Guerra: Regulating profit

The government shouldn't care if companies are making a profit as long as they are delivering value

During a recent panel discussion on multiple-award contracts sponsored by AFCEA International’s Bethesda, Md., chapter, participants were asked for their opinions about the government’s right to seek subsequent cost information about contracts awarded on a firm fixed-price basis. Frankly, I don’t get it.

I guess the goal of this process is to make sure industry isn’t making too much money on those contracts.

But why would the government care how much money a vendor makes? For example, if a vendor fixes a customer’s $200 million problem for $100 million, isn’t the government $100 million ahead? It is not clear to me why it would matter whether a company makes $10 million or $50 million when the result is that the government saves $100 million? If the company invested significantly to develop a product, service or capability that it can then deploy in a cost-effective way — even at significant profit margins — and if the company met or exceeded customer needs, the government should appreciate that it is a beneficiary of that capability.

Agencies today pay the same price that they paid for commercial products years ago. Arguably, those costs should have dropped. In the early 1980s, a then state-of-the-art, fully configured 8086 PC sold for about $4,500. Today, we see processors that are about 200 times faster selling at about 60 percent of that cost. And there is a similar story about software for which users get more bang for their bucks.

Again, go back to the early 1980s. That $4,500 PC required about $1,200 in software.

Users had to buy software for word processing, spreadsheet, presentation and database packages. Those packages often didn’t work well with one another, were cumbersome to use and minimally responsive.

Today, for as little as $175 to $225,Microsoft offers those capabilities and others that allow users to switch between programs on a multitasking basis so easily that even we technologically challenged users can increase our productivity fivefold.

Microsoft spent billions to develop that value. The company is entitled to benefit from that investment. And, by the way, Microsoft is not one of my clients.

You take your car in for repair, you get a quote, you have the car fixed for the quoted price, and you drive away. Do you ask the repair shop how much it made? If it fixed your car and made a 50 percent or 60 percent profit, would you have the right to tell the repair agent that you want some money back? If you were to go to the hospital with a serious illness, would you have a right to know how much it makes on the medical care it provides you? If you have a job earning $65,000 a year and your employer offered you $75,000 a year to do the same job because you brought it greater value, would you say you didn’t deserve that increase in income? Of course not.

In the private sector, we call this value pricing. You pay for the value of what you get, not the cost others incur in delivering that value. If costs were all that matter, wouldn’t we all be driving Yugos? We select our cars, homes, colleges and food based on a set of values and affordability.

Profit is not a four-letter word, unless it becomes a loss.

Our government would do well to worry more about holding vendors accountable for delivering value and less about how much money vendors make while delivering that value.

Guerra is a partner at consulting firm Guerra, Kiviat.

About the Author

Robert J. Guerra is a partner at the consulting firm Guerra and Kiviat.

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