Contractor compensation should be tied to how well vendors deliver on program outcomes.
As the Trump administration continues to set its agenda for the federal government, it is emphasizing accountability, efficiency and tangible results. The message is clear: agencies must deliver better results with fewer resources.
With budget cuts, hiring freezes and greater scrutiny of program funding, we need a fundamental shift in the way agencies acquire services and deliver on their missions to citizens. Outcomes-based contracting, which promotes a tight collaboration between agencies and their contractors, is a natural fit for this environment. With the administration’s business-centric approach to problem-solving, it would make sense for agencies to tie contractors’ compensation to their ability to deliver defined program outcomes.
In an outcomes-based contracting model, companies are paid for the results they deliver. It’s an approach that has already gained popularity within the technology industry, so much so that Gartner predicts that by 2018, one-third of all IT contracts will be based on program outcomes, replacing traditional cost-plus contracts that pay based on the completion of individual tasks or activities.
Outcomes-based contracting has enormous potential beyond IT procurements. Amid growing skepticism about the effective implementation of both large and small public programs, outcomes-based contracts help to ensure that agencies are good stewards of taxpayer funds by directly aligning contractor compensation with program goals.
There are a few key reasons this approach is particularly well suited for our current contracting environment. Outcome-based contracts are structured to incentivize contractors to achieve the program’s desired objectives in a timely and efficient manner. Such contracts open the competitive landscape by attracting vendors who are actually capable of performing the work—those who don’t deliver fully on the contract aren’t paid in full. Because contractors are held accountable for achieving results—not just delivering services—those who may have difficulty achieving the program’s goals will be discouraged from even bidding.
Whether driven by performance needs, budget realities or both, outcomes-based contracting offers a risk-sharing mechanism that allows agencies to contract for measurable results while relieving them of the responsibility of paying for services that do not meet expectations. This accountability helps agencies validate that taxpayer-funded programs are achieving value for citizens.
Designing outcomes-based contracts
Implementing an outcomes-based procurement model requires a different approach than that for fixed fee or cost-plus arrangements. Most importantly, government and contractors must fully agree on how outcomes will be defined, tracked and measured. Agencies must clearly identify and prioritize the desired results in their requests for proposals and ideally should identify a few key performance indicators that can serve as benchmarks for compensation. The RFP should not be overly prescriptive so as to not limit the contractor’s ability to innovate in achieving the desired outcomes. This is where industry expertise can lead to improved outcomes and efficiency.
It is important to note that programs do not have to be exclusively outcomes-based in order to succeed. Often with a new program, the desired outcomes are identified but the actual metrics are hard to gauge when in startup mode. In this case, a progressive or hybrid model, in which the contract payments transition over time, can help an agency transition to an outcomes-based contract when they have the data to establish more-defined metrics that align with the program goals.
Putting outcomes-based contracting to work
Governments in the U.K., Australia and elsewhere have used outcomes-based procurement methods for years with remarkable success. The same principles readily apply to the U.S. market. Indeed, some success stories already exist. For example, using an outcomes-based approach, the District of Columbia Temporary Assistance for Needy Families program made a sustained impact on helping people get back to work after losing their jobs.
Traditional government employment programs are evaluated by metrics such as the number of interviews an applicant goes on or how quickly they are placed in a job. Yet because that approach rewards the process, not the result, it encourages the contractor to send the candidate to many interviews, but not necessarily to interviews that could lead to employment that will build long-term self-sufficiency.
In contrast, the D.C. TANF program measures its success based on long-term job placement, and compensates the contractors according to their efforts to support the program at four milestones: initial engagement, job placement, 45-day job retention and 90-day job retention. This focus on helping candidates find sustainable employment puts the onus on the contractor to help individuals establish routines, achieve stability, position themselves for career advancement and, ultimately, transform jobs into sustainable careers.
An outcomes-based approach could work for addressing the VA claims backlog, which has steadily risen over the past several months, surpassing 100,000 cases in March. The results in this case could be tied not just to the number of claims processed, but to whether those cases are overturned on appeal.
Measuring the Impact
To meet demands and expectations of the American people, government agencies must demonstrate value—supported by proven outcomes—for the tax dollars they spend. Achieving a good return on investment requires managing costs, identifying efficiencies and, most of all, prioritizing results. Outcomes-based contracts can play a major role by serving as vehicles that drive performance, encourage innovation, share risk and reward, and motivate positive change for the long-term success of both government and industry.
Tom Romeo is General Manager of U.S. Federal Services Segment for MAXIMUS.