state’s buying power. Current software packages can track purchases from the initial development of terms and conditions, help support objective decisions based on these terms and conditions, evaluate and rank responses to requests for proposals, and monitor the full life-cycle of the contract and provide feedback on vendor performance.[38] 

Current software also can give the state the ability to negotiate and document contracts online. Templates for contracts can be stored on the system and used by any agency to develop a new contract. These systems allow contracts to be sealed or accepted by digital signature or digital certificate.

Use Electronic Marketplaces to Cut the Costs of Services and Supplies

The Internet will fundamentally change the way governments purchase goods and services. It will allow us to create far more competitive markets in many areas now controlled by cumbersome and costly paper-based systems that can be dominated by insiders. The federal government, for instance, recently announced plans to create a trading system for the broadcasting spectrum, so radio and television stations, telephone companies, and wireless Internet services all could bid for underused portions of the spectrum already controlled by other companies.

Business-to-business (B2B) marketplaces—Web sites where companies meet to buy and sell goods and services—are springing up daily. More than 500 companies presently are creating e-marketplaces. E-Steel.com, Metalsite.com, E-Chemicals.com, Chemdex.com—name the industry and a global exchange marketplace probably exists or is being established. Some analysts estimate that these types of global exchanges will amount to between 30 percent and 40 percent of all industrial commerce by 2004. Deals that once took months can be conducted in minutes.

Enron has set up an online marketplace where companies worldwide can buy and sell natural gas, coal, plastics, pulp, paper, oil, water and soon, even “bandwidth”—essentially, the electronic “pipe” along which companies send their Internet traffic. Enron will create a marketplace of buyers and sellers of bandwidth so, for example, a university with excess bandwidth in the summer can sell it to a company that’s facing a rising demand for bandwidth during the same time.[39] 

Last year, Pennsylvania contracted with Free Markets, Inc., to run several “reverse auctions” over the Internet to solicit bids for large purchases of aluminum and rock salt the state needed to make. In reverse auctions, sellers compete to offer the lowest prices on a commodity or service. The number of bidders increased dramatically, as did the level of competition. Savings to the state amounted to more than $10 million over traditional procurements (see Table 4-1).[40] 

By improving the flow of information among buyers and sellers, online marketplaces and reverse auctions make markets more efficient, inducing more competition among suppliers and reducing the costs of doing business with buyers. The Naval Supply Systems Command’s (NAVSUP’s) Naval Inventory Control Point held a reverse auction on May 5, 2000 to purchase 756 “sequencers”—technical equipment for aviation ejection seats. According to NAVSUP, the auction, which took less than an hour, resulted in a 29 percent savings over previous prices.[41]

FedBid.com, a private firm, has launched a system that not only allows federal buyers to fill virtual shopping carts with needed supplies, but provides a type of reverse auctioning in which sellers compete to offer the lowest prices on a given group of products.[42] 

Soon, artificial intelligence will become involved in online auctions and marketplaces. Computers will conduct an endless series of analyses comparing the bidding history of various suppliers with that of buyers and accept or reject bids based on that analysis. Intel CEO Andrew Grove argues that these new technologies will make the economy more efficient by a power of 10.[43] They will also produce large savings for governments.

ACTION:

The General Services Commission (GSC) is sponsoring an on-line procurement pilot called Texas Government to Business (TxG2B), and reverse auctions should be added to the pilot as a feature to procure goods and services where appropriate. Since reverse auctions are not appropriate for all types of purchases, the decision to use them should be left up to the agency or GSC. Texas Government Code § 2155.062 (a) should be changed to state explicitly that GSC may use electronic reverse auctions to purchase goods and services and to sell surplus property.

ACTION:

Internet-based electronic procurement (e-procurement) applications are substantially reducing costs and improving process efficiency and effectiveness within both private sector and public sector organizations. Savings of 66 percent to 75 percent per purchase order frequently are reported from online procurement, and returns on investment of more than 300 percent and payback periods of between 12 to 18 months are commonplace. These results are possible because market-leading applications eliminate paper-based processes and enable the implementation of best practices across the procurement process, facilitating end-to-end communication across organizations and integration with supporting systems.[44] In fact, some of the best e-procurement applications, in themselves, can be characterized as best practices.[45]

The TxG2B pilot program should be expanded with a goal of achieving a comprehensive and fully-funded, statewide electronic procurement for all state agencies, institutions of higher education, local governments, school districts and other political subdivisions qualified by law by the end of fiscal 2005. Existing state law qualifies the following entities as eligible to participate on state procurement contracts. State law should be amended further to allow for the formation of an intergovernmental policy-making council to oversee implementation of TxG2B.

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Networked Government Highlights
•By dramatically reducing the transaction costs of collaboration with outside firms, technology is enabling organizations to focus their energies on their core missions.

•Successful organizations, both public and private, are transforming from vertical, bureaucratic models of organization to flexible, networked models.

•The networked model will require fundamental cultural changes within the public sector.

•Networked models of government will increase outsourcing and public-private partnerships, flatten organizational structures, and entail a greater reliance on communications technology.

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e-Texas is an initiative of Carole Keeton Rylander, Texas Comptroller of Public Accounts
Post Office Box 13528, Capitol Station
Austin, Texas

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