A few weeks ago, I wrote a post listing five things that governments can do in 2012 to encourage and foster civic startups.

Though the month of January is not yet over, we now an interesting case study developing in the City of Chicago that highlights the overwhelming importance of one of these five items to the future success of civic startups – government procurement reform.

In my earlier post, I used the example of the City of Chicago’s RFP for an online lobbyist registration application as a way to underscore how out of line the current procurement system is in most cities with the startup ecosystem. The City’s RFP, somewhat unexpectedly it seems, drew a response from a group of civic hackers that had developed a lobbyist application using open data released from the City of Chicago.

This submission drew praise from Chicago CTO John Tolva, who wrote about it on his personal blog. The group that put the RFP response together also shared some candid thoughts on their experience with the process and public procurement in general in the City of Chicago.

Responding to an RFP for the City of Chicago is a herculean task… this approach to an RFP results in proposals from one type of contractor: firms that are very large and able to jump through all the hoops that the City has to ensure the minimum amount of risk and liability for the City itself.

Following this submission, the group behind Chicago Lobbyist formed a new civic startup – Open City – a company focused on building civic apps with open government data. The company has developed four open data apps to date, including the Chicago Lobbyist application and an enhancement of the city’s snow plower tracker application called Clear Streets.

As enthusiastic as the City of Chicago is about open government data and encouraging civic startups, and despite the abundance of smart developers in the city that want to build civic apps, the city’s procurement system is not currently set up with civic startups in mind.

A fairly good indicator of this came not long ago in the form of a rejection letter – the City of Chicago rejected the bid from the group behind Chicago Lobbyist to build an official online lobbyist registration app for the city.

Just how out of line the city’s procurement system is with civic startups is nicely captured by the group’s reaction to the rejection letter:

We were almost certainly rejected because we did not fulfill the application requirements set out by the Department of Procurement Services. We never intended to. Despite being very competent technologists and experts on lobbying data, we simply couldn’t meet them: The city’s requirements are not crafted with tech startups in mind.

This is not the first time a talented group of technologists dedicated to improving how governments use technology has tried to “storm the castle walls” through the procurement process. A Clay Johnson led Sunlight Labs tried it a few years ago when they put together a bid to build the federal Recovery.gov site.

But it is an important reminder of just how large the gulf is between the world of open data apps and civic startups, and the world of government contracts and purchasing.

I don’t mean to suggest that the group behind Chicago Lobbyist should have automatically been granted the contract to build an online lobbyist registration system – though their past work in this area would seem to have warranted more than just a form letter from the city’s procurement officer.

I don’t think civic startups should be given a free pass.

Government procurement rules exist for a reason. They help mitigate the risk that governments – and by extension, taxpayers – assume when they enter into a contract with a company for a good or service. The government has an interest in ensuring that such companies will be able to provide the good or service at quality, and that the firm will remain viable through the life of the contract.

Government procurement rules also exist to ensure that government spending is done without regard to political (or other) connections. They are meant to provide transparency and predictability to those that participate in the procurement process.

But, as the group behind Chicago Lobbyist can attest to, these rules often prove challenging to small startup companies rich in talent but lacking the skills needed to navigate municipal bureaucracy.

The sheer magnitude of government spending on IT goods and services is often pointed to as one of the key factors underscoring the potential for civic startups. But this potential won’t be realized unless governments find a way to accommodate civic startups within existing procurement systems, or unless they build new ones.

2012 has begun with a lot of attention being paid to civic startups, and the potential for startups to incite change within government. But without a plan to drive meaningful procurement reform in cities and states, it’s legitimate to ask how far reaching this change will ultimately be.

Sooner or later someone in government is going to have to assume some risk.

Governments will need to find a way to make a bet on small, agile companies with a demonstrated history of good work like Open City, or they will need to take on the task of reforming their procurement and purchasing systems. Either way, there is risk involved.

The fact that this all seems to be unfolding in Chicago, where municipal leaders have embraced open data with gusto, is intriguing.

Chicago seems to have raced to the front of the pack among cities hoping to use open government data to drive change. They have an open data portal full of useful data sets, and are fresh off a successful and highly regarded civic app contest.

In relatively short order they have made it to the same plateau where many cities supporting open data find themselves – looking for a way to foster the growth of sustainable apps and companies built on open data.

As more cities make their way to this same place, there will be a collective realization that to take things further will require some fundamental changes to the way that governments purchase IT services.

2012 could be the “Year of the Civic Startup,” or it could be the year of missed opportunities. The success of governments in finding ways for their procurement systems to work for companies like Open City will largely determine the direction we’ll take in the months ahead.