Education signs incentive-based contract

The Education Department signed the federal government's first of a new kind of

incentive-based information technology contract, saying it will save $40 million to $50 million by

fiscal 2004.

Under the share-in-savings contract with Andersen Consulting, the company

will be paid a percentage of the savings it creates by modernizing the Student

Financial Assistance Office's loan systems, which handle about $52 billion

each year.

Andersen expects to have the new system in by year's end, when it can begin

to earn money through savings. Andersen's payment will be capped at $14.4

million over the four-year period.

The contract calls for integrating the loan origination and loan servicing

systems. It eliminates the central data system, which has served as an intermediary.

The central data system's 12 functions will be reduced to seven and incorporated

into the other systems.

The savings accumulated by eliminating contract costs for the central system

will be the base for Andersen's payment. In fiscal 1999, the system cost

$20.3 million to operate. Increased efficiency should also reduce costs

related to fixing errors.

During a press conference Wednesday to announce the contract, which was

signed July 19, Greg Woods, SFA's chief operating officer, said the focus

on results will ultimately "improve services while cutting costs."

To highlight that, the department is not paying any upfront costs. Woods

gave Andersen Consulting partner Ken Dineen a large check for $0. "This

represents the government's investment," he said.

The General Services Administration has encouraged agencies to look at the

share-in-savings concept for more than a year as way to focus contracts

on program results — in this case, actual monetary savings — instead of

simply awarding to the lowest bidder.

Andersen was hired last year as SFA's "modernization partner." The company

will execute the department's Modernization Blueprint, which outlines how

the department should upgrade its systems. This share-in-savings contract

is the first of several deals.