Outcome-based contracts are smart but hard to field

Consensus holds that outcome-based contracting is the smart way to go, especially when requirements are well-defined and the customer has a clear vision of its goal.

But outcome-based contracting is rare in the federal market because of its difficulty to achieve and flaws in federal procurement systems. There also is a shortage of well-trained contracting officers inside agencies willing to take it on and a low amount of technical expertise across the federal government.

Washington Technology recently gathered a group of senior executives to discuss outcome-based contracting. This was an on-the-record, but not for attribution, conversations to foster a frank discussion. See the sidebar below for a list of executives who attended the event.

At first glance, outcome-based contracting is simple as the group said: Tell me where you want to go but don’t tell me how to get there.

Contractors then take on the risk and responsibility of determining the solutions, technology and overall approach.

“The benefit of outcome-based contracting is that it drives greater innovation,” one executive said.

Mission-focused projects seem to be the efforts that draw support from customers for an outcome-based approach.

“They’re getting the mission outcome that they want,” another executive said.

But that is the 50,000-foot view. Challenges come up when diving into the details and grunt work of developing a contract and performing on it.

Roundtable participants said they faced multiple challenges there because of what agencies face.

A lack of trained contracting officers and structural issues get in the way. Federal agencies often struggle to define the outcomes they want because that is not how they buy.

“The budget process is all screwed up,” one person said.

Budgets are developed three years in advance and just cannot keep up. The government has also lost a lot of technical expertise through retirements and others leaving the federal workforce.

“Our government programs have gone downhill in terms of their technological capabilities,” a participant said. “They don’t know whether you’re selling them a bag of rocks or a good solution because they can’t evaluate it. They just don’t know.”

Rebuilding the government’s workforce should be a priority, but it is a difficult challenge.

That is because many talented people want to work in the private sector because pay, benefits and working conditions are better. Many people want to serve the mission of government and can do that working for a contractor that offers more flexibility, executives said.

Executives who attended the roundtable also highlighted disconnect between what customers say they want and how they manage a procurement.

“They say, I’m going to truly do outcome-based. I’m not going to dictate how you get there,” one participant said. “But then they say, I’m going to evaluate how you did it, how you got there and I’m going to make my award decision based on your technical solution.”

Executives said they often see solicitations where the deliverables and service levels required do not really drive a performance outcome.

“They get very tactical and into the weeds,” another participant said. “That’s where it falls apart a lot of times.”

During the discussion, some executives often sounded frustrated with their customers. But that observation was quickly corrected by other participants who said those comments reflected passion, not frustration.

“There are success stories out there,” one said. “NASA will do performance-based contracting but they have the skills. They have the engineers and they have good contracting officers.”

Participants also brought up the Defense Department as an example of an agency successfully using performance- or outcome-based contracting.

The difference is that DOD and NASA have the funding, and the kind of technical expertise that executives said many civilian agencies lack.

A second critical difference is the strategic approach that DOD and NASA take on how and where they spend their money. The focus on mission and outcomes gets pushed down throughout the organizations.

That is one of the reasons DOD and the military services has been so keen to experiment with new ways of buying through organizations such as the Defense Innovation Unit and the Air Force Rapid Capabilities Office.

DIU and the AF RCO are successful in part because they attract the best talent from inside the agency. One executive pointed out they have technical expertise and know-how on contracting, pricing and project management functions.

But those organizations also tend to work with small projects. The challenge remains taking the lessons learned and spreading them out across broader parts of the government, another executive said.

A few of the roundtable participants were former government officials who have moved to the private sector, which has been an eye-opening experience. They voiced support for more exchanges of people, where a government person could work with a contractor for a set period of time and vice versa.

Exchanges have happened but on a limited basis. Several participants think it is the mid-level government person who would benefit the most.

“They need to sit through a pipeline review and a gate review and watch what happens when the draft RFP drops and see the behavior that triggers,” one person said. “They’ll see how delays and a lack of responsiveness drives risks and drives costs.”

For that group of people, executives said their behavior will be different when they return to government.

Related to the exchanges is a need for better communications on both sides and the sharing of success stories.

One participant highlighted this example scenario of connecting a customer with a success story at a different agency who is trying to solve a similar problem.

The conversation often turned to structural issues with the government particularly, when it comes to contracts that are structured around savings. Customers do not have incentives to save in many ways.

One executive described the scenario of an agency saving $19 million from one contract, but then finding another to spend that savings.

“We created more work for the contracting officer,” that person said.

Trust is another issue affecting the communications between government and industry.

Both a real and perceived lack of trust get in the way of trying new things and focusing on the outcomes. It can be done though.

“It took me two years through our operations and maintenance work to gain the trust that we could do a prototype and we could show them the art of the possible” an executive said.

PARTICIPANTS

Linda Asher, senior vice president, Booz Allen Hamilton

Tonico Beope, vice president, Leidos

Laura Cassidy, Dell Technologies

Dan Cuviello, senior vice president, CACI International

David Dacquino, chairman, Serco Inc.

John Espinosa, vice president and general manager, General Dynamics IT

Sandra Hinzman, senior vice president, Science Applications International Corp.

Gregg Mossburg, senior vice president, CGI Federal

Mike Palensky, vice president, Maximus

Christian Simms, Dell Technologies

Nic Skirpan, director, Bravium Consulting

Szu Yang, chief contracts officer, Peraton

NOTE: Washington Technology Editor-in-Chief Nick Wakeman led the roundtable discussion. The gathering was underwritten by Dell Technologies, but both the substance of the discussion and the published article are strictly editorial products. Neither Dell nor any of the participants had input beyond their comments.