Transforming Technology Procurement
Mike Stone is the Managing Partner within Global Government Consulting. Paul Dommel is an IBM Partner within the Strategy and Transformation Global Government Practice.
Many Governments around the world are updating how they procure technology. The goal is to reduce risk and get higher value out of investments -- especially from complex systems integration programs. This paper describes five common approaches to those changes, five lessons learned, and five key takeaways. In this first blog, we'll cover the first three approaches to procurement transformation.
Governments generally have a common set of goals for technology procurements:
- Economy: A combination of best price and value
- Transparency: A process that stands up to public scrutiny
- Equitable treatment of vendors:Procurements that are fair and open
- Competitive environment:Making sure there are competing bids
Key Challenges of Government Technology Procurement
Meeting those goals is not easy. Layers of regulations challenge procurement organizations. The result is cumbersome RFPs that are often years in the making and are hundreds of pages long, with dozens of detailed exhibits and contract terms.
To protect their interests, Governments frequently define very specific, atomized business and technical requirements, which quickly become outdated and/or irrelevant. Too often requirements are defined, and procurements released, without structured input from a systems integrator (SI). By the time long, complex programs are delivered, the systems are out of date. These procurements rely on best estimates of what technology will be able to accomplish at the point of development. These estimates are almost invariably wrong as technology has moved on apace. In these cases, the resulting programs do not meet current user requirements, do not use modern design techniques, and rely on old software and technology.
Deeply bureaucratic approaches to protect Government interests too often have the opposite effect and result in programs that are costly to manage and/or fail. High quality SIs understand the risks. They tend to avoid the highest-risk opportunities and real competition dries up.
Government leaders around the world are increasingly aware of this conundrum. They are shifting strategies in order to reduce risk, create a larger pool of quality vendors, and achieve better outcomes.
Global Approaches to Procurement Transformation
As already noted, Government leaders and taxpayers expect Industry to deliver effective technology programs. Current cumbersome approaches to procurement have made that harder and frequently result in failure to deliver on expectations, or to deliver capabilities that are past their ‘sell by date.'
To counter this, some Governments have shifted to more agile procurement techniques to get results faster. Underpinning this is an understanding that technology investments are not like other long-term capital investments, such as roads and bridges or warships. Technology investments must adapt to constant change. Outcome-based, multi-vendor programs are increasingly important to quality results. Getting that done requires greater opportunities for collaboration between Government and industry partners – while maintaining transparency and equity.
There are five approaches to procurement transformation that have emerged globally. They are frequently used in combination. These approaches are summarized in the list below and then subsequently reviewed in more detail:
- Technology-focused techniques for IT investments vs. capital investments
- Outcome-based contracting to deliver real outcomes and outputs – as opposed to delivering against dated specifications
- Framework agreements to reduce negotiations over individual procurements
- Multivendor awards to increase the pool of industry partners
- Increase knowledge exchange with industry partners to improve quality
These approaches are helping governments to reduce risk, realize benefits faster, and expand the pool of high-quality partners.
1. Technology-focused techniques for IT investments vs. capital investments
Capital investments are those in which there is a significant amount of spending on goods or services that provide benefits years after their acquisition. Capital investments include highways, schools, and power stations. Beyond physical infrastructure, countries make significant capital investments in defense capabilities like ships, planes, and equipment. Most of these investments return benefits over the course of decades. Beyond periodic maintenance and upgrades, there is little change to the asset itself. For example, the basic requirement of a road is to move vehicles from point to point.
Technology is different. While the typical lifecycle of a warship from concept to disposal is 60 years, the typical lifecycle of a technology asset is 5 to 8 years. Acquiring the IT that supports the warship using the same approach as for the warship itself -- and doing so on a fixed cost basis -- almost guarantees failure. Similarly, new policies, legislation, or mission demands require technology to meet constantly evolving needs. As an example, tax and revenue agencies generate the vast majority of national revenue. They do this through collecting revenue and fees through sales and business taxes, income taxes, and fees at the border. Each year, new tax and customs legislation and policies are written. That drives new rules and programs that technology needs to support.
At the same time, technology itself is constantly evolving. In 10 years, today’s iPhone 13 may have the same relative level of technology as a pager at the turn of the century. As a result, governments are developing new acquisition standards and investment management programs for technology. For example, purchases often need to be modular and provide modular benefits. Even the technology used in defense assets – like communications systems on a ship – need to be purchased as components that must change and be updated over time.
2. Outcome-Based Contracting Reduces Cost and Risk
Outcome-based contracts focus on overall results – business impacts and usable systems. They do NOT evaluate the performance of partners against highly defined, but confining business and technical requirements. Rather, the contracts specify outcomes to be achieved. SIs determine the best way to execute the work.
Embedded in contracts are core concepts:
- Defined outcome objectives and key performance indicators
- The data by which partners are evaluated
- Benefits and consequences based on performance
Outcome-based contracts support the use of agile development methods. Agile development is about the rapid deployment of code based on high levels of engagement with subject matter experts and end users. Agile relies on frequent engagement with SMEs and end users. It is far less reliant on requirements that may be years old.
Agile development and traditional, fixed-price IT procurement methods that rely on predefined requirements are not compatible. As a result, procurements are becoming less tied to highly detailed requirements and more tied to well-defined business outcomes. Governments are contracting for smaller, fixed-price packages of work and increasing the use of outcome-based payments, and using time and materials schedules for new development work.
While improving the likelihood of success for Government, these approaches also reduce risk to partners and will increase the number of firms competing for work.
3. Framework Agreements Speed Contracting and Create a Pool of Industry Suppliers
Governments increasingly use framework agreements to create a ready pool of industry partners. Framework agreements prescribe a scope of technology and services and the terms and conditions which would apply to future contracts for defined scopes of work. They reduce or eliminate the need to negotiate terms and conditions over every package of work. The agreements exist with multiple suppliers and speed contracting. Governments can award work directly to a single partner. They can also create a competitive procurement among those who the framework agreement.
While framework agreements speed contracting, Governments typically cannot add to the goods and services that can be acquired on the contract or increase the number of industry partners for the duration of the contract. Governments can buy from a new industry partner, but they cannot use the framework agreement to do it.
Framework agreements last for up to ten years. However, we are seeing many governments shorten the duration. This helps to ensure that there is a ready pool of high-quality technology, services, and industry partners.
In our next blog post, we will review the fourth and fifth approach to procurement transformation, provide a case study of the U.S. Department of Veterans Affairs, and end with key benefits and takeaways.