Outcome-based strategies must come before outcome-based contracts

Outcome-based contracting has become a buzzword in the federal market as the Trump administration pushes to streamline procurement.

They are saying the right things – buy results, not activities. The Revolutionary FAR Overhaul aims to give contracting officers greater flexibility.

But according to a new report from the IBM Center for the Business of Government, more emphasis needs to be put on an outcome-based strategy that then drives the structure of contracts.

The report, Outcome-Based Contracting in U.S. Government: From Policy to Performance, was co-authored by Daniel Finkenstadt, vice president of research and senior fellow with the Commerce & Contract Management Institute.

Finkenstadt told WT that are contracts instruments for communicating intent, establishing limits and defining behaviors.

"But they aren't the grand strategy of what you're trying to do through an acquisition," he added.

An outcome-based strategy can deploy multiple contracts and some of those can be very structured, while others can be very open-ended.

“But you are getting at an overarching outcome,” he said.

For industry, the shift toward outcomes-based contracting carries both opportunity and risk.

Risk is easy to miss and the opportunity is flexibility. An outcome-based structure gives contractors the autonomy to solve problems their own way, without seeking government approval at every step.

The risk is accountability without control.

Finkenstadt said he has observed a recurring pattern in negotiations where agencies say they want outcomes-based contracts, then reach back in during statement-of-work discussions and refuse to give up oversight of individual activities.

"If you're going to be put on the hook for outcomes, you need to make sure governance is in place that allows you to have that autonomy and flexibility," he said.

Contractors also need to ensure they can clearly attribute results — good and bad — to their own performance, not to government actions or inactions.

That governance question is where Finkenstadt said the real work happens. It's not about terms and conditions, but rather about how the two parties agree to behave under various conditions.

That includes conditions nobody anticipated. Customer and contractor must have open communications and flexibility.

“You have to do scenario planning,” he said. “Outcome-based contracts require you to think through the what-ifs in advance.”

A challenge for the government is a lack of data. The report Finkenstadt wrote for the IBM center identifies five critical success factors – outcome focused requirements, strong data capabilities, trust-based collaboration, effective governance structures, and oversight centered on results.

The data problem is acute because in order to pay a contract based on outcomes, the government needs to know how much of a given result can be attributed to performance versus market conditions, government decisions or external events.

Right now, that data capability largely does not exist.

The Contractor Performance Assessment Reporting System is the government's primary tool for measuring performance. But CPARS is siloed and historically accessible only to active source selections, making it useless for research or modeling.

Contract writing systems, finance systems and performance systems not talking to each other is another issue.

"Attribution is the mechanism of payment," Finkenstadt said. "We don't have the systems to pull that off."

Agencies tend to measure only what their systems can measure rather than outcomes that actually matter.

The report lays out areas where the government should focus to foster more outcome-based contracts. These areas include governance training, portfolio-level prioritization strategies, and conducting more pilots.

The Defense Department is an early adopter and has been actively moving procurements to the left to open more communications with industry and establish ways to measure outcomes.

Finkenstadt said that approach has centered on munitions as a portfolio for pulling the Army, Navy and Air Force into a unified approach covering everything from research-and-development through sustainment. Those service branches previously negotiated separate deals for munitions.

DOD is leaning on what it calls framework agreements, where its goals and objectives are negotiated at the corporate level. That frees contracting officers from having to renegotiate those for every contract or order, Finkenstadt said.

"I think outcomes-based got buzzworded a little bit. But if you don't have trust, if you don't have governance, if you don't have data, then you need to be more specific. And as you build those things, you can open up,” he added.