The $20 billion a year the government wastes because it distrusts contractors is just the beginning of the damage done by poor relationships.
With the federal government hunting everywhere for savings, a university study revealed what could be the missing link, particularly in defense. A May 2012 university research report, featured in Washington Technology, suggests the Defense Department has installed unneeded administrative bureaucracy in procurement due to perceived adversarial relationships between buyers and suppliers.
Of the current $400 billion of DOD procurement, about $100 billion is allocated to administrative costs. The authors of the study said that 20 percent of the department’s administrative spending is unneeded, and, if eliminated, could save about $20 billion in the budget per year.
Professor John Whitney of Columbia Business School said that the situation may be even worse than was revealed in the study: “Mistrust doubles the cost of doing business.” Both contractors and customers are dealing with strained relationships and a lack of trust is the culprit. And this is not just applicable to the defense environment, but other government agencies as well.
Critics indicate there are good reasons for some rules and regulations in procurement which can protect both parties. But according to the study, there appears to be more bureaucratic protection than is really necessary. Some reasons offered for requiring protective measures revolve around government being staffed by novice replacements for recently retired veteran procurement officers. Also mentioned is the massive insourcing in the government acquisition ranks. The high turnover of acquisition professionals hinders building the trust-based relationships needed for efficient and effective business. According to the study, constant changes in the cast of characters on both sides, “fuel dissent in relationships that are already on shaky ground, or reboot solid relationships and turn them adversarial.”
The lowest price, technically acceptable buying philosophy currently embraced by procurement officers only makes the problem worse. With the federal government driving efficiency initiatives, contractors are now forced to focus their proposition more on low-cost vs. best-value. With this scheme, the market could potentially become commoditized with points of differentiation so small that they provide no discernible value differential at all. It’s exacerbated by the government’s unwillingness to address or evaluate the risk involved. One senior government individual said that a good reason to use low price is that it easily avoids protests. This belief goes right to the heart of the trust argument. Is this in the country’s best interest?
Let’s focus on how industry organizations can serve as protagonists in solving this dilemma.
Developing customer intimacy and positive, enduring client relationships require a proactive client engagement process. Customer engagement with a concerted early opportunity identification and qualification phase should be considered critical activities within business development/capture. With an effective engagement process and robust identification and qualification of opportunities, business development organizations can avoid or reduce adversarial relationships and issues of mistrust.
Which strategy do you believe offers the potential to deliver better outcomes for both sides?
1. A commoditized, buy-sell, transaction-based acquisition strategy where customer and contractor contact is obviated, with mandated protective measures required to compensate for mistrust.
2. A long-term, relationship-based position built by engaging both operational and acquisition customers in substantive conversations and collaborating with them in creating the best, most technically efficient and cost-effective solutions to fulfill the mission.
The second approach has the potential to combine low-cost with best-value. This distinction is critical. Evaluating contracts on a single, low-cost metric is particularly dangerous in providing deliverables to our nation’s military. With this policy, technically acceptable outcomes become the trade-off and effectively commoditize service and product procurement.
In the first scenario, the operational customer is largely cut out of the pattern. Contracting officers and the acquisition community are in charge and have little to no stake in mission outcome or motivation to ensure the procurement is in the best interest of the operational customer. Additionally, in this downward price spiral, incumbents do not necessarily have the advantage they once enjoyed.
Quality, cost-effective solutions are the outcome of a collective approach, where a dialog on all of the issues and concerns offers value-added, budget-conscious results. Trust is the main factor in developing this kind of collaborative partnership with the client. This trust is built on people-to-people relationships fostered by frequent, problem-solving customer engagements, where the purpose is to ensure operational customers get their needs met to accomplish the mission.
Unfortunately, the current acquisition environment is opting for the first strategy. In the relentless search for low cost, industry finds the acquisition community is only minimally concerned with obtaining the operational outcome. Currently, some contractors search for operational customers with the spine and political clout to ensure mission accomplishment via true technical competence and a fair (as opposed to lowest) price. They’re essentially qualifying customer opportunities on this basis.
Contractors agree that it’s a very tough environment right now. Perception is that it’s exacerbated by the current administration’s expressed view of private business and its relationship with government.
Mistrust is apparent; and its affect is negative.
As former chairman of the Federal Reserve Alan Greenspan said, “Our market system depends critically on trust. Trust in the word of our colleagues and trust in the word of those with whom we do business.”
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