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Stop paying for support, start paying for results

Value-based arrangements make missions possible in the federal government.

Overview

Value-based arrangements could change the future of government contracting because they provide the means to achieve the mission more efficiently, and they give agencies the opportunity to align their budget with a new fiscal reality with moderate investment. By design, value-based arrangements are a significant departure from the traditional “incentive” approach of the past. Rather than providing a “bonus” for a job well done, value-based arrangements are ruthlessly focused on generating outcomes. The vendor may have the majority of their fees at risk. This aligns both the risk of the project with the rewards, which will ultimately be shared by both parties. In this way, it is a true partnership that encourages shared commitment to be a key component in the relationship and aligns incentives.

Federal agencies today want to maximize the effectiveness of their spend. They need to balance budget and realize tangible benefits. The ability to use value-based arrangements to share risk, reduce up-front investment and increase the focus on successful outcomes offers organizations across the world an opportunity to revolutionize the way they contract.

Background

Government is getting frugal. Considering that the administration is aiming to cut the deficit by $1 trillion over the next decade and reduce discretionary spending by $42 billion, FY2013 budgets will tighten for federal agencies while citizen expectations continue to rise. Agencies must cut costs now, but identifying—and implementing—cost-saving opportunities that are sustainable has its own price tag.

These tough fiscal times are shaping a new mindset in government—one that is focused on spending taxpayer dollars on initiatives that will generate results. Value-based arrangements provide a proven approach to translate this mindset into tangible benefits. Specifically, a value-based arrangement is an outcome-based contractual structure that can drive cost savings in the federal government because payment is based on vendor performance. A proportion of service provider fees are put “at risk” with payment based on the outcomes delivered. These unique arrangements make it possible for agencies to initiate new programs that reduce costs and keep mission goals on track.

Analysis

Both the private and public sector are beginning to look more to value-based arrangements. For example, the healthcare industry is adopting the concept for delivering care to individuals. In healthcare, value-based purchasing drives employers and other purchasers to gather and analyze information on the costs and quality of various competing health plans. They contract selectively with provider organizations based on demonstrated performance and commitments to improve performance with lower costs. The best performing plans and providers are rewarded with greater volume of enrollees or patients.2

The market is pressuring healthcare providers to better manage costs to compete. Accenture worked with a global healthcare company to provide strategic services through a value-based arrangement. The business had the largest employee cost to total cost ratios in the industry. It suffered from process inefficiencies and was overstaffed in support functions.

Accenture provided strategic services focused on business outcomes through five initiatives:

  • Manufacturing productivity

  • Enhanced sales force effectiveness

  • Business process improvement

  • Workforce planning and productivity enhancements

These initiatives delivered value through inventory reduction, procurement savings, reduced cost-to-serve, enhanced planning and logistics synergies across businesses, and better workforce forecasting. Following the project, revenues and employee productivity improved materially and stayed better.

2 U.S. Department of Health and Human Services Agency for Healthcare Research and Quality Report: “Theory and Reality of Value-Based Purchasing: Lessons from the Pioneers.” Online at http://www.ahrq.gov/qual/meyerrpt.htm.

Recommendations

Governments and taxpayers alike want to get more for their money in today’s economy. Value-based arrangements open several pockets of opportunity—and savings:

More value. In many value-based arrangements, vendors assume the majority of the up-front costs of assessing that agency’s needs and the opportunity for cost savings and performance improvement. Governments might spend upwards of $30,000-$50,000 per week for an initial assessment of cost levers, benchmarking and project development in a traditional engagement. In the value-based model, the vendor takes on those costs with the intention that they will share in the savings generated later when the government implements the program. By eliminating these up-front costs, agencies may pursue endeavors they previously thought impossible to fund and significantly reduce their risk that the benefits do not materialize.

More out of vendors. Value-based arrangements put contractors under pressure, placing a keen focus on outcomes such as cost reduction, revenue increase and/or efficiency gains. The onus is on the service provider to deliver measurable value. And if they don’t perform, they don’t get paid. Through value-based arrangements, agencies get more than support or services. They get results.

More for the mission. Once the project has been executed, both parties begin to reap the fruits of this labor. The agency will have achieved its goals without having to make a typical large up-front program investment, and the vendor will be compensated based on a percentage of the results achieved. This figure typically has a financial cap to help ensure the agency realizes the ongoing rewards—funds that can be reinvested back in the mission.