Tales From The Trenches: Reflecting Product Support Best Practice In The Contract

1. Tales From The Trenches: Reflecting Product Support Best Practice In The Contract Performance-Based Logistics Best Practices Implementation | Practical Concepts Primer Bob Barnhart, Research Associate, University of Tennessee http://thecenter.utk.edu/pbl

2. The Leading Universityon the Topic of PBL Launched in 2005, the PBL Curriculum at UT is a direct outcome of the funded research housed in the UT Aerospace/Defense Clearinghouse Boeing, Lockheed Martin, Northrop Grumman, Pratt & Whitney, and Raytheon sponsored the original research.   UT developed a strategic partnership with the Defense Acquisition University (DAU). Research continues Best practices in PBL, across the Air Force Quantitative analysis of PBL performance, in collaboration with the Wharton School at the U. of Pennsylvania Cultural predictors of PBL Success, in collaboration with Auburn U. at Redstone Arsenal The creation of National Defense Business Institute reflects our continued interest in the business issues of defense business and acquisition programs.

3. Active Publication Stream “Will Someone please hit the Reset Button?”, DC Velocity Magazine, May 2009 “The Myth of the Rheostat”, Overhaul and Maintenance Magazine, February 2009 “Performance-Based Logistics Works”, Aviation Week, November 3, 2008 “Performance-Based Logistics: A Contractor’s Guide to Life Cycle Product Support Management”, September 2008

4. PBL Tenets: Overview Performance Management PBL Contract Structure Elements Align Interests Establish the Business Relationship (Having a committed relationship that “gets PBL”) In our research, UT has identified 20 “PBL Best Practice Tenets” that fall into four general categories. 4

5. The Tenets Establish the Business Relationship PBL Center of Excellence PBL Knowledge Base Champions Stakeholder Analysis Alignment of Interests Win-Win Business Model Organizational Alignment Supply Chain Integration Asset Management Best Value Workload Allocation Appropriate Risk Management Contract Structure Pricing Model Incentives Contract Length Off Ramps Work Scope Funding Stability Performance Management Top Level Desired Outcomes Performance Reporting Continuous Improvement Focus Metric Alignment with Suppliers

6. Goals Are Not Aligned Industry wants growth Growth requires revenue, Return on Invested Capital (ROIC), profit (margin), and financial risk management • Title 10 mandates assured availability of a ready and controlled (i.e. government owned) source of technical competence and resources • 50/50 is measured in terms of dollars • Core is measured in terms of hours • Organic structure is required to invest 6% of annual revenue at the service level into the depots irrespective of future requirement • Congressional interests may be on jobs for specific geographies How can we possibly deliver best value when we pursue conflicting objectives?

7. Both teams are playing football But they are not playing the same game.

8. A middle ground? "In our country we buy our military equipment from private industry, so they're our partners in equipping our forces . . I would like to have a relationship of candor and dialogue...we're in this together.” -Ashton Carter, USD (ATL) Wall Street Journal May 1, 2009 Fowler said the goal of "next-generation PBL" is to define a "product support business model" that provides a more networked strategy among industry and government. It should also strive for more cost-effective performance and capabilities improvements across the targeted system's or platform's lifecycle, and a more balanced use of the defense industrial base. Randy Fowler as reported by Aviation Week (1) maximize competition and make the best possible use of available Department of Defense and industry resources at the system, subsystem, and component levels; and (2) maximize value to the Department of Defense by providing the best possible product support outcomes at the lowest operations and support cost. -Section 805 of 2010 Authorization Act 8

9. PBL Team Primer • PBL is about changing the traditional relationship • Traditional approach will yield traditional results • All stake holders and PBL team must be aligned • PM and Contracting Officer must accept the burden for making PBL happen • Recruit team members that have PBL knowledge and experience • Recruit Champions to act as enablers for change

10. Long Term Contracts A long term contract is the keystone or enabler for PBL behavior where a product support provider will commit themselves to desired levels of performance. Key Attributes: contract that has stability in performance requirements no gaps in requirements acquisitions includes a pricing structure that is not reconstructed from year to year or even several times per year Long term relationship facilitates better service and service parts planning capabilities Within the 2005 Authorization Act language was enacted to set limits on the length of delivery order type contracts as follows: Multiple Year: SEC. 813. PERIOD FOR MULTIYEAR TASK AND DELIVERY ORDER CONTRACTS The total contract period as extended may not exceed 10 years unless such head of an agency determines in writing that exceptional circumstances necessitate a longer contract period. “The preferred PBL contracting approach is the use of long-term contracts.” (USD/ATL policy memo: Performance Based Logistics: Purchasing using Performance Based Criteria (16 Aug 2004)) 10

11. What is the right contract term? It depends: Contract term needs to be long enough to drive the change in behavior by the product support provider Longer term contracts are more conducive to effective PBL implementation, however, research reveals they do not have to be as long as many PBL experts suggest : 3 to 5 years might be adequate 10 to 20 year terms may be reasonable Simple process changes can generate significant improvements and drive costs out Changes do not have to be major technology insertions or upgrades We believe contract pricing needs to be addressed at pre-defined timeframes allowing for the review of costs Potential re-pricing based on changes in cost base There needs to be a strategy for “harvesting the savings” created by cost reductions and process improvements 11

12. How do You Make a Long Term Contract Guarantee? Guaranteed funding for out years would be the ultimate situation; but, most funding is annually appropriated and limits ability to make Long Term guarantee Lack of funding “guarantee” drives year-by-year “Traditional Contracting” behavior Absent this absolute guarantee, what needs to be done differently to change the product support provider’s behavior? our research has shown a stable program with a long term contract having out year pricing (priced options) results in PBL type behaviors by product support providers and works in competitive or non-competitive environment product support providers are able to understand and assess the risk PBL simply cannot happen without product support providers stepping up to the plate…requires positive relationship for this approach to work. If the support provider doesn’t trust the government . . . Can be complex to accomplish…including legal counsel in discussions on this subject early in the process is a key to success 12

13. It is Not Either/Or . . . • Tendency to oversimplify the transfer of risk and reward to the contractor in PBL • Intelligently moving risk to the product support provider, and aligning contract and incentives to stimulate appropriate activities…PBL business model can remove risk from the total system. • Process should not be about moving risk . . . it is about realigning the incentives to reduce total program risk.

14. Pricing Model Pricing strategies that move away from transactions are a key element of creating PBL behavior High performing PBLs structure the pricing to adapt to the level of performance being received Pricing is adjusted based on performance and changes in levels of requirements, examples: cost per flight hour or steaming hour cost per system per month Provides a “rheostat” to adjust total cost based on increases or decreases associated with the requirement. Additional price adjustments from the negotiated support cost, examples: can be either increase the price based for exceeding the baseline performance level or decrease the price based on the product support provider not achieving the baseline these types of adjustments simply set up a pre-determined model to ensure the government only pays for the level of service it receives performance based contracting and performance based payments Complex PBL requirements may need a contract with multiple Pricing Structures, i.e. FP, CP 14

15. Achieving Pricing Model Process of implementing a PBL will require a significant exchange of data Research shows there is a direct correlation between the adequacy and accuracy of the data provided to the quality of the proposal by the product support providers It is almost universal that the initial proposal will be much more expensive than the Business Case portrays or for the current costs to perform This disconnect can add large amounts of lead time to PBL implementation The government pricing team needs to be prepared to roll up their sleeves and work through the details of the proposal and the BCA Requires the team have a clear understanding of the proposal, the government’s costs and the BCA On occasion final price agreements have only been achieved where there was a line by line price review and comparison to ensure an apples-to-apples understanding of the requirements and corresponding costs 15

16. Incentives High performing PBLs have incentive structures that are tightly aligned to the key performance attributes In developing financial incentives you need to ensure that the incentive does not reward the product support provider for performance beyond required or budgeted performance levels...Can create budget shortfalls and government paying for performance beyond requirement Incentives need to be against stretch goals…Significant performance improvement…be prepared to move bar over time Percentages for sharing of cost savings needs to consider magnitude of contract value…50% of $100K = $50K 50% of $100M = $50M Award Term extensions can provide significant performance motivation Award Term provisions complex Award term language has raised issues regarding whether the award term is actually a guaranteed commitment when funding is not available Can raise issues with Anti-Deficiency Act provisions Include Legal Counsel in discussions on award term provisions early in the process is a key to success Government has wide discretion in assembling and blending contract types and incentive types, tailored to fit the circumstances of the program 16

17. Metrics If you measure something and review the results on a regular basis, people are going to pay attention to the effort Without capabilities to meticulously manage key aspects of contract performance, it will be difficult to make the PBL model work It is important to ensure that there is a capability to obtain the data required for key metrics Manually gathering and manipulating data for PBL metrics will not work in the long run Data needs to be timely and transparent… Good metrics will drive product support providers to look for ways to better plan programs and subcontracts to improve performance to better negotiate and manage complex subcontract relationships to focus on supply chain management as a critical factor for business success When network suppliers fail, the product support provider fails 17

18. Supply vs. Services PBLs normally cover many ILS elements; and, can include the delivery of both supplies and services Determination of Supply vs. Services can be extremely complex Supplies are broadly defined by FAR Part 2 Service contract means a contract that directly engages the time and effort of a contractor whose primary purpose is to perform an identifiable task rather than to furnish an end item of supply. [FAR Part 37] There should be no pre-established Policy or Determination that all PBLs are either Supply or Service Contracts The determination of whether a contract is a Supply or Service Contract should be Governed by the SOW/SOO Governing Legislation The Walsh-Healey, Public Contracts Act (PCA) The McNamara-O'Hara Service Contract Act (SCA) 18

19. Supply vs. Services (Cont.) How the performance characteristics of the requirement are described is less import than what is the actual requirement to be delivered IRT the SOW PBLs achieving an outcome defined by the SOW/SOO can be a Supply contract Basis of payment is a determining factor in whether a requirement is a Supply or Service Contracting Officer makes final determination…adequate guidance exists for contracts personnel to determine if requirement should be Supply or Service. Our recommendation is that focus be placed on identifying requirements and describing required outcomes on a performance basis…Determination, Supply or Service, will be natural outcome of that effort 19

20. PBL- What We Have Learned • PBL is a Comprehensive Performance Package… not individual parts, repairs, services, ECPs, etc. • This approach changes the provider incentive paradigm • “Pay for Performance” contract needs to motivate provider to reduce consumption • Long term commitment enables provider to balance risk vs. investment

21. Best Value for work share ? Where is RIGHT to do the Work? PM Activity Activity Activity Activity Activity Activity Activity Activity Activity A teamed approach to define WHO does WHAT to get to best value. It isn’t binary. It is pooled. It is a portfolio. Activity Activity Activity Activity Activity Activity Activity 21

22. Questions? More info at http://thecenter.utk.edu/pbl 22