Timothy Coffin of iGate

COMMENTARY

Share the risk, then reap the reward

It’s a new environment in the government marketplace. There has been talk of budget cuts for quite a while, and now it’s actually being implemented.

Organizations are tasked with making significant cuts in their operating budgets, while still meeting their constituent’s needs and supporting the mission. Government leaders and their industry partners are looking for innovative ways to succeed within this new paradigm.

One approach that works: pay for outputs – measurable outcomes; rather than inputs – activities to get to a deliverable. This shares the risk, reduces costs – and improves results.

This isn’t really a new idea; in fact, the initial order from the War Department in 1907 (Signal Corps Specification No. 486) for a ‘heavier than air flying machine’ followed this model. There were specific objectives established, and no payment would be made unless the solution complied with all requirements, and only after a successful one-hour trial flight.

In addition, the bidders were incentivized to create a machine that would fly faster: if it flew slower than 36 mph it would be rejected, and no payment would be made. If it flew faster than 40 mph, payment would be greater than 100 percent, increasing as the speed increased. This is an excellent example of paying for outputs, sharing the risk, reducing the costs and improving results. The Wright Brothers were awarded this contract – and we are all grateful for the positive outcome of this transaction.

We believe that a mission-focused, outcomes-based model is both simple and elegant. It enables the integration of consulting, domain, technology, process and infrastructure. Sharing the risk with customers and focusing on outcomes will not only save customers money, but also improve productivity and support for the mission.

Large IT solution providers are well positioned to take on more risk, and make the initial investments in technology and operations, to better serve our government customers.

In essence, this is taking business process outsourcing to the next level. While the technology partner makes the upfront investment in building the technology and process platforms, the customer pays only for using the infrastructure, much like paying for electricity or gas that we use in our homes. It produces a business model where the government only pays when the value is received. For example, a customer sourcing medical claims services using this model would typically pay only for the desired outcome – such as a reduction in claims processing time achieved or correctly processed claims.

This model consists of best-in-class people, process and technology. Two key activities drive the success of this approach:

  • Defining the right parameters for the service.
  • Developing the right combination of end-to-end technology, process and talent to consistently meet the quality and cost specifications.

Recently we worked with a government customer operating a residential tenancy bond system that processed 750,000 financial transactions and claims each year. Their focused outcome was to reduce the time to process claims. When we became engaged, there was a three-month backlog of claims, and they had consistently carried a backlog of similar size. We were challenged by the customer to reduce the backlog, which was accomplished by focusing on results. The backlog was cleared in 30 days and processes implemented to ensure claims would be handled efficiently the same day they were received.

By investing in technology and optimizing business processes, this organization achieved its objective: reducing the time to process claims. In addition, the solution exceeded the customer’s desired results, by implementing processes that basically eliminated backlogs – achieving a target performance level of 99 percent transactions processed the same day as received – all within 30 days.

This approach can be used with many different types of challenges that government organizations face. It is especially effective where transactions are defined, processes are or can be standardized, there is a significant volume of transactions, the process has a defined beginning and end point, and demand is variable. For example, this model is well suited to help government organizations improve medical claims processing, human resource processing, and logistics management issues.

Additionally, the government and the supplier should be aligned around the governance and the management of shared risk and reward.
Sharing the risk and focusing on outcomes can help government organizations work with shrinking budgets while maximizing results. In today’s environment, changing the rules can deliver impressive value creation, to help government organizations better serve their constituents and more effectively drive mission outcomes.

And it increases the provider’s commitment: investing in our customer’s success will mature our relationship with our government client from that of a vendor to strategic partner.

And who knows – it might help us discover today’s greatest innovators.

Reader Comments

Mon, Jan 28, 2013 Joe Northern Virginia

I disagree with your statement about 'mission critical' - contracts have failed even when designated 'mission critical'. An organization that is motivated to succeed and to be rewarded only upon success will out perform a bloated contract that has to succeed.

Fri, May 25, 2012 Mariano Tellarini www.masthink.com

After lots of reading around the advantages of the so-called performance-based approach, I came to the conclusion that it has very limited application in federal contracting. In my opinion, this goal cannot be achieve, at least in “mission-critical” government contracting. Why? Because the consequences of underperforming a critical task can hardly be compensated by monetary means. Simply put, because underperformance consequences cannot be really transferred to the contractor, financial risks become irrelevant. In the Wright example, if the “machine” didn’t fly, the contractor would take the hit, maybe even put out of business. Because the risk is totally in the contractor’s hands, the government could simply not pay for the failure and call for the next guy in line. I don’t think this risk subordination is possible when the discussion is, for example, about how to protect the borders. I believe contractors and government first need to analyze the feasibility of transferring non-performance risks to contractors before they try to monetarize it. Again, if the task is to develop a solution to provide electronic surveillance in the southern border and after a few months into the implementation process the deployment falls behind plan (or even worst the systems malfunctions), not having to pay the vendor (or having to pay less) for the shortcoming will be the least of the Contracting Officer’s problems. The risk with adopting a performance-based approach is that it could lead parties to develop flawed solutions under the cover of a “financial security”. I have reservations with the government evaluating mission-critical proposals that incorporate financial implications for non-performance “lost revenue” as these have the potentiality of being serious distraction factors.

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