The DGS-TD has released a Request for Information to solicit comments and suggestions from current and potential CALNET customers and vendors on how to improve the provisions of the current CALNET Agreement, which will expire in December 2005. The feedback received will be incorporated into the Request for Proposals scheduled to be released in December 2004 as a part of the CALNET II replacement contract process. The DGS-TD has also formed a Customer Advisory Group of state and local users of CALNET to review and respond to the feedback.[3]

Under the current CALNET contract, the California Department of Transportation (Caltrans) has been using an interactive voice response system for its highway public information program. This application provides callers with specific information, or accepts an order based on specific input made by the caller after being prompted by the system. For example, a user can place a call to 1-800-COMMUTE and navigate through the system by selecting the desired language, location, state highway, etc.

In January 2004, a Caltrans manager reviewed the telecommunications bill for this service. After extensive evaluation of Caltrans’ and MCI’s records, the manager found a double-billing error in excess of $220,000 that occurred over a six-month period, caused by MCI including the subtotal twice. Identification of this error was difficult because the billing showed only a single-line entry for the service, instead of a detailed breakdown similar to the ones in residential telephone bills. MCI told Caltrans that the same type of error may also have occurred at other state agencies that have been using a similar voice response system.[4]

The results of this internal review prompted Caltrans staff to conduct an audit of telecommunications lines used by the traffic operations/permits group at the headquarters office. The audit reviewed the phone lines of 400 headquarters employees. As a result of the audit, 27 percent (20 of 73) cellular phone lines were eliminated, saving about $1,000 per month; and 39 percent (122 of 316) land lines were eliminated, saving about $2,000 per month.

Private sector recovery audit firms are often hired by a company or an agency under a pay-forperformance or performance-based contract. There are no costs to the state and all associated fees are a pre-negotiated share of actual recovered funds.[7] Under a performance-based contract, the agency defines its objectives and lets the contractor decide how best to meet them. Together the agency and the contractor choose performance measures to gauge the effectiveness of a solution.

The DGS contracted with two private sector firms to conduct recovery audits on telecommunications costs in California. One of them, John Richards Associates, Inc. audited a payphone contract (separate from CALNET) from 1997–1999, and found about $7 million in commissions owed to the state. The audit firm was paid 30 percent of this sum as its contingency fee. Another firm, Telecommunications Services Limited, conducted an audit of the 911 network. This firm recovered about $1.6 million and was paid a contingency fee of 39 percent of that sum. The DGS-TD is in the process of preparing a master agreement to pre-qualify recovery audit firms that all agencies can use on a contingency basis. The DGS-TD proposes that the audit be done on a departmental basis.[8]

As suggested in the Reasons Foundation’s Citizens’ Budget, 2003–05, the state could select one or more private recovery audit firms to analyze invoices, contracts, reimbursements, and other relevant records. The firm would then document and recover any overpayments. The recovery firm’s services would be paid through a contingency fee based on a percentage of recovered overpayments.[9] Firms are often paid about 20 percent. For example, according to one audit recovery firm, CashFlow Guardian, Inc., these firms almost always charge based on contingency, about 25 percent of the dollars recovered. The average payables error rate for U.S. companies is about 0.1 to 0.4 percent.[10] The Citizens’ Budget, however, suggests that the state pay no more than 10 percent of the savings recovered. In the area of contracts and grants, error rates for government agencies may be as high as 0.4 to 1.8 percent.[11]

Several recovery audit firms note that telecommunications cost error rates may be higher than in other industries. Telesoft Corporation claims that their customer base recovered nine percent refunded against every dollar spent on telecommunications billings.[12] Morgan Doyle Limited Co. reports telecommunications industry error rates averaging between five and 10 percent.[13]

Industry studies indicate error rates average between five and 10 percent.[15] Applying a five percent error rate to $120 million with a contingency fee of about 15 percent would recover an estimated $5.1 million per year. Estimated savings are based on a September 2004 implementation date.