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  1. 1. Ensuring Performance-Based Contracts Enable Mission Success Scott Dewicki, Rudolph Simpson, Robert St. Thomas IBM Corporation, U.S. Federal Unit Used with permission
  2. 2. Agenda <ul><li>The Emergence of Performance-Based Contracts </li></ul><ul><li>Applying Best Practices to Manage Success Factors </li></ul><ul><ul><li>Acquisition Team Composition </li></ul></ul><ul><ul><li>Identifying Areas of Opportunity </li></ul></ul><ul><ul><li>Scoping the Work </li></ul></ul><ul><ul><li>Defining and Measuring the Desired Outcome </li></ul></ul><ul><ul><li>Planning for Contingencies </li></ul></ul><ul><li>Conclusions </li></ul>
  3. 3. The Emergence of Performance-Based Contracts <ul><li>PBCs are becoming commonplace… </li></ul><ul><ul><li>Sabatier </li></ul></ul><ul><ul><li>Commercial Resupply Services </li></ul></ul><ul><ul><li>Commercial Crew </li></ul></ul><ul><li>… And are attracting attention </li></ul><ul><ul><li>Congress </li></ul></ul><ul><ul><li>Media </li></ul></ul><ul><ul><li>Service Providers </li></ul></ul>
  4. 4. What Makes A Contract “Performance-Based”? <ul><li>Mission-related outcome is the deliverable </li></ul><ul><li>POP at least five years </li></ul>Scope/Length Authority Mission Objectives <ul><li>Aligned to mission-related outcome </li></ul><ul><li>Clear, concise, easy to define/report </li></ul><ul><li>Industry capability replaces organic </li></ul><ul><li>Agency retains oversight of contractor </li></ul><ul><li>Delegation of much decision-making </li></ul><ul><li>What the agency really values </li></ul><ul><li>Can be strategic, transformative and/or operational </li></ul><ul><li>Should encourage the right behaviors </li></ul>Interaction <ul><li>Organic capability may be sub-contracted </li></ul><ul><li>Joint agreement on CPI targets </li></ul><ul><li>Bi-lateral scorecards, reporting </li></ul>Characteristics Outcomes Measures
  5. 5. Fixed-Cost: The “Teeth” In A Performance-Based Contract <ul><li>Forces agency to understand its own costs for equivalent service levels over the contract POP </li></ul><ul><li>Requires contractors to take calculated risks and invest in improvements </li></ul><ul><ul><li>Business processes </li></ul></ul><ul><ul><li>Simplification/standardization of product/system configurations </li></ul></ul><ul><ul><li>Technology improvements </li></ul></ul>These steps help reduce inventories and demand, increase service levels, lower costs and improve support
  6. 6. Key Questions For Acquisition Teams <ul><li>When outsourcing core competencies, what steps can identify potential opportunities while limiting risk and perceived loss of organic capability? </li></ul><ul><li>How should scope be defined to maximize service-levels and cost benefits while minimizing perceived loss of control and budget flexibility? </li></ul><ul><li>How are outcomes defined in a way that reduces the number of contracts managed, but supports socio-economic, competition, and cost objectives? </li></ul><ul><li>How can terms be defined to best prepare the agency and contractor for contingencies? </li></ul>
  7. 7. NASA Policy Presents Opportunities <ul><li>NASA’s Procurement Tenets already codify some important, supporting ideals </li></ul><ul><li>Integrated Acquisition Strategies and Product Teams </li></ul><ul><ul><li>“ NASA programs/projects shall develop an integrated acquisition strategy that involves all functional representatives (engineering, safety and mission assurance, legal, financial, procurement, small business and various technical authorities) early </li></ul></ul><ul><li>NASA and Industry Partnerships </li></ul><ul><ul><li>“ It is critical that NASA merge its core expertise with industry’s core expertise in acquisitions.” </li></ul></ul>
  8. 8. Applying Best Practices
  9. 9. Acquisition Team Composition Commodity Councils <ul><li>Cross-functional, cohesive, quasi-permanent organizations that encourage long-term thinking, behaviors and strategies </li></ul><ul><li>Responsible For: </li></ul><ul><li>Developing/executing commodity strategy </li></ul><ul><li>All contracting within commodity </li></ul><ul><li>Integrating contracts within commodity strategy </li></ul><ul><li>Commodity market intelligence </li></ul><ul><li>Not Responsible For: </li></ul><ul><li>Demand planning/forecasting </li></ul><ul><li>Customer, system or item management </li></ul><ul><li>Tactical planning, scheduling, asset management </li></ul>CC Leader Maintenance Other: IT, Finance, Item Mgt Procurement Program Managers Engineering Supply
  10. 10. Acquisition Team Composition Supplier Relationship Management <ul><li>Objectives: </li></ul><ul><li>Create the potential for exceeding performance expectations </li></ul><ul><li>Establish performance targets and scorecards </li></ul><ul><li>Identify opportunities for joint improvement </li></ul><ul><li>Supplier Tiers: </li></ul><ul><li>Stratification based on pre-determined criteria </li></ul><ul><li>Establish management approach, roles and strategic importance </li></ul>The set of disciplines and activities that ensure the correct focus for both the agency and contractors
  11. 11. Identifying Areas of Opportunity Market Research <ul><li>Objectives: </li></ul><ul><li>Gather information: market forces, characteristics, key players, actual costs, performance standards, available capabilities </li></ul><ul><li>Identify leverage points for sourcing and/or supplier management strategies </li></ul><ul><li>Develop vendor insights that can be incorporated into contract negotiations </li></ul><ul><li>Analyze/estimate maturity of products/services available for use; i.e. What can be outsourced? </li></ul>A collaborative discipline that seeks to identify market forces and conditions that can be exploited for strategic advantage
  12. 12. Identifying Areas of Opportunity Component Business Modeling (CBM) <ul><li>CBM defines and models discrete functional components of the enterprise that collaborate in the execution of business </li></ul><ul><li>CBM defines the required performance level for components based on contribution to mission or strategic goals </li></ul><ul><li>Functional components are described by the services they perform within the organization, the mission-related performance levels they are required to achieve, the costs and resources they need to operate, and other elements </li></ul>CBM is a diagnostic methodology that links mission, end-state goals, and required capabilities of an enterprise to it’s functional activities NASA Enterprise Strategic Goals
  13. 13. Scoping the Work CBM prioritizes the targets for improvement/investment/outsourcing <ul><li>Advantages: </li></ul><ul><li>Much greater understanding of the performance targets and cost targets that prospective vendors must meet </li></ul><ul><li>Baseline costs of organic (internal) functions can be described in detail </li></ul><ul><li>High-level vendor requirements, expected service levels, “rough order of magnitude” costs and pricing are clear </li></ul><ul><li>If a functional component’s role in mission support or business strategy cannot be well-defined, it may not be a good candidate for a performance-based contract </li></ul>Space Operations Strategic Goals
  14. 14. Defining and Measuring the Desired Outcome The measurable outcome should be meaningful to both the agency and contractor in terms of mission or business objectives <ul><li>Guidelines: </li></ul><ul><li>Define what should be accomplished, not how it should be accomplished </li></ul><ul><li>Care should be taken to avoid expressing outcome as a quantity of actions or deliveries </li></ul><ul><li>Use expressions such as readiness, availability, cycle time, MTBF, cycle time </li></ul><ul><li>Metrics should encourage reliability improvements, access to/adoption of new technology, lower total costs, etc. </li></ul><ul><li>Biggest challenge is data quality </li></ul>
  15. 15. Planning for Contingencies Uncertainties in cost, demand and mission objectives are some of the principal roadblocks to Fixed Cost PBCs <ul><li>Mitigating risk: </li></ul><ul><li>Begin a PBC under “cost-plus”, transitioning to “fixed cost” </li></ul><ul><li>Fix cost within “bands of demand” </li></ul><ul><li>Structure profitability/cost take-out later in the contract term, (i.e. after Year 3) </li></ul><ul><li>Address risk during the acquisition through strict demonstration of vendor capability </li></ul>
  16. 16. Conclusions <ul><li>PBCs encourage the right behaviors </li></ul><ul><li>Contractors are frequently more agile than the agencies they support </li></ul><ul><li>Use of revolving funds enables multi-year agreements and stability </li></ul><ul><li>Fewer contracts and contractors to manage; clearer lines of authority </li></ul><ul><li>Obsolescence issues are often self-correcting </li></ul><ul><li>The history of these agreements is overwhelmingly positive </li></ul>There are good reasons to preference Performance-Based Contracts By taking the right approach to determining candidate functions to be put on contract, setting the acquisition strategy and desired outcomes, and mitigating risks, NASA can be better assured that its objectives will be realized