Fixing the curse of incumbency
Reward excellence to achieve best value
Generally incumbency turnover in larger space hardware programs is a much more unusual situation, but it can happen when new blocks occur (e.g. GPS). If an incumbent is performing poorly, that incumbent should lose. However, the reality of bringing on a new contractor to actually build a complex piece of space-qualified hardware needs to be a factor with mission expertise being a major factor. Even if a contractor has performed poorly, the first question should be, “Is the poor performance on the contract the fault of the contractor, or the fault of ever changing funding profiles, an overly optimistic expectation of cost and schedule, or changing requirements”? It is highly unlikely that the majority of major corporations that build space systems are poor performers.
If you are basically building the same generation of technology, transitions between contractors are expensive and risky. The government typically has invested significantly in capital and intellectual resources for the incumbent for that generation of technology. When the incumbent loses, both capital resources and the mature engineering and management capability are lost, and a similar investment must be made in the new contractor team. 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. Most importantly, the highly relevant expertise of the incumbent's staff—their knowledge and skills—is lost because that technical staff is typically not accessible to the new contractor. This replacement cost is substantial. But, it is also true that an incumbent builds up inefficiencies, organizations created for a specific problem, long since solved, but the people and organization remain. A re compete energizes looking at such things and emphasizing efficiency, but, there is always great cost to competing, and a customer has to weigh the value of the re-compete, vs the potential savings.
It is also true if the technology to accomplish these missions advances significantly enough; it is likely wise to make the change as the most efficient way to move to significantly newer technology. The current people and expertise in the program would likely be grounded in the older, potentially obsolete technology, so change to a new baseline would be valuable. So, there are two big risks in the hardware world. The first is changing contractors when we are using the same baseline technology, and program specific expertise and experience is critical. The second is changing to significantly newer technology with an existing incumbent and base personnel expertise.
So, if we are staying with the same technology, experience is important. We should ask:
Surely we have learned over the years that we need to begin the next generation of systems while we are continuing to build and operate the previous generation. It is also certain that the current generation will need to continue to work and operate with the new generation of systems. So, how do we make this transition, without adding risk to the mission? At what point should a totally different organization do the acquisition of the next generation system?
If you are using fundamentally the same technologies and approaches, the current acquisition organization has the unique expertise and experience to assure a good quality technical evaluation. On the other hand, if you are changing the baseline technologies, the expertise in the older generation of systems can be a disadvantage. This generally requires new infrastructure and new thinking, and for an organization and its people used to doing things in a certain way, change can be problematic. This is true of both the incumbent contractor and the buying organization itself. It is difficult to buy a new approach with the same people.
Currently with aggregated multi-use space system development is complex, and expensive, new systems are years in development. This drives you to try to make them last a long time, and this further drives up the price. Once launched, space systems frequently must operate for decades and repairs are difficult to impossible, depending on the fault mode, and the technology becomes obsolete and hard to support. This places a premium on continuity with major prime developers for successor constellations, unless there is a record of poor performance.
Sometimes the government may get infatuated by the latest technology. For example, in electro-optical (E/O) systems, the fovernment is always enamored with the newest focal plane array (FPA), and frequently seems to want to build a system around this new “cool” FPA. The better, lower risk (and probably cheaper) approach would be to look at mission requirements and let contractors bid the optimized performance, cost, and schedule risk to meet these requirements. The DoD has begun to take advantage of “technical demonstrations” and “operational demonstrations” to first assess technology and then to assess its value and compatibility to the mission. This requires extra diligence in both source selection and monitoring contract execution. As the current technology becomes obsolete, it becomes hard to hire a new and younger next generation who won’t know or understand the older technology. Staffing both the contractor organization and the government organizations becomes problematic, and makes resistance to change high.
There is an alternative to complex, aggregated, long life systems. It is the affordable and resilient approach of disaggregation. This allows more affordable systems that we can build with shorter lives and resulting lower costs, and provide better technology insertion. With more of these systems on orbit, and more of these systems being developed, spares and therefore reconstitution is more readily available, and industry, in the coming tight budget times has more systems to keep industry as a whole (not just one or two contractors) more healthy and competitive.
The use of technology should be thought through. Are we proposing to use new technology to perform the mission better, lower the cost of ownership of these missions, respond to new needs or threats, or become more resilient? These drive you to implementing newer technology systems, and with lower cost, shorter lifetime systems, this can be done for lower cost than trying to continue the current approach. The new approach to affordability and resilience should definitely continue, and cost and schedule risk should remain at the forefront of these decisions.
Using demonstrations before building operational systems helps with this by driving down risk first. However, discipline must be used so that they only use “technical demonstrations” to advance the technology for the mission, and “operational demonstrations” not to advance the technology, but instead to demonstrate how the current state of the art in technology can support the operational mission. If we take these two steps first, we will lower the risk of executing programs of record. Unfortunately, operational demonstrations are used to continue to develop technology, and at some point we must stop and figure out how to support the mission at hand, but we need to assure the flexibility to continue to insert technology.
Of approximately $400 billion spent by the DOD on contracts for goods and services in fiscal year 2011, over half was spent on services. This is a big business sector, and one that mid-sized government contractors pursue aggressively. But these companies are confronted by policy imperatives to set aside more and more of this business to so-called small and disadvantaged businesses, increasing risk and threatening the business cases of the mid-sized contractors and their very survival in the aerospace business. And if we lose mid-sized companies, we lose the option of the potential of any company to grow to a large company.
In general, services contracts are re-competed every three years. This often discourages companies from investing in top quality performance and services since the contract will be up for competition in three years no matter how good a job they do. And it is generally cost, not good performance, which drives the government decision process. Recent statistics indicate about 75 percent of incumbents on services contracts lose in follow-on competitions, regardless to whether their performance was outstanding or poor. This is the result of an approach that emphasizes cost and the lowest qualified bidder.
Given the realities, incumbents realize that bidding the cost status quo is a losing proposition, regardless of how well they have performed. So incumbents, to stay competitive, set programmatic targets that include 15–20 percent cost reductions, regardless of the lost capabilities. While incumbents try to cull their marginal performers, keeping good performers in stressful times requires robust pay increases. So, even with efficiencies and innovation, costs can still present an incumbent with follow-on competition challenges.
Also, typically in a space program office the cost of the competitively contracted services (e.g exclude FFRDC) is much less than the cost of the prime developers, perhaps by a factor of five or more, so it falls much lower on the radar than problems with busses, payloads, ground networks, and so on. So the costs and inefficiencies of transition are small blips compared to problems with a prime. Mostly, they just don’t care, and don’t see service contractor transition as a mission risk, unless defending budget in congress.
When services contracts are competed, selection decisions are usually said to be made on factors related to cost and the promise of innovation and tools. Of course, while innovation is a cool thing to compete, what does innovation really mean in a services contract context? No doubt, providing smart people and good tools is valuable. If so, generally since strong management and good people are the real value of the contract, how can we give credit? Here are a few suggestions:
Certainly history has shown that changing contractors rarely, if ever, save money. Great tools rarely, if ever, make people so much more productive so as to allow significant manpower savings. Innovation exists not just with new bidders, but, pretty assuredly, within the current contract also. Make sure you are changing for reasons that are an advantage to the program and at a point in the program where you do not engender great risk.
A better way: reward excellence to achieve best value
There are two ways to reward excellent performance. The government could go back to that performer in a “sole source” fashion. Or the government could find a substantive way to provide significant rewards in proposal scoring points to a quality incumbent.
Sometimes a sole source makes sense. When a program is in a critical development period and the deep knowledge of the program is essential, a break in continuity would be risky. Also, the contractor has displayed a consistent focus on controlling costs. Many government program managers would agree with this position. Given the unique technical demands of the space systems, there are times that the government is better served by treating superior competitors in a manner analogous to sole-source contract selections. Of course they already do this with FFRDCs, so perhaps given they get continuity of service there they are not as concerned with creating churn among private companies.
The government’s need for world-class systems or services should support an argument that providing such a reward would be akin to acting on an unusual and compelling urgency, where the government would be seriously injured unless the agency is permitted to offer the benefit for superior performers. National policy should want to also reward these superior competitors as part of a strategy to maintain the industrial base and encourage contractors to hire, develop and sustain a first-rate workforce. This, in turn, would enhance essential engineering, research, or development capabilities. In short, rewarding superior performers could be described as satisfying vital government imperatives to sustaining, maintaining, or expanding the defense industrial base.
However, in general there remains a great desire for competition, and its resulting benefits especially the entry of new thinking into the program. It is not just poor performance that might drive the desire for change, but also different challenges on the program that the incumbent may not be agile enough to change. This would be fully consistent with the mandates of the Competition in Contracting Act (CICA) of 1984. CICA generally governs competition in federal contracting and requires contracts be entered into after “full and open competition through the use of competitive procedures” unless certain circumstances exist that would permit agencies to use noncompetitive procedures. Despite the “full and open competition” requirement, CICA allows the government to reorder priorities in a way to realize the benefits of other goals, such as the protection of national security or efficiency in agency operations such as procurement activities.
Support for a performance reward proposal idea can be found in the Kadish Report. It states, "[f]ollowing this determination, Source Selection Authorities should evaluate technical and management proposals and base their source selection decisions on technical and management risk of the proposal as well as the ability to achieve cost and schedule targets. At contract award, the agreed high confidence cost should be set as the contract target cost and industry should be incentivized aggressively to deliver at or below that cost. Today's Acquisition System should be replaced with one that recognizes both the importance of time-to-need and the critical role that technology maturity plays in achieving program success. At Milestone 0, a realistic capability delivery date, the definition of an initial operationally useful capability and the level of acceptable technology risk, based on the current level of technology readiness of major potential subsystems components, should be established.”
Assuming the government adopts contracting strategies that truly rewards good incumbent performance and implement policy changes to benefit superior performers, there are a number of important steps that the government could take in order to implement this as part of space systems acquisition. Some of these steps include:
There is need for tough, fair, and stressing competition in all government contracting. In performing this function, source selection authorities should use clear evaluation criteria that requires all bidders to justify their unique qualities, strengths, technical solutions, and management approaches. Selection authorities should be encouraged to make sure that past performance by program incumbent contractors be given more than a check mark, or pencil-whip evaluation. Good performance by contractors should be rewarded with hard scoring points. Similarly, selection authorities must consider the down side of picking new contractors, weighing the known risks and additional costs of using successful incumbents against the tremendous risks found in selecting win-at-all-cost proposals by contractors who do not have sufficient expertise and knowledge of the historical technical, resource, and schedule risks of the program.