Contracting for the Best Results

overnment frequently uses traditional procurement procedures that discourage focusing on outcomes to produce superior results. That's why the General Services Administration should be applauded for piloting share-in-savings contracting for information technology projects. As Steven Kelman, former administrator of the Office of Federal Procurement Policy, has observed: "Share-in-savings symbolizes a shift in the way government procurement functions and will make it easier for government and vendors to focus on results that will advance agency missions and taxpayer service."

To make government more efficient, government buyers must continue to approach procurement in more innovative ways, drawing lessons from the private sector. For many years, Andersen Consulting has engaged in value-based contracting and the use of shared-benefits contracts, which encourage a client-consultant partnership involving shared risks and a common goal. Clients reap rewards from these arrangements.

For instance, to sharpen its competitive edge by reengineering its merchandise procurement process, Sears Canada partnered with Andersen Consulting. Andersen was paid under a gain-sharing contract on the basis of improved operating results, such as increased sales, reduced working capital inventories and eliminated operating expenses.

Such arrangements work because they focus on outcomes, rather than a prescribed process. They align the vendor's financial incentives with the government agency's goals. More importantly, value-based arrangements result in transformational changes that translate into big gains in service for citizens.

Traditional contracts include a litany of specifications, strictly outlining how and what the vendor is expected to do to fulfill the obligation. As a result, both the contractor and the client focus more on adhering to the contract requirements than on the outcome.

The scenario sets the stage for an adversarial relationship that benefits no one. The restrictive nature of this environment does not offer contractors or agency personnel the latitude to do creative work, or to add the value that government organizations and taxpayers want, expect and deserve. Value-based arrangements encourage the alignment of an agency's strategy or mission with its people and processes, increasing the probability of success.

Well-defined contracts lead to the development of mutually beneficial partnerships between contractors and clients. While this requires risk-taking on both sides, the resulting value more than makes up for the risk. The key is to ensure that the client clearly communicates the end objective to the consultant and that both agree on what will constitute the ultimate success of the project.

For example, the Army could use such an arrangement to modernize its logistics system. A share-in-savings arrangement could allow the Army to pay for this major investment on the back end out of savings realized by a more efficient system, while avoiding the up-front risk of
paying for a solution that may not deliver results.

Another type of value-based arrangement employed in the private sector involves a flat fee per transaction. The Education Department used per-transaction contracting to design, build and run the Federal Direct Student Loan Program--a huge success by any measure and a model for other agencies. Under the contract, a vendor funded the system's development with the understanding that it would be paid on a per-loan-processed basis, making the vendor assume more risk.

The system is expected to save the Education Department $6.8 billion by fiscal 2000. Since the Federal Direct Student Loan program's inception, more than 3.5 million loans have been processed for students attending 1,500 colleges and universities nationwide. The program is rivaled only by Sallie Mae, with a student loan portfolio valued at $38 billion.

The reengineered program helps the Education Department focus more on those it serves. Students complete an application at the school's financial aid office, where need is verified and the form is electronically submitted to Education. Once approved, the student signs the promissory note and the school credits the student's account. Colleges and universities benefit from greater control over the loan process and from improved cash flow as a result of tuition payments being made faster.

Agencies across the federal government must continue to push for the adoption of more innovative contracting practices, such as value-based and transaction-based contracts. Although not always the answer, value-based procurement is a sound strategy when the contract is centered on sharing risks and achieving outcomes. These arrangements, such as the General Services Administration's share-in-savings pilot, offer a way for government agencies to provide better service to citizens with fewer dollars.

Stephen Rohleder is managing partner for the Americas Federal Government practice at Andersen Consulting.