Before Slashing Budgets, Find the Savings

Value-based contracts could be a boon for the federal government.

It was a bold move for a government entity. In 2005, the commonwealth of Pennsylvania hired a private company to overhaul the archaic way it buys goods and services. It seemed simple enough, but what was innovative -- and daring -- was a key condition: 30 percent of the contractor’s compensation would come from the savings achieved. No savings, no payment.

Putting such a risk on the contractor paid off handsomely. Among other things, officials combined the buying clout and pricing data of all 89 executive branch agencies and departments to strike better deals. Without cutting a single program or service, Pennsylvania saved more than $140 million, or 21 percent, from its annual $700 million tab for everything from office and cleaning supplies to information technology services and tires. The savings far exceeded projections.

Pennsylvania is not alone. Similar value-based contracts enabled the New York City Board of Education to shave $86 million from its $720 million procurement budget, and state and local agencies are experiencing similar savings.

At a time when the federal government is looking to slash trillions of dollars from its budget to curb the national debt, it’s time for Washington to consider the same approach on a broad scale. Even before the 2011 Budget Control Act was passed, the Defense Department, for example, faced the daunting challenge of cutting $465 billion over the next 10 years. If value-based deals could be struck by the Pentagon and other agencies whose budgets dwarf state and county spending, then the federal government would be much better positioned to achieve significant savings on products and services.

In fiscal 2011, the federal government spent $269 billion on services, excluding research and development. If the government could cut 20 percent of that sum -- the same percentage that state and local governments have been able to achieve -- that would result in savings of $53.8 billion, a significant sum by anyone’s measure.

The federal government already has shifted significantly from its routine contracting practices. For many years, a high percentage of its contracts were cost-plus agreements written in a way that guaranteed contractors a profit beyond simply covering their costs. Under cost-plus contracts, companies had no incentive to reduce spending, so the government began favoring fixed-price contracts, which put more of the risk for overruns on the contractors. But there still was no incentive to save money. So, as agencies focus greater attention on cutting costs, the time has come to take the next step and tie at least some contractor payments to their ability to identify and achieve savings.

This is good for government in several ways. First, it holds contractors accountable and provides a better return on investment if they succeed. If contractors do not succeed, then they don’t get paid.

Value-based deals can change the future of contracting by giving agencies a chance to align their budgets within the confines of tighter fiscal realities. Rather than writing contracts that offer bonuses for a job well done, which is how some agreements are structured, agencies should design value-based deals that are ruthlessly outcome-centric.

The trend is forcing government and industry to forge new partnerships: Vendors are betting that their work will achieve maximum results, and agencies are reducing the risk of costly failures at taxpayers’ expense.

Two years ago, President Obama declared: “It's time to fundamentally change the way that we do business in Washington. To help build a new foundation for the 21st century, we need to reform our government so that it is more efficient, more transparent and more creative. That will demand new thinking and a new sense of responsibility for every dollar that is spent.”

The states are the laboratories in which government innovations can be tested and, if successful, adopted in Washington. Value-based contracting is one of those pilots ready for prime time -- and desperately needed -- at the federal level.

John Goodman is a managing director and Stephen Pimpo is a senior executive of supply chain and operations in Accenture’s U.S. defense and intelligence agency business.

X
This website uses cookies to enhance user experience and to analyze performance and traffic on our website. We also share information about your use of our site with our social media, advertising and analytics partners. Learn More / Do Not Sell My Personal Information
Accept Cookies
X
Cookie Preferences Cookie List

Do Not Sell My Personal Information

When you visit our website, we store cookies on your browser to collect information. The information collected might relate to you, your preferences or your device, and is mostly used to make the site work as you expect it to and to provide a more personalized web experience. However, you can choose not to allow certain types of cookies, which may impact your experience of the site and the services we are able to offer. Click on the different category headings to find out more and change our default settings according to your preference. You cannot opt-out of our First Party Strictly Necessary Cookies as they are deployed in order to ensure the proper functioning of our website (such as prompting the cookie banner and remembering your settings, to log into your account, to redirect you when you log out, etc.). For more information about the First and Third Party Cookies used please follow this link.

Allow All Cookies

Manage Consent Preferences

Strictly Necessary Cookies - Always Active

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data, Targeting & Social Media Cookies

Under the California Consumer Privacy Act, you have the right to opt-out of the sale of your personal information to third parties. These cookies collect information for analytics and to personalize your experience with targeted ads. You may exercise your right to opt out of the sale of personal information by using this toggle switch. If you opt out we will not be able to offer you personalised ads and will not hand over your personal information to any third parties. Additionally, you may contact our legal department for further clarification about your rights as a California consumer by using this Exercise My Rights link

If you have enabled privacy controls on your browser (such as a plugin), we have to take that as a valid request to opt-out. Therefore we would not be able to track your activity through the web. This may affect our ability to personalize ads according to your preferences.

Targeting cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.

Social media cookies are set by a range of social media services that we have added to the site to enable you to share our content with your friends and networks. They are capable of tracking your browser across other sites and building up a profile of your interests. This may impact the content and messages you see on other websites you visit. If you do not allow these cookies you may not be able to use or see these sharing tools.

If you want to opt out of all of our lead reports and lists, please submit a privacy request at our Do Not Sell page.

Save Settings
Cookie Preferences Cookie List

Cookie List

A cookie is a small piece of data (text file) that a website – when visited by a user – asks your browser to store on your device in order to remember information about you, such as your language preference or login information. Those cookies are set by us and called first-party cookies. We also use third-party cookies – which are cookies from a domain different than the domain of the website you are visiting – for our advertising and marketing efforts. More specifically, we use cookies and other tracking technologies for the following purposes:

Strictly Necessary Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Functional Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Performance Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Social Media Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Targeting Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.