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Share in Savings: Activity, But Limited Results
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In late July, the Government Accountability Office (GAO) reported that more than two years after the enactment of the E-Government Act of 2002, not a single share-in-savings (SIS) information technology (IT) contract has been awarded (GAO-05-736). The E-Government Act, currently set to expire in September 2005, authorized the use of SIS for IT and required the implementation of regulations by September 2003. However, according to the GAO, for various reasons, "Agencies' limited exposure to share-in-savings contracting for information technology has not extended much beyond the initial steps of analyzing potential business cases."
Figure 1: SIS Timeline
Activity
As the timeline above indicates, there has been plenty of activity surrounding SIS. In January and March of 2003, the GAO issued two reports on the use of SIS, one outlining commercial use of SIS contracting and the other addressing the need of the Office of Management and Budget's (OMB) Office of Federal Procurement Policy to ensure that the acquisition workforce understands and can apply the authority enabled by the E-Government Act of 2002.
In February of 2003, the General Services Administration (GSA) established an SIS program office and in July the GSA launched two web-based tools to help agencies identify and assess SIS opportunities. In September of 2003, agencies were able to start using the business case decision tool. As of March 2005, 219 analyses had been conducted, and 15 IT potential projects had been identified. While some of the 15 programs are still under consideration, none has resulted in an award.
Next, the GSA hired a contractor to train agencies on how to identify SIS opportunities, structure solicitations, and analyze proposals. The training has been available since July 2004; as of March 2005, 21 federal acquisition employees from 6 agencies had taken the training.
Finally, in July 2004, GSA established blanket purchase agreements with six contractors, each of which is a major player in the IT space, and all of which have SIS contracting experience. Since no SIS projects are at the contracting stage, no agencies have taken advantage of these blanket agreements.
Impediments to Success
The GAO report notes several impediments to getting share in savings off the ground.
Absence of implementing regulations and OMB guidance. Agency officials, understandably, are hesitant to make use of SIS before FAR implementing regulations are finalized and they receive clear regulations on when and how to use it. Furthermore, because SIS is considered innovative in federal government procurement, agency officials are reluctant to use it without additional guidance from OMB. OMB officials have indicated that implementing regulations and guidance will be completed most likely in September 2005.
Difficulty determining baseline costs. Baseline costs are the costs of current operations. SIS contracting is impossible in the absence of a clear understanding of baseline costs, given that its effectiveness relies on a clear, up-front understanding by all parties of the potential savings. According to the GAO, some of the necessary business process and administrative cost information may not be available. Additionally, calculating baseline costs is complicated by factors such as determining reduction in human capital effort based on IT changes, and increased productivity related to system improvements. Furthermore, the GAO has determined that the government is hindered by "material weaknesses related to financial systems, fundamental recordkeeping, financial reporting, and incomplete documentation."
Perceived limited ROI. Agency officials believe that the potential return on investment (ROI) in most cases is too low to interest potential contractors. The GSA and the Office of the Secretary of Defense's Business Initiative Council determined that a successful SIS business case must have a 3-to-1 savings-to-investment ratio. Many agency officials do not believe they can guarantee that kind ratio.
Funding motivation. Even under an SIS contract, in which the contractor covers the up-front costs, the E-Government Act requires funds to be available for the first year of the contract to cover cancellation and termination liability. And these funds can represent a sizable proportion of the total cost of an IT project. In order to ensure that any savings would stay with the government, officials are motivated to use the appropriated funds for IT projects and to award traditional contracts.
Limited training. Despite the availability of training in SIS, few federal acquisition personnel have been trained.
As OMB expects to release implementing regulations and guidance in September 2005, some of the impediments to SIS will be removed. However, if government leaders want to give SIS a fair chance, Congress will have to extend the authority beyond September 2005, and other impediments will have to be addressed.
For information on how Pivotal Insight can help your organization better manage strategic acquisitions, visit our web site at www.pivotal-insight.com.
To access a copy of the GAO report cited in this article (GAO-25-812R) go to http://www.gao.gov/new.items/d05812r.pdf.
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