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entitled 'Contract Management: Commercial Use of Share-in-Savings 
Contracting' which was released on March 04, 2003.



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Report to Congressional Requesters:



United States General Accounting Office:



GAO:



January 2003:



CONTRACT MANAGEMENT:



Commercial Use of Share-in-Savings Contracting:



GAO-03-327:



GAO HIGHLIGHTS:



Highlights of GAO-03-327, a report to

Congressional Requesters, House of

Representatives



CONTRACT MANAGEMENT

Commercial Use of Share-in-Savings

Contracting



Why GAO Did This Study:



The Congress and federal agencies are increasingly turning to

performance-based contracting methods to enhance the delivery of

government services. Share-in-Savings (SIS) contracting–in which

the contractor assumes more risk by investing upfront costs but also

receives a share in any savings generated by its efforts–is one

performance-based technique that Congress is trying to promote. We

were asked to examine its use by industry in terms of whether there

were any key conditions that needed to be in place to make this

technique successful. In conducting our review, we found

that the form of SIS used in a commercial contract varied by

contract. Some contracts employed a basic SIS approach, in which a

contractor’s total compensation was paid entirely through sharing a

portion of a client’s savings or increased revenues. And some

employed a tailored approached in which contractors were paid for at

least some portion of their time and materials costs, even if savings 

or increased revenues were not realized. We performed a detailed

analysis on four specific contracts to identify conditions that 

fostered success.



What GAO Found:



SIS can be a highly effective contracting technique to motivate 

contractors to

generate savings and revenues for their clients. But to be successful, 

clients and

their contractors need to be specific and in agreement in their goals 

and

objectives, as well as how to achieve them. This can be a difficult 
task 

for more complex services, but the companies we spoke with found that 

pursuing this type of arrangement was worth the extra effort.



Conditions that Facilitate Success



• An Expected Outcome Is Clearly Specified. By outcomes, we mean such

things as generating savings by eliminating inefficient business 

practices,

realizing savings through conservation measures, or identifying new

revenue centers. Because the success of SIS relies heavily on the 

ability 

to identify and track savings or revenues, it is critical that a 

contractor and client have a clear understanding of what they are 

trying to achieve.



• Incentives are defined. Both the client and the contractor need to 

strike a

balance between the level of risk and reward they are willing to 
pursue. 

A

pure SIS arrangement offers attractive benefits, such as no upfront

investment on the part of a client and a bigger return for a 
contractor. 

But

there are real risks, particularly for a contractor, if savings or 

revenues are not realized as anticipated. As a result, clients and 

contractors need to work through incentives and risks and come to 

agreement on how far they would take their SIS arrangement.



• Performance measures are established. By its nature, SIS cannot work

without having a baseline and good performance measures to gauge 
exactly

what savings or revenues are being achieved. Agreement must be reached

on how metrics are linked to contractor intervention. For some 
services,

such as energy management, they are relatively easy to define. For more

complex services, such as those in the information technology industry, 

this

can be a much more difficult task.



• Top management commitment is secured. This is paramount in any SIS

arrangement. A client’s top executives need to provide contractors with 
the

authority needed to carry out solutions, since change from the outside 
is

often met with resistance. They also need to help sustain a partnership 
over

time since relationships between the contractor and client can be 
tested in

the face of changing market conditions, legal pitfalls, and other 
barriers.

To date, federal agencies have made limited use of SIS contracting. 
Officials

we spoke with noted that these arrangements may be difficult to pursue, 
given

potential resistance and the lack of good baseline performance data. 
However,

it may be worthwhile for agencies to examine ways to overcome potential

problems to achieve better outcomes.



What GAO Recommends:



We did not make recommendations in this report.



To view the full report, including the scope

and methodology, click on the link above.

For more information, contact David Cooper

(202) 512-4125, CooperD@gao.gov.



United States General Accounting Office:



Washington, DC 20548:



January 31, 2003:



The Honorable Tom Davis

Chairman

Committee on Government Reform:



The Honorable Jim Turner

Ranking Minority Member

Subcommittee on Technology

 and Procurement Policy

Committee on Government Reform

House of Representatives:



The Congress and federal agencies are increasingly turning to 

performance-based contracting methods as a way to enhance the delivery 

of government services. You requested that we determine how Share-in-

Savings (SIS) contracting, one performance-based technique, is used in 

the commercial sector. This report responds to your request by 

examining four commercial SIS contracts and identifying common 

characteristics that made them successful. For the purposes of this 

report, we have defined SIS contracting as an agreement in which a 

client compensates a contractor from the financial benefits derived as 

a result of contract performance. Financial benefits can come from 

either contractor-generated savings or revenues.



Results in Brief:



We found variations in the forms of SIS used in the four commercial 

contracts we studied. The forms ranged from a basic SIS approach, in 

which a contractor’s total compensation was paid entirely through 

sharing a portion of a client’s savings or increased revenues, to a 

tailored approach in which contractors were paid for at least some 

portion of their time and materials costs, even if savings or increased 

revenues were not realized.



We also found, in the commercial SIS contracts we reviewed, that four 

key conditions facilitated the development and execution of the SIS 

contracts. First, the client and contractor clearly defined an expected 

outcome from the arrangement, such as generating savings by eliminating 

inefficient business practices, realizing savings through conservation 

measures, or identifying new revenue centers. Second, both client and 

contractor had incentives to use this contracting technique. SIS 

contracting is attractive to clients who (a) do not have the funds for, 

or choose not to pay, some or all of the up-front costs of a needed 

project and (b) are willing to pay the premium SIS contractors charge 

for putting some or all of their compensation at risk. Contractors, on 

the other hand, must have confidence that the financial benefits they 

can produce are sufficient to cover their costs and provide a profit 

that rewards them for the increased risk they incur. Third, a baseline 

and performance metrics could be established to define a client’s costs 

and/or revenue prior to, and after, contractor intervention. Fourth, 

the client’s management contributed to success by committing to execute 

the project and implement contractor recommendations.



Overall, the commercial companies we studied, along with other users of 

SIS, have noted that, even when the right incentives and measures are 

in place, other issues could impact a company’s use of SIS contracting. 

For example, parties may blame each other, when savings or increased 

revenues are lower than expected. As a result, before going into such 

an arrangement, both client and contractor need to carefully consider 

the potential risks and rewards of an SIS arrangement and whether the 

conditions that facilitate success are present-something that may not 

be easily achievable in government, which frequently is unable to 

calculate a baseline. On the other hand, companies have found it 

worthwhile to overcome potential barriers to SIS contracting because 

successful arrangements have generated savings and revenues-in one case 

highlighted in this report, $980,000 in annual energy savings, which 

otherwise would not have been realized.



This report does not contain a recommendation.



Background:



In its basic form, SIS contracting is a contracting and financing 

technique in which a contractor, rather than a client, funds the up-

front cost of a project, and, in return, receives a percentage of the 

savings that the contractor generates for the federal agency. SIS 

contracting effectively shifts the risk of contract performance to the 

contractor because, in addition to providing the up-front capital, the 

contractor receives payment only after savings are realized. In short, 

a contractor is paid only for results, not just effort. The attraction 

of this technique to the federal government is the ability to 

capitalize on modern technology, while not incurring the up-front 

expense. Conversely, the attraction to a contractor is the potential 

for a greater return, because of the increased risk, than from a 

traditional contract. Both parties involved in an SIS contract 

anticipate that a contractor’s potential to earn more will generate an 

incentive to save more, thereby creating a win-win situation.



The appeal of SIS contracting has generated congressional interest to 

expand its use within the federal government. For example, the Clinger-

Cohen Act of 1996 authorized pilot programs to (1) contract on a 

competitive basis with a private sector source to provide the federal 

government with information technology solutions for improving mission-

related or administrative processes of the federal government and (2) 

pay the private-sector source an amount equal to a portion of the 

savings derived by the federal government from any improvements. The 

recent E-Government Act of 2002 expands authority to enter SIS 

contracts in fiscal years 2003 through 2005 and also provides for 

incentives to federal agencies.[Footnote 1]



Despite this interest to expand its use, there are few documented 

examples of SIS contracting in the federal government. One of the best-

known examples of federal SIS contracting is in the Department of 

Energy (DOE). The National Energy Conservation Policy Act, as amended 

by the Energy Policy Act of 1992, and subsequent executive orders 

require federal agencies to reduce their consumption of energy in 

federal buildings. This law provided that federal agencies may enter 

into SIS contracting as a way of encouraging industry to help achieve 

this goal and required DOE to establish methods and procedures to 

implement this authority, which allows federal agencies to realize 

energy efficiencies with minimal up-front costs to the government. 

Accordingly, DOE’s Federal Energy Management Program crafted an energy 

savings contract under which energy service contractors are expected to 

contribute the up-front costs identifying a federal facility’s energy 

needs and buying, installing, operating, and maintaining energy-

efficient equipment to cut energy bills. In return, the companies get a 

share of energy savings generated by the improvements.



Forms of SIS Varied by Contract:



We found various forms of SIS were used in the four commercial 

contracts we studied. The forms ranged from a basic SIS approach, in 

which a contractor’s total compensation was paid entirely through 

sharing a portion of a client’s savings or increased revenues, to a 

tailored approach in which a contractor was paid for at least some 

portion of the time and materials costs, even if savings or increased 

revenues were not realized. The difference between the approaches was 

the level of risk the contractor assumed and the portion of the 

contractor’s compensation tied to the savings and/or revenue generated.



Of the four situations presented in this report, two used a basic SIS 

approach in which the contractors’ compensation was entirely at risk-

unless they produced results, and two used a tailored approach. The 

basic SIS approach was used by (1) the Massachusetts Institute of 

Technology (MIT) and its contractor, Alliant Energy Integrated 

Services/Cogenex, to reduce utility costs in MIT’s 100-building campus 

and (2) Texas Online Authority and its contractor, 

BearingPoint,[Footnote 2] to create an Internet Web site to provide 

state and local government services to Texas businesses and citizens. 

The tailored approach was used by (1) Best Buy and its contractor, 

Accenture, to identify cost reduction opportunities and potential new 

revenue centers and (2) Harley-Davidson and its contractor, Henkel 

Chemical Management, to reduce Harley-Davidson’s chemical management 

costs.



Certain Conditions Facilitated the Use of SIS:



For the commercial SIS contracts we studied, four conditions emerged as 

playing a key role in facilitating the development and execution of the 

SIS contracts. As shown below, the client and contractor (1) defined an 

outcome, (2) determined whether SIS incentives were appropriate, (3) 

established a baseline and performance metrics tied to their desired 

outcome, and (4) obtained client commitment to success.



An Expected Outcome Was Clearly Defined:



SIS contracting was considered only after the client and contractor 

defined an expected outcome, such as realizing savings through energy 

conservation measures, identifying new revenue centers, or generating 

savings by eliminating inefficient business practices. A clearly 

defined outcome was required so that contractors could focus their 

resources, knowledge, and expertise on obtaining solutions to their 

clients’ needs and/or business problems. To define an outcome, the 

client and contractor examined the client’s existing systems and/or 

business processes to determine whether opportunities existed to 

generate savings and/or revenues for the client. The examination 

process involved an open exchange of information and took, in one case, 

6 months to complete.



Table 1: How Clients and Contractors Defined an Expected Outcome:



Client/contractor: ; MIT/Alliant Energy Integrated Services/Cogenex; 

How an expected outcome was defined: ; Outcome: Reduced utility costs.; 

; In 1987, MIT recognized the need to reduce utility costs by upgrading 

its inefficient lighting, heating, and air conditioning systems. 

Because managing such a project is not an MIT core competency, MIT 

solicited the assistance of Alliant/Cogenex. Alliant/Cogenex is an 

energy service company whose expertise is to reduce energy costs by 

determining whether energy inefficiencies in facilities exist and, if 

so, executing the changes needed to eliminate the inefficiencies. 

Through its energy audit, Alliant/Cogenex determined that enough energy 

savings (the amount MIT would have paid if improvements were not made) 

could be accomplished over 10 years to pay for the improvements. In the 

end, MIT saved $980,000 annually over what it would have paid had the 

improvements not been made.



Client/contractor: ; Texas Online Authority/BearingPoint; How an 

expected outcome was defined: ; Outcome: Enable on-line access to 

government services.; ; The Texas Online Authority was established to 

satisfy an unfunded state legislative mandate to create an Internet 

site[A] to provide the services of state agencies, counties, cities, 

and institutions of higher learning to Texas businesses and citizens. 

The intent of the legislation was to provide a variety of online 

services such as driver license and motor vehicle registration 

renewals, occupational license and permit renewals, and college tuition 

payments. BearingPoint responded to a Request for Offer and was awarded 

the contract to develop and operate the Web site at no cost to the 

state. BearingPoint’s confidence that it could meet the contractual 

requirements, recover its costs,b and earn a profit rested on (1) state 

legislation encouraging/requiring the use of online servicesc and (2) a 

Texas Online survey of potential users revealing that business and 

citizens were willing to pay the additional fees required to allow 

BearingPoint to recover its costs and earn a profit.



Client/contractor: ; Best Buy/Accenture; How an expected outcome was 

defined: ; Outcome: Higher revenues and reduced costs.; ; Best Buy 

wanted to identify cost reduction opportunities and new revenue centers 

because, in 1996, Best Buy faced a dilemma: fast, furious growth but 

sagging profits, which, if left uncorrected, would result in 

operational losses that could drive the company into bankruptcy. Best 

Buy recognized that it was best served by entering into a consulting 

agreement with an organization whose retailing experts could 

independently study Best Buy operations and business processes. 

Accordingly, Best Buy contracted with Accenture to perform a study of 

their operations and business processes. The purpose of the study was 

to determine if Accenture could (a) identify inefficiencies 

contributing to Best Buy’s sagging profits, and, if so, (b) if 

Accenture, working in partnership with Best Buy, could eliminate such 

inefficiencies. As a result of that study, which lasted 6 months, 

Accenture determined that there were cost reduction opportunities and 

potential new revenue centers not recognized by Best Buy.



Client/contractor: ; Harley-Davidson/Henkel Chemical Management Group; 

How an expected outcome was defined: ; Outcome: Reduced costs for 

indirect materials.; ; Harley-Davidson wanted to realize cost savings 

from the indirect materials and services needed for the maintenance, 

repair, and operations of their facilities. Examples of indirect 

services and materials include building repair, janitorial services, 

vehicle maintenance, plumbing, and chemical management. Through 1998, 

Harley had been spending about $85 million annually with more than 

3,500 suppliers for such indirect materials and services. To help 

realize cost savings, Harley contracted with Henkel. The Henkel 

Chemical Management Group has a core competency in chemical management. 

Examples of indirect materials and services, which Henkel could help 

achieve cost savings over what Harley had been paying, include oils/

greases, coolants, washer/cleaning fluids, adhesives, and paint 

additives/chemicals to name a few. After reviewing Harley’s chemical 

management program, Henkel determined it could deliver cost savings 

through improved pricing by leveraging buying power and the 

introduction of new usage and disposal efficiencies.



[End of table]



Sources: MIT/Alliant Energy Integrated Services/Cogenex; Texas Online 

Authority/BearingPoint; Best Buy/Accenture; and Harley-Davidson/Henkel 

Chemical Management Group.



[A] A high available Internet facility and portal.



[B] Forty-three million dollars for capital equipment plus $15 million 

to $20 million for operations and variable expenses, as of December 4, 

2002.



[C]ONE EXAMPLE IS TEXAS SENATE BILL 645 (ENACTED BY THE 77TH 

LEGISLATURE), WHICH REQUIRES 233 occupational licensing entities to use 

a common Internet licensing system on Texas Online.



Incentives to Use an SIS Contract Were Identified:



Once the outcome had been identified, both the client and the 

contractor determined that it was in their individual best interest to 

engage in an SIS contracting arrangement and they struck a balance 

between the level of risk and reward they were willing to pursue. For a 

client, SIS contracting is attractive because it enables a company to 

initiate a project without borrowing or investing its own funds. 

Moreover, it ties contractor compensation to results rather than just 

contractor recommendations that may not translate into the savings or 

increased earnings a client expects. But a client may hesitate at 

pursuing a basic SIS approach because that would require foregoing 

savings generated, and instead opt to finance some up-front costs or to 

partially compensate the contractor for effort in order to obtain a 

greater share in the savings. For contractors, SIS arrangements provide 

an opportunity to earn a return on investment that is higher than a 

traditional contract. But the contractor faces the risk that savings or 

increased revenues will not be realized after investing heavily in the 

project or will be realized more slowly than anticipated. To mitigate 

that risk, the contractor may also decide not to pursue a basic SIS 

arrangement. In each of the cases we examined, the client and 

contractor were able to work through these issues and come to agreement 

on how far they would take their SIS arrangement.



Table 2: How Clients and Contractors Determined Incentives Were 

Appropriate:



Client/contractor: ; MIT/Alliant Energy Integrated Services/Cogenex; 

How incentives were determined to be appropriate: ; MIT entered into an 

SIS contract because it (1) allowed MIT to reduce utility costs without 

having to lay out any cash for needed upgrades and (2) provided that 

Alliant/Cogenex compensation be made entirely through sharing a portion 

of the savings realized. Alliant/Cogenex installed and maintained 

energy efficient equipment and assumed the risk that enough savings 

would be realized to compensate for the up-front costs[A] incurred and 

provide a profit commensurate to the risk undertaken. Alliant/Cogenex’s 

confidence that the SIS contract would be profitable rested on its MIT 

energy audit and its experience in providing energy-savings measures in 

over 3,200 customer buildings. Those energy-saving measures included 

the installation of energy efficient lighting, motors, chillers, 

boilers, building automation systems, and air conditioning systems. In 

the end, MIT saved $980,000 annually over what it would have paid had 

the improvements not been made.



Client/contractor: ; Texas Online Authority/BearingPoint; How 

incentives were determined to be appropriate: ; The State of Texas, 

through Texas Online, found a vehicle to offer Internet-based services 

to its businesses and citizens from state agencies and local 

governments, without spending general revenue funds. BearingPoint 

agreed to provide the equipment, setup, and ongoing operation of the 

Web site-including hardware, software, and staffing-at no cost to the 

state. In addition, once operational, Texas Online was designed to be 

self-supporting through the use of fees to use the service. 

BearingPoint determined that it could recover its investment by 2006 

and would achieve the returns that would reward it for the risks it 

took in funding the project. The investment recovery projection was 

based on (1) the commitment made by the state (see table 4) and (2) 

numerous assumptions, including those pertaining to the continued 

growth in using the Internet as a medium to acquire government 

services.



Client/contractor: ; Best Buy/Accenture; How incentives were determined 

to be appropriate: ; Best Buy entered into a gain-sharing contract with 

Accenture because, with their operational losses, Best Buy did not want 

to risk entering into a typical fee-for-service contract which could 

have resulted in paying for a consultant’s advice that may not have led 

to improved profits. To reduce that risk, Best Buy wanted to partner 

with a consultant committed to success through the sharing of project 

risks and benefits by being paid, at least in part, for results 

achieved. Accenture, through its Best Buy business process study, was 

confident it could help deliver needed change in areas such as supplier 

consolidations, price negotiation strategies, advertising, inventory 

levels and in-stock performance, and buyer support and tools. Further, 

Accenture convinced Best Buy’s top management that it had the 

resources, knowledge, and experience to deliver the needed change. 

Finally, Accenture was willing to share risk by reducing its standard 

consulting fee in consideration for receiving 20 percent of the 

Accenture-caused earnings growth, up to a contractual cap.



Client/contractor: ; Harley-Davidson/Henkel Chemical Management Group; 

How incentives were determined to be appropriate: ; Harley entered into 

an SIS agreement with Henkel because Henkel committed to provide a 

cumulative savings of 68 percent over a 5-year period, compared to what 

Harley had been spending for the products and services, which Henkel 

now provides. After the total savings commitments for the contract term 

are achieved, Harley and Henkel will share in Henkel-caused savings on 

a 50/50 basis. In addition, to the cost savings, the SIS agreement 

allows Harley to concentrate on its own core competency of 

manufacturing motorcycles, while simultaneously benefiting by having 

Henkel be the single source for chemical management to include 

products/services, technical support, and environmental compliance. 

Henkel’s confidence that the SIS agreement would be profitable for them 

was based on their (1) study of Harley’s chemical acquisition, usage, 

and disposal programs; and (2) experience with other manufacturing 

clients. Henkel officials said additional incentives include continued 

growth in their core competency of chemical management and the goodwill 

generated by having Harley-Davidson as a client.



[End of table]



Sources: MIT/Alliant Energy Integrated Services/Cogenex; Texas Online 

Authority/BearingPoint; Best Buy/Accenture; and Harley-Davidson/Henkel 

Chemical Management Group.



[A] Alliant/Cogenex borrowed $8 million to finance the project’s up-

front costs.



A Baseline and Performance Metrics Were Established:



Because contractor payment was derived directly from savings and/or 

revenues generated, the ability to link the financial benefits 

generated for the client back to contractor-implemented recommendations 

was critical. Accordingly, both the client and the contractor agreed on 

(1) a performance baseline to determine the performance the client 

would have experienced without contractor intervention and (2) metrics 

to measure how contractor-implemented recommendations generate savings 

and/or revenue. When required, the baseline took into account market 

factors outside of the client and contractor’s control. For example, 

energy savings are impacted by weather and energy prices, neither of 

which a client or contractor can influence.



We found that it is easier to establish a baseline and performance 

metrics in the energy industry than in other industries because it is 

easy to measure energy usage, through the use of metering devices. In 

the information technology industry, on the other hand, calculating the 

baseline can be more complicated. It can be difficult, for example, to 

isolate the direct savings from a reduction in the time an employee 

spends on a new task that replaces one or more old tasks. Also, the 

information necessary to calculate the baseline may simply not be 

available.



Table 3: How Clients and Contractors Established a Baseline and 

Performance Metrics:



Client/contractor: ; MIT/Alliant Energy Integrated Services/Cogenex; 

How a baseline and performance metrics were established: ; MIT and 

Alliant/Cogenex agreed that energy reduction would be defined as the 

difference between energy consumed prior to Alliant/Cogenex’s 

intervention (the baseline) compared to energy consumed after Alliant/

Cogenex installed energy efficient equipment. Energy measurement was 

based on metering, which is the direct tracking of energy according to 

engineering protocols. The advantage of metering is its accuracy. In 

addition to metering, MIT and Alliant/Cogenex agreed to adjust the 

baseline due to changes outside of either party’s control, such as 

unanticipated changes in operating hours, electrical loads, user 

participation, equipment performance, operation, maintenance and 

repair, and equipment replacement.



Client/contractor: ; Texas Online Authority/BearingPoint; How a 

baseline and performance metrics were established: ; The established 

and agreed upon performance measures are based on providing online 

services in exchange for fees to use the service. Because this service 

is new, all transaction revenue is attributed to the contractor. How 

contractor-implemented recommendations generate revenue from a typical 

user fee transaction follows. A user inputs information. After user 

identity is authenticated, appropriate parties validate electronic 

charges made either by credit card or electronic check. The services 

are fulfilled and payments are distributed. Of the gross revenues 

generated, the state receives 10 percent and BearingPoint receives 90 

percent, until its initial costs are recovered. After BearingPoint’s 

initial costs are recovered, revenue sharing will be made on an equal 

50/50 basis.



Client/contractor: ; Best Buy/Accenture; How a baseline and performance 

metrics were established: ; Best Buy and Accenture agreed on a baseline 

defined as the 12-month historical performance of net sales, cost of 

goods sold, profit margins, and appropriate variable expenses. The 

historical performance was adjusted by existing growth/decline trends 

and inflation. For example, if audio had historically experienced an 

annual sales growth rate of 8 percent,[A] then the audio baseline (net 

sales, cost of goods sold, profit margins, and appropriate variable 

expenses) for the following year would include the 8 percent growth 

rate. With implemented Accenture recommendations in place, improvement 

over that baseline would be attributed to Accenture. After adjusting 

for factors outside of Accenture control, such as inflation, a joint 

Best Buy/Accenture team computed benefits on a monthly basis. For 

example, because increasing inventory turns increases revenue, 

Accenture introduced an optimized in-stock management model to receive 

merchandise based on rate-of-sale and out-of-stock risk versus the 

previous method of pushing inventory into stores. Success was measured 

by the increased in inventory turns over the established baseline, as 

determined by the Best Buy/Accenture team.



Client/contractor: ; Harley-Davidson/Henkel Chemical Management Group; 

How a baseline and performance metrics were established: ; The baseline 

against which cost savings are measured is Harley’s 1998 cost of 

chemicals, or the last price paid, whichever is higher. The information 

sources are paid invoices. For new items, the average of three viable 

quotations established the baseline. Henkel cost savings and 

calculations are submitted to Harley on a monthly basis, reviewed by a 

management team composed of managers from both Harley and Henkel, and 

approved when a reduction in the total cost of conducting business can 

be documented. Cost savings projects can occur in several areas, such 

as item/transaction cost reduction, product substitution, inventory 

reduction, waste reduction/elimination, and machine wear improvement.



[End of table]



Sources: MIT/Alliant Energy Integrated Services/Cogenex; Texas Online 

Authority/BearingPoint; Best Buy/Accenture; and Harley-Davidson/Henkel 

Chemical Management Group.



[A] Data based on information contained in Best Buy’s annual audited 

financial statements filed with the Securities and Exchange Commission.



Client Management Committed to Success:



Although commitment by management is necessary for a successful 

relationship with any contractor, it was particularly critical with the 

SIS contractors. Top managers needed to commit to change the way the 

company did business. Moreover, because SIS arrangements can be 

long-term, top managers needed to help sustain the business 

relationship. In the cases we looked at, managers helped facilitate 

success through frequent meetings with their contractors, backing 

contractor recommendations, and investing staff with the authority 

needed to carry out contractor recommendations.



Table 4: How Client Management Committed to Success:



Client/contractor: ; MIT/Alliant Energy Integrated Services/Cogenex; 

How client management committed to success: ; MIT’s president was 

committed to energy efficiency and decided to give control of executing 

an energy savings SIS project to Alliant/Cogenex. MIT was focused on 

outcomes and wanted to create an incentive for Alliant/Cogenex to 

develop optimized energy efficient improvements by linking their 

compensation to the savings achieved through their work. MIT 

recognized, through its commitment to let Alliant/Cogenex decide 

project details, that it was depending on the capabilities and 

experience of Alliant/Cogenex for success and believed that Alliant/

Cogenex was in the best position to execute the project..



Client/contractor: ; Texas Online Authority/BearingPoint; How client 

management committed to success: ; The commitment of Texas Online 

Authority management is reflected in state legislation that encourages/

requires online services. One example is Texas Senate Bill 645 (enacted 

by the 77th Legislature), which requires 23 occupational licensing 

entities to use the common Internet licensing system on Texas Online. 

In addition, in January 2002, the State of Texas Web site was merged 

into Texas Online, providing “one-stop shopping” for government 

information and services. Further, each participating government agency 

is charged to inform potential users about Texas Online as a new 

service channel and to encourage its use..



Client/contractor: ; Best Buy/Accenture; How client management 

committed to success: ; Accenture required, and Best Buy agreed to, the 

active participation of its top management to include the chief 

executive officer, the chief operating officer, and the chief financial 

officer. These officers, with Accenture support, provided the direction 

and commitment by reviewing monthly overall progress in areas such as 

supplier consolidations, price negotiation strategies, innovative 

advertising, optimal inventory levels, and buyer support. Best Buy top 

management also empowered their staff to implement the recommended 

changes. Best Buy top management agreed to partner with Accenture 

because it recognized that implementing Accenture initiatives would 

require changing behaviors, standard practices, supplier performance, 

and cultural norms. Best Buy also recognized that such changes are 

difficult because they can run afoul of existing behaviors, practices, 

and procedures..



Client/contractor: ; Harley-Davidson/Henkel Chemical Management Group; 

How client management committed to success: ; Management commitment, by 

both Harley and Henkel, is manifested in a two-tiered organizational 

structure to ensure SIS contract success. The first tier is a steering 

team managed by Harley’s Director of Operations for Purchasing and 

Logistics and the Henkel Chemical Management Group’s Operations 

Director. The purpose of the steering committee, which meets monthly, 

is to develop an overall strategy/business plan to meet operational 

goals and make financial commitments, sign contracts, and dedicate 

appropriate personnel to ensure success. The second tier is a site team 

consisting of Harley plant management and a Henkel site representative. 

The site team’s role is to realize the steering team’s operational 

goals by managing individual savings efforts..



[End of table]



Sources: MIT/Alliant Energy Integrated Services/Cogenex; Texas Online 

Authority/BearingPoint; Best Buy/Accenture; and Harley-Davidson/Henkel 

Chemical Management Group.



Other Issues Can Impact SIS Opportunities:



Officials from companies we contacted, and others knowledgeable about 

SIS contracting, noted that other issues could pose challenges to, or 

promote SIS use. One issue identified was that SIS contracts could put 

a strain on a business relationship when savings or increased revenues 

are lower than expected. Further, when contractor-generated savings and 

revenues are greater than originally anticipated, some clients may want 

to re-negotiate because, they believe, the contract’s sharing agreement 

turned out to be inequitable, allowing the contractor to reap too large 

a windfall. Also, legal issues can affect the use and structure of SIS 

contracts. For example, in the health care industry, due to the 

potential conflict of interest between providing high-quality hospital 

care and reducing costs, civil monetary penalty and anti-kickback 

legislation[Footnote 3] was enacted that restricts the use of SIS 

arrangements[Footnote 4] by hospitals and physicians.



Within the federal government, there may be additional barriers to 

using SIS contracting. For example, according to GSA officials, federal 

agencies have difficulty in measuring baseline costs. Without a 

baseline agreed to by contractor and client, savings cannot be 

measured, leaving a contractor in a risky position with no confidence 

that the savings needed to cover costs and provide a profit will be 

realized.



Also, our previous work on energy-savings SIS contracting,[Footnote 5] 

together with our work on this audit, revealed that DOE headquarters 

officials believe such contracts are a viable option only when federal 

funding is unavailable. The DOE considers direct appropriations as the 

first option to pay for capital energy renewal projects, since all of 

the savings would then accrue to the government.



Conclusions:



In the contracts we studied, an SIS contract was a highly effective 

contracting technique to generate savings and revenues. But to be 

successful, clients and their contractors had to be specific, and in 

agreement in their goals and objectives, as well as how to achieve 

them. Moreover, top management commitment was paramount--not only to 

provide the authority needed to carry out solutions, but to help 

overcome additional barriers and problems that can arise and to sustain 

the partnership. Federal agencies may find it even more difficult to 

engage in these arrangements given the lack of good baseline 

performance data. However, it may be worthwhile to examine ways to 

overcome potential problems in order to achieve the benefits possible 

through SIS contracting.



Agency Comments:



In December 2002, we requested comments on a draft of this report from 

the Director of OMB. In official oral comments on the report, staff 

from the Office of Federal Procurement Policy, an office within OMB, 

stated that:



* The report’s findings will be taken into account in structuring 

future policy on the use of share-in-savings contracting, including 

implementation of section 210 of the E-Government Act.



* Agencies need to heed the lessons learned by industry to achieve 

success with this technique. Namely, there must be thorough and 

deliberative planning, as well as management commitment, to identify 

clear outcomes and measures that are agreed upon by both parties to a 

share-in-savings contract.



Scope and Methodology:



To find information regarding commercial sector use of SIS contracting 

and identify companies that use or have used SIS contracting, we 

searched numerous electronic databases and queried several professional 

organizations. Although these queries identified thousands of 

references, most were unrelated to the share-in-savings contracting 

concept. Excluding the energy industry, we found a limited number of 

references to companies or state agencies that use or have used the SIS 

concept. Because our focus was on the commercial sector, we contacted 

companies identified and asked them about their SIS contracting 

experiences.



We then developed case studies on four SIS arrangements, which 

represent different industries, and were determined to be successful by 

the SIS clients and their respective contractors. For each case study 

presented in this report, we interviewed the clients and their 

contractors to obtain their views on when this type of contracting 

method is best used, the risks associated with SIS contracting and how 

such risks are mitigated, the importance of developing baselines and 

performance measures, and other characteristics that distinguish SIS 

contracting from traditional contracting methods.



For information regarding the use of SIS in the federal government, we 

used our previous work on SIS contracting, searched government web 

sites, including those belonging to the General Services Administration 

(GSA) and the Office of Federal Procurement Policy (OFPP), and had 

discussions with GSA and OFPP officials.



We conducted our review from November 2001 to January 2003, in 

accordance with generally accepted government auditing standards.



As agreed with your offices, unless you announce the contents of this 

report earlier, we will not distribute this report until 30 days from 

its date. At that time, we will send copies of this report to other 

interested congressional committees, the Secretaries of Education and 

Energy, and the Administrators of the GSA and OFPP. We will also make 

copies available to others upon request. In addition, the report will 

available at no charge on the GAO Web site at http://www.gao.gov.



Please contact me at (202) 512-4125, or Ralph Dawn at (202) 512-4544, 

if you have any questions regarding this report. Major contributors to 

this report were Marie Ahearn, Cristina Chaplain, Daniel Hauser, Mary 

Jo Lewnard, and Russell Reiter.



David E. Cooper

Director

Acquisition and Sourcing Management:

Signed by David E. Cooper:



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FOOTNOTES



[1] Public Law 107-347, December 17, 2002.



[2] Formerly KPMG Consulting.



[3] Social Security Act, as amended, 42 U.S.C. sec. 1320a-7b(b)(1)-(2).



[4] SIS arrangements are referred to as gainsharing arrangements in the 

health care industry. Gainsharing arrangements are designed to align 

incentives by offering physicians a portion of a hospital’s cost 

savings in exchange for implementing cost-saving strategies.



[5] Energy Conservation: Contractors’ Efforts at Federally Owned Sites 

(GAO/RCED-94-96, Apr. 29, 1994).



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