Our September Acquisition Insight looked at share-in-savings (SIS) procurements that require vendors to absorb much of the expense of implementing information technology projects and then base the vendor’s compensation on the savings that an agency actually realizes from the project. SIS provides the best incentives for guaranteeing vendor success rather than vendor appearance. It is similar to the difference between giving a grade for how a student performs in a classroom and grading on whether or not the student is present.

There have been some interesting actions on the SIS front since our earlier Insight.

• In November 2004, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council approved a draft final rule that would lay out share-in-savings contracting procedures for the future. The final plan was sent to the Office of Federal Procurement Policy (OFPP) in December 2004 and is awaiting approval. We expect to see a broadening of SIS authority, with some hope that it will be expanded beyond information systems.
• Although many on the contracting side of government have taken an “after you” approach to SIS, a few innovators are beginning to take advantage of the benefits that can come from this acquisition approach. Fifteen agencies have requested the required OMB approval for 45 pilot SIS projects. GSA has 10 more projects in the pipeline.
• Criticisms of SIS have begun to heat up. The former Bush OFPP chief and federal employee union executives claim that SIS could be more expensive for the government than traditional procurement methods and could circumvent Congressional budgetary authority. To a large extent, the criticisms are procedural. Lack of guidance on savings calculation or limits on total compensation paid to the vendor could be costly. However, these misgivings are bucking the trend towards SIS. Congressman Tom Davis’ (R-VA) House Government Reform Committee introduced the Acquisition System Improvement Act (ASIA – HR.4228.IH) in 2004 that would substantially increase the number of SIS procurements. ASIA was sent to DOD for executive comment in May 2004.
• The Federal Acquisition Councils have required agencies using SIS to develop a business case, to use best value as the criteria for making decisions about SIS, and to evaluate SIS contract performance on a preliminary baseline cost analysis of the work, including procurement, management, maintenance, administration, operation, and personnel expenses.
• The GSA’s share-in-savings group (www.gsa.gov) has laid out clear and useful guidelines for agencies that want to take advantage of SIS.
• It must be used to fund significant, transformational projects, not marginal projects that have already been rejected.
• The agency must be able to identify a solid historical cost for calculating savings based on specific, measurable, quantitative results.
• Due diligence is critical. Both agency and vendor must have time to understand if savings can be achieved and if the proposed solution is viable.
• The vendor must be able to independently analyze the agency’s baseline cost and performance data, and reach its own conclusions about the viability of the project.
• Both the agency and vendor must have incentives to make the project work.
• Internal agency support is important. The agency must commit to implement the vendor’s recommendations for the life of the project. Agency procurement, budget and legal offices must be on board.

Pivotal Insight believes that 2005 will see a large increase in SIS projects fueled by tightening budgets and the intrinsic benefits of this acquisition approach.