Are we on the cusp of an era of procurement revolution?
I’ve been trying to catch up on some of my reading this morning and I visited Steve Kelman’s Lectern blog at FCW.com.
In his most recent post he explores some of his favorite topics on procurement innovation – share-in-savings and risk tolerance. Both concepts have great potential for the contractor community.
Many observers have speculated that the Trump administration will embrace share-in-savings contracts as a way to reduce costs while also making the government more efficient.
The concept has been around for a long time as Kelman points out but it hasn’t gained much momentum in the federal space. But over the last 15 years it has gained greater use in the commercial market and there are success stories.
Kelman cites a column by A.T. Kearney partner Howard Steinman that promotes the concept of share-in-savings as an attractive solution for the Trump administration. Of course, not all procurements fit the share-in-savings model and Steinman provides a handy checklist for determining when it is appropriate.
Two of the big ones in my mind are whether baseline costs can be clearly measured and whether savings can be quantified.
Those are huge and probably the biggest barriers to be overcome. But they aren’t insurmountable.
One thing Kelman doesn’t talk about is the potential for a hybrid approach. Perhaps year one of a contract can have a more traditional structure such as cost-plus or time and material, but during that first year, the critical baselines are established by the contractor and the customer working together. Once the baseline is established, the contract’s structure converts to a share-in-savings model.
For this to work, however, the other items on Steinman’s checklist must come into play, namely that the senior leadership at the agency has to support the concept, dedicate resources to it and establish buy-in from across the organization.
While the drive for share-in-savings is often stated in dollars and cents, it is a huge change so the soft factors of people and culture cannot be ignored.
The reason I like the share is that in theory it gives contractors more flexibility and the incentive to propose innovative solutions. The other reason I like it is that it is an opportunity for disruption in the marketplace, creating opportunities for new players to emerge and challenge established companies.
With the increasing use of cloud computing and X as a service, you don’t have to be a huge prime contractor to take on a large, complex project. With domain expertise and the right partners, virtually any company can challenge anyone else.
Incumbents need to be on their toes and that’s a good thing.
The second concept that Kelman explores in his post is risk. He uses the SpaceX venture and NASA as his example. Kelman has written about SpaceX in the past from the perspective of lower costs compared to traditional rocket launches.
This time he riffs off a blog by Tim Fernholz, a space and science writer. Fernholz looks at how the SpaceX program has NASA looking at risk in new ways. He compares the space shuttle era where launches sites had to meet 2,200 safety requirements. Today, NASA has 500 safety requirements. Meanwhile, commercial launch sites have 55.
NASA likes zero risk while commercial entities look more at calculated risks.
Fernholz says that NASA maybe changing how it looks at risk as it re-engages with human space flight. Being too risk adverse might undermine NASA’s mission to “pioneer the future.”
I won’t comment on that part of risk because it likely won’t be one of my sons going up in a rocket, but I do think any discussion of risk is worthwhile because the government’s risk aversion goes well beyond rocket launches.
If the government was more accepting of failure (I’ll draw a line where human lives are involved), I think we’d see more progress and innovation, and this includes share-in-savings.
Any new administration brings the potential for change and a break from the past, and while we might not agree with all of it, this might be one area where more of us will agree than disagree.
Posted by Nick Wakeman on Feb 24, 2017 at 7:34 AM