Education office pioneers 'share-in-savings' contract

The Department of Education cut a check for zero dollars Wednesday and handed it over to Andersen Consulting, marking one of government's earliest attempts to enter into a "share-in-savings contract."

For that modest investment, the department hopes to garner nearly $46 million in savings from a revamped loan servicing computer system. Should that target be met, Andersen could end up walking away with more than $14 million.

The share-in-savings contract between the Office of Student Financial Assistance (SFA) and Andersen is based on a premise borrowed from the private sector-don't pay contractors money up front, but instead award them a percentage of the savings at the end of the job.

It's an incentive approach that should produce great savings for the federal government, according to Andersen's Ken Dineen. Under a similar arrangement, Andersen helped the California Franchise Tax Board save $70 million over five years. It also helped a large financial institution save nearly $200 million.

"This achieves the goals that Congress laid out for us," said Greg Woods, SFA chief operating officer. "It improves performance and reduces costs."

Under the contract, Andersen will help SFA integrate and simplify its central data system, which is used to process 1.8 million direct student loans each year. Operating costs for the system were $20.3 million in fiscal 1999.

By getting rid of duplicative functions and integrating other functions into a streamlined central data system, SFA officials hope to bring the annual operating costs down to $9.1 million. That amounts to savings of $45.7 million over the next five years. If the goal is achieved, Andersen would get a decreasing percentage of the savings each year.

For instance, in fiscal 2001, Andersen will receive 47 percent of accrued savings. In 2002, the percentage drops to 45 percent and 41 percent in 2003. Should SFA hit its five-year projection, Andersen would get a total of $14.4 million, leaving SFA with net savings totaling $31.1 million.

Of course, Andersen won't actually make $14 million. Dineen projected the company's up-front costs would range between $10 million and $14 million.

"We will hopefully hit the low end of that range," Dineen said. "We are trying to get to the stage where we can encourage investment in the government sector."

The share-in-savings concept is being pushed in various corners of the federal government. Congress opened the door for SFA to use such an approach in 1998, when it turned the office into a performance-based organization. The designation freed SFA up from federal procurement and personnel restrictions. Woods claimed that Office of Management and Budget officials were "overjoyed" that an agency was finally entering into such an arrangement.

Kenneth Buck, executive director for business innovation at the General Services Administration, said many agencies have resisted leading the way in issuing share-in-savings contracts. The concept is so foreign to the federal government that it requires a huge culture change as well as enlightened leadership, Buck said.

"There are some people who believe that if you save money, either the Hill or OMB will take it away," said Steven Kelman, former head of the Office of Federal Procurement Policy. "On a retail basis, agencies have to have talks with their appropriating committees and OMB and tell them why it's important to keep the savings."

Woods noted that the $31.3 million SFA is hoping to save is only a fraction of the $150 million it must save in order to maintain its mission at a functional level.