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By Patience Wait


Between now and 2007, the federal government will spend a whole lot of money -- $56 billion -- on outsourcing its information technology services.

During this period, IT outsourcing is expected to grow 18 percent annually, from $8 billion in fiscal 2002 to $14.8 billion in 2007, according to market research firm Input Inc. of Chantilly, Va.

Included in that sum are some juicy contracts:

*The Army is about to release a request for proposal for the Information Technology Enterprise Solutions contract, a five-year, multiple award contract with an estimated $800 million ceiling, to overhaul the service's IT infrastructure.

*The Coast Guard's Security Planning and Integrated Resources for Information Technology contract, known as SPIRIT, is a potentially huge contract to provide everything from information management analysis and planning to information systems engineering and design.

*The Commerce Department's Commerce Information Technology Solutions Next Generation, the recompete of its COMMITS contract, is a dedicated small-business vehicle with an expected value of $5 billion.

One thing in common among these three outsourcing opportunities, as well as many other forthcoming projects, is a commitment from the program offices to use performance-based contracting.

"Performance-based contracting goes hand-in-glove with outsourcing," said Steve Kelman, former administrator of the Office of Federal Procurement Policy in the Clinton administration, and now professor of public management at Harvard University in Cambridge, Mass.

That's because performance-based contracting, done properly, provides an objective means for measuring how well a contractor is performing, he said.

Under a performance-based contract, an agency describes what it wants to achieve. Contractors then submit proposals with solutions for reaching the agency's goals. The winning contractor then works toward measurable outcomes that are stipulated and agreed upon in the contract. The company is rewarded or penalized, depending on whether it's reached the stated goals.

The concept of performance-based contracting isn't new, but the Bush administration is emphasizing it as a way to achieve savings and obtain greater value. For many of the same reasons, the administration also has been pushing federal agencies to outsource more work to the private sector.

Although it is not necessary to make an outsourcing contract performance-based, many procurement experts agree it is the best way to achieve the greatest benefits for both the customer and the vendor.

A performance-based contract helps ensure that the contractor's employees, who essentially are outsiders, align their goals with their customer agency, Kelman said.

"If you're going to get them to act on behalf of your goals, you're going to have to be able to measure what they're doing," he said.

COMING DOWN THE PIKE

The Bush administration wants at least 30 percent of service contracting monies to be used in performance-based contracts, increasing to 50 percent by 2005. This is helping to drive the Office of Management and Budget's requirement that agencies develop business cases to justify proposed IT expenditures.

Consequently, many agencies are considering contract language that would tie contractor compensation to performance. For example, the request for proposals for the Army's Information Technology Enterprise Solutions program probably will include performance measures that have been suggested by interested vendors.

"We had a meeting with the Army. They were soliciting ideas from private contractors about how the performance measures [could be constructed]," said Linda Allan, executive vice president of strategic solutions with NCI Information Systems Inc., McLean, Va.

Allan said her company takes a mission perspective in suggesting performance measures. "If a financial office is getting services, there are metrics particularly for them vs. someone in a logistics supply chain whose metrics might be very, very different," she said.

The Army's Small Computer Program is using the enterprise solutions contract as a way to consolidate several programs. "We believe it's going to be a primary acquisition vehicle for the Army," Allan said.

The RFP, expected to be released the week of April 21, is split into two functional areas: enterprise hardware solutions and enterprise mission support services solutions. It is the latter in particular to which performance-based measures will be applied.

Many of the IT industry's largest companies -- Lockheed Martin Corp., Northrop Grumman Corp., Computer Sciences Corp. and Electronic Data Systems Corp., among others -- are expected to bid.

Brett O'Donnell, the Coast Guard account executive for Unisys Corp., Blue Bell, Pa., said that for contracts such as SPIRIT, the agency will look for vendors that can demonstrate a successful history of working with performance-based contracting.

The Coast Guard "might ask bidders to explain their track record of working with performance-based contracts," he said. "You'll say, 'Here's the performance requirements from X contract, here's how I've successfully met them.' "

The three Coast Guard projects that Unisys bid on in the last nine months were performance-based contracts, O'Donnell said.

SPIRIT was smaller in scope and had a different name under an initial plan to provide a range of IT services and products just to the Coast Guard. But after the Coast Guard was relocated in the Homeland Security Department, Spirit was made a department-wide vehicle.

The contract now includes four major functional areas that can cover nearly anything DHS will need: information management analysis and planning; information systems engineering and design; information systems operation and management; and information systems security.

NASA also has been implementing performance-based contracts for some years, according to Dan Norton, vice president of NASA and Jet Propulsion Laboratory Services for Lockheed Martin Corp. The agency's Ames Research Center will soon release an RFP for its Ames-Consolidated IT Services contract, worth up to $290 million over five years.

"NASA is three to five years ahead of other agencies" in using performance-based contracts, Norton said. "That's the only way I see that agencies can see that they're getting what they're paying for."

The space agency April 9 released an RFP for the Space Mission Communications and Data Services contract, worth an estimated $1.5 billion. The performance-based services contract is divided into five work packages that provide a wide range of IT services, including knowledge management, outsourcing of network management, consulting and design services, and planning and analysis at five different NASA locations.

It is "a great opportunity" for doing high-quality performance-based services contracting, said Ray Bjorklund, vice president with market research firm Federal Sources Inc., McLean, Va. "It's heavily into task work, [and] each one is another opportunity for creating performance criteria."

 

PITFALLS AND ROADBLOCKS

If performance-based contracting is so good for the government, and the administration has made it a requirement, why have many agencies moved so slowly to adopt it?

Performance-based contracting is an even greater change for federal agencies than outsourcing itself, industry executives said. Government procurement executives have been trained to monitor contract compliance, said Chip Mather, co-founder of Acquisition Solutions Inc., an Oakton, Va., consulting company that advises agencies on procurement policy and strategy. The procurement officers don't want to give up that control.

As a result, the government often demands overly structured, rigid performance requirements within performance-based contracts, said Jeff Feinberg, director of operations for Verizon Communications Inc.'s federal networking systems unit.

"On the commercial side, I could negotiate. On the government side, when the government publishes an RFP, you have to accept their terms," he said.

For example, on the Treasury Communications System contract, the government included an option to require one-hour deadlines for restoring systems. "That increased the cost 15 or 20 times," he said.

Some contractors also are uncomfortable with performance-based contracts, said Jerry Wesbecher, vice president of business development with Pearson Government Solutions, a subsidiary of Pearson Inc., Eden Prairie, Minn. Pearson Inc. is part of Pearson plc, the British media and education company.

"Some of the very large players in the contractor community today are not used to performance-based contracting; they're used to cost plus fixed fee," Wesbecher said.

The clash between the administration's goals and agency resistance frequently leads to what several people termed "malicious compliance" by federal procurement officials. These officials comply with the policy by tacking onto contracts the elements of performance-based metrics to get OMB approval, but the fundamentals of the contracts don't really change.

FSI's Bjorklund recalled an RFP written about 18 months ago in which "the first sentence in the statement of work read, 'This will be a performance-based contract,' but the rest of the document was exactly the same as before."

An interagency group that includes the departments of Defense, Commerce, Treasury and Agriculture and the General Services Administration has been working to design a seven-step process to create, implement and monitor performance-based contracts, said Mather, whose company assisted the group.

It will take a serious investment of time and effort to make such a dramatic change in how the government acquires IT services, he said.

"The guidance, to be generous, has been spotty at best ... To truly implement performance-based contracting is such a huge cultural change, [it's] not going to happen overnight," Mather said. "You've got to show people how it works, why it works." *

Staff Writer Patience Wait can be reached at pwait@postnewsweektech.com.