Performance-based contracting and the road less traveled by Andy Akrouche

According to a World Bank report titled Performance-Based Contracting for Health Services in Developing Countries: A Toolkit, performance-based contracting is a type of contracting with;

  1. a clear set of objectives and indicators,
  2. systematic efforts to collect data on the progress of the selected indicators, and
  3. consequences, either rewards or sanctions for the contractor, that are based on performance.

Given the above, performance-based contracting seems to be fairly straight forward.

Unfortunately the world is anything but straight forward in terms of variables that can and do effect the original criteria upon which a performance-based contract is structured.  In short, there are natural changes in buyer requirements and supplier capabilities that occur over the life of a contract that cannot be anticipated from the outset.  This includes political, economic, social, technological and environmental changes.  As a result, what were once a clear and useful set of objectives, is no longer applicable in terms of achieving the desired relationship outcome.

Like the analogy of the fruit from the poisonous tree, when objectives and corresponding capabilities inevitably change, both the data collection framework and the criteria upon which the rewards and sanctions are determined, are no longer relevant.

The main question then becomes how do you manage this unknown yet expected change?

Traditionally, the approach in terms of measuring post-execution contract performance is usually centered around the enforcement of the original contract terms and conditions.  In other words, the contract itself becomes the driving force behind the attainment of buyer objectives and supplier responsibilities.  This is similar to encountering an unexpected roadblock on a long journey that you had previously mapped out.  Instead of looking for an alternative route you insist upon driving through the barricades.  You ultimately know that you are not going to go too far, no matter how much you insist that you must stick to the original route.

This insistence that you “stick with the original plan” – or in the case of performance-based contracting – the original terms and conditions of the contract, is the reason why so many relationships fail to deliver the desired outcomes.  Yet we insist upon trying to manage the barricade as opposed to forging a new and better route, because we have not structured the agreement and more specifically stakeholder relationships, around a collaborative approach to inevitable change.

In essence we have drawn a line in the sand that attempts to enforce a rigid set of original performance criteria that is more reflective of a penny wise and pound foolish mindset.  Or to put it another way, we place a greater emphasis on how we do something as opposed to how we can actual get there.

What we really need to do, is to recognize the fact that in order to be effective, a contract is a living document, and must therefore be flexible in its anticipation of the inevitable barricades that will come in the form of unanticipated change.  As a result, we must establish an entirely new set of criteria that focuses upon the ability to respond to change, regardless of whether said change takes the form of a buyer’s shift in needs or the supply base capabilities.

For example, what if the vehicle that you selected for the original journey is no longer suited to the terrain that you will have to take as a result of the roadblock?

Keeping in mind once again that neither you nor the supplier could have anticipated the fact that the original route will no longer work, or that a change in way or vehicle would be needed.  Do you still hold the supplier responsible for this?  Do you indicate that by taking the contract it is the supplier’s sole responsibility to address the roadblock, and penalize them for any possible delays?

This is the flaw in how performance-based contracting is implemented.  Specifically the inherent inflexibility that first seeks to hold the supplier accountable to a rigid set of criteria, as opposed to seeking a mutually beneficial alternative solution.

It is what I call the fork in the relationship road, because it forces the supplier to create a separate agenda that singularly reacts to challenges as opposed to jointly managing them with the buyer.  Similar to a disgruntled passenger in the back seat fuming that their journey has been delayed or forced to take a road less travelled the buyer, by contractual choice mind you, is in effect no longer in the driver’s seat as a co-pilot.

Like the Plexiglas partition in a taxi, a wall of limiting communication goes up, preventing the necessary collaboration that would lead to an arrival at a shared destination.

So what is the alternative?

Relational contracting.

In terms of complex, long-term relationships, performance-based contracting will only be able to produce positive outcomes or results within the context of a relational model.

This is due to the fact that with the relational model, the emphasis becomes one of sourcing and managing relationships with vendors versus a prescribed set of performance statements of work.  The end result is that a strategic fit between all stakeholders is maintained and aligned with the relationship’s original goals.

At the heart of the relational model, is the Relationship Charter.

The Charter is the business arrangement framework within which contractual elements and metrics such as deliverables, incentives, timelines, financial obligations and service quality are jointly managed, measured and evolved.  The Relationship Charter shifts the focus from one of adherence to a static set of vendor criteria within the confines of a single transaction, to one that places greater emphasis on ongoing collaborative problem solving.  This means that there is a framework for the adjustment and alignment of capabilities involving all stakeholders, that reflect the real-world changes that have an impact on the ultimate success of an initiative.

In short, with relational contracting, it is not how you get there, but that you get there.

30

FrontLine Defence Magazine Special

Andy Banner

Click magazine cover to access article . . .

“To be truly successful, the Defence Analytics Institute or DAI has to take the program beyond itself to deliver results” – Andy Akrouche

Editor’s Note: Defence spending is a hot topic lately on both sides of the Atlantic, as government’s are challenging Defence Departments to do a better job in terms of procurement. In this special article for FrontLine Defence Magazine, I provide my perspective on the Canadian Government’s efforts to better manage Defence spending through the formation of the new Defence Analytics Institute.

30

How to make Outsourcing and PPP Relationships Work Webinar Series Launched on Udemy by Andy Akrouche

In response to the steadily increasing number of requests I am receiving from senior managers of both public and private sector organizations regarding the Relational Model of Outsourcing and Public-Private Relationships, I have created an on-line webinar series.

Utilizing a frank, conversational style format, the 4-Part video series on “bridging the gap between expectations and successful outcomes” will provide senior managers with an executive level briefing on how to make complex Outsourcing, FutureSourcing™ or PPP initiatives successful.

In this series, in which I talk with host Jon Hansen, I focus on providing answers to the following five most frequently asked questions:

  1. Why do Outsourcing and Public-Private Partnerships fail to meet expectations, and more specifically what are the fundamental issues?
  2. What is a relationship based approach and how can it solve many of the root problems?
  3. How can you introduce effective consumer protection constructs and create the conditions for sustainability?
  4. How can you use procurement framework and industrial policy to create a strategic supply chain and economic value beyond the project bubble?
  5. How can you establish and operationalize a relationship charter representative of all stakeholder interests and goals?

Available on the Udemy platform I invite you, as well as others who are contemplating any form of strategic procurements including Outsourcing, FutureSoucring™ or Public-Private Partnerships, to view the series.  My ultimate goal is to provide you with the insights that will help to guide you towards achieving improved outcomes with lower risk.

Up until the 28th of April I am pleased to offer you a 50% discount off the regular course price.  Simply enter Coupon Code COMP503W where indicated using the following link; https://www.udemy.com/outsourcing-and-ppp-relationships/

 

The Groundswell Effect and the Emergence of the Public-Private Partnership Relational Model by Jon Hansen

relationalblogger:

News of the Joint Venture Agreement between SRS and the Commonwealth Association for Infrastructure Development has not gone unnoticed . . .

Originally posted on Procurement Insights:

Andy Microtrends

In his book Microtrends: The Small Forces Behind Tomorrow’s Big Changes, Mark Penn argues that the biggest trends in America are the Microtrends, the smaller trends that go unnoticed or ignored.

If you think about it for a moment, you will see that Penn is right on the money.  After all, how many of us thought that from its somewhat humble bulletin board beginnings, that the Internet would become the catalyst for global social and economic change?

This is perhaps one of the main reasons why I started this blog back in May 2007.  At the time, I wanted to provide a lens on the silent, groundswell shifts that would ultimately envelop the industry and redefine the way we do business.  Generally speaking, and based on the growth we have seen in readership, it would appear that we have been successful in identifying emerging trends and players.

Within…

View original 361 more words

Bridging the gap between PPP promise and successful outcomes by Andy Akrouche

“Recent failures, bailouts, and excessive costs show that the risk analyses and value-for-money accounting used to justify P3s are clearly flawed and cover up the true costs and risks for the public.”

Such as the one from which the above excerpt has been taken, there are no shortages of articles and papers relating to the unrealized expectations of what were once promising PPP initiatives.  The question is why do PPPs consistently underperform?

An April 2012 report titled “Public Private Partnerships in India: Lessons from Experiences” goes a long ways towards identifying at least in part, some of the key problem areas that have caused so many programs to run off the rails.  While this report points to many of the issues requiring solutions, it unfortunately fails to offer a real systematic framework for fixing them.  The issues to which I am referring include a “static” transactional orientation, how variability of demand and expected changes are viewed and managed, risk/reward allocation, and the effective utilization of PPP procurement as a vehicle to create sustainable economic value above and beyond project bubble.

With UK government taking a hard look at PFI and introducing PF2 as a measure to improve the performance of traditional PPPs, where the public sector partner(s) take an active role and ownership of the “business”, the gap between the promise of P3s and their outcomes may become slightly narrower.  However, until a truly holistic adaptive framework is introduced, we will continue to struggle to gain the necessary traction to achieve the hoped for outcomes.

So what is a holistic adaptive PPP framework?

An adaptive PPP, or as I sometimes refer to it as a relational PPP (in keeping with the relational terminology), is a relationship-based Public-Private partnership framework where the focus of the PPP management process is on two integrated dimensions:

a)      Establishing the baseline business arrangement from which we will begin a continuous alignment process. This dimension includes all of the usual management, technical and financial planning activities, but without the burden of having to predict the unforeseeable in terms of variability of Demand and PESTL  environment; and

b)      The establishment of a Relationship Charter within which contractual elements and metrics such as deliverables, timelines, financial obligations, service level quality and performance are jointly managed.

For those who have already read my book Relationships First (eBook ,Hard Copy), and have attended my seminars and training programs, you know that the SRS Relational Contracting Methodology provides a detailed roadmap for managing the process and development of baseline arrangement referenced in point “a”, as well as how to properly structure and operationalize the Relationship Charter.

Consisting of three constructs, the Relationship Charter will also provide the framework that is needed to operationalize the new UK approach to PPPs.  

The SRS Relationship Charter consists of:

a.       Shared relationship mission and purpose;

b.      Joint Governance Framework;

c.       Open book financial management offering transparency and accountability in managing public funds.

With the added layers of transparency, openness and objectivity required for public procurements, the SRS Relational Contracting Model becomes an essential enabler and a natural platform to launch and implement successful Public-Private Relationships.

This is due to the fact that the SRS relational model provides the necessary checks and insight mechanisms to ensure the selection of the right strategic partner. In referring to the right strategic partner, I am of course talking about one that can deliver to meet today’s needs, but is also strategically capable of adapting to changing circumstances to jointly manage the delivery of improved outcomes.

Understanding the Changes in Defence Spending by Andy Akrouche

When news broke earlier this month that there were major changes being implemented regarding Defence spending in Canada, no one was really surprised.  Change as they say was inevitable.

The question is what does it really mean?

Over the next week I will be posting several articles that will provide what I believe will be an unprecedented look at why these changes happened and even more importantly, what we can expect in terms of both immediate as well as long-term outcomes.

In the meantime, and in referencing PWGSC Minister Diane Finley’s comment regarding the need to engage Canadian businesses in the defence spending process, the following video excerpt from my Relationships First webinar series explains the why and how of an effective Industrial Regional Benefit policy.

Click anywhere on image to play video . . .

Click anywhere on image to play video . . .

30

The Ultimate Relational Contracting Model Primer by Andy Akrouche

I was recently asked a question regarding Futuresourcing™ in terms of developing an effective contract governance model.  Specifically, what is the best way to structure a contract to ensure that the desired results are achieved when neither the buyer nor the supplier have had any previous experience with the required task.

My answer was simple . . . Futuresourcing™ is an inherent part of all contract relationships in that history is not a sufficient indicator of future success, nor can you anticipate all future events or try to manage them within the framework of a static contract.  In short, regardless of whether or not one is dealing with the delivery of a known product or service or looking to source an entirely new deliverable, relying on a contract to ensure an intended outcome will not work.

Rather than merely providing a critique of existing contracting protocol without offering a viable alternative, I wrote the book Relationships First: The New Relationship Paradigm in Contracting as a means of introducing the Relational Contracting Model.

For those of you who have already read the book you know that within its pages is a practical guide – supplemented by corresponding case studies – for structuring a relationship-centric model that has over the past 20 years, consistently delivered the expected outcome for clients in both the public and private sectors.

In February, we will be extending this knowledge transfer through our new interactive Relationships First webinar series on Udemy.

With more than 2 hours of quality, high impact content, I will personally take you through my new introductory course that will provide you with the basic framework for establishing a truly relational contract.

As part of our series launch, Udemy will be providing one-time special discount pricing, so you will definitely want to take advantage of their exciting offer.

In the meantime, take a few minutes to watch the following video to learn more about the new Webinar and the SRS Relational Model.

Andy Video Pic1

30

The Relational Divide: Why CGI HealthCare.gov experience reflects more about the contracting process than the company itself by Andy Akrouche

I read with interest the January 14th Wall Street Journal article “Accenture to Take Over Fixing HealthCare.gov Website” by Stephanie Armour, in which it was announced that CGI’s contract with the Federal U.S. Government would not be renewed.

Even though the loss of the contract was small in terms of CGI’s overall revenue, what likely stings the most is the perception that blame for the highly publicized challenges with the new website was the sole responsibility of the Montreal-based consulting firm.

But does this conclusion reflect the true story?

One of the biggest lessons I have learned over the years, is that when faced with the opportunity to enter into a true partnership based on a shared mission and purpose there really is no other alternative. You must choose to collaborate.  Unfortunately and as repeatedly demonstrated by so many initiatives in both the public and private sector, collaboration is an afterthought when it comes to the contracting process.

In the following excerpt from Relationships First: The New Relationship Paradigm in Contracting, I talk about why initiatives – and more specifically relationships – such as the one involving the HealthCare.gov website go off the rails:

Why Do the Majority of Outsourcing Initiatives Fail?

Despite industry’s best efforts to modernize and professionalize sourcing practices, project management and service delivery methods, 70% of significant business relationships or large projects do not meet their objectives.

This is because organizations in both the public and private sector continue to rely on outsourcing partners who provide services based on a static requirement that is established at a specific point in time. Relationships that are structured around this approach inevitably fail because a ‘single transaction’ approach does not allow for the natural evolution of needs and stakeholder capabilities.

These issues are further exacerbated by ‘futuresourcing’ which takes place when new service requirement capabilities are introduced in the absence of client or vendor experience.

Even with the promise of significant up-front reductions in operating costs, vendor responses to ‘futuresourcing’ bid requests are speculative and often tied to a ‘let’s win the business first and worry about making it work afterwards’ mindset.

As discussed in Section I, the failed relationship between the U.S. Navy and EDS demonstrates the folly of this approach. Yet it continues to be the norm in the industry.

In order to reverse this trend, we must change our mindset around contracting and contract governance. We have to think in terms of being ‘relational’.

In my book I go into great detail in terms of what it means to be relational.  For the purposes of this post I will say that without a relational framework collaboration is a virtual impossibility.  And this is where the challenges with the creation and launch of the HealthCare.gov website likely originate.

The fact is that this was an extremely complex undertaking, which meant that traditional contract governance models would prove to be ineffective in creating the kind of collaborative framework that would have been necessary to address the website challenges in a timely and cost effective manner.

The real question going forward is simply this . . . has Accenture been set-up for success or failure?  If the same engagement process that was used to originally create the relationship with CGI was also used to select Accenture, how can we expect a different outcome?  This of course is the real story behind the headlines.

Over the coming weeks and months we will likely learn the answer – at least in part – to this last question.

CGI post HealthCare

30

The (Real) Art of the Deal by Andy Akrouche

With everyone from deal architects to premier transaction firms embracing a “Relationship” mantra when it comes to complex contracting and outsourcing, the true meaning of the word is being lost in a sea of good intentions.  Or to put it another way, just because you say the word relationship, or incorporate it into your negotiation process, does not mean you have a relationship with your trading partners.  This is especially true when you continue to view doing business through a transactional lens.

Relational . . . more than a catch phrase

Relational . . . more than a catch phrase

The fact is that 70% of all long-term outsourcing, futuresourcing and PPP initiatives underperform or fail because they are structured as a deal or a transaction as opposed to a strategic relationship between key stakeholders.  Whatever name you give it, a transaction or a deal is still a deal.

So what is The “REAL” Art of the Deal?  Quite simply it is knowing when something isn’t a deal or a transaction.

At this point I would like to emphasize the fact that I am not against deals or transactions.  There is definitely a place for them.  However, the mistake we frequently make is to erroneously apply a deal or transactional mentality to what is supposed to be a dynamic business arrangement.

What is a deal or a transaction?

A deal or a transaction is an instance of buying or selling something, such as closing on your house, getting a new mortgage, withdrawing money from an ATM machine.  In a transaction like the ones previously described, there is no flexibility, no need to interact and absolutely no changes allowed.  This of course works well in these instances.  After all, what interaction is really required after you get your money from the ATM machine?  It is a done deal!

Complex business relationships or dynamic business arrangements are not as cut and dried, as a deal is never done – even after the ink dries on the contract.

Change both within and outside of the complex or dynamic relationship is inevitable.  Whether it be the result of Political, Economic, Social, Technological or Legal otherwise known as “PESTL” variables, the fact remains that change will happen.  In this light, attempting to respond to said changes within the framework of a transaction arrangement is as the Department of Defence’s Ian Mack put it, tantamount to trying to “achieve certainty based on the initial deal.”  It just doesn’t work.  Hence the reason why 70% of all outsourcing, futuresourcing and PPP initiatives miss the mark!

Despite this dubious track record, legal firms and financial advisers are still trying to manage both the anticipated and unanticipated risks associated with complex business relationships within the confining framework of a deal or transactional structure.  By doing so, they are attempting to “legislate” change and its associated risk rather than recognize and adapt to it.

This is not a true relational approach.

So what do I mean by a relational approach?

When I first developed the relational model more than 20 years ago, I in essence redefined what complex business relationships actually entail.

If you have had the opportunity to attend one of my many seminars or workshops or, have had the chance to read my book, you will already know that I define a relationship in a business context as being a continuous, process-centric interaction involving an infinite number of deals or transactions.

From this standpoint, the focus is not solely on contractual metrics such as timelines, financial obligations and service level quality, but on the establishment of a Relationship Charter within which each of these critical areas is jointly managed.

Consisting of three parts: Shared Mission and Purpose, Joint Governance, and the SRS Open book financial management framework, the Relationship Charter is based on six foundational principles, which are as follows:

  • Act of Relating – and this is where “relational” comes from.  Connecting and linking in a naturally complementary way
  • Mutuality – Having the same or similar view or output each to the other
  • Respect – Recognizing each other’s needs, requirements, contributions, abilities, qualities and achievements
  • Innovations – Use of combined strength and synergies to deliver improved outcomes
  • Continuous Alignment – Making necessary adjustments to improve and achieve relationship objectives
  • Empowerment – Introduction of Joint management structures and processes at the strategic and operational levels to manage the realization of relationship objectives.

My book Relationships First: The New Relationship Paradigm in Contracting provides an introduction to what is needed to source and manage relationships vs deals or transactions.  Coupled with the SRS Complex Outsourcing Body of Knowledge COBOK™, you will have everything you need to establish high performing complex business relationships.

In the meantime, I would exercise due caution when you hear phrases like “negotiating to Yes” and “negotiating to We” as they reflect the “old” as opposed to “Real” Art of the Deal.

30

Ministry of Defence privatization plans: Setting up stakeholders for failure or success? by Andy Akrouche

We are all familiar with quotes such as “Insanity is doing the same thing over and over again but expecting different results.”

Even though the announcement that the Ministry of Defence’s plans to privatize its troubled procurement process would be scrapped has been anticipated for the past couple of weeks, when news of the initiative’s demise had finally materialized it was nonetheless noteworthy.  Especially with its detractors whose refrain “I told you so,” could be heard clear across the Atlantic.

Click here to check out Relationships First, to find out what MoD could have done differently . . .

Click here to check out Relationships First, to fund out what MoD could have done differently . . .

While I am not one to echo those same sentiments, it should probably come as no surprise to anyone, especially those who have attended my seminars or read my book, that I am all for outsourcing.  However, I am also a strong believer that the public sector cannot simply outsource its responsibility and accountability for the delivery of a service it is legally mandated to deliver.  Nor do I believe that it can successfully transfer and wash their hands of the associated risks of its duties to a private entity.

Within this context, the outsourcing of these complex business processes to the private sector can work if they are structured as a partnership, and in a manner that maximizes shared insight and learning on an ongoing basis.  This is especially true when it comes to establishing the criteria by which success will be measured and modified both now and throughout the life of the relationship.

Unfortunately, and as experience has shown us time and again, said partnerships cannot be borne out of a strategy that is designed around a transactional mindset that is myopically focused on circumstances in the here and now only.

Nowhere is this precept more critical than it is when an organization attempts to outsource the purchasing process.

Procurement affects the whole operation.  It is the place where if you apply a change in one area, it will almost certainly have to varying degrees, a dramatic impact on all areas of the organization.  As a result, you have to be extremely careful not to misconstrue your objectives and misinterpret the corresponding results.

For example, realizing a lower cost on a particular product is not tantamount to realizing an improved collective or enterprise-wide outcome.  In fact, it could mean arriving at a worse outcome for the very same stakeholders you are attempting to satisfy.  After all, a gain in one area should not be achieved at the expense of another area of the program.

This is another key point, in that a “disconnect” of this nature – particularly when it extends to include an external partner – will ultimately come back to hurt the entire program and nullify the anticipated benefit.  I call this the unintended consequence factor.

In the case of MoD, the desire to address the known challenges with the procurement process is laudable.   However, and by relying on the same broken procurement regime to both analyze and source the new arrangement in the hope that it will deliver a different result, is where the program went wrong.

A new more adaptive approach is needed, that takes into account not only the factors that are known today as well as identifying any unknowns through a proper industry analysis, but maintains a relational ability to recognize and respond to future changes.

What do I mean by a relational ability?  Quite simply, it means that all stakeholders are a party to both the understanding and establishment of the collective goals and outcomes of the relationship.  The only way to accomplish this is through an effective engagement mechanism that focuses on the selection of partners based on strategic fit.  Specifically, you must select those partners who are able to work with you to deliver your known set of deliverables and, are also strategically positioned to work with you to manage the known unknown variables that will invariably crop up up down the road.

I completely agree that MoD should retain advisors that can help them innovative/renovate their process.  But they need to properly source the relationships that are necessary to fix the present procurement function within the government, instead of simply outsourcing their problems and a set of arbitrary objectives that will likely set their third-party partner up for failure rather than success.

In short, they have to build their capability and capacity to source relationships as opposed to transactions or deals.

30

Follow

Get every new post delivered to your Inbox.

Join 17,065 other followers