Innovative Funding in Challenging Times

The use of performance-based partnershipswhere organizations and vendors collaborate in sharing risks and rewardsis gaining momentum and results.

Flat and shrinking budgets are causing organizations everywhere-whether commercial or government-to look for creative answers to accomplish and fund their business objectives. At the same time, IT vendors are asking themselves, “How will we survive without the revenue streams of large, multi-year projects?”

For many, the answer lies in a collaborative approach in which the organization shares both risks and rewards with a vendor partner. A relationship that affords novel, innovative funding models allows the organization to implement IT-based business solutions without having to make large, up-front investments.

The Continuum of Performance-based Partnerships

Commonly called a “performance-based partnership,” this approach consists of a continuum of possibilities that offers benefits to both the organization and the partner.

In a typical performance-based partnership, a private business partner shoulders the up-front costs associated with initiating a project, and receives compensation only when a project brings in revenue. The partner also provides the systems, consulting, and implementation expertise to get the project off the ground.

“Performance-based partnerships can work well in organizations facing budget constraints,” says Chris Ambrose, research director at market research firm Gartner, Inc. Ambrose notes that the method is only effective in situations where the benefits to both parties are mutually agreed to and are clearly measurable.

The concept is gaining some ground throughout the government and corporate world as enterprises faced with flat or declining IT budgets look towards creative solutions to meet their requirements and achieve stated business objectives.

An example of a performance-based partnership is working with a vendor to develop a system that streamlines a state agency’s purchasing processes, creating a virtual enterprise-wide procurement system. In the case of using the shared-risk, shared-reward model, such a system would use a reverse funding approach that requires no up-front appropriations; instead, funding is accrued by charging suppliers a small transaction fee, as well as an annual registration fee. This nontraditional scenario requires the private sector partner to make an up-front investment until the fee stream begins.

Although this and the following example come from the public sector, commercial organizations should consider an offshoot of this idea, in which a partner builds and hosts a revenue-generating system, charging financial institutions a fee each time a transaction takes place. This way, the organization avoids spending the money to build an internal technology infrastructure, reducing costs while retaining control over customer relationships and operations. Again, it’s about collaboration focused on shared rewards.

Revenue Collection without Risk

What if a state found a way to collect the millions of dollars it is owed in uncollected taxes with little or no risk? And, what if that state collected enough revenue in this manner to stem inevitable budget shortfalls-even enough to ensure additional ongoing revenue for the agency?

Although it may sound implausible, state tax agencies are already doing this-and more-by turning to nontraditional and collaborative methods of revenue generation. In this era of tight budgets and reticence to approve new expenditures, it’s up to agencies to find innovative ways to improve operations and raise revenues without raising taxes or slashing vital services.

One of the most successful types of performance-based partnerships is the “benefits-funded” approach, which optimizes debt collection by improving the tax system and its surrounding systems. Unlike typical procurement scenarios-in which governments pay for systems up front-benefits-funded solutions shift much of the risk to the private sector partner. With this approach, the business partner provides the funds up front for the technology and business process overhaul, receiving payment only when the agency collects previously uncollectible funds. In short order, benefits funding systems pay for themselves. Once implemented, they continue to generate income.

Benefits funding often is part of an overall modernization of an agency’s tax systems. The resulting integrated system may include data collection and reporting tools, a powerful customer relationship management (CRM) function, a comprehensive tax accounting and processing system, sophisticated audit selection techniques, automated audit work papers, a data warehouse and state-of-the-art decision support tools. This integrated approach leads to stronger collections and administration, as well as better taxpayer service. This results in more efficient management of accounts receivable and audit through better case management and correspondence management, as well as more efficient data collection and reporting. Taxpayers are provided many opportunities to self-administer their tax matters, in registering, filing, paying, and checking their official tax records.

Using the benefits-funded approach to fund tax administration modernization, some states have experienced as much as a 20 percent increase in collections of accounts receivable within one year of implementation. At one large state tax agency, implementation of a benefits-funded approach realized a total incremental revenue of more than $320 million-more than 10 times the $25 million cost of the project. In fact, it’s not uncommon for benefits-funded partnerships to pay for themselves as much as tenfold once agencies begin to recoup previously unattainable funds.

And that’s just one example. Four state tax agencies implementing this approach have collected a combined total of over $1 billion more than they would have expected under a traditional accounts receivable scenario.

Efficiency and effectiveness also rise significantly with a benefits-funded partnership, where tax collectors work more efficiently and effectively, utilizing the latest in case management and reporting tools-part of a comprehensive benefits funding package. Speed also increases. The longer it takes for collectors to contact debtors, the higher the risk that the debt won’t be paid. A modern, automated, integrated system can help ensure that industry standards are met. Lastly, productivity is increased through the use of automated productivity tools.

Countering Misperceptions of Performance-based Partnerships

If performance-based partnerships are such a great idea, why aren’t more organizations taking advantage of them?

Some may simply be unaware of the approach, while others may believe the risk is too high or the concept too unproven. Here are some common misconceptions:

It’s too risky. Actually, the opposite is true. By partnering with a third-party entity, you’ll share risks and returns. Your partner should be willing to front start-up costs, accepting repayment only as the solutions they implement produce revenues. A good partnership will cap the amount of fees paid to the partner, ensuring that the organization is the primary beneficiary over the long term, once the partner is paid in full.

We won’t collect enough additional funds to make it worthwhile. Once a performance-based system is in place, it collects previously unattainable revenue on an ongoing basis. In the case of a state tax and revenue agency, it’s not uncommon to collect significantly less than 30 percent of what is owed annually. As highlighted above, the benefits-funded approach improves this number significantly.

We’re under intense scrutiny, and concerned that this approach won’t stand up under that scrutiny. Today, more than ever before, everything organizations do is watched by oversight authorities. A successful performance-based solution employs a rigorous, conservative methodology for identifying incremental revenue, ensuring that authorities won’t find anything amiss.

We can’t implement new systems without legislative or boardroom approval, and it’s tougher than ever to convince them to approve the finances to implement new systems. By proving that you’ll reap more than you spend-and that you’ll be incurring little or no risk-you may end up getting the modern, integrated system you need on one unified technology platform.

Most organizations can benefit from performance-based partnerships, but to reap the biggest payoff:

• Engage a consultant to analyze your revenue potential. During the assessment, the consultant will examine your technology and business processes, juxtaposing it against industry best practices. A good consultant can estimate how much incremental revenue you would realize from implementing specific initiatives.
• Make sure the partner you choose is experienced not only in integrated systems, but also in performance-based funding. Your partner should be at the forefront of the field, having instituted creative funding models for technology-based products that have funded new initiatives and increased revenues.
• Ascertain that your partner is willing to front the costs and receive repayment only as the solution reaps benefits.
• Make sure your partner uses a flexible approach and isn’t wedded to the technology of one or two companies. A technology-agnostic approach will ensure that your system meets your unique needs and can grow as your needs change.

Realizing the Rewards

The cooperative and collaborative environment fostered by performance-based partnerships can translate into benefits for organization and vendor partner alike.

According to a recent report from Gartner (Make Gain Sharing Part of IT Services Agreements, 13 March 2003, R. Cox and I. Marriott), “gain sharing sets up a direct link between the rewards earned by an IT services supplier and the business benefits delivered to the client. It gives both parties real incentives to cooperate and improve the service.”

For the vast majority of organizations-commercial and government-the performance-based partnership is a powerful tool, offering benefits and financial rewards for both the organization and partner for years to come.

Donna Morea, Executive Vice President for AMS’s Public Sector Group, directs the company’s work with federal, state, and local government agencies. In 2002, AMS revenues from all public sector customers totaled more than $616 million. Ms. Morea has more than 23 years of experience building leading IT consulting practices that focus on strategic, enterprise-wide solutions for public sector customers. Learn more about AMS and benefits-funding.