Share in Savings, Share in Glory

ecoming a trendsetter often requires taking risks. Officials at the Education Department did just that last year when they entered into an unproven and controversial type of contract known as share-in-savings. The premise behind share-in-savings is that contractors are paid-up to a fixed dollar amount-from the savings generated by the projects they're hired to complete. "Share-in-savings is a common practice in the private sector. Firms will build the systems, absorb all the development costs and then they will turn it over to the customer for some share of the savings," says Greg Woods, chief operating officer at Education's Office of Student Financial Assistance (SFA). Share-in-savings is not a new concept for the private sector, but in government circles, where an idea must be vetted through many layers and endure much scrutiny before it can be implemented, share-in-savings contracts still are infrequent. "Share-in-savings contracting represents the single most exciting innovation in getting better value for the government from the contracting process," says Steven Kelman, a judge for for the Business Solutions in the Public Interest Awards. Kelman is Weatherhead Professor of Public Management at Harvard University's Kennedy School of Government and former administrator of the Office of Federal Procurement Policy. "Share-in-savings dramatically ties the contractor's success to the government's success," he says. "The only way the contractor can succeed is if the government succeeds." SFA developed just that type of arrangement when it linked up last June with Accenture, formerly Andersen Consulting. Formed in 1965, SFA is the largest financial aid provider in the country, accounting for two-thirds of higher education loans and grants in the 1998 to 1999 academic year. SFA provides, guarantees, administers and collects college student loans, as well as issuing grants. As Congress added aid programs over the years, SFA created new layers of information technology to handle each one, eventually creating a tangled mass of systems and contractors administering them. SFA also is one of two congressionally chartered performance-based organizations (PBOs), which commit to tough performance goals in exchange for exemptions from federal procurement and personnel rules. Its PBO status requires the agency to have an annual performance plan. One of its goals for fiscal 2000 included identifying $18 million in savings to reinvest in computer systems. In March 2000, SFA formed a partnership with Accenture to facilitate the modernization of the dated and redundant loan servicing computer system. Under the contract, Accenture helped 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 by 2005. Accenture gets a decreasing percentage of the savings each year. "It's an innovation in an area that promises great benefit to the government," Kelman says. "Others have talked about this, but there are a whole bunch of contracting and technical issues that have to be worked out to make it work and the Education Department was the first agency that sort of took the problem by the horns and said 'we are going to actually make it work.'" Successful share-in-savings contracts require agencies to specify a cost baseline and, according to Kelman, agencies often do not know their costs well enough to buy into a share-in-savings deal. "A lot of agencies sort of feel we have to have perfect costs in order to be able to do this," Kelman says. Another barrier agencies face is pulling together the upfront money they must set aside to pay the contractor if the government cancels the contact. "A lot of agencies either don't want to do that or aren't able to do it," Kelman explained. According to Karen Wilson, a vice president at Honeywell International and a judge, it took courage for SFA to tune out critics and move forward to tackle a contracting project using a concept that did not have a proven track record in the government. "They came up with a really innovative way to determine what the risk was and incentivize it," Wilson says. SFA is the first federal agency to come up with effective methods of defining how the savings would be determined and how the risk would be apportioned, and they did it by tasks and by project, Wilson adds. "They broke it down into bite-size pieces, so they have accountability where they can actually influence results." The share-in-savings approach allows SFA to make investments in its system, rather than upfront payments to the contractor. That's because Accenture assumes most of the early financial risks. It only gets paid if it meets specific performance goals. SFA's risk came solely in coming up with a pool of money to cover Accenture's investment if the government decided to terminate the contract. "The reluctance that people have to [share-in-savings] is fear of the unknown," SFA's Woods says. "My background is as a businessman so I had done this type of thing before." The fundamental idea was sound, Woods explains, and agency officials bought into it because they knew Accenture could complete the project. "The deal itself is really easy, the thing that is hard is the cultural change, because you can't have a share-in-savings without everybody being on the same team," says Candace Hardesty, SFA's director of acquisitions and contract performance. "First of all, we believed that it was the right thing to do, we believed that we could in fact enter a partnership where we could share in the savings, and we just knew that it was the way the government could do business. The old way of doing business was not working, and we knew we had a lot on our plates and this was the only way to get this done. And it works, that's the beauty, it works." With the success of the project, which was completed in late 2000, accumulated savings for the government now total about $900,000 a month, according to Woods. "The whole project took eight months, start to finish," Woods says. "And as proof of its success, when we cut over from the old system to the new approach, no one noticed." Savings from the deal with Accenture have helped SFA speed up its agency-wide computer systems modernization. The agency has several other smaller share-in-savings contracts with Accenture to finish the computer modernization project. They will kick off later this year. One will focus on retiring a computer network SFA uses to communicate with schools. The contractor will convert it to a Web-based system. The agency also plans to replace an aging financial reporting system and says other contractors are now stepping up with share-in-savings ideas. "We're retooling our entire direct loan system," Woods says. "The whole heart of our [loan] origination and disbursement system with the schools is being redone. These are core business processes that are being redone on a share-in-savings basis." With Accenture absorbing the front-end development costs, completion dates for other projects are shortening. "We can do it and do it at practically no risk to the taxpayer," Woods says. "We don't start paying anything on these systems until it works." The share-in-savings project at SFA has created a buzz in the federal government. Agency officials conduct at least one briefing a week about the contract for other government officials, different trade groups and federal chief information officers. "It's a very, very exciting form of contracting that brings with it a promise of really increasing the success rate that government has in its information technology and business process reengineering process," Kelman says.