Gain-Sharing Contracts Trigger Opportunities and Debate

Among the different contracting schemes that integrators have deployed over the years, none have become as evolutionary or as controversial as those commonly referred to as gain-sharing or risk-sharing contracts.

The ground-breaking pacts are today using largely customized formulas to link integrator compensation to customer performance.

For instance, a contract designed to overhaul the City of Chicago's parking violations systems guarantees Electronic Data Systems Corp. a share of the city's outstanding ticket collections. Under the contract, the integrator is today focused on collecting as much of the city's outstanding tickets as possible in order to enlarge its own reward.

These contracts, sometimes described as being "incentivetized," should in no way be confused with "liquidated damages," or penalty clauses, which commonly require integrators to lose increments of compensation when certain contractual deadlines are not met.

Instead, the consummation of a gain-sharing pact takes the industry's traditional contracting relationships several levels deeper.

"In the commercial world, we are now going to companies and saying, 'Let's take a look at your objectives from a stock market point of view, as well as from an earnings point of view. Can we improve your earnings? Can we improve your tax returns?' And if we can't, we will not expect to be paid," said George Newstrom, EDS' top government executive. If EDS succeeds, the integrator expects to share a small portion of the company's expanded wealth.

For many reasons, gain-sharing opportunities are expected to first blossom in the commercial, state and local markets.

"I don't think gain-sharing is at all suited for [the federal] government market. I can't imagine a procurement that would ever want to involve [gain-sharing] because it would need to cross administrations and cross budget years," said Computer Sciences Corp.'s chief executive and president Van Honeycutt, who, unlike Newstrom, remains a gain-sharing skeptic.

"Let's say I have a consulting contract with a Fortune 500 company and I have a gain-sharing relationship. What does it really mean? Do I get a percent of your profits and if so, how long? I think it's very complicated. While it sounds good at the end of the day, it's like hiring a financial planner and paying him a percent of what you make the rest of your life," Honeycutt explains.

The growing debate over gain-sharing contracts is expected to become increasingly heated as integrators such as EDS, Andersen Consulting and Perot Systems all attempt to take their customer relationships to the next level. Whether commercial, state and local customers are prepared to deploy the new contracts in volume, EDS' ticket-collection scheme is already leading to some spirited discussions within America's corporate boardrooms.