Today's tough fiscal times have dictated a new leadership mindset in government -- one that focuses on limiting taxpayer dollars to initiatives that generate results. Executives have the added challenge of navigating through multiple technology innovations: mobile, big data, the cloud, digital, and cyberservices.
Government leaders remain understandably uncertain about the impact of these technologies and whether investments made in them will deliver the intended results. One way to reduce that uncertainty involves the use of value-based arrangements.
A value-based arrangement uses an outcome-based contract to ensure results. Such arrangements can save costs because payments depend on vendor performance -- a portion of service provider fees are put "at risk," with payment based on outcomes delivered. Value-based arrangements can enable agencies to initiate programs with less risk and at lower costs while keeping goals on track.
[Lowest-price, technically acceptable contracts reduce costs but sacrifice long-term value. Here's why: PTA Contracts Stifle Government Innovation.]
In a typical value-based arrangement, the vendor assumes the majority of the up-front costs of assessing an agency's needs and opportunities for cost savings and performance improvements. For example, in a traditional arrangement, an agency might spend $50,000 per week for an initial assessment, benchmarking work, and project development. In a value-based model, the vendor takes on those costs, with the intent of sharing the savings and benefits generated when the government implements the program. Eliminating these up-front costs enables agencies to pursue projects they may have previously considered too expensive while potentially adding improvements.
Value-based arrangements focus on cost reduction, efficiency and revenue gains, and service improvements. The service provider is responsible for delivering measurable value, and if it doesn't perform, it doesn't get paid. In this model, agencies get more than support or services -- they get results.
Once a project has been executed, both parties reap the rewards: The agency achieves its goals with little or no up-front program investment, and the vendor is compensated based on a percentage of the results achieved. The contract typically includes a financial cap to ensure the agency realizes the bulk of the ongoing rewards -- funds that can be reinvested back to the project.
Though value-based arrangements started with procurement specialists and financial leaders, their application has caught on with CIOs and IT organizations in both the public and private sectors as a way to tie technical initiatives to the success of mission-critical programs. In addition, organizations and agencies recognize the benefit of applying an outcome-based mindset to the creative delivery of services.
The healthcare industry offers an excellent example, with its adoption of contracts that emphasize demonstrated performance in delivering care to individuals at lower costs. Value-based purchasing also drives employers and other purchasers to gather and analyze information on the costs and quality of 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.
By design, value-based arrangements represent a significant departure from the traditional "incentive" approach. Rather than providing a bonus for a job well done, value-based arrangements focus on generating outcomes. This aligns the risk of the project with the rewards, which are ultimately shared by both parties. The approach also increases effectiveness by created a true partnership with shared commitments and incentives.
Federal agencies, and IT departments in particular, must maximize the effectiveness of their increasingly limited resources. They need to balance the budget and realize tangible benefits. Value-based arrangements can help them share risk, reduce up-front investment, and sharpen their focus on successful outcomes.
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