Making Performance Based Service Acquisition Work for You

By Donald Freedman, Senior Fellow, DoD DAWIA III, PMP

Professional sports have successfully used Performance Based Contracting. Baseball players get bonuses for such things as making the all-star team, or winning so many games as a pitcher. Football players sometimes have a contract bonus tied to the number of offensive or defensive plays in which they participate.

Can the Federal Government have similar success with its approach to performance based contracting? With government agencies and their contracting approaches under the microscope, federal agencies need to take a second look at how they implement Performance Based Service Acquisition (PBSA) where the contractor is paid more or less depending on how they perform. PBSA can be a useful tool in getting the most for your dollars but only if you use it correctly.

Focus Should be on Mission Outcome

As others have written and some agencies have discovered, performance based contracting can be less than successful if more emphasis is placed on ongoing activity rather than the ultimate objective.

Generally, the government specifies the performance standards in the Service Level Agreements (SLA) from what the government can measure rather than the required or desired outcome. This leads to one of two unfortunate situations. In the first situation, a contractor meets all of the performance standards and is paid a performance bonus but provides a product that does not meet the customer’s need. In the other case, a contractor’s deliverable does everything the customer expected, but the contractor does not achieve the performance metrics and is penalized.

Performance Standards a Key Measure

Choosing the right performance standards is key. Say that the desired outcome is improving throughput. Let us apply this to McDonald’s customer service and data processing by a computer. Measuring the number of errors or error rate percentage is a common metric used in performance based contracting. Although common, it is not equally applicable to McDonald’s order processing and computer data processing.

My experience at McDonald’s is that they rarely get the order wrong and therefore have a very low error rate. A mistake in filling an order or giving the customer incorrect change will affect the profitability of the franchise because it slows down the movement of product. Even worse, if customers go elsewhere because the service is slow, the financial impact could be devastating. The restaurant’s end goal of earning profit from satisfied customers would be compromised. McDonald’s has developed a number of ways to properly fill orders and reduce service time.

In data processing, throughput is a key performance measure. Improving data inputs will positively affect throughput. Is throughput more constrained by the computer’s processing speed or by the number of entry points? Is error rate one of the two or three things most likely to improve throughput? Is error rate a proper SLA? There may be other measures that better demonstrate the contractor’s performance.

How Can I Make PBSA Work for Me?

You must clearly articulate the desired outcomes or the end state. The SLA’s must support this end goal.

When you pick your SLAs:

• Pick ones that achieve mission outcomes
• Limit the SLAs to a few meaningful ones
• Make sure the SLAs benefits are worth the rewards paid out
• Make sure the SLAs are achievable

Recognize that what is important to one organization is not as important to another organization in the same situation. Going back to a sports analogy, assume a country’s Olympic Organizing Committee during this past summer’s Olympics had a performance based contract with an SLA based on the medals won. For many countries, it was enough to have a representative on the podium. Seven countries won only one bronze medal. This might have exceeded their wildest dreams and hopes, and their SLA. For China, the desired outcome was winning the most gold medals. It failed to meet that SLA.

As a spectator and a fan, I believe in a very different SLA. For me, every athlete who exceeded a personal best deserved a gold medal.

Still Worth a Look

PBSA has been around the Federal Government for a long time with limited success. With all of us challenged to find more cost-effective models for purchasing, we should reconsider how PBSA can achieve mission goals by creating carefully constructed performance standards.

What do you think? Can we do better? Continue the discussion at Integrity Matters.