FCW Forum — Contracting

Bring back share in savings

The innovative approach to services contracting could help the government save money

In case anybody hasn’t noticed, the government — largely because of spending to stimulate the economy out of the country’s economic crisis — is running trillion-dollar deficits, which everyone knows are unsustainable.

I have been suggesting since January that the contracting community needs to play its part by looking for ways to cut spending on contracting. Indeed, the Obama administration has directed agencies to reduce contract spending in the next two years, though there is a risk that agencies will meet the mandate by doing less with less rather than first seeking ways to do the same (or more) with less — for example, by expanding the use of strategic sourcing and reverse auctions.

In the context of efforts to reduce spending, the time has come to take on the naysayers and revive the statutory encouragement that expired a few years ago for share-in-savings contracting.

Share in savings is an innovative way for the government to contract for services whereby the contractor’s full or partial payment is a percentage of the savings its effort generates. In the most radical version, the vendor’s total payment is a percentage of the savings it generates — no savings, no payment, and the greater the savings, the greater the payment. In less radical versions, the vendor is paid a fixed fee plus a lower percentage of the savings.

Like any innovative form of contracting, share in savings isn’t appropriate for all situations. Generally, for information technology projects, the vendor’s effort must generate a large pool of savings in the underlying business process the new application supports. Share in savings has been used in the successful modernization of several state tax systems, where better IT improves enforcement and increases compliance-related tax revenues. A similar example would be an IT application that allows patients to leave hospitals earlier through better bed management or one that tracks down unused office phones.

Where appropriate, share in savings aligns government and vendor incentives. The better and quicker the vendor does at meeting government needs, the better it does financially. And the government isn’t left holding the bag if the vendor fails, as is often the case now.

However, vendors won’t agree to accept the risks unless they get higher profits if they succeed. That aspect of share in savings has aroused the ire of so-called watchdog groups such as the Project on Government Oversight, which would apparently rather see a contract fail than have a vendor make money. Its opposition, along with at best tepid support from the Bush administration under the disastrous reign of Angela Styles at the Office of Federal Procurement Policy, doomed share in savings when legislation promoting the idea was up for renewal in Congress.

Agencies can use share in savings now, based on multiyear contracting authority in the Federal Acquisition Regulation. However, for a number of technical and political reasons, they are hesitant to do so without legislation that will help them with some technical problems and give them political cover from critics. Can the new OFPP administrator step up to the plate on this?

About the Author

Kelman is professor of public management at Harvard University’s Kennedy School of Government and former administrator of the Office of Federal Procurement Policy. Connect with him on Twitter: @kelmansteve

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Reader comments

Fri, Oct 16, 2009 Jim Flyzik

Hurray for Steve Kelman. We need S-I-S again. I'd like to see "true" performance-based contracting reinvigorated too. Unfortunately, many of the recent task awards have gone back to low bid wins resulting in the government getting the "C" team and mediocre contractor performance.

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