Common contract types for instance, cost-plus, time-andmaterials,

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39

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Out-comes-based contracting is a procurement strategy

that ties compensation to a

con-tractor’s ability to meet, or exceed, defined program outcomes in a meaningful and measurable way—rather than simply linking contract payments to a contractor’s ability to accomplish tasks on a project list. There are many ways outcomes-based contracts can be structured to ensure that the work performed meets program objectives. How-ever, all rely on clearly defined performance goals, reporting and measurement, and the alignment of incentives or rewards to the

success-ful achieve-ment of program goals. When the focus is on results and outcomes, rather than on processes and outputs, procurement officers and agency leaders can better design contracts that drive innovative, cost-effective services; equitable risk- sharing; and measurable results. Unlike other contracting models, with outcomes-based contracting, the govern-ment doesn’t assume all of the risk—in fact, the contractor can be held fully

accountable for its ability to achieve required outcomes. If the contractor does not deliver the outcomes stipulated in the contract, the government does not pay the outcome fee. This procurement strategy creates greater motivation for contractors to focus on helping achieve the program’s desired outcomes rather than on simply completing tasks.

THE TIME IS RIGHT FOR

OUTCOMES-BASED

CONTRACTING IN

GOVERNMENT

In today’s environment of budget deficits, economic uncertainty, and increased public scrutiny, the government is increasingly under pressure to deliver better results with fewer resources. This pressure is driving OUTCOMES-BASED CONTRACTING: A RESULTS-BASED APPROACH TO PROGRAM SUCCESS

40 Contract Management | June 2014

Common

contract types—for

instance, cost-plus,

time-and-materials, and firm-fixed-price—

have been used for decades to

facilitate the delivery of goods and

services to the U.S. federal government.

Yet recently, a more effective approach

to meeting the mission goals of U.S.

public agencies has begun to gain

traction with procurement officers

and agency leaders—the use of a

particular type of incentive

contract, the “outcomes-

based contract.”

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the need for a fundamental shift in the way the government acquires services, creat-ing an opportunity to transition toward an outcomes-driven approach.

Outcomes-based contracting grew out of the need to more equally distribute account-ability and responsibility to the contrac-tor. Governments in the United Kingdom, Australia, and other countries have been using this procurement methodology for years—with remarkable success—and the same principles can readily apply to U.S. government contracting.

When executed effectively, this type of procurement model incents the contractor to more effectively leverage expertise and resources, thus yielding tangible, meaning-ful results. Amid growing skepticism about the implementation of massive public programs, outcomes-based contracting

helps to ensure that agencies are good stewards of taxpayer funds—by directly aligning contractor compensation to meet-ing project goals. As a result, little or no “gray area” exists between the contractor’s

delivery, the agency’s mission, and the end-customer’s expectations.

Whether driven by performance needs, budget realities, or both, outcomes-based contracting offers a risk-sharing mecha-nism that allows agencies to contract for measurable results or outcomes—and it relieves them of the responsibility of paying for services that do not meet the program’s performance expectations. This accountability helps agencies validate that taxpayer-funded programs are achieving value for citizens.

A FOCUS ON THE FULL

LIFE CYCLE OF SERVICE

DELIVERY

In the current contracting landscape, procurement officers often seek to mitigate risks by adopting procurement strategies that parcel out separate contracts spread across multiple contractors. In the case of a federal call center, for example, one compa-ny might do outreach, another might man-age the contact center, and a third might handle automation. While each contractor may perform well in their specific domain, it remains complex and difficult to ensure that the initiatives across all contractors come together to meet project outcomes. In some instances, contractors have successfully delivered on their contracts, but the project failed at the key point of integration, leav-ing the government customer frustrated by disjointed processes and left paying for a project that didn’t meet its goals.

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A holistic, outcomes-driven approach to ser-vice delivery projects can help avoid these breakdowns in the private sector’s delivery of public services. Consider a scenario in which the desired outcome is to enroll eli-gible immigrants in a reform program. If the contractor is paid for successful enrollments, they are incented to find the best approach to locating and educating candidates—in-cluding understanding language and cul-tural issues—and then helping candidates collect the information required to apply for the program. The contractor’s primary incentive would be to enroll immigrants ef-ficiently and effectively in order to maximize program goals. The contractor then ties its success to enrolling a greater number of eligible constituents, which also happens to be the desired outcome for the program.

STRIKING A BALANCE

It is important to note that programs do not have to be exclusively outcomes-based to succeed. Procurement officers, agency leaders, and contractors can adopt a

pro-gressive or hybrid model, one in which the contract payments transition over time. By designing procedures that directly impact the desired outcomes and measures, the transition from traditional contracts to outcomes-based contracts is easier to attain, and fosters a balance between performing specific tasks and ensuring they contribute to the program or project goals.

In any successful outcomes-based model, government and contractors must be com-pletely aligned on how outcomes will be de-fined, tracked, and measured. Government entities must be able to clearly identify and prioritize their desired results as one of the first steps in developing a request for pro-posals. Ideally, the agency or contracting body should identify a few key performance measures that become pay points and are clearly aligned with its vision of success, rather than setting too many performance goals that divert attention from those that are really most important. Often with a new program, however, the desired outcomes are identified but the actual metrics are

hard to gauge. A hybrid model enables the agency to transition to an outcomes-based contract when the data is available to estab-lish metrics that align with program goals.

MYTHS VERSUS REALITIES

When considering the transition to a results-based procurement strategy, often miscon-ceptions arise about what an outcomes-based contract is—and what it is not: � Myth: Outcomes-based contracting

means losing control over how work is performed.

� Reality: The government has a clearly defined outcome that the contractor must achieve. Thus, the government has full control over the desired outcome, and is even more effectively able to hold the contractor accountable for results. This procurement strategy also does not limit the government from including specific required components or method-ologies for how the work is performed. OUTCOMES-BASED CONTRACTING: A RESULTS-BASED APPROACH TO PROGRAM SUCCESS

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landscape by attracting contractors who are capable to do the job effec-tively and efficiently, as it can be more profitable than fixed-fee contracts when they can successfully deliver the defined outcomes. It helps to discourage contractors who may have difficulty achieving the program’s goals, because if they fail, they will not be fully compensated.

� Myth: The most cost-effective model for government procurement is cost-plus-fixed-fee.

� Reality: While cost-based contracts have a place when buying com-moditized services that require little subject matter expertise, they also provide little to no incentive for ef-ficiency, timeliness, or effectiveness. In an outcomes-based contract, the contractor is incented to achieve the program’s outcomes in a timely and efficient manner, as this leads to earning contract incentives. When those contracts are up for re-bid, the incumbent contractor will be incented � Myth: Outcomes-based contracting

re-quires complex program management skills.

� Reality: In fact, a results-based approach often simplifies oversight and surveil-lance because the government is not responsible for tracking and managing the contractor’s every task. The govern-ment is still responsible for providing the contract oversight needed to ensure the contractor is achieving outcomes defined and measured in the course of contract administration. But this strategy also allows the contractor the flexibility to apply knowledge and expertise to make the program successful and efficient. � Myth: Outcomes-based contracting

limits competition since many contrac-tors are not willing to assume greater risk or accountability.

� Reality: Implementing a progressive model can help to open the competitive

OUTCOMES-BASED

CONTRACTING

Measures success, not in terms of what tasks

were performed, but in the impact of what outcomes

were achieved;

Motivates contractors to align their work with the program’s goals;

Aligns with mission, program, and budget goals as identified in the contract

structure and documented with performance targets;

Facilitates cost predictability and reduced total

cost of investment; and

Contributes to a better return on

investment of taxpayer funds.

to pass on cost reductions to the gov-ernment to help ensure they continue with the work. The long-term result for the government is lower costs due to an efficient and effective program. � Myth: It is too complex to design an

outcomes-based contract.

� Reality: Outcomes-based contracts can take many forms. A cost-plus-award-fee in which the award fee is tied to outcomes could lie at one end of the spectrum, with a fixed-payment-per-outcome at the other end. While the fixed-payment model would give the contractor much more incentive to meet program objectives and improve efficiency, the cost-plus model could still tie some portion of the payment to outcomes if defined appropriately. The most successful contracts tie payments to a few criti-cal outcomes.

� Myth: It’s too hard to utilize an outcomes-based contract on a new program because there are too many unknown factors.

� Reality: In such case, the contract can be initially set up on a cost-basis and then include the option for the agency to switch to an outcomes-based con-tract once a baseline is established.

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OUTCOMES-BASED

CONTRACTING IN ACTION:

LEVERAGING FLEXIBILITY

AND RISK-SHARING

TO ACHIEVE PROGRAM

SUCCESS

Nothing is more powerful than seeing real results. Several federal, state, local, and in-ternational governments have already begun employing an outcomes-based procurement strategy and benefiting from its success. The following are just a few examples.

District of Columbia: Achieving

Permanent Results for Temporary

Assistance for Needy Families

Using an outcomes-based approach to its jobs programs, the District of Columbia Temporary Assistance for Needy Families (DC TANF) Pro-gram supports participants and their families in overcoming barriers to employment. Traditional government employment programs are evaluated by metrics such as the number of interviews an applicant

is granted by potential employers or how quickly they are placed in a job. Yet, because that traditional approach rewards the pro-cess, and not the result, it encourages the contractor to send the candidate on many interviews—but not necessarily ones that could lead to employment that will build long-term self-sufficiency.

In contrast, the DC TANF Program measures its success based on long-term job place-ment, and compensates contractors accord-ing to their efforts to support the program at four milestones:

� Initial engagement, � Job placement,

� 45-day job retention, and � 90-day job retention.

This focus on finding sustainable employment for the candidates versus merely achieving specific tasks puts the onus on the contractor

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When the focus is on results

and outcomes, rather than

on processes and outputs,

procurement officers and

agency leaders can better

design contracts that drive

innovative, cost-effective

services; equitable risk-sharing;

and measurable results.

to help individuals establish routines, achieve stability, position themselves for career ad-vancement, and ultimately transform jobs into sustainable careers.

United Kingdom: Compensating

Contractors for Helping

Citizens Transition to Economic

Independence through

Long-term Employment

The U.K. Department of Work and Pensions launched an aggressive welfare reform initia-tive in 2010, referred to as “The Work Pro-gramme.” The Department’s primary objective is to transition people off of public benefits into long-term employment so that these individu-als would achieve economic independence. As another example of a major outcomes-based procurement strategy, the Work Programme aims for long-term positive results. Thus, under the program, contrac-tors are required to meet a minimum level of service, but are more heavily compensated for achieving the desired program goal of

long-term employment and job sustainment. The Department pays contractors a small upfront attachment fee when job seekers are enrolled into the program. This is simply to meet minimum service requirements and support the job search over the two-year period. However, contractors do not receive

another payment until long-term employ-ment is achieved, as defined by the program, which in most cases is six months. Once job seekers achieve the long-term employment outcome, contractors are further incentivized through sustainment payments. Sustain-ment paySustain-ments are paid to contractors if the

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job seeker remains in employment beyond

the six-month time period. Sustainment payments can be paid for up to 17 weeks to achieve the desired outcome of getting the long-term unemployed to transition off public benefits into employment and to ulti-mately achieve economic independence. Contractors have the flexibility to design the program that best suits the needs of the popu-lation groups they are serving—the process is not mandated; the outcome is. Outcomes-based payment amounts also vary among the different population groups not only to acknowledge the fact that job placement for certain populations can be more difficult, such as the recently incarcerated, but also to ensure that the contractor isn’t targeting the “low-hanging fruit” and is serving all

popula-tions. This program fully leverages the flexibil-ity inherent in outcomes-based contracting.

A PHILOSOPHICAL

SHIFT: THE FUTURE

OF OUTCOMES-BASED

CONTRACTING

Delivering quality outcomes will become even more important in the future as constituents expect a government customer experience that mirrors the private sector one. Understanding the best mode of com-munications to reach constituents and meet their needs may necessitate an investment in new technologies. But it is also prudent to ensure that investments are made to deliver the desired results of meeting the needs of consumers rather than of simply following the latest technology trends. Right now, leaders across the political spectrum are engaged in the bold and neces-sary legislative thinking that may result in immigration reform. This would have major significance for federal, state, and local governments that would be responsible for enacting the resulting mandates. It would also involve engaging millions of people—many of whom have no permanent U.S. government records under their true identities and lack proper documentation or formal legal status— in a new government program. Immigration reform may also significantly impact worker Visa programs, thus forcing new registration,

program outcome monitoring, and labor market assessment activities.

The outreach and associated efforts that will be necessary to communicate these new rules and regulations can be complex and confusing. Moreover, successful implementation of immi-gration reform will certainly require dedicated public education efforts to ensure the public understands the process and their options. Dur-ing the passage of the Immigration Reform and Control Act of 1986, the U.S. government was not able to reach and educate applicants (and many still felt distrustful of the process). The result was a much lower turnout than expected. To ensure success for future programs, leadership teams need to be focused on how they will structure these programs to deliver the best results for the public. If immigration reform becomes law, the government is likely to turn to contractors for help in implement-ing ensuimplement-ing regulations, since the private sector can provide the expertise and flexible, scalable solutions. Whether reform occurs via sweeping legislation or piece by piece, these are significant changes that can impact immigration in a time of great fiscal chal-lenge. Immigration reform is an ideal arena for outcomes-based contracting. It offers the

promise to make a positive contribution to the overall effort to manage costs, achieve measurable results, and stand the tests of rigorous public and budget scrutiny. To meet demands and expectations of the American people, government agencies must demonstrate cost-effective results and value for public expenditures—supported by proven outcomes. Costs must be managed, efficiencies must be identified, and results must be ranked as the top priority. Out-comes-based contracts have a role to play as vehicles that drive performance, encourage innovation, share in both risk and reward, and finally, motivate positive change in pro-gram operations for the long-term success of both government and industry. CM

ABOUT THE AUTHOR

THOMAS ROMEO is president of MAXIMUS

Federal Services, a subsidiary of MAXIMUS, Inc., dedicated to providing business process management solutions to federal government agencies and programs.

Send comments about this article to [email protected].