Best Value Business Model Kenneth T. Sullivan PhD, MBA Performance Based Studies Research Group School of Sustainable Engineering and the Built Environment Ira A. Fulton Schools of Engineering Arizona State University www.pbsrg.com
PBSRG’s Research Results(Performance Based Studies Research Group) • Worldwide as a leader in Best-Value Systems • Conducting research since 1994 • 900+Projects • $4.4 BillionServices & Construction • 5% Increase in Vendor profit • 98% On-time, On-Budget, Customer satisfaction • PMI, NIGP, IFMA, IPMA • Tests in Netherlands, Botswana/Africa • ASU – investments of over $100M due to BV
General Dynamics University of Minnesota General Services Administration (GSA) Heijmans, Netherlands Ministry of Transportation, Netherlands State of Alaska Brunsfield (Malaysia) University of Alberta State of Oklahoma State of Idaho Idaho Transportation Department State of Oregon US Army Medical Command USAF Logistics Command University of New Mexico University of Idaho Arizona Parks and Recreation US Solar Neogard Arizona State University US Corps of Engineers Arizona Public Service (APS) Salt River Project (SRP) Rochester Utility Boise State University Idaho State Lewis & Clark City of Phoenix, AZ City of Peoria, AZ Hennepin County, MN City of Roseville, MN Olmstead County, MN Fann Environmental EVIT School District Fulbright Program /University of Botswana, Africa US Embassy, Bank of Botswana RMIT, Melbourne Australia Aramark, Canon, Qwest, ISP, Chartwells, AP, Pearson Various Contractors and Consultants Research Clients
Tested Application Areas • Construction & Design/Engineering • Large GC, infrastructure, municipal, laboratory, education, hospital, financial, large specialty, etc. • Small GC, renovation, repair, maintenance, roofing, demolition, etc. • DBB, CMAR, DB, IDIQ, JOC, Low Bid • Development, supply chain • IT • Networking, Data Centers, Software (COTS, custom), ERP, etc. • Facility Services • Maintenance, industrial moving, custodial, waste management, services, etc. • Business, Municipal, & University Services • Dining, Document Management, Multi-Media Rights, Fitness Equipment, Online Education, Bookstores, Material Recycling, Furniture, etc. • Health Insurance, Medical Services • Manufacturing
Working Commission 117 & JournalInternational Efforts & Partners Univ of Alberta 5 years 15 tests for infrastructure Two major GCs Tongji University Brunsfield Complete Supply Chain Fulbright Scholar University of Botswana PIPS tests RMIT Teaching IMT PBSRG platform
What makes our research message unusual….. • Simplistic • Uses logic • Efficiency: less decision making, less management, and better results (best value and high profits) • It is more important for the vendor who does the work to know what to do than it is for client’s representative to know what the vendor should do • Measurement
Industry Structure High III. Negotiated-Bid II. Value Based Qualified vendors invited Owner selects vendor Negotiates with vendor Vendor performs Best Value (Performance and price measurements) Quality control Vendor minimizes risk Probability of Performance I. Price-Based/Traditional IV. Unstable Market Specifications, standards and qualification based Management & Inspection Client minimizes risk Low High Competition
Impact of MinimumStandards & Requirements High Low High Low Vendor 1 Vendor 2 Risk Risk Performance Performance Vendor 1 Vendor 2 Vendor 3 Vendor 4 Vendor 3 Vendor 4 Low High Low High
Perception Problems with Traditional Systems High High Performance Performance Low Low Owners “The lowest possible quality that I want” Vendors “The highest possible value that you will get” Maximum Minimum
Industry Performance and Capability Vendor X Customers Highly Trained Outsourcing Owner Partnering Owner Medium Trained Minimal Experience Price Based
Traditional Management Initial conditions Final conditions D1 M&C Laws Laws Time • D1: Client makes decisions on budget, time, and expectation • D2: Client consultant/professional makes more decisions to make expectations true • D3: Vendors attempt to use the lowest possible price to minimize the risk caused by the decision making of client & consultant/professional • M&C: The client attempts to force vendor to make expectations happen D2 D3
Project Management Model Initial conditions Final conditions M3 C1 M2 Laws Laws Time • C1: Client Expectations based decisions and various factors – may or may not be “realistic” • M1: Measured vendor plan that more accurately describe the initial conditions replaces C1 – converts to a predictive contract • M2: RMP/WRR measures deviation & performance to plan • M3: Final performance measurement M1
Micro-Management Performance dictated by technical information Specification is the requirement Inspection by client Client’s professional is the expert and has control No performance measurements Increase flow of information Relationships (partnering, deals, give and take) used to solve issues Need more people (inefficient) No accountability Leadership Performance dictated by performance information Specification is only the intent Quality control by contractor Vendor has control Performance measurements Decrease flow of information High performance vendors used to minimize risk Need less people (efficient) Accountability Inefficiency vs Efficiency Can you make the transition?
Performance-Based Functions III. Negotiated II. Performance-Based High • Treat as a Commodity • Volume Based • No Accountability • Finger Pointing • Management & Inspection • Minimum Standards • Client minimizes risk • Value & Performance • Maximize Profit • Vendor Accountability • Minimized Management & Inspection • Quality Control • Vendor minimizes risk Performance IV. Unstable Market I. Price-Based Competition Low High
Best Value Overview • Complete business model for organizations & projects • A best value selection and management tool (developed and tested over 17 years) • It can be applied to any type of system, organization, structure, procurement, project, or need • Best Value is not just a procurement method. It is a selection and management tool that can be applied in: • Business Services (IT, dining, consultants, equipment, doc mgmt, insurance, etc.) • Facility Services (maintenance, roofing, janitorial, landscaping, supplies, etc.) • Design, bid, build (DBB), Design build (DB), Construction manager at risk (CMAR) • A/E & Design, Job Order Contracting (JOC), Indefinite Delivery Indefinite Quantity • BV is not a computer software package, but rather a combination of IMT principles that allows a client to make an informed decision
What does the Best Value Model do? • Makes things simple (measurement, dominant information) • Minimizes the fuel of bureaucracy (decision making, non-dominant information, management, control, and direction) • Creates transparency • Allows organizations/vendors to be highly efficient and successful • Proposes that to accurately identify what “is” and then to have a plan to efficiently meet the needs will minimize risk
What is the model? • Identify the expert with as little effort as possible, using measurement and differential • Transfer risk and control to the expert through preplanning and risk minimization, focusing on risk that are not controlled • Hire the expert • Use alignment, planning, & measurement in place of management, control, and direction • Create a performance information environment to drive accountability and change • Proactive vs. Reactive • Supply chain (us mentality) • Logic vs. Experience • Predictable vs. Chance
Best Value System PHASE 1 PHASE 2 PHASE 3 Measurement of Deviation from the Expectation Pre Planning and Risk Management Identification of Potential Best-Value
Best Value System PHASE 1 PHASE 2 PHASE 3 Measurement of Deviation from the Expectation Pre Planning and Risk Management Identification of Potential Best-Value
Scenario 1 Scenario 2 What are we trying to accomplish? Question: If Purchasing wants to buy a “green circle”, in which scenario is hiring the right “green circle” easiest to justify?
BV Process Filter 2 Current Capability Filter 3 Interview Key Personnel Filter 1 Past Performance Information Filter 4 Prioritization (Identify Best Value) Filter 5 Cost Reasonableness & Dominance Check Filter 6 Pre-Planning & Risk Min High Quality of Vendors Award Measurement of Risk & Performance During the Contract Low Time
Evaluation Criteria • Past Performance Information (not rated) • [Scope Plan – if needed(rated)] • “Technical” Risk Plan (rated) • “Non-Technical” Risk Plan (rated) • Value Added Plan (rated) • [Milestone Schedule (not rated/not weighted)] • Cost / Financial Proposal (not rated) • Interviews (rated)
Weighting • General Guideline • 30% Price (but always have dominance check!!!!!) • 70% Performance • Performance Criteria (typical order of importance) • Interview • Non-Technical Risk Plan • About equal • Technical Risk Plan • VA • PPI
Submitting a proposal • Identify best person / team via measurement • Get in a room, plan it out • Identify & prioritize risk w/ solutions • What else does the client need or could be better • Cost it out / financial proposal • Then write up your proposal
Filter 1 – Past Performance Information Filter 2 Current Capability Filter 3 Interview Key Personnel Filter 1 Past Performance Information Filter 4 Prioritization (Identify Best Value) Filter 5 Cost Reasonableness & Dominance Check Filter 6 Pre-Planning & Risk Min High Quality of Vendors Award Measurement of Risk & Performance During the Contract Low Time
Critical Individuals Past Performance Information will be collected on all critical team components, which includes: Components • The Firm (Company/Firm) • Boss or Money Decider (if service) (Individual) • Project Manager (Individual) • Site Manager (Individual) • Critical Sub-Parties (Firms or Individuals)
Filter 2 – Current Information Filter 2 Current Capability Filter 3 Interview Key Personnel Filter 1 Past Performance Information Filter 4 Prioritization (Identify Best Value) Filter 5 Cost Reasonableness & Dominance Check Filter 6 Pre-Planning & Risk Min High Quality of Vendors Award Measurement of Risk & Performance During the Contract Low Time
Filter 2 Components • Technical Risk Plan • Non-Technical Risk Plan • Value Added • Schedule (not weighted, not rated) • Cost / Financial Proposal
Technical Risk Plan • TECHNICAL RISK – Project risk that other vendors have due to lack of experience and expertise (capability is more important than project detail) • PURPOSE • To identify vendor’s technical expertise and risk of other vendors caused by lack of capability • Differentiate vendor based on dominant expertise • Length: 2 page maximum
Non-Technical Risk Plan • Non-technical risk: any non-technical risk by other participants which could cause time or cost deviation • Purpose: • capability of vendor to think in the client’s best interest; • vendor understand that this is the most important risk; • vendor take charge of the project; • vendor minimizes transactions of the project; • vendor becomes proactive instead of reactive; • vendor preplans activities that they do not control • Length: 2 page maximum
Value Added • Value added: • Difference from average vendor in vendor’s capability to add value to the project; • what can help project have more value; • beyond the scope of the project “technical” requirements • Understand need better than client can specify • Adds value or minimize cost ; increases value of delivered service for client • Length: 2 pages maximum
Milestone Schedule The milestone schedule should identify key action steps and milestone dates for delivery of the service or transition. • Milestone schedule for all phases needed (1-page) • Anonymous • No template – follow your own preference
Format of the Plans In order to minimize any bias, the Plans must NOT contain any names that can be used to identify who the proponent is (such as proponent name, personnel names, project names, etc). A template is provided and must be used. Proponents are NOT allowed to re-create, re-format, or modify the template. The plans should not contain marketing material. The Technical Risk Plan must NOT exceed 2 pages. The Non-Technical Risk Plan must NOT exceed 2 pages. The Value Added Options must NOT exceed 2 pages The Schedule most NOT exceed 1 page The Pricing must be submitted as to the template 35
Example of SolutionsRisk: Noise from Demolition Type: Technical Risk • Plan 1 • We will work with the user to minimize the impact of noise from demolition. • Plan 2 • We have planned to demolition during off hours and weekends. This will have a slight impact on our cost (less than 1%), but the impact to customer satisfaction justifies this. • We will also install rubber sheets on the floors to diminish noise and vibrations. • Both solutions can be performed within your budget. • Both solutions have been used on multiple previous projects w/ high levels of customer satisfaction (9.4/10).
Example of Solutions Risk: Getting water to the site Type: Technical Risk • Plan 1 • Coordination with [water company] is critical. We will coordinate and plan with [water company] as soon as the award is made to make sure that we get water to the site to irrigate the fields. • Plan 2 • We will coordinate and schedule the water with [water company]. However, based on past experience there is a high risk they will not meet the schedule (the water company does not meet schedule over 90% of the time). • We will have temporary waterlines setup and ready to connect to the nearby fire hydrant to irrigate until [water company] is ready. • We will also have water trucks on-site if there is problems with connecting the lines.
Example of Solutions Risk: Concrete EscalationType: Non-Technical • Plan 1 • The owner can be assured all risks associated with material escalations will be eliminated because we offer the benefit of an experienced project team that includes the most detailed, prequalified and extensive list of subcontractors and suppliers, from around the world. • Plan 2 • The cost of concrete has been rising drastically. Since this project requires a substantial amount of concrete, cost is a risk. To minimize this risk, we have secured and signed a contract with a local concrete manufacturer to prevent any increase in cost during the duration of this project.
Example of Solutions Risk: Loss of Radio Flagship in Major MarketType: Non-Technical • Plan 1 • We will work very hard to maintain excellent affiliate relationships. If we lose a radio station (e.g. it changes its format) we will move quickly to replace the lost station. If we cannot quickly replace a flagship station, we can be very creative and could even consider purchasing all local inventory from a new flagship station. • Plan 2 • In the past 10 yrs, on over 50 accounts, 7 radio stations format changes have occurred. The following solution is optimal. • We own and will maintain two radio contracts covering the area, where signals can be switched if required. The flagship station will be the station with the stronger signal and greater coverage. • If a station is lost we will have a equal replacement within 2 months. If within two months a replacement is not contracted we will purchase inventory from another station or discount the cost of an inventory purchase and add it to our payments to the client.
Example of Solutions Risk: Safe Food Supply/Food Born Illness Type: Non-Technical • Plan 1 • Our internal food safety standards are recognized as being far more stringent than government regulatory requirements. In the unlikely event of a food-borne illness, our strong relationships with local, state, and national health agencies will ensure and 24-hour response. • Plan 2 • If a food safety issue arises, vendor will effectively minimize the client’s risk of exposure by: • 1) Vendor’s system will issue a safety alert and related directives to 10,000+ units and all ASU email accounts in less than 15 minutes. • 2) The vendor will place a lock within in its foodservices purchasing system on any food with risk so it cannot be purchased, • 3) The vendor will remove all potentially harmful products within the first hour of notice. • 4) The vendor will identify as many purchasers as possible through credit receipt names and the client system to notify them individually. Warnings will be placed around campus within two hours of discovery.
Example: Value Added Items Reroofing this building will not stop all water leaks. The majority of the leaks are caused by cracks in the parapet walls, broken/missing glass, and poor caulking. For an additional $20K and 3 weeks in schedule we can replace and repair all of these items.
Plans Summary The All Plans are 2 pages maximum each The Plans must NOT contain any names. No marketing / No technical information Avoid general risks / solutions Identify value added options (and explain why) The Plans becomes part of the final contract. The Plans provide a high performing vendor an opportunity to prove their expertise & prove they are not a commodity. If nobody can clearly differentiate themselves in the Plans, the prioritization will be based on other factors. 43
Filter 3 – Interviews Filter 2 Current Capability Filter 3 Interview Key Personnel Filter 1 Past Performance Information Filter 4 Prioritization (Identify Best Value) Filter 5 Cost Reasonableness & Dominance Check Filter 6 Pre-Planning & Risk Min High Quality of Vendors Award Measurement of Risk & Performance During the Contract Low Time
Interview Format The client will actually “interview” each critical individual. This is not a “presentation” All individuals will be interviewed separately. The client will not allow group interviews with the proponents team. The client will not allow any other individuals to be present during interviews Generally, interview times will last about 15-25 minutes per individual A standard set of questions will be generated and asked to each individual. The client has the option to clarify any answers (or ask additional questions to clarify an answer). No substitutions will be allowed. Individuals listed on Proposal Form must be present. If a team member is not present for the interview, they will jeopardize the teams competitiveness.
Primary Questions Why were you selected for this project? How many similar projects have you worked on? Individually and as a Team? Describe a similar project you have developed/worked on to the current project. What is different about this project from other projects that you have worked for? Draw out the process for this project by major milestone activities. Identify, prioritize, and how you will minimize the risks of this project. What risks don’t you control? How will you minimize those risks? What do you need from the client and when do you need it? How are you going to measure your performance during the project? What value do you bring to the project in terms of differences based on dollars, quality, expertise, or time?
Filter 4 – Identify the Potential Best Value Filter 2 Current Capability Filter 3 Interview Key Personnel Filter 1 Past Performance Information Filter 4 Prioritization (Identify Best Value) Filter 5 Cost Reasonableness & Dominance Check Filter 6 Pre-Planning & Risk Min High Quality of Vendors Award Measurement of Risk & Performance During the Contract Low Time
Filter 5 – Dominance Check w/ Cost Reasonableness Filter 2 Current Capability Filter 3 Interview Key Personnel Filter 1 Past Performance Information Filter 4 Prioritization (Identify Best Value) Filter 5 Cost Reasonableness & Dominance Check Filter 6 Pre-Planning & Risk Min High Quality of Vendors Award Measurement of Risk & Performance During the Contract Low Time
Best Value Prioritization Best Value Prioritization No No Yes No Yes Yes Yes No Yes Yes Yes Yes Yes Yes Yes Yes Proceed to Pre-Award Go with Alternate Proposal or Cancel Dominance Check & Cost Reasonableness Proceed to highest ranked proposal within budget Best-Value is within budget Best-Value is the lowest price Dominance Check Also Best-Value is within X% of next highest ranked firm Best-Value can be justified based on other factors