Procurement reform's next big thing

Anybody who reads this column Jan. 11 will have a chance on the morning of Jan. 12 to participate in what I am willing to venture—even this early in the year—will be one of the most important meetings of 1999.

At the General Services Administration Auditorium in Washington, D.C., between 8:30 a.m. and noon, GSA's Federal Technology Service plans to host a meeting to launch a governmentwide initiative to promote use of share-in-savings contracting for information technology.

What's share-in-savings? The basic idea is simple. Every IT contract is designed to achieve benefits for the government. Share-in-savings asks the government to focus on the benefits that the contract is supposed to deliver and then to pay the vendor in the form of sharing with it a percentage of the benefits achieved by the contract. The more benefits generated for the government, the more the vendor gets paid. The fewer the benefits, the less the vendor receives. Depending on how an individual contract is negotiated, the vendor may receive only a portion of the benefits generated. If the vendor generates no benefits, it doesn't get paid at all. No award fee, no profit, no nothing.

Let me give a real-life example involving logistics modernization efforts that the military services have begun. The services have logistics systems that are several generations behind the commercial state of the art in IT. For example, the Army doesn't know very well where in its far-flung, decentralized system the spare parts are located. By shifting to a modern logistics system, the services could quickly locate and deliver spare parts while stockpiling fewer parts. The system will provide many benefits, the most tangible of which would be fewer purchases of spare parts, saving the Army $4 billion over 10 years.

Share-in-savings comes into play whereby the winning vendor would be paid in the form of giving it a negotiated percentage of the savings that the military services would realize from making fewer purchases of spare parts. The greater the savings, the greater the vendor's payment. If the vendor's efforts fail to produce savings, tough luck for it.

Share-in-savings is the next great leap forward in procurement reform because it focuses the government and vendors on the overarching goal of government: to generate results for agency missions and taxpayers.

Is there anything in this for vendors? For the good ones, you bet there is. Quality vendors, which have higher hourly rates and are good at delivering results, are frustrated by having to compete against body shops for level-of-effort work in which the vendor gets paid even if it accomplishes nothing. Share-in-savings allows quality vendors to compete with body shops more successfully because the vendors get paid based on benefits achieved rather than costs incurred.

Share-in-savings contracting obviously is not appropriate for every situation. You need to be able to put a dollar value on the benefits that a contract is supposed to achieve, although there is no reason that benefits cannot be off-budget—for example, improved turnaround time for processing Department of Veterans Affairs benefits claims—as well as on-budget. And if the vendor is paid only a portion of the benefits, with no base fee, then the return on the government's investment will need to be very high for the business arithmetic to work.

Budgeting policy issues also must be addressed, and some are more easy to deal with than others. These might include the fear of anti-deficiency violations, reprogramming across budget categories and the ever-present problem of the disincentive for an organization to generate savings in the first place if the savings get swept up into some centralized budget pot.

The federal government has been slow to take up this new contracting technique since it was first endorsed in the Clinger-Cohen Act in 1996.

That's why GSA's initiative is so important.

Attending the meeting on Jan. 12 will be senior officials from California and Massachusetts, who will talk about share-in-savings contracting in their states. Office of Federal Procurement Policy Administrator

Deidre Lee plans to speak, not only to give a procurement seal of approval but, I hope, to offer to help out in dealing with the budgeting issues that must be confronted.

--Kelman was the administrator of the Office of Federal Procurement Policy from 1993 to 1997. He is now Weatherhead Professor of Public Management at Harvard's Kennedy School of Government.