Can deliberate risk empower deliberate speed in the DoD contracting arena? A recent Speed to Contract, Speed to Market video podcast—with host Tim Templeton and guest Shay Assad—seeks to answer this critical question. Related topics include “Why do entrepreneurial companies deserve special handling by the government?” and “How can a paradigm of ‘cost trust’ help the US truly reward innovation from commercial businesses?” Mr. Assad, former DoD Director of Defense Pricing and CEO of Raytheon Co.’s Engineering and Construction Businesses, offers enlightened and innovative perspectives.
We’ve edited the below comments for brevity and clarity.
Look at acquisition through 3 different prisms
When you look at speed to contract, you must look at it through several prisms. One is what I call “traditional procurement”: the existing weapons systems and military items we're buying today in the context of traditional defense companies.
The second, which has been extremely important for several years, is “How do we bring an innovative commercial environment into our defense work? How do we bring that to the table in a big way?”
The third that we're dealing with is very traditional commercial companies. We're buying the same products that folks buy every day from these commercial vendors.
It's three different perspectives. And you have to have different skill sets to deal with each of them.
Don’t avoid risk by operating in all 3 with the same rule set
I think the most important thing in terms of speed to contract is—I used to call it “deliberate speed,” and that infers that you can, in fact, take risks. Taking risks is not something we should avoid if it's deliberately thought out, right? It's not just, “I'm gonna decide to take risks because it would just make things go faster.” It's, “ I had a plan. I executed that plan, and I, yes, took some risks. Here’s why I took those risks. And here's the benefit the taxpayers and warfighters received for my risk.” I think if you can operate in that environment, you can be very successful.
Our problem is that we're trying to deal with all three of those environments—traditional procurement, commercial innovation, and traditional commercial— with the same rule set.
Traditional defense companies run differently than commercial
The DoD is kidding itself if it thinks it will be able to get innovative commercial technologies —brought to bear by significant commercial companies—and try to apply the same rules to them as the defense industry. The defense industry benefits from several policies that some would say are subsidies, which commercial companies can’t take advantage of.
They can't take advantage because they're not in that environment. The risk posture of a commercial company is completely different than the risk posture of a defense company. Many people think there's a significant difference between commercial companies' accounting practices and defense contractors' accounting practices.
But the reality is many accounting practices are very, very similar. It's just the manner in which those companies decide to proceed with business. In the case of the defense industry, the traditional defense contractor wants a contract and funding in hand, and then they'll build to whatever that contract tells 'em to build. In a commercial environment, they're building to a forecasted, risk-based revenue projection.
And that's a totally different animal than what the defense companies deal with. But if we're under the assumption that commercial companies don't understand what things cost, that's a fool's paradise. They collect their costs maybe a little bit differently, but in many ways, it's the same on the commercial side, which is strictly, “I'm going to buy a commercial item that everybody else buys.”
That's the simplest thing for us to deal with. We've got pricing information that says, “This is what a variety of different buyers pay for that item.” And in general, the department's position has always been, “We're going to pay what a variety of customers pay for any particular item.” If it's competition, that’s totally different—this is where I see the speed coming in.
But let's talk about the traditional environment first.
Create systems that make it easy for companies to meet requirements
Many companies don't understand the data requirements they're obligated to meet. They often say things like, “I had to submit volumes of data; it was seven feet high.” The reality is that how they choose to estimate or provide the data for a particular proposal is really up to them. But the underlying fact base is really pretty simple.
Most times, companies think, “I gave them all the information that was associated with preparing my proposal.” But that's not what the requirement is. The requirement is “Just give me the factual data that a prudent buyer and seller would consider that could significantly affect price.” And I think they fall down a little bit here.
If we can create systems that make it easy for companies to say, “Okay, I'm going to meet that fact-based requirement, and here's how I'm submitting.” And if a system and a process get put in place that they understand, and the government says, “Yes, that'll do the trick from a fact-based point of view,” then they can go off and develop their proposal. What are they thinking? “I've got it that this is the fact base, but I chose to develop my proposal on this basis, and here are the reasons why that's fair game.” If substantiated correctly, this approach is fair game.
Develop commercial systems, as companies do for themselves
What I'm suggesting is that we shouldn't force companies to translate their data into some format that the government will accept. But there are certain fundamental elements of cost—material cost. This is an indirect cost, right? This is overhead. This is G&A, direct engineering labor, or whatever it might be. And I think we need to have “commercial” systems.
Companies like ProPricer and others can provide systems and simply say, “All right, I got it. I'm going to be able to extract that information from my accounting records and present it to you.” And I think what we're really looking for, at least in terms of what I think is important, is, at the end of the day, can you demonstrate? And this is really when I say “traditional systems.” These involve supplied products that are either the same or similar year over year.
Produce an estimating model with an actual cost foundation
A company should be able to say, “This was what we proposed, this was the expected result—which is what we negotiated—and here's the actual result, and is there a correlation between the two?”
Where should the government eventually go? Establish a high degree of correlation. Say to the companies, not the government: “This is your product. Demonstrate to me that you can develop an estimating model that has the disclosure of factual, actual cost as its foundation.” That says, “If you use my model, and you make these materials, and you put these actual inputs in, we're going to go down a learning curve. We've got so much indirect or so much variable and fixed cost; here's how it's going to impact us, and here's the number.” And at the end of the day, I think companies ought to be able to say, “If you use my model, here’s what we negotiate for the fiscal year.”
Primes & subs should present a model that creates data correlation
“Because if you use my model, here's the outcome, and here's what the model said it was going to be.” If you can create that high degree of correlation, which would require both the prime and its subs to correlate—don't let the subs off the hook. Now, you’ve got to be reasonable about the level of subcontracted data you go down to, but the big dogs have to play just like everybody else.
Everyone has to be in the same kennel. If we can create that, I recommend creating contracting instruments that enable us to not only contract for the current year but use that very same data and just contract out for the next year or two. But not so far out that it places an unreasonable risk on the company or causes the company to want to put in some reserve that will cover that risk.
An approach where both parties assume a degree of risk
It would be great for the government to be able to say, “Let's stay in a range where both of us can assume a degree of risk. We both can participate; we can reasonably expect an outcome.” Yes. If we can create that kind of approach, we can lose a lot of time from the process.
But there's another part of this process, and it's somewhat the tail wagging the dog. That's the requirements side, right? When I was in the Department, it was not unusual for a requirement to take three years to generate and come through the system. We have to be able to work faster, and that's another degree of risk that we have to be able to take.
Handle non-traditionals differently. They’ve invested capital
We may not get this exactly right, but you know, I never met a flag officer or a general officer who wasn't willing to take some risk if they could get a capability to the field much quicker. And so, we need to accelerate the requirements process, and then we need to streamline and accelerate how we actually get the contract.
Once we've got a requirement, how we get the contract, the next prism is what I'll call the “non-traditionals.” We’ve got to deal with them totally differently because most of what they have created was done on a risk basis. There was no government requirement that existed. They created it; they paid for it. In many cases, it was a capital investment made by entrepreneurs and folks of that nature who realized this was really risk-based but then said, “By the way, I want to get a return when I'm taking that kind of risk.”
Defense companies take no risk. The government makes the entire investment
So we can't treat those companies in the same way we treat traditional defense companies, who are fully reimbursed. They don't invest any of their own money. The government makes the entire investment. Risk, here, is basically non-existent. Then you go into a non-traditional world, and it’s the opposite. They're funding everything—not just their capital equipment, but their technology and trying to put it together, then whatever testing must be done.
The government doesn’t have the skill set to deal with non-traditionals
The most important thing about speed to contract is: How quickly can you determine that you are paying a fair price, which will require dealing with non-traditional firms? It’s going to require a level of sophistication that we typically do not have in the Department. And the traditional defense company doesn't have it either.
So, let's get that out on the table. They don't have those skill sets. So, you're dealing in an environment where there still has to be a degree of transparency. But then there have to be other factors that are taken into account.
For example, existing profit policies are cost-based and don't incentivize companies to reduce their costs.
Speed, improvement, innovation, price, & cost-benefit
In traditional defense work involving non-traditionals, we need to talk about the speed of capability, the magnitude of improvement, innovation brought to the table, and ultimately price benefit and cost-benefit.
“What are we gaining as a warfighting entity in doing business with this particular company? And what's a reasonable amount of money to pay for that kind of capability?” What that means is you're going to have to take it out of the traditional transaction—involving the contracting officer and contract administrator or contract manager from the other company—into a much broader evaluation.
The PEO has to put their name on a document—for the warfighter
You have to get the PEO involved. They must be willing to put their name on a document that says, “Yes, I thought this was a reasonable price to pay, not just the contracting officer.” And then, in most cases, it's probably going to involve the sponsor, the warfighting sponsor who's the resource general, who says, “This is a remarkable improvement to our warfighting capability, or to what it costs us to maintain things, and brings into account a different approach.” I'm not going to call it value-based pricing. Because, in my mind, we have a lot of companies that try to use that term as a basis to just overprice things. I'm talking about bringing a demonstrated technical improvement or warfighting capability improvement to the table.
Process data 10 times faster & ensure its accuracy
Many commercial tech companies—such as the one you’re involved with (ProPricer)—say, “Look, I can process data 10 times as fast as you can, and oh, by the way, I can assure you it will be accurate, and here's how we do it. And I can develop a system that can interface with other companies, extract their actual data, and get it to you. And here it is.” Well, that's worth money, right? That's value. And so, we have to be able to deal with that.
Changes for significant procurements, tech, or spending only
Now, you can't do that for every single non-traditional you do business with who might bring a $500,000 or a million-dollar procurement. I'm talking about significant changes in technology or significant spending, where a company has come forward, put a lot of their money upfront into this, and then says, “In order for us to modify this technology to meet your requirements, here's what we need in order to do it.”
Non-traditionals deserve ROI
Now, what's the partnership in that investment? “Here's the kind of return that I've got to have in order for me to make the investment.” I don't think there's anybody who begrudges any company from saying, “Well, you made an investment, so you have to get a return on that investment.” In technology, you did the R&D, and you’ve got to get a return on it. You ask, “Isn’t some of it going to fail?” That's part of the deal. But we want to encourage companies to do things like that. And so, we shouldn't dissuade and say, “I'm not going to pay you for that because you failed.” “Well, wait a minute, you know what? It took me four different approaches and seven months to figure it out. But I finally did figure it out. So, if I hadn't failed, I wouldn't have known that I had a particular problem.”
A degree of substantiation for anyone who wants to see it
This takes a sophisticated buyer who's going to have leadership that has their back. And a degree of substantiation to anybody who wants to look at it. You ought to be able to go into Congress or anybody else and say, “Here's why we made the decision.”
My biggest hangup with a number of companies the DoD deals with? When we pay a premium, we want to know that we are paying the premium, and there's got to be a purpose and a reason for us to pay the premium. Not simply that we overpaid. I mean, any dodo can do that. What we want to be able to do in this environment is to say, “Yes, we paid a premium in the traditional sense, but it really wasn't a premium.”
“It was actually a hell of a deal. Let me explain why.”
Don’t present it as if it’s a root canal
Then you go to the commercial side. How do we get companies to say, “Look, when you’ve got a commercial product, you have to quickly bring that pricing data to the table. Don't make it look like I'm going in to get a root canal every time we do business.” It should be simple and easy for you to provide the data.
Commercial companies need assurance that pricing won’t leak
Now, the legitimate concern of a number of commercial companies is, “Look, I provide different prices to different customers for a variety of reasons. And I cannot afford to have my pricing practices divulged to the world.” Well then, we need to assure those companies that adequate protections will enable them to make disclosures without fearing that the government will blow up their entire business model.
“They let so-and-so company know that I was given a better deal.”
Sometimes you make decisions when December 31st comes along. You can give some really good deals to people on this date. And there are reasons for that. And so, we have to be mature enough on the government side to recognize this. They may say, “Well, I understand why they did that. They were under intense pressure. They had significant revenue shortfalls. They had numbers to meet. And so, they cut their normal price for the following reasons.” And when we look at the other data, they didn't do that at any other time.
So, of course, the prudent government guy would say, “Let's wait until December 31st every year.” No, I’m only kidding.
Buying products is different than services
So there are three different ways that we have to look at this. And, of course, buying products is different than buying services. Buying services ought to be very easy. And my view is not the fact basis. The disclosure should be really simple. And there should be no excuse for an untimely award of a contract.
In the services world, if both sides are being transparent, the big challenge when dealing with a non-traditional is to say, “No. You have got to be transparent. I have to understand what it is you did and how you did it.”
And yet there has to be a degree of trust that implies, “Look, I'm trying to understand this because I'm looking at it in a very different way. I'm not looking at it necessarily from what was the marginal cost for you to develop that particular service or provide data. I have to look at who developed it, why they developed it, and how long it took to develop; there are a lot of different things. What you invested, how you invested, what your expected return was, these kinds of things.”
We need to develop these processes in the Department of Defense. We should take our existing profit policy and throw it out the window. We need to take a totally different approach to how we deal with traditional companies and how we should be rewarding innovation.
Reward speed, quality, & price
We ought to be rewarding speed. We ought to be rewarding quality. And a lot of other things. Yes, price is absolutely important. But I always stress to people, “Look, if you were paying a hundred dollars or so and the company was making 10 bucks, if they could figure out a way where you would pay $80, but they're going to make $15, is that a problem? I don't think so.” That's a pretty good deal. We're paying less, we're paying $80. Alright. Okay, so they made $15; they should make more money if we're going to pay that much less. And it's what I'm stressing in the traditional defense world: Understand that cost basis upfront. What it did cost, what it does cost, and then open the door to the companies and say, “Look, if you can find ways to get what it should cost down through efficient manufacturing, changes in technology, changes in testing methodology, whatever it might be, then you're going to get more.” And incentivize them that way.
Create an environment of trust
But you can't get there until you create an environment of trust—that fundamentally doesn't exist right now. The trust of saying, “Yes, I do understand what this costs and I understand what it did cost, and yes, I'm on my way to try to get to a place of understanding what it should cost.” And as the company takes on more responsibility to take risks, to get it to where it should cost, they ought to be rewarded for that in a very different way than we have rewarded in the past.
It’s that we're very transactional, right? And there isn't a lot of understanding on both sides of the table, at least based on my experience at the table level. Agency people usually don't have the experience to understand when we talk about simple things like cash flow, right? What does that actually mean to a company? Why is it so important? And how do you use cash flow fairly, not unfairly? Not to bring a company to its knees, but how do you use cash flow to say we ought to be able to distinguish between the outstanding performers, those that seem to get it right most of the time, and then those that almost never get it right? Right now, we treat them all the same way. That doesn’t make a lot of sense to me.
Reward transparent companies that submit on time
You should be able to reward the outstanding companies that are transparent and get their proposals in on time. They also usually produce quality products, and there ought to be a difference in how we deal with them. And it doesn't take a rocket scientist to listen to any one of the conference calls of these major companies to know that they know what's important to the Department. You get it in the first, say, 45 seconds of their calls. And so, you ought to be able to mold that into this equation—a better understanding of what commercial companies really do. How do they actually pay for their products and services?
How do they treat those environments? And why is it so different? And it just takes understanding what we're going to need to do. When I say I'm retired, I still like to think I’m a government guy, right? But what do we have to do? We've got to do a hell of a lot better training people to work in this environment, and then secondly, and probably just as important, we have to help our leadership have a really good understanding of how these companies work and why, and then flow down that support to enable their folks. “Yes. You can take some risks.”
Cameron Holt said, “Look, we need to figure out a way to speed things up and buy things cheaper, where it's a mathematics scheme, it’s arithmetic.” He's right about that. And so, we've got to figure this out, and it's going to require a degree of trust that doesn't presently exist. On both sides, most of the time, the lack of trust is rooted in ignorance. Often, people really don't understand what they think they're talking about.
Once you get people on the same wavelength and they start to understand that there's a mutual benefit here, things can improve. From a warfighter's point of view, we want products for the field that work, and we want to pay a fair price. From the company's point of view, they also want to supply products that work and get to the field, but they have to make a reasonable return. Those things can't be totally divorced.
Both parties can achieve their goals if they're willing to trust each other and work together.
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Sources
Speed to Contract. Speed to Market: Video Podcast featuring Shay Assad
