A way to win

Industry, government drop business as usual with performance-based strategy<@VM>Hoped-for savings hard to get<@VM>OMB trims goal to encourage compliance

Agencies can be surprised by the work required on a performance-based contract, said Eric Stange of Accenture.

Laurie DeWitt

Richard Cromley, DLA

Nate Pierson/DLA

When the Defense Logistics Agency awarded Accenture Ltd. a performance-based contract two years ago to modernize its supply chain management system, agency officials soon realized the "performance-based" aspect of the contract required as much work from them as it did from the contractor.

During the first two months of the $575 million project, Accenture requested that key DLA officials from facilities in Columbus, Ohio, Philadelphia and Richmond, Va., meet regularly with company officials to discuss how to standardize operations in those locations, which were accustomed to operating autonomously, said Eric Stange, managing partner of the homeland security and defense practice at Hamilton, Bermuda-based Accenture.

DLA agreed to the rigorous schedule, rotating meetings among the three facilities so the 150 agency officials involved in the initial project planning could gather regularly. The need for the agency to respond fast was an early lesson-learned on performance-based contracting, Stange said.

"They realized they were in for some change, but I don't think they had any way of understanding the magnitude of change that we were talking about [or] the effort needed to achieve it," he said.

DLA has scrambled to keep pace with the contractor on the five-year Business Systems Modernization Program, said Richard Cromley, a procurement manager with the the agency's contracting office overseeing the program. "If you set up a performance relationship, the contractor is going to want you to run as fast as they are running," he said.

The project is a metaphor for the relationship between the federal government and the contractor community when it comes to performance-based contracts. Industry has grown increasingly impatient with federal agencies that are just beginning to understand the level of commitment these types of acquisitions require as a result of needed technical training and cultural changes.

Usually, when agencies put out a solicitation for a new system or service, they spell out in detail how the system should be built or the service delivered. But in a performance-based approach, agencies specify the outcome they want, then let contractors propose solutions. Agencies and contractors work together to establish performance standards that measure the contractors' progress toward reaching the results.

Government now prefers a performance-based approach to acquiring services to foster innovation, ensure accountability and generate savings, acquisition experts said.

The Office of Management and Budget three years ago mandated that federal agencies shift more of their professional and technical services work to a performance-based approach. The quotas have increased incrementally, and today, agencies must conduct 40 percent of their services acquisitions using performance-based methods.

The federal government won't know until December whether agencies as a whole have met the fiscal 2004 mandate, said David Drabkin, chief acquisition officer for the General Services Administration. Based on his observations, Drabkin said he thinks that agencies either will meet the mandate or come close to it.

Agencies have increased their use of performance-based contracts, but industry executives said the process remains fraught with problems. The contracts' complexity has created substantial resistance among procurement officials who have grown comfortable with usual acquisition methods.

Performance-based contracting is "harder to do the first few times, but after that it's easier," said Stan Soloway, president of the Professional Services Council. "Acquisition reform isn't about making things easier, it's about making things better."


Some industry officials doubt the government will be able to achieve its mandated quotas for performance-based contracting.

"Based on our discussions with the agencies themselves, it seems unlikely they will hit the 40 percent targets," Soloway said. "It's also difficult to discern whether everything categorized as a performance-based contract really meets all of the tests."

The degree of use across the federal government varies widely, said Steve Stryker, president of Rockville, Md., consulting firm Stryker Associates Inc. Some agencies are very strict about when they will use performance-based contracts and when they will not. They also are striving hard to reach their mandated goals, he said.

Such agencies have a strong performance-based methodology to ensure that the contracts they say are performance-based are in fact, performance-based. The same can't be said for everyone, though.

"There are other agencies where the impetus is there, but to say that every one of the procurements in that category is truly performance-based is questionable," Stryker said. "It really depends on how well the individual agency is committed to seeing performance-based acquisition happen."

Government officials discarded the term "performance-based contracting" several years ago in favor of "performance-based services acquisition," because such procurements involve a variety of disciplines and stakeholders, including financial, legal and technical experts, as opposed to contracting staff only.

A major obstacle to creating genuine performance-based acquisitions, said industry officials, is a lack of training, guidance and incentives for procurement personnel to use the approach. Consequently, the benefits are hard for them to see, their work goes unacknowledged, and they don't receive sufficient support from top levels.

"There is a clear need for more focused and widely available training, especially practical training, as opposed to classroom training, that is focused on the actual requirements," the Professional Services Council's Soloway said.

Agencies often have difficulty developing performance metrics for high-end services such as business process reengineering, as opposed to acquiring products and support services, industry officials said. As a result, some government contracts are being mislabeled performance-based.

It's like the way leftover meatloaf is served, said Carl DeMaio, president of the non-partisan think tank The Performance Institute in Washington.

"They take yesterday's statement of work and add salt and pepper to it," he said. The garnishes are measures and standards that fall short of real performance-based acquisition. Such an approach has led to a proliferation of measures and an additional reporting burden with little results-oriented management behind it, he said.

"The government has a long way to go to realize the vision of performance-based acquisition," said Greg Baroni, president of public-sector services with Unisys Corp., Blue Bell, Pa. Unless the cultural barriers come down, "you are not going to see the vision realized," he said.



Both government and industry officials agree that improvements must be made in training, oversight and metrics if performance-based acquisition is to achieve its intended purpose.

Michael Sade, director for acquisition management and the procurement executive at the Commerce Department, said agencies are taking steps to solve these problems. For example, Commerce has a board that reviews all acquisitions of more than $5 million to ensure that contracts labeled as performance-based do, in fact, use that approach.

Still, some slip past, Sade said.

"We aren't going to catch every one," he said. "We certainly don't see every solicitation that goes out from our office."

[IMGCAP(2)]Not every component of a project needs to be performance-based for an acquisition to be considered as such, Sade and other procurement executives noted. One way to promote and expand performance-based contracting is to use hybrid approaches that combine performance-based measures with other approaches, he said.

"One of the things we learned from our internal review was that everyone was approaching this from an all-or-nothing standpoint," he said. If it proved too difficult, staff would sometimes abandon the performance-based approach. Now the department is encouraging hybrid contracts.

The Commerce Department, for example, converted the operations and maintenance portion of its financial system contract from a time-and-materials approach to a performance-based, fixed-price approach when it recompeted the contract, he said.

Federal acquisition officials also said that they are training more procurement personnel than ever before, as well as experimenting with new approaches. This summer, the Commerce Department began putting technical program and procurement staff, who will work side by side on major acquisitions, through performance-based training courses together, Sade said.

At GSA, about 600 employees -- half of its procurement personnel -- recently graduated from a performance-based training course, and the agency is preparing to put the other half through the same course soon, Drabkin said.

As for the DLA, Cromley said the performance-based contract with Accenture to modernize its business systems has been well worth the effort. The contracting method has helped create a better partnership between DLA and Accenture, and kept them focused on "performance standards, associated outcomes and quality, rather than the amount of resources the contractor has expended," he said.

Because project changes will require re-examination and perhaps renegotiation of performance standards, a performance-based contract might complicate problem resolution, Cromley said. But as their experience with performance-based contracting grows, agencies and contractors will grow more adept at establishing relationships and administering projects, he said.

"Performance-based approaches should be embedded into an organization's culture and normal operating procedures over time," Cromley said.

Staff Writer William Welsh can be reached at wwelsh@postnewsweektech.com.

As agencies become efficient in using performance-based contracts, they might be able to achieve savings of 25 percent to 30 percent, said Carl DeMaio, president of The Performance Institute.

J. Adam Fenster

California is considering performance-based contracting as a possible cure for its budget woes, with a new report asserting that the state can save from $684 million to nearly $1.36 billion over the next five years using such contracts. Procurement experts, however, said state officials might be hoping for too much.

A commission established by Gov. Arnold Schwarzenegger (R) to help California out of its tight fiscal trap said in August that the state could save more than $32 billion over the next five years by government restructuring and procurement reform. Among its recommendations, the California Performance Review Commission said the state should over four years, phase in performance-based contracting until it has converted half of its contracts.

Some analysts and industry observers are skeptical that California can get large-scale savings from a contracting methodology with which it has little or no experience.

"It remains to be seen if California can do that on such a grand scale," said Ray Bjorklund, senior vice president and chief knowledge officer with market research firm Federal Sources Inc., McLean, Va.

The same holds true for performance-based contracting in the federal arena. Actual savings generally are more modest than those touted by government officials, analysts said. It's not that performance-based contracting can't deliver large savings; the government lacks the experience to achieve those savings, they said.

A benchmark study by the Office of Management and Budget and the Congressional Budget Office shows that performance-based contracts, when administered properly, can produce 18 percent to 20 percent savings over more typical approaches.

"There is a well-documented performance and efficiency benefit," said Stan Soloway, president of the Professional Services Council of Washington. "It's just that agencies don't have the tools, training and background to do it right."

Carl DeMaio, president of Washington think tank The Performance Institute, said savings would be higher were it not for government's limited capabilities. Because of this, OMB's estimate represents "the floor and not the ceiling" of how much can be saved using performance-based contracting, he said.

As agencies become more efficient in performance-based contracting and as financial management systems are re-engineered to track the savings, it may be possible to achieve savings of as much as 25 percent or 30 percent over previous methods, he said.

Saving money has never been the sole motivation behind performance-based contracting, DeMaio said. Such contracting not only produces dollar savings, but also improves contractor performance, he said.

Steve Stryker, president of the Rockville, Md., consulting firm Stryker Associates Inc., agreed.

"The real savings will occur not so much from the absolute dollars but from the ability to get what's needed from the contractor the first time," he said.

If agencies don't hit the performance-based contracting goal this year, "they will be awfully close." ? David Drabkin, chief acquisition officer, GSA

J. Adam Fenster

Beginning next month, federal agencies will be required to use performance-based contracting methods on 40 percent of eligible jobs worth more than $25,000. Previously, the goal had been set at 50 percent for fiscal 2005.

The new administration policy, outlined in a Sept. 7 memo from the Office of Federal Procurement Policy, also lowers the percentage of contract requirements that must be performance-based from 80 percent to 50 percent for a contract to be considered a performance-based acquisition.

The memo, sent to agency chief acquisition officers and senior procurement executives by OFPP Associate Administrator Robert Burton, said performance-based methods should be applied to contracts, task orders, modifications and options awarded in fiscal 2005. OFPP officials will re-evaluate the 40 percent target after reviewing agencies' fiscal 2005 performance, he said.

With performance-based contracts, agencies describe their needs in terms of desired results instead of telling contractors how to perform the work. Performance-based contracts include measurable performance standards such as response time or customer satisfaction. The contracts may include monetary and nonmonetary incentives to the vendors.

Contract actions that are ineligible for performance-based service acquisition methods include some architect-engineer services, construction services, utility services and services that are incidental to supply purchases, according to the memo.

According to an Office of Management and Budget staff member, federal officials thought agencies were not using performance-based contracting methods as often as they could because the 80 percent bar was so high; therefore, that requirement was cut to 50 percent.

"We are now hoping they will apply [performance-based methods] on a wider variety of contracts over $25,000," the staff member said.

The 50 percent requirement was cut to 40 percent to give agencies time to get used to working under new guidelines for performance-based contracting contained in a proposed procurement rule published July 21 in the Federal Register, the OMB staff member said.

Agencies will identify their performance-based service contracts through the governmentwide contracting database, the Federal Procurement Data System and to OFPP directly if they are not required to use the FPDS exclusively, the memo said.

Some federal officials are optimistic about agencies' ability to meet the 40 percent goal. Others said it's hard to know how much performance-based contracting is happening.

If agencies don't hit the goal this year, "they will be awfully close," said David Drabkin, chief acquisition officer for the General Services Administration.

Other officials said it's hard to judge agencies' progress toward the goal, because data in the old FPDS is unreliable and data from the new FPDS isn't yet available.

At the Defense Department, for example, Domenic Cipicchio estimated that between 20 percent and 22 percent of DOD contracts in fiscal 2002 were performance-based, and about 24 percent of contracts were performance-based in fiscal 2003. Those numbers could be revised higher or lower in the future, however, said Cipicchio, deputy director for policy in the Office of Defense Procurement and Acquisition Policy.

The Defense Department already has a goal of awarding 50 percent of all contract dollars in a performance-based manner by fiscal 2005. Cipicchio said department officials would re-evaluate the 50 percent goal over the next month, keeping the OMB memo in mind.

"We certainly have pushed performance-based contracting, and the numbers are going up but not as drastically as some people had hoped," Cipicchio said. "The question is: Do we need to adjust the goals or come up with initiatives to help people do more performance-based contracting? We need to take another look at it."

OFPP officials said they are taking steps to teach agency officials more about performance-based contracting. According to the Sept. 7 memo, OFPP is creating a network of subject-matter experts and a database of successful performance-based contracting examples.

One of those examples could be the Coast Guard headquarters team that writes performance-based statements of work, the OMB staff member said.

Dani Wildason, chief of the contract planning, procedures and quality engineering division at Coast Guard headquarters, created the team in early 2002. Wildason brought together six staff members with expertise in engineering, business administration, quality assurance and information technology, among other areas.

The group's job is to work with Coast Guard technical staff to define contract requirements, then write the performance-based work statements for the technical staff.

"Rather than try and teach technical customers for what might be a one-time requirement ... I got the idea that this should be done like you get your taxes done," Wildason said. "You bring a bunch of good information to someone who does this [performance-based work statements] all the time."

Wildason's group drafts work statements within two to three days; the entire process can be done in three weeks or less.

When the group started its work, Coast Guard headquarters had two performance-based contracts in place. In fiscal 2004, Wildason's group completed 166 performance-based work statements.

"I can't say enough good things about how this has worked out," Wildason said. "To our knowledge, we are the only ones who do anything like this."

Staff Writer Gail Repsher Emery can be reached at gemery@postnewsweektech.com.

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