<div>Governments worldwide are faced with the dual-challenge of delivering “Public Services of the Future” while tightly controlling their budgets. There is a pressing need for governments to find reliable ways of implementing reform to realise savings and higher operating efficiencies, without affecting the services they deliver, whilst reducing the initial investments required for such transformation and mitigating the involved risks. “Delivering Public Service for Future” programme by Accenture has identified four profound structural shifts that will drive the future of governments. One of these represents a different approach to operational efficiency: instead of focusing on budget cuts, governments can better deliver public services by make productivity their mission. <br /><br />Over the past few years, governments around the globe have opted to partner with the private sector for designing and implementing projects in the public space to bring in efficiencies. With governments facing financial pressures, the priority now is to manage the funds outflow from the government, while delivering high quality, successful According to the Department of Economic Affairs in India, Public-Private Partnership models have been in existence for over 11 years, with the model in vogue over the past 6-7 years, especially in the infrastructure sector. As of July 2011, more than 750 PPP projects were in progress with estimated project costs of over Rs 380,000 crore. The primary reasons for opting for a PPP model tend to revolve around improved quality of infrastructure or service, and The key to ensuring success in a PPP project is employing a combination of identified effective accountability measures, careful monitoring of the private partner’s performance, and similar oversight to their payout. <br /><br />Traditionally, public service organisations procured private services for a deliverable. These are fixed price arrangements under which a contractor is paid on the actual cost of direct labor, usually at specified hourly or monthly rates, the actual cost of materials and equipment usage, and an agreed upon add-on to cover the contractor’s overheads and profits. These contracts dangerously pit the purchaser and the supplier against each other instead of aligning their incentives. If operating under a fixed fee / time and materials contract, a provider has little motivation to look for the most cost and time effective solutions. The provider may even try to shortchange the buyer to improve his margins by either lengthening the duration of contract fulfillment, or supplying less skilled, lower valued labour than quoted (who in turn would take longer to complete the task than necessary). <br /><br />When several suppliers are competing for the same Time and Materials contract, as they often are, the situation is more tenuous. Once bidders have been vetted and approved, Indian government organisations are usually bound to hire the firm or contractor that quotes the lowest price for the work. The situation starts to resemble a distorted prisoner’s dilemma: each firm tries to anticipate the other’s quoted price and find a way to cite a cost lower than that. <br /><br />Needless to say, quality concerns fly in the face of this silent war of abrasion. Government agencies have been known to be so stricken by the possible engagement of an approved contractor who quotes a price so low that quality will most certainly be compromised, that they scramble to find legitimate reasons to disqualify bidders that are notorious for this practice, a needless waste of time and effort for evaluators. Or, they are forced to specify a minimum contract value, which barely addresses the question of quality. The same contractor whose intention was to simply win the bid now has a higher minimum to quote, his commitment to value unchanged. And in the process the government agency also just lost its chance to hire a contractor who may actually have had an innovative cost saving scheme for them. <br /><br />It is not wrong to posit that time and materials contracts represent a silent devaluation of government services, the opposite of a silent auction, which reveals which bidder values you more.<br /><br />More problematically, by their very nature, the evaluation of these contracts’ fulfillment can only focus on binary - Yes or No - delivery of outputs, not on the quality of the output. There is increasing recognition that focusing merely on <br />outputs does not support full value realisation. <br /><br />In contrast, value based arrangements, represent a new approach to fulfilling the needs of the public service organisation. This system provides performance incentives and/or consequences for non-performance and ties payment to quality of outcomes by minimising upfront investments, sharing risks and aligning incentives. An example of this may be tying the contractor’s payments to the savings or additional revenue it is able to accrue to the government agency that hired it. <br /><br />Value-based arrangements are not a new concept. In the corporate sector, employee salaries are segregated into fixed and variable components. The variable salary component is dependent on the performance of the individual and sometimes of the company during the appraisal period. Individuals and teams strive to work harder to perform beyond their expected performance objectives to receive a higher payout at the end of the appraisal period. <br /><br />The need to deliver next-generation services at a lower cost has become a priority for all governments. The proliferation of Public-Private Partnerships with high risks and rewards affirms the need for governments to focus on outcome delivery through a “risk and reward-sharing’ approach: a portion of service provider fees are put at risk with payment based on successfully meeting the terms of the contract. A value-based arrangement ties some portion of the service providers’ fees to the outcomes delivered. In simple terms, it holds service providers accountable and provides a better return on investment (ROI) if they succeed. Lack of success impacts the reward they will receive from the public service organisation. <br /><br />Governments can demand improved quality of services from the private partner and value-based deals can change the future of contracting by giving governments and public service organizations a chance to align their budgets and incentives within the limitations of tight fiscal realities. Rather than writing contracts that offer payments on milestones or outputs being achieved, which is how some PPP agreements are structured, governments need to design value-based deals that are outcome-centric, especially in large PPP projects.<br /><br />In fact, Time and Materials contracts represent and out-of-date paradigm. It is difficult to say when they came into existence, but the 15 September 1975 edition of The (US) Armed Services Procurement Regulation Manual for Contract Pricing, explained the use of time-and-materials contracts thus: “This arrangement is designed for situations where the amount or duration of work cannot be predicted and, as a result, where the costs cannot be estimated realistically. These are the conditions under which we sometimes buy repair and overhaul services, situations where you cannot predict with confidence the condition of items to be The (US) Department of Defense Contract Pricing Reference Guides described the “typical application” of a time-and-materials contract as “Emergency repairs to heating plants and aircraft engines.” Clearly, the application of time and materials contracts was toward relatively short-term, single task, small scale blue collar jobs in which the nature and extent of the work are unknown; and toward short-term consulting for long-term, complex, large scale white collar services in which subcontractors may play a significant portion of the main contractor’s work, and where outcomes are less objectively measurable. <br /><br />Many governments are already reviewing and restructuring contracts with service providers, with the focus on using existing government budgets more effectively by aligning success with compensation. Recently, a regional government in the USA hired a private company to overhaul the way it buys goods and services, with 30 per cent of the contractor’s compensation coming from the savings achieved. No savings, no payment.<br /><br />Mutually beneficial results for the government and private partner are dependent on many elements. It is vital to clearly define project roles & responsibilities at the outset, and establish meaningful performance measures that are transparent and auditable. To this end, it is important to research commercial quality standards, establish collaborative relationships with contractors to develop appropriate measures, and use a logic model to link measurable outputs to outcomes. <br /><br />Given that value-based contracts are a new concept in India, it will be necessary to train public institutions’ facilitators on the basics of performance based contracts so they can draft and hire wisely. For a project starting from groundup, say a business process reengineering assignment that aims to cut costs for the client, typically no contractor can assure certain outcomes from the outset; uncovering all possible cost savings is part of the work. This means that instead of establishing outcomes from the beginning as is done currently, the client and the contractor have to continually assess the outcomes and their arrangement and tweak it as required. If the client had promised 5 per cent of all savings as fees, expecting only 10 per cent reduction in costs, should the share increase or decrease if the contractor is able to create a more dramatic reduction? <br /><br />Without adequate exposure and training, government officials are not currently equipped to answer this question, which may not even have one right answer. The Government of India launched the National PPP Capacity Building Programme in 2010 with plans to train 10,000 senior and middle-level government officials to improve capacities among government officials in preparing and managing PPP projects across various infrastructure sectors. This programme must incorporate training specifically for best practices in value based contracts, by perhaps even inviting <br />private companies that have benefited from awarding value-based contracts to share their experiences. <br /><br />In the United States, the Executive office of the President, Office of Management and Budget, and the Office of Federal Procurement Policy jointly issued a comprehensive “Guide to Best Practices for Performance-Based Service Contracting” that instructs on all aspects of the topic, from basic developmental elements, to job analysis (organisation, work, performance and standards, directives, costs and incentives analyses), to drafting the performance work statement, quality assurance plans and surveillance methods, contract administration and even conflict resolution. In fact, individual states, such as Washington have their own modules of instruction on the topic that are continually updated and laden with resources on performance reporting and evaluation methods. <br /><br />They are clearly overwhelmingly supporting performance-based contracts; the website quotes this fact below as introduction to the topic: “Conversion to performance-based contracting for Navy aircraft maintenance resulted in immediate savings of $25 million. Additional savings are anticipated through the positive and negative incentives contained in the contract. The proposal, evaluation and award process took 30 days less than was needed for the previous nonperformance based competition. Working with industry as a team, to meet Navy aircraft maintenance requirements, resulted in dollars and time savings. So far, performance is surpassing the contract’s minimum required standards.”<br /><br />A similarly well-informed and enthusiastic approach to training officials will pay rich dividends in India.<br /><br />Value-based arrangements can have a significant impact on public service budgets and performance. At the primary level, these contracts can reduce expenditure by minimizing the cost of service and ensuring increased efficiencies are realised. The best value-based arrangements represent a win-win scenario for both partners, and our public services officials should be encouraged to identify these latent synergies. By spending less, and spending wisely, value-based arrangements provide a more effective way to realize greater ROI, which is arguably the most important metric to those who ultimately receive these services, our citizens.<br /><br />(<em>Nilaya Varma is Managing Director, Health & Public Services India practice at Accenture India</em>)</div>
