GAO: Share-in-savings motivates, but tough to do

Share-in-savings contracting can be highly effective in motivating contractors to generate savings and revenue for their clients, but it's especially difficult to do in the federal government, according to a new General Accounting Office report.

Reps. Tom Davis, R-Va., and Jim Turner, D-Texas, asked the GAO to determine how share-in-savings contracting is done in the private sector. Davis is chairman of the House Committee on Government Reform; Turner is ranking minority member of the House Select Committee on Homeland Security. With share-in-savings contracting, the contractor invests in the project up front and is compensated from the client's savings or increased revenue.

The GAO found that four key elements were necessary for successful share-in-savings contracting:

  • A clearly defined outcome, such as generating savings by eliminating inefficient business practices or identifying new revenue centers.

  • Incentives for both client and contractor to use the technique, such as a lack of client funds and contractor confidence the financial results they produce will provide a profit.

  • A baseline and performance metrics to define the client's costs and revenue prior to the job.

  • Client commitment to implement contractor recommendations.

  • Share-in-savings contracts have been rarely used in the federal government. The GAO found that some of the key elements of successful share-in-savings arrangements may be difficult to do in government. For example, GAO found that calculating a baseline on an IT job can be difficult because the information necessary to calculate the baseline may not be available, or it may be difficult to isolate direct savings from a reduction in the time an employee spends on a new task that replaces an old task.

    The GAO studied four uses of share-in-savings, including a contract with the Texas Online Authority in which the compensation to contractor BearingPoint Inc. of McLean, Va., was completely dependent on the results it delivered.

    Under the contract, BearingPoint created a Web site to provide state and local government services to Texas businesses and citizens. According to the GAO report, the contractor provided hardware, software and staffing at no cost to the state. BearingPoint will receive 90 percent of the gross revenues generated from use of the site until it recovers its initial costs. Thereafter, the company receives 50 percent of the revenue generated. BearingPoint determined that it would recover its costs by 2006 through fees levied to use the site.

    The Clinger-Cohen Act of 1996 authorized pilot share-in-savings programs for IT solutions that would improve mission-related or administrative processes. The E-Government Act passed last year expands agency ability to enter into share-in-savings contracts in fiscal years 2003 through 2005 and gives incentives to federal agencies to do so.

    According to the GAO, staff of the Office of Federal Procurement Policy said that the report findings will be taken into account in devising future policy on the use of share-in-savings contracting, and that agencies wanting to do this type of contracting need to do thorough planning, secure management commitment and identify clear outcomes and measures agreed upon by both the agency and the contractor.

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