The new way to win

An important trend is brewing in the competition for big systems design

contracts, and it deserves more attention: Vendors are starting to use commitments

to performance and results to win government business.

This is great news for the government and for taxpayers.

Computer Sciences Corp. recently was awarded a contract worth several

hundred million dollars to modernize the Army's antiquated logistics system.

Billions of dollars of potential savings for the Army hang on the success

of an effort to apply commercial best practices to logistics.

But the big news is how CSC beat out its competition. The Army asked bidders

to propose performance metrics, and responses included supply availability,

logistics response times, inventory turns and satisfaction of logistics

system users. Vendors also bid how much of their payment they were willing

to put at risk for not attaining performance goals and suggested performance

bonuses for exceeding goals.

The performance measures and performance risk/bonus numbers were one

of the major subjects of negotiations between the bidders and the Army's

Communications and Electronics Command, the innovative Army buying center

running the acquisition. A crucial factor in CSC's win was its willingness

to tie an aggressive portion of its payment to attaining or exceeding the

metrics. (These factors could be considered because 1997 changes to Federal

Acquisition Regulation Part 15 allows the government to negotiate for better

performance, even when a bidder has met the minimum requirements of the

solicitation.)

Word is that CSC's aggressive stance stems from having been stung by

a loss last summer to Andersen Consulting. By committing to specific performance

improvements, Andersen snagged an Education Department contract for modernizing

college student loan processing.

It seems that some vendors believe performance commitments and a willingness

to tie payment to performance is a strategy for winning government business.

If the trend spreads, it will be the most significant change yet to emerge

from procurement reform. Awarding contracts faster and with less hassle

is good, particularly in the rapidly changing IT marketplace. But structuring

the business relationship between the government and vendors to reward good

performance is a home run.

The new way to win contracts has two implications for the government

and one for industry:

* Government: Take advantage of this new trend. Put performance metrics

in your solicitations or ask bidders to propose them. Negotiate around metrics,

and around rewards and penalties tied to those metrics.

* Government: Hold the winner's feet to the fire. Some vendors may bid

unattainable commitments to win business, hoping the government will relent

if they fail. Check past performance of bidders in a performance commitment

environment.

* Industry, a new world may be dawning. Prepare to perform, or don't play.

— 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.