Navigating the Challenges of IT Procurement

By Cassandra Kirsch| Vol . 22, No. 27 / July 2014

NCSL NewsDid you know?

  • At least 30 states use an e-procurement system or are in the process of implementing one.
  • According to the 2013 NASCIO Survey of State CIOs, almost two-thirds of CIOs believe their IT procurement process is either somewhat or very ineffective.
  • Sixteen states conveyed in a 2013 NASPO survey that they have unlimited liability because of conflicts with the state constitution, legal statutes or no flexibility to waive the sovereign immunity rights.

Information technology (IT) is the critical infrastructure that supports government operations and service to citizens. Many states use IT to transform government service delivery and obtain cost savings and efficiency in government operations. States spend about $30 billion a year on IT, including the education sector.

State IT procurement includes products and services such as mainframes, software, email systems and smart phones. New technology trends—such as the growth of cloud computing, where users license software hosted by a third party in a remote location—can challenge procurement departments that are not used to purchasing on-demand services. According to the 2013 NASCIO Survey of State Chief Information Officers (CIOs), almost two-thirds of CIOs believe their IT procurement process is either somewhat or very ineffective because it does not take into account the “complexities and subtleties of IT systems.”

State Action

In light of the rapid pace of change in technology, states are increasingly moving away from asset-based systems to complex services and systems that require interoperability. They are reviewing existing IT procurement laws and policies to better align them with industry standards and best practices in order to create a more flexible, efficient process that will encourage vendor competition and lower costs. Their reform efforts cover many aspects of the procurement process, including the areas highlighted below.

Limited Liability. Limitation of liability (LoL) clauses limit the type and amount of damages that can be recovered in a lawsuit. They are intended to protect the state by transferring unlimited liability for potential claims to vendors. For vendors, such liabilities can discourage their participation in the bid process or increase prices. According to a 2010 NASCIO Survey, 28 states allow LoL clauses in IT vendor contracts. Another 16 states place unlimited liability on vendors due to conflicts with the state constitution, legal statutes or sovereign immunity. Five states grant case-by-case liability protection to vendors. The NASCIO study found that many states are moving to limit liability by using a multiplier tied to the contract’s value.

Indemnification. Contract clauses can change (indemnify) who is responsible for the cost of damages in a lawsuit. Indemnification provisions might require a vendor to pay the full costs associated with a lawsuit, even though the state might have been liable under the law. Requiring broad indemnification beyond damages for which a contractor is legally liable is a serious deterrent for vendors. Some states—including Arkansas, Kansas and Minnesota—have enacted anti-indemnification laws that prohibit either the state or a vendor from indemnifying the other in construction contracts related to state IT projects.

Warranties. A warranty is a promise by a seller that an article or service has certain qualities. State IT contracts often contain a warranty providing an extended period to determine that contract requirements have been met; the most common time period is one year. Moreover, states sometimes use warranties for IT hardware and services that generally do not correspond to commercial norms. Broad, complex warranties, combined with continuing obligations of unreasonable duration, can push vendors to avoid government business.

Intellectual Property Rights. Intellectual property (IP) rights, patents, copyrights and trademarks enable innovators to obtain recognition or financial rewards. Some states require vendors to confer IP ownership to the contracting public entity, which can discourage vendors from entering into government contracts. A TechAmerica study recommends governments secure only the essential IP rights needed to achieve the goals of a particular project and avoid requiring total ownership or broad rights.

Negotiation. Some states are restricted by statute or in practice from negotiating terms and conditions. Even questioning a term or offering an alternative can sometimes render a bid non-responsive. If negotiation is not allowed, some vendors choose not to respond to a solicitation or submit proposals. In Virginia, negotiations with selected vendors are required by law and can consider factors other than price. California also allows negotiation, but statutory authority is required under the California Code.

Transparency. Transparency not only allows states to view purchasing activity across agencies, but also allows vendors to view other bids. In many states, individual agencies manage purchases within independent systems or manually, providing few means to examine what is purchased, from what vendors and at what prices. Electronic procurement (e-procurement), purchasing via the Internet, improves transparency by allowing vendors to track and bid against competitors. According to the 2011-2012 National Association of State Procurement Officials (NASPO) Survey of State Procurement Practices, at least 30 states used an e-procurement system or were in the process of implementing one in 2012.

As a result of 2009 legislation, the Iowa Department of Administrative Services adopted rules capping vendor liability at one times the contract amount, with the option of requesting greater liability. Iowa reports seeing increased bids and time savings on negotiations. Oregon worked with TechAmerica to develop six IT-specific contract templates in May 2010. In 2013, the Arizona Office of the Auditor General recommended that the State Procurement Office develop IT-specific contract templates with provisions for limitations on liability and modification of intellectual property rights.

PDF Version