Fixing the curse of incumbency
by Thomas “Tav” Taverney
|Numerous reviews of space systems acquisition have pointed out that government source selection teams do not fully reward good performance. Doing a good, or even great, job does not ensure a win in follow-on competitions.|
If we are to reward excellent performance on future competitions and achieve best value for the taxpayer and the government, how should we identify and reward excellent performers? The purpose of this essay is not to argue against space industry competition. Rather, it argues for applying more wisdom to how we conduct them. By better rewarding good performance, we can obtain better value for the taxpayer, the mission, and the industry.
This is not a new observation. Over the years, numerous grand and noble studies and reviews observed that incumbents lose at a very high rate, and therefore have recommended a better assessment of excellent incumbent performers. However, implementing these recommendations remains a work in progress. We need to do better and reward the importance of and provide substantive value to the excellent performance of incumbents during follow-on competitions.
When bidding in government-sponsored contract competitions, one might think that it is hard to beat an incumbent, especially one that is performing well. But that is not the way things really are, especially in the space industrial marketplace. There is a curse of incumbency. Under the competition shaman’s mystic rattles and incantations, incumbents frequently lose. And when some incumbents lose, the taxpayer, the mission, and industry all lose. That result is unfortunate and avoidable.
Numerous reviews of space systems acquisition have pointed out that government source selection teams do not fully reward good performance. Doing a good, or even great, job does not ensure a win in follow-on competitions. Follow-ons usually end with the government customer choosing to change horses. The taxpayers and mission frequently suffers as a result. This occurs because the winning team is often unprepared and needs to face a steep learning curve on the details and issues on complex programs. The government then has to step into the breach, pouring money and other resources into failed programs in a frantic attempt to fix programmatic and technical shortfalls, contractor changeover transition failures, and reductions in productivity due to lost program expertise. New contractor team can lose their way as they take on the learning curve through program specifics, often not bid by the winning teams nor properly anticipated by customers.
Why is it so hard for the government to properly invoke performance as major source selection criteria in space acquisitions? The most obvious reason is that source selection officials rely far too much on price as a the key discriminator. However, we know all too well from experience that if one drives down the price too far, he loses access to the best people, the ones who are highly skilled technically in their specialties, are deeply knowledgeable in the program specific issues and challenges, who bring wisdom and vision to the program. They are, after all, economic beings. Giving realistic prices to retain this talent is a losing proposition. The government has not yet figured out how to better integrate this economic calculus into its sources selections.
The mantra is that “competition is good.” But competition based on price alone is not an unmitigated good. In government space systems acquisitions, competition can increase programmatic risk. Some low-bidding contractors are unable to perform what is needed and expected of them. Low-bidding teams are often inexperienced, unprepared, and unaware of the real program challenges, but, in times when opportunities are scarce, management is willing to gamble all with low-cost, higher risk proposals in order to win scarce government contracts.
How can a lower-cost bidder be assumed to be equal or superior to a current successfully executing contractor? One would think that such incumbents should be favored. They are, after all, known quantities. The conventional wisdom is that one should expect incumbents win most competitions. They intimately know the customer, the program, the mission, and the work. But result has not turned out to be the case; the conventional wisdom is wrong.
Incumbents are often placed at a huge disadvantage. Wells Fargo financial analyst Edward Caso has found that data shows incumbents win rates are plummeting during contract re-competes. Consulting firm Wolf Den Associates claims that win rates for incumbents are looking more like win rates for new business, which is typically around 30 percent. There is tremendous pricing pressure on re-competes and contract extensions. According to Wolf Den, even if an incumbent wins, it does this only by pricing its proposals at 20 percent to 30 percent lower than the preceding contract.
|So both the government customer and contractor community are accidental co-conspirators in the fiction that claims the best value is usually achieved with the current source selection processes.|
Experts tracking this phenomenon are seeing that wins are now based primarily on price not proven competency. This has significant implications for incumbent bid strategies, and this severely reduces incentives to focus on internal investments that emphasize low technical risk and effective execution. These factors discourage them, all to the detriment of the on-going and future program. Why invest one’s resources in excellence if there are few payoffs for doing so?
Incumbent strengths are minimized in a re-compete. The government discounts their technical, cost, and schedule risk advantages and treats them as pass-fail criteria, waiving off any impression that they are favoring the incumbent in order to appear “fair” to all competitors. At the same time, weaknesses of any incumbent, however minimal, are amplified by selection evaluators. Competitors are not encumbered by such considerations.
Incumbents cannot easily propose new innovations; such efforts are generally discounted because it is felt if the incumbent had any good innovative approaches, one would expect that they should have already implemented them. Any little issue they have had over their performing years is known, tracked, and cataloged; every little mistake documented. So it appears that the government, in a perverse interest to make sure the playing field is level, has ceded the true and important advantages of the incumbent to irrelevance, while amplifying the disadvantages.
So the competition advantage is now with challengers. To win, challengers are often very willing to gamble and justify their gambles of lower cost by proposing innovation, new tools, flexibility, new ideas, and the like as means to achieve success with huge cost reduction. Knowing the realities of the program, the incumbent cannot take such risks. In a bit of reverse logic, incumbents that bid innovation must face the test of being assessed against historical pricing data that removes the benefits of whatever innovations they propose, while their competitors are not held to any such standard. Incumbents usually move forward with retained excellence, compelled to bid their more expensive workforce.
As noted by Brad Antle, CEO of Salient Federal Systems, “They [incumbents] don’t come to the bid with a clean sheet of paper.” That produces tremendous pressure. Some in the blogosphere argue that the primary reasons challengers are unseating incumbents is because, more often than not, challengers come to the negotiating table bidding with incumbent capture, but with drastically cut salaries. If offered continuing work with the winning bidder, the incumbent labor force is then greeted by the new awardees with a "this is the offer, take it or leave it" mindset. The government encourages this result by defaulting to low price selections (even though procurement officers point to "best value" for the selection in the competitions evaluation criteria). Then, after insisting on pricing that assumes the contractor will hire entry-level employees, the government complains unless the contract reaches out to hire employees with extensive experience.
So both the government customer and contractor community are accidental co-conspirators in the fiction that claims the best value is usually achieved with the current source selection processes. New awardees are often unable to staff their work at the skill levels proposed for the price. Then, either one of two things happens: the new contractor executes at lower skill levels, exposing the mission to programmatic risks with less experienced staffing, or they hire the experienced staff at higher costs. In either case the program costs and risks escalate. Studies continue to reflect that the federal government needs to do a better job of assessing types of risks in its evaluation of cost proposals and throw out unreasonably low bids. However, contracting officers are encouraged to increase competition, so, there is a reluctance to throw anyone out, they tend to try to level the playing field, even with extremely marginal bidders.
A 2006 Defense Acquisition Performance Assessment (DAPA) report observed that “the current process for development of solicitations and subsequent contract structures does not adequately incentivize desired contractor performance, either during competition or after contract award.” As noted by the DAPA report, US government defense acquisition strategies encourage an insidious “Conspiracy of Hope.”
The Conspiracy of Hope describes acquisition scenarios when industry is encouraged to propose unrealistic costs and optimistic performance, and to understate technical risk estimates, during the acquisition solicitation. Government acquisition teams, and their technical leads and contracting officers, reciprocate as they are rewarded when accepting these proposals as foundations for program baselines. This conspiracy introduces instability at the very beginning of vital acquisition programs.
The Conspiracy of Hope is underwritten by new bidders, who attempt to flip competition expectations and seize business portfolios away from incumbents. Incumbents, having struggled to produce good or winning results in ongoing contracts, cannot act unscrupulously. They are forced to bid the realistic understanding of what needs to be built, or services provided. They are backed into an unwinnable position.
|In performing research for this essay, the author found that loss-rate numbers estimates varied between 50–90 percent. Thus, incumbents are only successfully winning competitions 10–50 percent of the time.|
There is good and bad to selecting new contractor: good if the selection and the new winning contractor’s solutions lower costs, while providing as good or even better support. While that is always the hope, it rarely proves to be the case. And one can always slink back to the 1990s, when one significant long-standing space industry prime contractor was lectured and fingers wagged in its face that it had lost its way, and had failed to reduce costs and increase innovation. But the newly selected contractor was wholly unprepared technically and programmatically, and this resulted in dramatic failure. So much for best value. Billions were squandered on one program until the government returned to its original contractor team. Clearly in this case the government did not pay attention to the learning curve of the prime that was inherent in the product they wanted. Factoring that in might have changed a cost/risk evaluation enough to change the award results.
One can also look to the multiple GPS program competition round-robins—with each new system/block, a new contractor team was selected—and each new team suffered learning curves, producing programmatic expense, schedule delays and risk.
Of course, incumbents do not always lose, though there is no agreed-to rate at which incumbents lose. And there are no assembled numbers assessing the success rates of incumbent contractors. In performing research for this essay, the author found that loss-rate numbers estimates varied between 50–90 percent. Thus, incumbents are only successfully winning competitions 10–50 percent of the time. Regardless of whether the loss-rate numbers are 50 percent or 90 percent, significant loss-rates provide powerful support for a conclusion that incumbency imposes a significant burden in any acquisition.
In 2003, the Defense Science Board’s “Acquisition of National Security Space Programs” report observed that incumbents lost greater than 90 percent of recent space system hardware competitions. No doubt, if an incumbent performs poorly, that incumbent should lose. That said, despite some high-profile failures in acquisition efforts, it is highly unlikely that 90 percent, or even 50 percent, of the industrial giants building space systems are consistently poor performers on their individual contracts.
It is also interesting to note that incumbents on “poorly performing” contracts often win against successful incumbents on other competitions. Finally, it matters how its measured. Constantly changing requirements by the customer results in contract cost and schedule growth that certainly looks like the contractor didn’t know what they were doing, although the government is complicit in the problems.
Transitions between contractors are expensive, not just in transition costs, but in lost effectiveness and productivity. This occurs because the government typically invests significantly in capital and intellectual resources for an incumbent. When that incumbent loses, a good bit of these invested resources and the mature engineering and management capability are lost. Then the government must then make comparable investments yet again and provide support and foundational support to a new contractor team.
|Constantly changing requirements by the customer results in contract cost and schedule growth that certainly looks like the contractor didn’t know what they were doing, although the government is complicit in the problems.|
This happens as the government pays for purchase and installation of specialized equipment, as well as fit-out of manufacturing and assembly spaces that are tailored to meet the needs of the program. More troubling, significant components of the incumbent's staff relevant expertise—their tremendous knowledge and skills—can be lost as that staff is typically not readily made available to a winning competitor. The lost opportunity costs associated with replacing this human capital can be substantial.
As noted above, incumbents often re-compete with a realism-based, higher-priced workforce, keeping their evolved, strong performing team together. In contrast, challengers are not hampered by this constraint, and often try to win by submitting bids that emphasize lower price points. If government accepts or encourages this result, one could infer the policy is that government values the price more than the workforce. And if the government customer doesn’t value the experienced in-place workforce, then one should conclude that the incumbent should be free to fire higher priced workers and replace them the same way a challenger would “in a perfect world.” We know that will not happen, or, if it does, it would only happen rarely.
There are some distinct differences between hardware and services incumbencies and I discuss them below.