Breakout Session # 303 Diane K. Whitmoyer, CPCM Vice President, Contracts & Procurement

1. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

2. How to deal with OCI in today’s world of mergers and acquisitions Breakout Session #303 Diane K. Whitmoyer, CPCM Vice President, Contracts & Procurement BAE Systems Monday, April 26, 2004 2:45 PM – 3:45 PM NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

3. Agenda • Industry Consolidation • What is an OCI? • Unfair Competitive Advantage • Lack of Impartiality • OCI General Rules • Providing Statement of Work • Exemptions From OCI • Mitigation Plan/Actions • Questions NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

4. Industry Consolidation • Given the number of mergers, acquisitions and consolidations that have taken place in the defense industry in recent years, contractors face being told they are ineligible to compete (or vie for their recompete) for a contract because they—or their predecessors have an unfair competitive advantage over other firms. • The Government relies heavily on contractors to get much of its work done and this outsourcing trend appears to be continuing. • The Government, who once had a large stable of contractors upon which to call to perform professional services, is finding their favorites being gobbled up by the larger hardware and systems providers. • With fewer competitors, there will be more situations where OCI becomes an issue. There could well be competitions in which none of the offerors is without some kind of an OCI. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

5. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

6. What kinds of situations can be mitigated? • As any good support contractor will tell you… • All conflicts of interest can be mitigated in one way or another. • Except those of my competitor! NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

7. What Is an OrganizationalConflict of Interest?(OCI) NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

8. FAR Provisions • Principles result in three broad categories of OCI (FAR 9.505 lists four, but they overlap) • Evaluation of own work impairs objectivity (FAR 9.505.1 & .3) • Contractor sets “ground rules” of procurement (writing SOW or performing systems engineering and technical direction effort) skewing competition in its own favor (FAR 9.505.1 & .2)   • Access to nonpublic information in performance of Government contract (FAR 9.505-4) NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

9. FAR Provisions • FAR 9.505-1 -- Providing Systems Engineering and Technical Direction • Contractor provides systems engineering and technical direction for a system but does not have overall contractual responsibility for development and integration • Prohibits contractor from • Being awarded a contract to supply the system or any of its major components; or • Being a subcontractor or consultant to a supplier of the system or any of its major components. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

10. FAR Provisions • FAR 9.505-2 -- Preparing Specifications or Work Statements • Where contractor provided specifications for non-developmental items – may not compete to supply item • But normal to select firms most advanced in field for developmental work • These firms can be expected to design and develop around their own prior knowledge • Creates unavoidable competitive advantage that is not considered unfair; hence no prohibition NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

11. FAR Provisions • FAR 9.505-3 -- Providing Evaluation Services • Prohibits a contractor from evaluating its own offers for products or services, or those of a competitor, without proper safeguards to ensure objectivity to protect the Government's interests • FAR 9.505-4 -- Obtaining Access to Proprietary Information • Contractors who obtain access to proprietary data must protect data from unauthorized use • Usually requires company-to-company agreements to protect and properly use such data NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

12. Unfair Competitive Advantage Relating To Source Selection Or Competitor Information Examples: • Access To Or Improper Use Of Competitor Technical Approach • Access To Or Improper Use Of Competitor Pricing Information • Developing Technical Requirements Which Favor Parent Company • Conducting Or Reviewing Technical Data And/or Test Results Of Parent Company NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

13. Lack of Impartiality Relating to Privileged Information I wonder if we can write the spec around our product Examples: • Consulting services • Writing Specs • Writing SOWs NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

14. Lack of Impartiality (Cont.) Example: • Contractor develops and delivers a product. • Contractor tasked to test product under separate contract. • Contractor may be incentivised to perform in biased manner. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

15. Lack of Impartiality (Cont.) Example: • Contractor parent company builds automobiles • Contractor tasked to test another auto company’s experimental product that could compete with parent company’s products NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

16. Exemptions From OCI • Contractor is Sole Source • Contractor also participated in design and development work • More than One (1) Contractor prepared SOW NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

17. Duty to Mitigate • FAR 9.504 encourages the Contracting Officer to analyze planned acquisitions in order to • identify and evaluate potential conflicts of interest as early in the acquisition process as possible; and • Avoid, neutralize, or mitigate significant potential conflicts of interest before contract award. • The Contracting Officer shall award the contract to the apparent successful offeror unless a conflict of interest is determined to exist that cannot be avoided or mitigated. • Courts decisions emphasize the agency’s inherent discretion in this area and accords considerable esteem to the Contracting Officer’s determination. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

18. Areas of Conflict • Each area of possible conflict can have different mitigation techniques: • Impaired objectivity or biased judgment. • Unfair competitive advantage created by unequal access to proprietary or source selection information. • Biased ground rules where the contractor provides the “ground rules” or specs, for a future contract or system. • Most OCI mitigation plans tend to be made up of similar elements. The Contracting Officer should not rigidly adhere to any particular technique, but should maintain the flexibility to choose among and apply such techniques only to the extent required to mitigate a potential OCI. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

19. Disclosure of Relevant Information • Several agencies are requiring offerors to disclose all information relevant to an OCI determination. • Although DOE has limited the period to 12 months, other agencies provide no such limitation on the “look back” period. • DOE also limits disclosure to the apparent successful offeror and does not require information from subcontractors, except under certain circumstances. • Companies not only need to have systems in place to be able to screen new work against contracts already in place containing OCI provisions, but also new solicitations with OCI provisions which might conflict with future plans of the business. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

20. Firewalls • The written agreement between the conflicted entities usually relies on a combination of procedures and physical security to establish organizational “walls” to avoid potential, real, or perceived OCIs from impacting the business activities of either party. • Organizational separation in an OCI plan should be at a level low enough in the contractor’s organization so as not to deprive the Government of valuable products and services merely because of their inclusion in a business unit and to facilitate adequate administration of the mitigation plan. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

21. Confidentiality Agreements • Employees are required to execute special confidentiality agreements with penalties for noncompliance, including disciplinary action up to and including termination. • Requires the employee to notify a high ranking corporate official should any person not working on the contract attempt to solicit information or influence the work being performed under the contract. • This requirement goes hand in hand with training for the affected employees regarding their responsibilities under the contract. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

22. No Sharing of Personnel • Based on the assumption that by eliminating communication between personnel from the conflicted entity and the organization, the potential for bias is effectively eliminated. • One weakness to this strategy is that the potential for bias remains because the organizational relationship still exists. Separation of employees does not eliminate the organizational relationship between the related entities. • Plan can also require that the affected employees not receive any incentive compensation that would reward them for the performance of their affiliated business unit. • However, the employee stands to lose more than he might gain by disclosing protected data to a sister unit. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

23. Divestiture of the Company • Creation of a new company with a completely separate board of directors to perform the conflicted work. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

24. Removal of Conflicted Persons • Conflicted personnel usually have been providing Program support for many years under a variety of prime contractors. • Loss of the individuals could create dire consequences for the Program should their efforts be interrupted. • In these cases, the affected individual (s) can be hired by another non-conflicted entity to perform the same work. • Government needs to be careful to keep the employees “whole” from a salary and benefit perspective. • This can have a negative affect on the morale of the employees. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

25. Removal of Conflicted Work • Offerors can be allowed to propose the exclusion of SOW task areas that create a conflict, if appropriate, or revise the statement of work so that the conflict is mitigated. • For example, if the purpose of the contract is to perform testing of products produced by a sister unit, then a possible mitigation would be to have the conflicted entity perform the actual tests and another contractor (or the Government itself) perform the analysis of the tests and make further recommendations as to the product’s acceptability. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

26. Switching Work from the Prime to the Sub • Depending on who has the conflict, work can be switched from the Prime to the subcontractor, or vice versa. • In cases where the Prime is merely passing through work to a subcontractor, and is providing little or no value-added to the work to be performed, it is possible for the oversight of the subcontractor’s efforts to be performed by the government, rather than the prime contractor. • The Prime contractor’s role would be reduced to financial tracking of the subcontractor only for the particular task. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

27. Developing Multiple Alternatives • The Agency can have several contractors develop alternatives to resolve technical and or policy issues so that the Agency ends up choosing the desired approach instead of the Contractor. • A shortcoming of this approach is that it is not as cost-effective to provide several options for every assignment. • Since the conflict would still remain, the contractor could still bias the selection of the options and/or the studies and data the contractor provides to support the options. • However, knowing that a bias may exist, the government can take such bias into consideration when making a selection. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

28. Review by a Third Party • A neutral third party can review the conflicted company’s adherence to their OCI mitigation plan on a regular basis to ensure compliance. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

29. FAR OCI Examples • Company A agrees to provide systems engineering and technical direction for the Navy on the power-plant for submarines (i.e., turbines, drive shafts, propellers, etc.) • “System” is the power-plant, not the submarine • Company A should not be allowed to supply any power-plant components • Company A can, supply unrelated components of submarine (e.g., fire control, navigation, etc.) NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

30. FAR OCI Examples • Company A develops new electronic equipment • As a result of this development, it prepares specifications for the equipment • Company A may supply the equipment • XYZ Tool Company and PQR Machinery Company, of American Tool Institute • Work under Government supervision and control to refine specifications or to clarify the requirements of a specific acquisition • Companies may supply the item NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

31. FAR OCI Examples • Company A is awarded a contract to prepare data system specifications and equipment performance criteria to be used as the basis for the equipment competition • The specifications will be the basis for selection of commercial hardware • Company A should be excluded from the initial follow-on information technology hardware acquisition NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

32. FAR OCI Examples • Company A receives a contract to define the detailed performance characteristics for purchasing rocket fuels • Company A has not developed the particular fuels • Agency will use the performance characteristics arrived at to competitively choose a contractor to develop or produce the fuels • Company A may not be awarded this follow-on contract NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

33. FAR OCI Examples • Company A receives a contract to prepare a detailed plan for scientific and technical training of an agency's personnel • It suggests a curriculum that the agency uses in its request for proposals establish and conduct the training • Company A may not be awarded a contract to conduct the training NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

34. In Summary • The FAR encourages mitigation of a conflict, if at all possible. • The Contracting Officer has great discretion as to the acceptability of the mitigation plan offered. • Court decisions generally support the Contracting Officer’s decision, provided they conducted a thorough analysis. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

35. Questions? NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”