Capitalizing on Inefficiency: The High-Risk, High-Reward Strategy of Share-in-Savings
- Jordan Clayton
- Jun 1, 2025
- 4 min read
A recurring paradox in the defense market involves firms pitching solutions that offer undeniable efficiency - saving millions in sustainment, energy, or logistics costs - only to be rejected due to a lack of budget. Program Managers (PMs) often lack the funding to purchase the very technology that would solve their fiscal constraints. They are trapped in a cycle of expensive obsolescence, unable to afford the "upfront cost" of modernization.
The Share-in-Savings (SiS) contract offers a mechanism to bypass this objection.
It is the ultimate "no-brainer" pitch for a budget-constrained government: "You don't pay us unless we save you money." In this model, the contractor funds 100% of the modernization upfront - capital, labor, and technology - and is compensated solely through a pre-negotiated percentage of the verified savings generated over time.
While compelling, SiS is the highest-risk vehicle in federal contracting. It transforms the contractor from a vendor into a financier, bearing all execution and cost risk. It requires a firm to bet its own balance sheet on its ability to execute within the federal bureaucracy. Success requires not just technical excellence, but deep financial engineering and high-level stakeholder alignment.
The Mechanics of the "No-Cost" Deal
An SiS contract is a performance-based incentive structure where payment is strictly contingent on results. It fundamentally alters the economics of the transaction.
The Investment Phase The contractor acts as the investor. You fund the R&D, hardware, software, integration, and labor required to implement the solution. The government pays $0 upfront. This removes the "Budget Barrier" - the need for the PM to request new money from Congress.
The Return Phase The contract defines a "baseline" of current costs.
Scenario A: Your solution fails to generate savings. The government pays $0. You lose 100% of your investment.
Scenario B: Your solution generates verified savings (e.g., reducing energy costs by $10M/year). You receive a negotiated share (e.g., 20% or $2M/year) for a defined period (e.g., 5-10 years).
Use Case Alignment This model is not for R&D or experimental tech. It is for optimization. It thrives in environments with high, measurable waste:
Energy Savings Performance Contracts (ESPC): Upgrading HVAC/lighting at a base to lower utility bills.
Legacy IT Modernization: Digitizing paper records to eliminate warehouse leases and manual data entry labor.
Logistics: Using AI to optimize inventory levels, reducing spoilage and storage costs.
The Strategic Value: Bypassing the Budget Cycle
For firms with the capital to execute, SiS offers unique strategic advantages that traditional contracts cannot match.
1. Removing the PPBE Barrier The greatest friction in defense sales is the Planning, Programming, Budgeting, and Execution (PPBE) cycle, which requires new programs to wait 24 months for funding. SiS bypasses this. The funding source is the existing inefficiency - money that is already appropriated but currently being wasted. You are not asking for new money; you are asking to redirect wasted money.
2. Creating Perfect Alignment In a Cost-Plus contract, the contractor makes more money if the project takes longer. In an SiS contract, incentives are perfectly aligned. The contractor is motivated solely to generate savings as quickly as possible. This eliminates the adversarial "oversight" dynamic and replaces it with a partnership model.
3. Building Franchises A successful SiS contract creates a multi-year, high-margin annuity stream. Once the system is installed and saving money, the revenue is recurring. It embeds the firm as a long-term partner essential to the agency's financial health.
The Gauntlet: Why Firms Fail
Despite the logic, the failure rate for SiS proposals is high. The risks are structural and must be mitigated during the capture phase.
1. The Baseline Trap Savings cannot be proven without an immutable Baseline.
The Trap: You believe the current process costs $10M/year. The government later argues it only costs $7M/year. Your projected savings - and your revenue - evaporate.
The Fix: You cannot rely on government estimates. Your proposal must include a rigorous, data-backed audit of the current state. The Baseline must be contractually agreed upon before work begins. If the baseline is fluid, the revenue is imaginary.
2. The Budget Shell Game (Color of Money) This is the most dangerous bureaucratic hurdle. Savings generated in one account (e.g., Operations & Maintenance or O&M) may not be legally transferrable to pay the contractor if the contract was structured under a different authority.
The Fix: This requires "Pre-Wiring" the deal with the agency’s Comptroller and Legal Counsel. You must identify the specific mechanism (e.g., Title 10 USC 2911 for energy) that authorizes the agency to retain the savings and pay you.
3. The Incentive Mismatch A Program Manager whose budget is cut because they saved money has a perverse incentive to resist efficiency. In the DoD culture, a smaller budget equals less prestige.
The Fix: The champion for an SiS deal cannot be a mid-level manager protecting their budget authority. It must be a High-Level Leader (General Officer, SES, or Agency CIO) with a mandate to reduce enterprise costs and the political cover to reinvest those savings into other mission priorities.
The Strategic Playbook: Execution Requirements
To win an SiS campaign, you must function as a merchant bank, not just a tech vendor.
1. Quantify the "Cost of Inaction" Your sales narrative must shift from "Look at our tech" to "Look at your waste." You must quantify the daily cost of not hiring you. "Every day you wait costs the command $27,000 in excess energy spend."
2. The Measurement & Verification (M&V) Plan The contract must include a rigorous M&V Plan. This dictates exactly how savings will be measured. Will you use meters? Labor logs? Algorithms? This plan is the "cash register" of the deal. If the M&V plan is vague, you will never get paid.
3. Balance Sheet Strength Do not attempt this strategy if you are cash-poor. You must be able to float the entire project cost for 12-24 months before the first savings payment arrives. This is a game for mature firms or well-capitalized startups.
Share-in-Savings is a powerful tool for mature firms with strong balance sheets and proven solutions. It allows innovation to be funded by inefficiency. However, it demands a level of financial and contractual sophistication far beyond standard procurement. At DualSight, we provide the Strategic Advisory to structure these complex deals and the Capture Strategy to align the financial, legal, and operational stakeholders required to close them. We turn your efficiency into an asset class.
