To tackle new projects without new money, share-in-savings contracts offer a viable option.
The Trump administration should revisit an old, results-based approach to contracting currently prevalent in the private sector—share-in-savings, also known as gain share. Unlike other types of contracts that commit the government to funding a project upfront, a share-in-savings contract requires the government to make only a minimal, upfront investment to begin a project, paying the contractor only when agreed-upon milestones or expected results are realized.
Share-in-savings contracts begin with specific agreed-upon measures, measurement methods, targets, timing, and rewards earned from successful results. The contractor is paid if it meets or exceeds the agreed-upon targets in the specified time. Further, if savings against the established cost baseline are generated, both the government and the contractor share in the savings. This incentivizes the contractor to save the government money, and helps ensure that the government does not pay for work done poorly or not at all.
It’s not a new concept for the federal government. During the George W. Bush administration, the 2002 E-Government Act authorized share-in-savings contracts for information technology investments. The General Services Administration awarded share-in-savings blanket purchase agreement to six companies. However, by 2005, no task orders had been awarded, and the budget authority was revoked.
The Government Accountability Office reported several reasons for the lack of awards:
- Lack of guidance on how to budget or deal with regulation implementation
- Excessive risk due to difficulty determining a cost baseline
- Contractors believed ROI was too low
- Appropriations were still required to cover cancellation liabilities
- Acquisition personnel lacked training
It seems the federal government’s consideration of share-in-savings contracts might have been ahead of its time. During the past decade, the use of gain share contracts across the commercial sector has risen sharply and proven successful. Could share-in-savings contacts also work for the federal government? Necessity can be the mother of invention. It’s reasonable to believe that the new administration—with its desire to take on many new projects without new money—would be attracted to having consultants bear some or all of the risk in helping transform many aspects of the government. It would not be surprising if a top-down mandate or directive to this effect were issued soon.
If agency who can answer yes to the following questions may find share-in-savings is a viable option:
- Is this project a priority for senior leadership? Does it have senior level support, dedicated government resources, and buy-in from within the organization?
- Is there trust between consultant and client? Have the parties worked together before?
- Are the expected benefits considerable for both parties?
- Can baseline costs be clearly measured? Do measurements already exist?
- Are savings easy to quantify? Have both parties agreed to a measurement methodology?
- Is the scope of the project independent of adjacent areas? Or, is the risk of impacting adjacent areas low? Are the results sensitive to external variables, such as marketplace supply and demand, politics, etc.?
- Are savings tangible? Do they avoid “soft targets,” such as cost avoidance or personnel reductions, which can prove difficult in government?
Share-in-savings is not right for all projects. In our experience, the best project candidates are those with large, measurable expected benefits, and with the parties having some ability to control implementation. Gain share contracts can work with IT cost reduction through the modernization of legacy systems and infrastructure, facilities rationalization, procurement, and share services engagements, which are all ripe for the elimination of large-scale inefficiencies.
Share-in-savings agreements work only when the parties can outline and then deliver on a project in which both sides succeed. While the government has the final say, if the deal is too one-sided, the slighted party often faces too much financial and political risk to continue with the arrangement. A fair deal where the parties work closely together serves to mitigate both parties’ risks and maintain their focus on the project’s objectives.
To addressing the GAO’s concerns about the government’s past experience and learn from the commercial sector’s success, government executives and consultants can work with OMB and GSA to provide clear guidance to:
- Help industry leaders and government executives, contracting officers, and budget officers understand and evaluate risk
- Address profit ceilings, as the savings could far outweigh the costs and risk associated with the project
- Address upfront funding of termination liabilities
- Clarify fraud and abuse definitions
Leaders should also offer training for industry and government on best practices and key management disciplines (i.e., establishing cost baselines and determining objective criteria for targets, establishing payment caps for consultants, etc.).
Share-in-savings contracting is a viable path for driving large-scale change while holding all parties accountable for the results. As the new administration looks to implement several transformative projects, share-in-savings contracts may be just the right vehicle at the right time.
Howard Steinman is a partner with global management consulting firm A.T. Kearney and a leader in the firm’s Public Sector Practice for the Americas region. He can be reached at email@example.com or by Twitter: @HowardSteinman.