Report out to DGS from Subcommittee 1-Terms & Conditions

September 24, 2007

Accenture, Cisco, Deloitte, IBM, Maximus

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• Flexibility

• Risk Assessment

• Solution-Based Approach

• Uniformity

• Shared Information

• Documented Information

• Competition

• Quality Solutions

• Qualified Bidders

• Measurable Objectives

• Fiduciary Responsibility

• Public Trust

What the IT Industry Wants What the State Needs

“Industry Wants” and “State Needs” is a delicate balancing act are aligned.

April 2007 DGS Presentation - Context

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Sub – Committee Recommendation :

Remove Pass/Fail Ts & Cs Admin Requirement

AcquisitionPlanning

Post AwardActivity

Acquisition Phase

• Independent Oversight

• Project Management

• Contract Management

• Market research

• Business case analysis

• Information Technology Procurement Plan

• Request for Information

• RFP development

• Risk assessment

• Legal review

• RFP issued

• Interactive exchange between State and bidders

• Opportunity to ask questions and request change

• Final Proposal assessed and scored

• Value validation

• Negotiation as allowed by law - 6611

• Intent to Award

• Contract Award

• Business case finalized

Business needidentified

RFPDevelopment

RFPAdministration

Evaluation &Validation

Selection &Award

Remove PASS/FAIL Admin Requirement for Agreement to Terms and Conditions

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Current Solution-Based Approach May Not Solve Competitive Issue

AcquisitionPlanning

Post AwardActivity

Acquisition Phase

• Independent Oversight

• Project Management

• Contract Management

• Market research

• Business case analysis

• Information Technology Procurement Plan

• Request for Information

• RFP development

• Risk assessment

• Legal review

• RFP issued

• Interactive exchange between State and bidders

• Opportunity to ask questions and request change

• Final Proposal assessed and scored

• Value validation

• Negotiation as allowed by law

• Intent to Award

• Contract Award

• Business case finalized

Business needidentified

RFPDevelopment

RFPAdministration

Evaluation &Validation

Selection &Award

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Mil

lio

ns

Cost

Decision to Bid can only be made after Significant Investment

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Impact of Pass/Fail Requirement

• In spite of a new process that emphasizes early negotiation of Ts and Cs, significant costs are expended prior to an understanding of whether a vendor can bid or not.

• For types of bids being contemplated, the costs associated with bidding range from $1M - $5M and sometimes beyond.

ULTIMATE IMPACT OF PASS / FAIL REQUIREMENT:

• State does not avail itself to multiple solutions and multiple prices

AND

• Develops a Contract that doesn’t take into consideration the unique solution it is buying and price it is paying

AND

Competition is Not Achieved

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Other State / Jurisdictions Approach

State Bidder Required to Accept RFP Contract

“As Is”

Bidder I.D. Exceptions in Proposal Bidder Not Required to I.D. Exceptions in

Proposal

Negotiations After Contract Award

WA No Yes. State considers exceptions as part of overall Proposal evaluation.

No. Yes.Based on submitted exceptions

AZ No Yes. State considers exceptions as part of overall Proposal evaluation.

No. Yes.Based on submitted exceptions

TX No Yes. State considers exceptions as part of overall Proposal evaluation.

No. Yes.Based on submitted exceptionsState sometimes makes preliminary award to, and conducts negotiations simultaneously with, more than 1 bidder.

NY No Yes. State considers exceptions as part of overall Proposal evaluation.

No Yes.Based on submitted exceptions

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Other State / Jurisdictions Approach

State Bidder Required to Accept RFP Contract

“As Is”

Bidder I.D. Exceptions in Proposal Bidder Not Required to I.D. Exceptions in

Proposal

Negotiations After Contract Award

KY No No Yes Yes

NC Varies (for large projects, contract terms appear to be negotiable)

Yes. State does not consider exceptions as part of overall Proposal evaluation.

No Yes.Based on submitted exceptions

MA No Yes, provided that bidder accepts State’s Standard Contract and Standard Terms and Conditions and only identifies “non-conflicting” additional terms for negotiation (but standard terms are relatively scant, so significant flexibility is provided to bidders)

No Yes.Based on submitted items.

OH Yes No No No

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Sub-Committee ‘Ask’ - Original ‘Ask’

PERMITTING POST-PROPOSAL NEGOTIATION OF CONTRACT TERMS AND CONDITIONS

Problem: The State is obtaining insufficient competition for IT procurements (large and smaller).• Recent major procurements attracted only one bidder at the time of final bid submission.• Single bidder procurements have also occurred on a range of smaller IT projects.

Perceived Cause: Major and Small/Mid-sized IT contractors have been reluctant to participate in IT procurements because of concerns regarding the State’s required terms and conditions, and the State's unwillingness to consider modifications to such terms and conditions.• Typically bidders have been required to agree to all of the State's proposed Terms and Conditions as a prerequisite to having their offers considered responsive.• While in some cases the State has been willing to discuss some alterations in Terms before proposals are due, it has refused to accept proposals that combine innovative and cost efficient solutions with modifications in Terms and Conditions that permit those solutions to be offered.

Proposed Solution: For IT procurements, adopt the model established by the CALPERS PSR procurement that permits negotiation of terms and conditions with the highest rated offeror as part of negotiation of a successful contract after submission of final proposals but before notice of intent to award. The model would have thefollowing steps:1. Submission of proposals which could suggest modifications of the RFP's Terms and Conditions that individual bidders considered appropriate to their particular solutions to the State's requirements.2. State evaluation of competing offers and ranking of them in order of preference.3. Intense negotiation period, strictly limited in duration, between the State and the highest ranked bidder, any time during which either party could declare formally that a successful contract negotiation was not likely.

a. If such a declaration was made, the same negotiation would begin with the next highest ranked bidder, continuing with successive bidders according to ranking, until a seven day period passed without such a declaration.

b. If no such declaration was made, the parties would proceed to complete negotiation of a contract.4. Only after a contract had been negotiated would a notice of intent to award be posted, triggering the time within which protests could be brought.

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Sub-Committee ‘Ask’ - Original ‘Ask’

PERMITTING POST-PROPOSAL NEGOTIATION OF CONTRACT TERMS AND CONDITIONS

Benefits: Such an approach would:• Encourage competition – the CALPERS PSR procurement, which used this approach, resulted in proposals from three major IT companies.• Give bidders the ability to offer individual solutions tailored to particular requirements, not constrained by pre-established contract terms applicable to all bidders.• Offer the State an opportunity to evaluate competitive proposals bringing to bear the best thinking of leading IT contractors focused on meeting the State's needs in an effective and price sensitive manner.• Provide a common basis for competition in that every bidder would have the ability to propose modifications that it thinks might be beneficial.• Permit the State to consider proposed adjustments in terms and conditions in the context of understanding the effects those adjustments could have on the price or manner of contract performance.

Authority: The approach is authorized by CA Public Contract Code §6611, which permits the State to conduct negotiated procurements. It is also similar to the procedure already specifically permitted in Public Contract Code §6106 for Architectural Consulting Services.

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Apply Original ‘Ask’ to Following Opportunities

EDD UI Mod EDD ACES FI$Cal CWS/CMS CalWIN Rebid MMIS Rebid DMV Modernization BETS Replacement FTB IT Modernization EBT iLicensing CDCR SOMS CalTides

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Specific Problematic Model Terms and Conditions

CALIFORNIA STATE MODEL IT TERMS AND CONDITIONS ANALYSIS

SUMMARY OF MODEL TERMSThe State of California’s (“State”) Model Information Technology General Provisions and Model Information Technology Special Provisions (collectively “Model Terms”) contain several provisions that are significant variances from generally prevailing market policies and that create undue risk for contracting firms. Examples of such Model Terms include:

WARRANTIESScope: Broad, subjective warranties, with an extended warranty period that benefit a large class of entities and that cannot be priced or predicted, such as a warranty that deliverables will be free from “defects” (with no definition of “defects” or other objective standard to which the warranty could be tied). Such warranties would encompass 3rd party products (e.g., a warranty that “Deliverables”, which are not limited to items developed and furnished by the contractor, will conform to contract requirements, will be free from harmful code, will provide the required functionality, and will not infringe any IP rights).Market Approach: In performing services and providing deliverables, most firms will agree to explicit performance warranties for the benefit of the contracting agency entity. More specifically, most firms will agree to perform their services in a good and workmanlike manner, and that deliverables prepared and delivered by the contractor will materially conform to their relevant specifications, with re-performance of non-conforming work of which the contractor is notified (in writing) within 90 days after acceptance or delivery. With respect to third party products delivered under the contract, Most firms will pass-though and assign the third party manufacturer or vendor warranties for such products, and will assist the State in managing the warranty relationship with the third party. Most firms believe that the foregoing is equitable, aligned with industry standards, and consistent with their pricing

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Specific Problematic Model Terms and Conditions

CALIFORNIA STATE MODEL IT TERMS AND CONDITIONS ANALYSIS

INFRINGEMENT INDEMNITYScope: The Model Terms would require the contractor to indemnify for any product or service that infringes any U.S-enforceable IP rights. Such indemnity would not be limited to products and services developed and provided by the contractor, and it would not be the State’s sole and exclusive remedy for the infringement. In addition, the Model Terms would require that the contractor pass-through to the State any indemnities provided on 3rd party hardware and software, but if the 3rd party fails to honor the indemnity obligation, the contractor must step-in and provide the indemnity.Market Approach: The SEC mandates that public companies providing indemnities and guarantees on 3rd party products must undertake serious and substantial accounting recognition and financial disclosure requirements. Accordingly, most firms will provide indemnity for any 3rd party claim that a service or product developed and provided by the contractor under the contract infringes a copyright, trade secret, or U.S. patent (existing as of the date of the contract), and such indemnity would be the sole and exclusive remedy for the alleged infringement.

PERSONAL INJURY AND PROPERTY DAMAGE LIABILITYScope: The Model Terms set forth broad liability for personal injury and property, and such liability is not limited to an indemnity for third party claims for bodily injury and tangible personal property damage caused by the Contractor’s negligence or fault. Market Approach: In keeping with market practices, most firms will agree that they should “make whole” their clients whenever their wrongful actions cause personal injury to a third party (or the third party’s personal property). As such, most firms will indemnify for third party claims of personal injury and/or tangible personal property damage, to the extent caused by their negligence or willful misconduct.

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Specific Problematic Model Terms and Conditions

CALIFORNIA STATE MODEL IT TERMS AND CONDITIONS ANALYSIS

ACCEPTANCEScope: Although the Model Terms require the State to provide a written notice of rejection within a “reasonable time” (up to 60 days after delivery), and such notice must specify the manner in which the Deliverable does not substantially conform to specifications, the Model Terms contain separate and additional provisions enabling the State to reject Services or Deliverables that don’t conform to requirements (and upon such rejection, the Contractor must reclaim, re-perform, and “immediately” replace the rejected work). These latter, additional, provisions do not reference the warranty or acceptance provisions. Therefore, although the Model Terms are not entirely clear as to how these additional provisions fit within the warranty or acceptance provisions, the contractor could not reliably expect that the State would exclusively call upon the acceptance provisions for the rejection and remedying of non-conforming work.Market Approach: Acceptance and rejection of work should be clearly limited to the acceptance criteria set forth in the contract, and notice of rejection should be provided within 30 days of delivery.

TERMINATIONScope: The Model Terms contain broad default and convenience termination rights that do not include any termination rights for the contractor.Market Approach: Because projects are scoped and priced in their entirety at the outset of the arrangement, termination for convenience should not include rights of partial termination. In addition, termination for default should be limited to the contractor’s material breach of a contract term, and the cure period should be no less than 30 days. The contractor should be entitled to terminate the arrangement for the State’s uncured failure to pay amounts when due under the contract, or other material and uncured breach by the State.

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Specific Problematic Model Terms and Conditions

CALIFORNIA STATE MODEL IT TERMS AND CONDITIONS ANALYSIS

COMPLIANCE WITH LAWSScope: Under the Model Terms, the contractor must warrant that it will comply with all applicable statutes, rules, regulations, and orders, and the contractor will indemnify the State for costs and losses resulting from non-compliance. The Model Terms do not contain any requirements for the State to comply with laws.Market Approach: Most firms believe that under any contractual arrangement, each party should be assured that the other party will comply with all laws applicable to such other’s party’s business. In addition, in keeping with the indemnity discussions above, most firms would provide an indemnity for 3rd party claims resulting from their failure to comply with any such laws.

CHANGES TO WORKScope: The Model Terms provide that work not “anticipated” or “foreseen” at the time of contract execution will be performed via a Work Authorization.Market Approach: In agreeing to the contract, both parties are agreeing that the contractor will perform a specific scope of work for the specified pricing arrangement. Any change to such work – regardless of whether the change was “anticipated” or “foreseen” at the time of execution (including a force majeure change) – should require the parties to agree on the modified scope, as well as equitable adjustments (if any) to the price and overall project schedule. The contractor would not be authorized (or required) to perform the change unless and until the parties agree to such modifications in a Work Authorization that is executed by both parties.

INSURANCEScope: Under the Model Terms, the contractor must maintain any insurance coverages deemed appropriate by the State.Market Approach: Most firms agree they should be required to provide insurance coverage. However, the types and amounts of such coverages should be specifically identified in the contract.