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As outsourcing grows, administration pushes performance-based contracting to ensure quality<@VM>Few big deals in state and local market
One challenge of performance-based contracts is that government often demands overly structured performance requirements, said Jeff Feinberg of Verizon Communications Inc.
Henrik G. de Gyor
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 firstname.lastname@example.org.
Smaller outsourcing projects to prevailBy William Welsh
IBM Corp.'s Rick Webb said for now, at least, the company is likely to find its state and local outsourcing business in managed services and business processing.
WT file photo
Rather than running up millions of dollars chasing large outsourcing projects that get canceled before award, as happened earlier this year in Georgia, top systems integrators are pursuing small-to-medium-sized deals that provide a safer, more reliable return on investment.
"The larger, mega-deal bandwagon will move much slower, because those [projects] are expensive and hard to do," said Rick Webb, associate partner for business consulting services at IBM Corp., Armonk, N.Y.
Smaller governments tend to be more pragmatic and less likely to push toward major customization that can complicate an outsourcing project, said Lisa Mascolo, federal client group managing partner for Accenture Ltd., Hamilton, Bermuda.
"The smaller state and local entities are very much aware of human resources and fiscal constraints, and seem more willing to take turnkey solutions, while the larger states are less willing to look at turnkey solutions," she said.
But even as the larger deals lose their appeal, the prospects for outsourcing look very bright. With states facing record budget deficits, industry officials said the time has never been better to expand the number of managed services and business process outsourcing projects they have in the market. That's because such projects hold the promise of improved operations and better performance at reduced cost, they said.
Managed services refers to the life-cycle support of applications and related systems, including design, implementation and maintenance. Business processing refers to government functions or operations performed by contractors, which typically include accounts receivable, billing, claims processing, help desk and transaction processing.
Accenture, which has child support enforcement contracts in Maryland, New Mexico and Tennessee and is a key subcontractor on the Texas Medicaid program, sees a growing demand for business process outsourcing related to human resources and financial management, Mascolo said.
Affiliated Computer Services Inc. of Dallas will be looking for more business process outsourcing contracts in electronic toll collection, red light and radar photo enforcement, child support enforcement and electronic benefits transfer programs, said Ed Gund, chief operating officer for ACS' state and local group.
In the past 12 months, ACS has won a child support payment processing contract in Illinois worth $109 million and another in Ohio worth $234 million. An even bigger deal was a $450 million contract the company nabbed in New Jersey for electronic toll collection.
Less than one-third of the states have laws permitting red light and radar photo enforcement. This likely will change in the years to come, Gund said. "As people become more comfortable with the results, this program will spread to all 50 states," he said.
IBM's purchase of PWC Consulting last year gave the company a combination of skills to transform infrastructures and business processes, company officials said. The surest bet for IBM is likely to be managed services and business process outsourcing contracts in financial services, human resources and IT infrastructure, Webb said.
IBM has blended successfully e-government and outsourcing in projects such as Service Arizona, Webb said. Using a self-funding model, the company built a Web-based vehicle registration system for the state that enables Arizona to provide related transactions via the Web. The company manages the transactions, maintains the infrastructure, and operates its own payment engine.
American Management Systems Inc., Fairfax, Va., has a robust state and local outsourcing business. One of its largest outsourcing contracts, worth $156 million over seven years, is with the New York City Department of Finance. On that project, the company provides both applications management and business processing outsourcing for a parking violations system.
This year, AMS officials are looking to expand their outsourcing business around the company's proprietary services, such as applications management, credit operations, billing and collections, and tax and collections.
Many of the company's government clients are upgrading their IT systems and applications, and AMS sees this as the perfect opportunity to sell back managed and business process outsourcing services to them, said Ed Nadworny, senior vice president of AMS' public-sector group. *
Staff writer William Welsh can be reached at email@example.com.