Share-in-Savings Contracts: A Solution for Federal IT Modernization?

Through a series of four blog posts, Cairns and Read outline a contracting model where contractors would be paid for their IT modernization efforts through the savings they provide to the government.

In a recent FCW article, Steve Kelman describes his efforts along with Rep. Tom Davis (R-VA) in the early 2000s to advocate for share-in-savings because “it gave the contractor a strong profit incentive to perform what could be risky work. No savings, no payment to the contractor. Lots of savings, lots of payment; because of the risk, the government would need to accept that a successful contractor would make lots of money.”

Although a three year pilot ensued, the contracting model did not catch on, other than in the area of energy savings where Energy Savings Performance Contracts (ESPCs) came to fruition.  Agencies have attempted to use ESPCs for data center consolidation, but have run into OMB policy issues when more of the savings would be garnered from IT modernization rather than energy savings.  

Cairns’ and Read’s first blog post, “Bootstrapping the Modernization of Federal Legacy Systems through Agile Share-in-Savings Contracting,” envisions a world where “the private sector eagerly and confidently invested its own capital to modernize the federal government’s legacy systems.” If this happened then the following would occur:

• Agencies could award contracts with “zero” money down (exceptions apply).
• Funds allocated to cost-inefficient systems could be used elsewhere.
• Those extricated funds could be apportioned as payments back to firms for higher-than-normal profits (performance motivation).
• Remaining funds could be retained by agencies for reinvestment in innovation and modernization projects.
• Antiquated systems could finally be brought into the 21st century, making government more efficient, effective, secure, flexible, and resilient.

The blog goes on to say that this method of contracting, share-in-savings (SiS), is mostly possible under existing regulations and completely possible with resurrection of old legislation.

In their second post, Cairns and Read call the SiS model “by far the most results-oriented, performance-incentivized, and risk-mitigated way you can structure a contract.”  The private sector has made use of these contracts for decades and the government has used them for energy savings projects.  However, SiS is not appropriate in all situations. This method works best when savings can be easily and objectively calculated and measured; and “where the savings is large compared to the estimated costs to achieve the savings.”

Early in the century, the federal government attempted to spur SiS IT contracting using a number of different initiatives, including the 2002 E-Government Act and GSA’s awards of government-wide SiS contracts in 2004. But SiS IT contracting never took hold.  A 2005 GAO report on the subject uncovered a number of inhibitors, including lack of guidance, lack of training, and concern among officials that funding for termination liability still needed to be obtained.

In the final blog post, Cairns and Read offer a detailed model for a modern Agile Share-in-Savings approach applied to software and information technology. They describe three CIOs with $10m annually for maintaining a legacy system. Using an agile share-in-savings process, they narrate how each CIO might go about modernizing their legacy system using this approach.

Cairns and Read present a convincing case for revisiting the share-in-savings methodology for modernizing federal IT.  Agile share-in-savings contracting could provide a viable method for updating many federal legacy IT systems by placing much of the risk and upfront funding on the contractor.