ELECTRONIC DATA SYSTEM'S VALUE-ADDED CONTRACT

Value-added contracts can be quite rare-and very dramatic. They exist when a vendor is paid a percentage of revenue generated by the new system, which reduces the up-front fee, sometimes to zero. The landmark deal of this type was signed several years ago by the City of Chicago and EDS (a large consulting and systems integration firm), which agreed to reengineer the process by which the city collects the fines on 3.6 million parking tickets per year. At the time, because of clogged courts and administrative problems, the city collected on only about 25% of all tickets issued. It had a $60 million backlog of uncollected tickets. Dallas-based EDS invested an estimated $25 million in consulting and new systems in exchange for the right to up to 26% of the uncollected fines, a base pro cessing fee for new tickets, and software rights. To date, EDS has taken in well over $50 million on the deal, analysts say. The deal has come under some fire from various quarters as an example of an organization giving away too much in a risk/reward-sharing deal. City officials, however, counter that the city has pulled in about $45 million in previously uncollected fines and has improved its collection rate to 65% with little up-front investment.

QUESTION:

Do you think the city of Chicago got a good deal from this arrangement? Why or why not?