To modernize its software, the Agriculture Department's National Finance Center is using an unusual form of contracting that would make the winning vendor a partner in NFC's payroll business.
The "share-in-success" contract being contemplated by NFC Director John Ortego would require the vendor to cover the entire upfront investment for the new software in return for a fee per person successfully paid under the new system. NFC handles the payroll for 38 percent of the federal civilian workforce.
Ortego estimates that buying and installing a new software system the old-fashioned way would cost NFC $30 million to $45 million. Under the new plan, NFC would pay nothing until it began successfully processing payroll using the new software. Ortego also intends to offer the winning firm an incentive to attract more agency customers to use NFC's payroll services.
"It's a win-win for everybody. The more people I pay, the more revenue to the provider," says Ortego.
Ortego also expects the cost of paying each person to drop with a new system requiring less manual intervention and maintenance than NFC's current mainframe-based system. Ortego hopes expanded business will help him avoid layoffs.
Though Ortego still is working out the legal and contractual aspects of his idea, top firms in the government human resources and payroll software market already are salivating over the deal. "Whoever wins this deal owns the federal market," says Karol Burt, vice president for business development of Oracle Service Industries. "I think Congress will encourage agencies to use NFC as one of the few agencies whose core competency is to cut paychecks," she adds.
Russ Goodrich, director of federal sales for SAP Public Sector and Education Inc., sees the NFC engagement as a way for his company to break into the federal payroll market. "We need to federalize our payroll product, and they need an application that can grow forever," says Goodrich. SAP has been seeking federal customers for only about 18 months. "Oracle owns the database market. PeopleSoft is known as the HR and payroll provider. We're not first to the game, but we're not new. We're looking for partners here," he adds.
Ortego acknowledges his concept involves big risks for both NFC and the prospective vendor. "If they can't make it work, they walk away with nothing and a major loss to their reputation, and we walk away wounded." But, Ortego says, his risk-shifting contracting approach would protect the government and his agency customers from paying the cost of any failure. "If it doesn't work, I've suffered a major defeat but I've not asked the client to pay for the defeat," Ortego says. "We will pay only for people we successfully pay at the center."
Ortego hasn't chosen a contracting vehicle yet, but says he is considering whether to use the General Services Administration's Federal Supply Schedules or to conduct a full and open competition. Either way, he plans to offer all serious contenders an opportunity to take a close look at the way NFC handles payroll processing for nearly 500,000 federal employees. "They need to understand the complexity in order to offer meaningful bids," he says. NFC will provide the infrastructure to run the new software along with subject matter experts "who know every interpretation of [civil service pay rules] for every agency," Ortego says. He expects a vendor to begin paying people with the new software within a year of closing a deal.
Ortego wouldn't prevent a winning vendor from marketing the software elsewhere, though he hopes the contract will provide sufficient incentive for the contractor to bring business to NFC. He also plans to write the pact so that once the vendor has recovered its initial investment, its payment would be reduced to a maintenance fee.
Officials with PeopleSoft refused to comment on Ortego's concept, but Oracle and SAP clearly are ready to bid. "Oracle is 100 percent behind it," says Burt. "We're going to be aggressive," SAP's Goodrich says.