Dusting off a contract idea
- By Diane Frank
- Mar 25, 2001
No one would call it new, but President Bush may have given the share-in-savings contracting method a revival after calling on agencies to expand its use in his proposed fiscal 2002 budget, released last month.
Under share-in-savings, a vendor puts up all or most of the money for an agency's information technology system, often millions of dollars. The vendor then recoups the upfront cost over several years by taking an agreed-upon percentage of the savings that the new system generates for the agency.
Federal and state agencies use the contracting method in many areas, such as collecting payments on parking tickets, and it has the obvious benefit of being the ultimate in performance-based contracting because agencies spend little or no money until the vendor can show a result. But calculating those benefits is tricky in the IT arena, where "savings" often cannot be clearly measured because agencies may not know the current costs from which to calculate future savings and return on investment.
"This is really hard stuff to do right; it's Ph.D.-level contracting. You need to either have a baseline or know how to establish one," said Chip Mather, senior vice president at Acquisition Solutions Inc., a federal contracting consulting firm.
The biggest federal proponent for IT share-in-savings contracting is the General Services Administration's Federal Technology Service. FTS has pushed share-in-savings since early 1999, holding educational conferences, creating templates for determining good candidate contracts and bringing in vendors who are using the method in the commercial market.
GSA's support has definitely helped, Mather said. But there are still only a few agencies using share-in-savings for IT.
The highest-profile agency to do so is the Education Department's Office of Student Financial Assistance Programs, which last July awarded a contract to Accenture. The contract is expected to produce net savings of about $30 million by 2004 and could provide the company up to $14.4 million. Officials from OSFAP could not be reached for comment, but according to the agency's fiscal 2001 performance plan, the office's share of those savings will be put back into its modernization effort.
Most agencies do not use share-in-savings simply because most of the candidate contracts don't fit the model, said Ken Buck, executive director for business innovation at FTS and leader of the agency's share-in-savings efforts under GSA.
"About 12 or so agencies have expressed interest and brought forward candidates. We've run them through our template, and that's been the great equalizer," Buck said. "We want serious candidates, ones with high [return on investment], good baselines."
Although the government endorsed share-in-savings as a pilot program in the Clinger-Cohen Act of 1996, the law that defines federal IT management practices, agencies have been wary about trying anything new that lacks explicit administrative support. And the Office of Management and Budget under the Clinton administration did not press hard for using share-in-savings, said Paul Brubaker, who was deputy chief information officer at the Defense Department under President Clinton and is one of the draftees of Clinger-Cohen.
"It was new, it was different, and they weren't going to encourage people to use it, and by not encouraging, they really discouraged it," said Brubaker, who began last week as the president of e-government services at Commerce One Inc.
Bush's mention of share-in-savings in the budget is a positive sign from the new administration, "but if you just say it's a good idea, it's not really going to encourage people to do it," Brubaker said. "You've got to say it's a good idea repeatedly and make sure there is the support in the management levels at OMB and in the agencies."
OMB officials, including Director Mitchell Daniels Jr., Deputy Director Sean O'Keefe and other positions yet to be filled — notably the deputy director for management and the administrator of the Office of Federal Procurement Policy — must make it clear to agencies that they will support innovation in this area, Buck said. That's especially true in encouraging the program and budget people to come together at the CIO and Chief Financial Officers councils, he said.
Winning the support of the financial community within agencies is crucial becuase any unusual funding method makes people uneasy, Brubaker said. "The financial people don't always understand the concept behind share-in-savings, and they're afraid that the government is going to be put at risk somehow."
Because share-in-savings does not follow the normal rules of appropriations, lawmakers must also get behind the concept. Several are already expressing support, including Rep. Tom Davis (R-Va.), chairman of the new House Government Reform Committee's Subcommittee on Technology and Procurement Policy, and Sen. Joe Lieberman (D-Conn.), ranking member of the Senate Governmental Affairs Committee. Earlier this month, Davis told Federal Computer Week that the time has come for share-in-savings, and according to one source, Lieberman is preparing legislation to encourage its use.
The last part of the equation — industry — has been waiting for just this moment, said Olga Grkavac, executive vice president of the Information Technology Association of America's Enterprise Solutions Division. "A lot of ITAA members have been very supportive of the concept and are willing to step forward."
Share-in-savings does require deep pockets on the industry side, and criticism has arisen that smaller companies will be left out because they cannot front the millions in cash that these contracts require. Although "it's not for everyone," Grkavac said, there are still opportunities for the smaller vendors to step up.
Share-in-savings is a form of performance-based contracting that requires the vendor to put up all or most of a system's funding instead of the agency. The vendor is then "paid back" by the agency over a predetermined number of years via an agreed-on percentage of the savings the agency realizes.
A key aspect of these contracts, and the sticking point in determining good candidates, is how to measure savings. This requires the agency to determine a baseline (how much time and money it spends now on a certain function) and a goal (how much it wants to spend) so that the difference can be measured and shared with the contractor.