By Steven Kelman
August 15, 1998
By many standards, procurement reform since the beginning of the Clinton administration has been an enormous success:
And there are some signs that the improved process is producing better results. A number of weapons systems bought using the new methods have come in at decreased costs. The most dramatic example is the 50 percent cost reduction on the Joint Direct Attack Munition, which is particularly noteworthy because the system was re-bid using acquisition reform principles after having previously been bid out the old way. Government now has quick access to the latest computers at rock bottom, cutthroat-competition prices. And if you doubt the impact of procurement reform, think for a moment what it would have been like to try to deal with the year 2000 computer problem with the procurement system we had five years ago.
At the same time, it's still a bit too early to say that procurement reform has succeeded. And I say that as someone who deeply believes in the reforms and was very involved in bringing them about. We will not be able fully to declare victory until we know for sure that the visible changes in the process have been matched by systematic changes in the way government interacts with its suppliers.
The next great steps forward, I believe, will be changes in the contracting process that are specifically targeted at increasing the odds that the business relationship between the government and its suppliers will produce maximum value for taxpayers and for agency missions. Such changes will take place in three key areas.
Performance-based contracting. The next great challenge is to bring performance-based contracting to more complex services, particularly information technology services. One way the various governmentwide IT services contracts (known as GWACs)-such as those run by the Transportation Department, the National Institutes of Health and the General Services Administration-could contribute to the next generation of procurement reforms would be by more actively assisting agency customers with performance-based statements of work. This is particularly easy for more focused governmentwide buying vehicles, such as the GSA data center or seat management contracts, which is one advantage they have over broad GWAC vehicles.
Share-in-savings contracting. This idea involves giving vendors a share in the savings (including improved benefits for the public) that their efforts produce. A contract might specify, for example, that the vendor gets paid l5 percent of the savings generated for the government. Contractors who don't get results don't get paid. At the same time, vendors are no longer evaluated or audited based on hourly labor rates or costs incurred, since the emphasis moves to achieving results, not counting inputs. Contractors would compete based on their past performance in delivering results and on how favorable a share they offer the government.
I call share-in-savings contracting "turbocharged performance-based contracting," since it gives enhanced incentives for contractors to deliver performance results. Share-in-savings contracting is still in its infancy in the federal government. The Defense Department has signed energy conservation contracts for DoD facilities that are funded by energy savings, and a contractor is offering agencies telephone billing-management services financed through a share in the savings such services generate.
Targets of opportunity for share-in-savings contracting include defense logistics reform (funding modernization through savings from reduced inventories) and business process reengineering efforts throughout government (paying contractors a portion of reduced costs and improved benefits). GSA has announced it plans to award a governmentwide multiple-award contract where vendors would compete to do share-in-savings task orders with agencies. Such a contract could provide the breakthrough for share-in-savings contracting and would be a valuable public service.
"Due diligence" as part of the contracting process. When you are asking vendors to improve an existing government business operation, whether that operation is outsourced or kept in-house, it's hard to get them to bid with any level of specificity unless they have a good feel for the "as is" state of the operation. In private business transactions, the process by which one party learns what it needs to about the operations of another party is called "due diligence."
Due diligence is about seriously kicking the tires. In a contracting context, it refers to an opportunity for potential bidders to spend several weeks learning about how an agency's business processes currently work. Commercially, due diligence is used not only in financial transactions, such as mergers, but also in contractual arrange
ments, such as outsourcing.
Without due diligence, only the incumbent vendor, if there is one, has any real feel for the agency's operation. The lack of an opportunity for due diligence inhibits competitors, which is especially difficult for an agency with indifferently performing incumbents who believe they've been around so long they have a lock on the business. In such circumstances, due diligence is crucial.
Like share-in-savings, due diligence is still a new concept in government. It has been applied at Kelly Air Force Base in connection with competitions for aircraft and engine maintenance contracts occasioned by the base's impending shutdown.
The concepts of performance-based contracting, share-in-savings and due diligence are interconnected. Performance measures serve as a baseline for share-in-savings contracting. The willingness of potential suppliers to sign up for performance-based contracts will often be contingent on their having had the opportunity to do due diligence before they sign on the dotted line.
Smart program managers will rush to embrace these cutting-edge contracting practices, to achieve the full promise of procurement reform. They know fixing the acquisition process is ultimately about getting a better deal for taxpayers and restoring popular confidence in government.
By Steven Kelman
August 15, 1998