Ready to test the water

GSA's business case decision tool

Procurement leaders have been touting the benefits of share-in-savings contracts for years to little avail. Those proponents, however, hope that several recent developments will help agencies wade into at least the shallow end of the procurement pool to test the innovative method.

Civilian and defense acquisition councils published a proposed rule in the Federal Register last month outlining the methods agency officials should take to create share-in-savings contracts. Then, General Services Administration officials awarded blanket purchase agreements a few weeks ago to six contractors that agency officials can use to enter into share-in-savings contracts with many of the terms and conditions already set.

Ken Buck, director of the share-in-savings program office at GSA, said the six BPAs are intended to guide agency officials who are skittish about the contract approach but want to try it. He said GSA's guidance will eliminate many of the potential stumbling blocks.

Now, leaders at the companies are eager to begin.

Share-in-savings contracts are risky for contractors, because the contractor bears much of a project's cost and gets paid only when the project generates significant savings for a customer. But company officials at some of the contractors said it is also potentially more rewarding.

"In a funny way, there's something counterintuitive about the risk profile of share-in-savings," said Donna Morea, president of CGI-AMS, one of the awardees. "I think that if you know what you're doing and if you have a good business case, they are actually much less risky than traditional projects that are organized by tasks. They're driven by results rather than contract compliance."

The BPAs, or other share-in-savings opportunities, could also lead to more contracting opportunities than might not otherwise be available, said Barbara Moffatt, vice president of business development for the federal sector civil group at Computer Sciences Corp., another BPA winner.

"A lot of our government customers are facing severe budget challenges," she said. "In the face of that, a share-in-savings arrangement offers some opportunities that wouldn't otherwise be funded."

Along with the BPAs, GSA officials also introduced a methodology to help agency managers determine projects that would be especially suitable for a share-in-savings approach, said Dan Chenok, vice president and director for policy and management strategies at SRA International Inc.

"There's a tool now that didn't exist before," he said. For added security, "we can work directly with agencies, or we can have agencies

work through GSA until they get more comfortable."

CGI-AMS has had success with the approach in commercial settings and with state governments, Morea said.

Contracting consultants say that the success of share-in-savings contracts depends on an accurate assessment of baseline costs of the process or system being changed. The savings, a share of which will go to the contractor, is calculated by simply comparing the cost of a completed project to the baseline costs.

But a successful share-in-savings partnership requires effort by both sides, Morea said. The contractor has to intimately understand the business needs of the customer so that company managers can develop a practical proposal. Agency officials, meanwhile, must determine how to measure those baseline costs and set a fair foundation against which to compare future accomplishments.

When they work well, Morea said, share-in-savings projects can soar.

"They enable government to create projects that are more likely to be successful," she said. "They're oriented around a good business case. Everyone has skin in the game."

Morea commended GSA officials setting up the BPAs.

"This is a big change in the federal world," she said. "I think the GSA did a really nice job creating the framework for these contracts, a framework that's designed around building a compelling business case."

The business leaders said that agency managers need to see one or two success stories, and then they will become more open to the concept.

"I think one or two is all it's going to take," Moffatt said. "There are people waiting and watching to see some success."

Like sands through the hourglass

The wins need to be quick, company officials said, because the BPAs expire in September 2005. The statutory authority behind the BPAs, contained in the E-Government Act of 2002, expires at the same time.

CGI-AMS officials have some practice at identifying good prospects for fast success through share-in-savings contracts outside the federal sector, Morea said.

"Even in our very, very large projects, we always try to break these projects into chunks so that we can have wins consistently through the life of the project," she said.

The wins don't have to be large, Morea added. They will help build confidence "as long as they're visible, measurable, tangible and can happen quickly," she said. "Let's go for a few first downs before we try for our first touchdown."

"We, among the other BPA holders, will be working with the government to identify a number of specific cases" in which share-in-savings could bring results in a short time, said Chenok, a former Office of Management and Budget official. Those cases will be instances in which "there's a clear understanding of the baseline costs and a clear understanding of the savings that can be achieved under the baseline."

Although there is an older share-in-savings authority already in the law, the E-Government Act's version allowed agencies more flexibility, notably in that they are not required to have enough money on hand to cover the costs of a contract termination or cancellation, Chenok said.

Those fees may be one sticking point causing agencies to balk, some observers said. Morea said agency and business leaders can minimize the chances of a contract's termination.

"The way we've handled it is to try to limit the exposure — to everybody," she said. "It comes back to finding a way to quickly achieve success so that you have proof that the concept is right."

Steve Kelman, a professor of public management at Harvard University's Kennedy School and administrator of the Office of Federal Procurement Policy during the Clinton administration, said the BPAs could succeed in encouraging more share-in-savings contracting in the future.

"This will make it easier for the government to get started," he said. "I would say that share-in-savings is an important way for the government to [make incentives for] good vendor performance. Particularly in the current procurement environment, which is encouraging caution and process orientation, it is particularly crucial for innovative contracting methods to obtain better results to get under way."

"If an agency wanted to do a share-in-savings [contract], they could do one," said Robert Guerra, a consultant and partner with Guerra, Kiviat, Flyzik and Associates Inc. "The difference is you now have the tacit endorsement of the government that this is something they want to do. You've got the fundamental endorsement of the federal government, with the strength of the GSA schedule behind it."

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Tips for agencies

Figure out what the activity costs now. You won't be able to measure how much you've saved with a share-in-savings contract unless you know how much you're spending now. If there's no clear way to do that, the project is not a good share-in-savings contender.

Secure top managers' commitment. Agency leaders have to be sold on the need to change business processes and sustain a close relationship with the contractor's officials.

Keep the information flowing. Agency officials need to foster an active dialogue with potential contractor partners before issuing a request for proposals.

View the agency/contractor relationship as a partnership, not just a contract. Both sides have to be aligned for share-in-savings projects to yield good results.

Use the new tools that the General Services Administration has provided to determine which projects are a good fit for this approach.

Sources: CGI-AMS, Computer Sciences Corp., SRA International Inc.

Share-in experience

When Donna Morea, president of CGI-AMS, talks about share-in-savings contracts, she's speaking from experience. American Management Systems Inc., as the company was known before it was bought by CGI Group Inc., has a long record of entering into share-in-savings contracts with state government agencies and commercial customers. Here are the facts on two such contracts:

Customer: Commonwealth of Virginia

Project: Develop statewide e-procurement, giving state agencies end-to-end Web-based procurement.

Goal: To reduce the cost of procurement from about 5 percent of the cost of goods to 2 percent.

Share-in-savings: AMS gets 1 percent of the amount saved, and the state keeps the rest.

Customer: Commonwealth of Virginia

Project: Modernize tax operations, including implementing online filing and better customer service.

Goal: To reduce costs and improve the collection of delinquent accounts.

Share-in-savings: Paid on a sliding scale. AMS kept 90 percent of the savings in the first year to help defray the company's costs more quickly. By the fifth year, the rate AMS keeps will slide to 10 percent.

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