Why scrap shipbuilding strategy? Improved outcomes starts with open communications and transparency

“That project was awarded to the Seaspan’s Vancouver Shipyard. The briefing assigned no blame but suggested there were improvements the B.C.-based shipbuilder could make . . . “Vancouver Shipyards needed to find skilled staff, establish capability to increase design work and learn how to use new facilities,” the briefing material said.” – CBC News, November 25th, 2015

As I read the above excerpt from a recent newspaper article in which it was reported that costs related to the national shipbuilding procurement strategy (NSPS) had “ballooned” by the billions of dollars, it would be reasonable to wonder what happened?

Was there a breakdown in communication, or a lack of understanding relating to what was and was not actually possible, that led to the project coming in at 181 percent over budget?

Simply put, in formulating its “procurement strategy” through which partners such as Seaspan were engaged, were the government and its industry partners too eager to make a move in a particular direction? Did they make key decisions before they had a true handle on either the scope of the project, or its eventual cost?

Once again, and coming in at 181 percent over expected budget, one could be excused for thinking that this was the case. To a certain degree – at least in relation to the last paragraph, this would be a fair conclusion.

But does it bring us any closer to a real understanding of why it happened, and more importantly, how we can prevent it from happening again in the future?

In this regard, I would like to refer to an Ottawa Citizen article by former ADM MAT Alan Williams.

According to Williams, the government should scrap its plan – in fact the entire NSPS strategy, in favor of a return to the way things had been done in the past. Specifically, utilize DND personnel to write the statements of requirements that will achieve the needed balance between effectively describing the military’s needs while, enabling the private sector to bid a fixed or certain price.

While Williams’ approach may at first glance, seem reasonable, there are some problematic gaps in terms of what he is recommending.

To start – and this should come as no surprise to anyone who has read my blog or, attended my seminars, it is virtually impossible to reliably establish a set requirement without taking into account that both our needs and/or the product or service offering of the vendor will inevitably evolve over time.

Beta Versus VHS

Think about what I am saying from the standpoint of an everyday situation.

Many of you will likely remember when both Beta and VHS first came out.

They were clearly different formats that were not interchangeable. This meant that when you chose one over the other, you were in reality locked in to that choice.

However, and before making your final decision of which technology to buy, you likely did some research into the differences between the two, in an effort to determine which format would best suit your needs both now and in the future. In short, you made your decision based upon the best information that was available at that time.

Shipbuilding Options

What happened to everyone who chose Beta?

In choosing Beta, did you make a bad decision? Did you make a mistake?

Perhaps you can take solace in the fact that even VHS was eventually replaced by newer and more advanced technology.

The point is this; wouldn’t it have made sense to pursue a certain course of action today, while keeping your options open for the future relative to any unforeseen changes in the market?

For example, what if you purchased your Beta system from the vendor, with the understanding that you could trade in the unit and exchange your library of movies at a future date, and do so at a preferred price?

I realize that this is an overly simplistic example, but it does effectively illustrate my point regarding the problems with locking in both the buyer and vendor into a set course of action. Particularly when it involves complex technologies and long term contracts that can span years and even decades.

Now I do not want you to misinterpret by position regarding the Williams suggestion as an indication that I am fully supportive of the NSPS approach. It clearly has its shortcomings. This being said, I do believe that the NSPS strategy has its strong points, and is therefore good for Canada.

For example, it does facilitate government intervention with regard to creating a sustainable supply chain. The NSPS strategy also stimulates economic activity and opportunities, that would otherwise have been missed under the transactional model that Williams is proposing.

What this means is that rather than trying to tighten specifications and hold vendor feet to the proverbial flame, we need to work towards creating a more consultative and collaborative engagement mechanism between government and private industry.

Once again, this is something that is not possible under the ever elusive certainty model that Williams is proposing.

While Williams and perhaps even the Central Agencies want us to think that they operate in a world of absolutes in which there is a high degree of certainty in costs and outcomes, nothing can be further from the truth. The fact is, there is no such thing as absolutes – especially when it comes to building new aircraft, new warships or for that matter any complex acquisitions for which either new supply chains must be established or, an economic activity created.

Now at this point, some might be inclined to point to LCC analysis models as a solution to the problem. While there is no doubt that LCC analysis will enable management to understand the total cost of ownership, it is not a cost prediction tool.

A more reasonable approach to addressing budget overruns is to accept the fact that with complex initiatives, absolutes do not exist until after the fact. It is the immutable 20-20 hindsight rule of the procurement world.

Within this context, it would make far more sense to openly say that we do not know what the exact cost and benefit will be at this time however, it would be reasonable to establish a target of say $30 billion in cost, and $50 billion in potential benefits.

As we progress further through the process we are, at set time intervals, committed to establishing a communication and reporting discipline involving all stakeholders. It is at these points of open engagement that we will be able to gain more certainty regarding costs as well as the related economic and industrial benefits. In short, the present information vacuum that exists between project announcement and the revelation of a 181 percent budget overrun will be eliminated, and with it the shock leading to a futile exercise in finger pointing, and what went wrong lamentations.

What I am really talking about is managing a collaborative process as opposed to executing an adversarial transaction.

If the government really wants to achieve a different outcome, then they have to move beyond the adversarial matrix of a transactional orientation in which the buyer’s role is limited to project monitoring and contract enforcement.

Shipbuilding transparency2

This means that they will have to adopt a radically different yet undeniably proven mindset, that is based on a collaborative approach that drives ongoing alignment with project goals, and open communication.

The real question this raises is whether or not TBS, PSPC, IC and Program owners are ready to become relational in their thinking and approach.

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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.

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