By Steve Kelman
In recent blogs, I have suggested a number of ideas for specific ways to improve the procurement system – one is a way to encourage small businesses who currently don’t sell to government to enter the federal marketplace
and the other is a way to encourage contractors on fixed-priced contracts to share some of their cost savings
on those contracts with the government. I made these two suggestions in fairly rapid succession partly because I actually think that both are, on balance, good ideas that would improve the procurement system – but also as a way to encourage others in the system to get their thinking caps on and come up with ideas of their own. With the importance of government contracting, and the current budget environment, the procurement system can use good ideas for improvement.
The reaction to both suggestions from blog commenters was mixed. Fine. However, I would like in a generic way to respond to at least some of the comments by the critics, because I believe my perspective provides some guidelines for how we ought to think about new policy ideas in general.
First, and most importantly, when evaluating a new idea, the standard against which it should be judged is not nirvana – few ideas have no disadvantages or downsides – but in comparison with problems the status quo creates. The correct question is always, “Compared to what?” If an idea has problems, tote these up against problems with the way things work now.
Second, Teresa Amabile at Harvard Business School did some fascinating research a number of years ago where she presented different groups of experimental subjects a book review. The versions were almost identical, but one group got a version with critical or negative adjectives, while the other read a version using favorable or positive adjectives. She found that subjects who read the version with critical words rated the review as more insightful and the reviewer smarter than did the subjects who read the same review with favorable words. She labeled what she discovered as “negativity bias,” and it may be hard-wired in people. People may feel smarter if they can come up with criticisms.
It was interesting to see that one critic of my ideas on the use of past performance
for cost savings on fixed-price contracts idea rejected the proposal arguing that it would have no effect on contractor behavior, while another rejected it believing it would terrify contractors into submission to the government. Maybe those reading the comments think those writers are smart, but obviously that doesn’t necessarily produce useful policy or management dialogue.
Lastly, although I recognize the blogosphere is not known as a font of gentle or respectful language, some of the expressions used in some of the comments were, I think, problematic. I am a big boy: I can take it when a commenter writes “a three percent 'kickback' for future work sounds a bit like payola to me” or “I cannot tell you how awful I think the ‘fee’ return idea is. Truly awful.”
But this kind of language can bully or intimidate people from presenting new ideas, particularly if those with the new ideas are young or in a junior position compared to the person using words such as these. This kind of language in organizations or teams is an enemy of useful deliberation about ideas, and it is an excellent way to discourage new ideas from being presented in the first place. Younger or lower-ranking people, in a world of this kind of rhetoric, are likely just to say to themselves, “Why bother?” and return to their cubbyholes. This is exactly what government does not need.
Posted on Jul 17, 2012 at 7:03 PM9 comments
The front page of the business section of today’s New York Times (yes, Washington Post readers, the Times has a standalone business section that is several pages long) featured an article called “16 Million Reams of Paper, Please,” about how private equity firms such as the Blackstone Group have banded together to negotiate better pricing on common items such as office supplies, overnight packaging, and commodity IT for the companies they own in their portfolios.
“We have incredible leverage,” a senior Blackstone executive was quoted in the article as saying, “The more volume we have, the lower our prices go.” The purchasing entity, called CoreTrust, uses both pre-negotiated contracts and reverse auctions to bring prices down. They basically demand that their vendors give the purchasing entity the lowest price that has been negotiated by any of the companies owned by the private equity group. (The example given in the article was that the largest firm in the group was paying $6.95 for an overnight package shipment, while the smallest was paying $9.95 – CoreTrust negotiated a $6.95 price for all the companies in the group.)
One thing that is interesting about this article is that this purchasing alliance consists of a large number of different companies owned by several different private equity firms – it is not just inside one company. This makes it more analogous to governmentwide leveraging of buying power across federal agencies, if anything even more difficult. It is also interesting that the private equity companies have developed this new model in response to changes in the economic environment – they are having to hold the companies they buy for a longer period of time because of the slowing economy, and they are reacting to that economic change by changing the way they do business. A lesson for government in the tight budget environment.
There was another interesting quote in the article, where the same Blackstone executive, referring to trying to get lower prices from suppliers, stated, “We negotiate them to the wall.” As I have noted in other blogs and columns, there is sometimes an attitude around Washington that if the government negotiates vigorously on behalf of its interests, it is “anti-contractor” or against partnership. This is no more true than to state that if contractors negotiate vigorously with the government – which they do – they are “anti- agency.”
I believe that the interests of the government and of well-performing contractors are mostly the same, but they are clearly not always identical, and price is often an example of this. To be sure, there are sometimes tradeoffs that need to be managed – indeed, the Times article notes there are some worries in some of the companies the private equity firms own that this approach will hurt supplier relationships. There is no one size fits all management approach here, and it should be noted that a company that receives a lot of business from these deals is likely actually to treat the customer better, because the business relationship has become more important to it.
Posted on Jul 12, 2012 at 7:03 PM8 comments
I have, more or less forever (actually, since I published a book on government information technology procurement back in 1990), argued that consideration of vendor past performance in the award of new contracts has the potential, if used well, to dramatically improve the quality of vendor performance. It’s common sense – a key way any market economy works is that if you have a good experience with a product or service, you go back for more. If you don’t, you don’t.
I do believe that introducing consideration of past performance in government procurement in the 1990s improved the process, though I have also extensively written about problems and shortcomings in the system as used in the real world of government contracting.
At any rate, I also believe there are lots of ways to use past performance to improve various intractable, or hard to get a handle on, elements of the procurement process. I wrote recently on that theme in a column on making better use of past performance evaluations in sole-source spare parts pricing. Today I want to suggest another idea – using past performance evaluations to encourage vendors to share cost savings on fixed price contracts.
What’s the issue here? There is an increasing emphasis in the government on using fixed-priced contracts for service contracting, a trend that on balance in my view is a good thing (though I am aware of the criticisms and downsides). One virtue of fixed-price contracting is that it encourages vendors to come up with lower-cost ways to meet contractual requirements, since the contractor’s payment is independent of their costs, and if they can lower their costs, their profits will go up.
At the same time, though, currently there is no way for the government to get any of the benefits of such contractor cost reductions. Since the contractor is entitled to receive the full fixed price agreed to as long as the contract requirements are met, there is no sharing of cost-savings benefits as with an incentive fee or share-in-savings contract.
Here’s my proposal: if a contractor, at the end of the contract where performance has met requirements, returns 3 percent of the fee on a fixed-price contract to the government customer (maybe make it 5 percent for a contract under $500,000), the contractor will automatically be given the highest-possible rating on the cost control element of the past performance evaluation, with an explanation in the evaluation of why the rating was received. With the increased attention these days to cost control, this may be a valuable incentive for contractors to return money (to which, it should be remembered, they are entitled to by the contract) to the government
A few points: First, I suggest a specific percentage return, rather than “at least,” because you want to tell the contractor in advance exactly what will earn them the highest possible rating. (I realize that no contractor is likely ever to return more than the 3 percent or 5 percent, even if they had saved 30 percent.) Second, one thing I like about this approach is that it recognizes the idea of rewarding a contractor who goes “above and beyond” contract requirements, rather than expressing the view one hears sometimes that contractors should do only what the contract specifically says, nothing more.
Note that an agency, or even an individual office working on an individual contract, could implement my proposal with absolutely no statutory or Federal Acquisition Regulation changes – although I think if an agency plans to do this, it should announce the policy in its solicitation. But this will be more powerful if adopted as a policy at an agency or even a government level. Maybe an Office of Federal Procurement Policy letter or something on this? This certainly would tie in with the administration’s emphasis on cost savings from contracting, as well as being a complement to the administration’s effort for more fixed-price contracting.
I raise this proposal partly because I think it’s a good idea, and partly to get others to think about other good ideas for how to improve the way we use the procurement system to deliver value to the government.
Posted on Jul 09, 2012 at 7:03 PM11 comments