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Thursday, December 18, 2014

Are we bidding on supplies or suppliers?

The article for this post is very long, and very good and worth the read in its entirety. You probably would do well to just skip this post and go directly to the article at the link, although I have offered a few comments down below, after presenting bits of the article in my usual fashion of slicing and dicing it beyond recognition of its author. 

The author is Charles Shafer, a principal consultant with Red Team Consulting, a consulting, capture and price strategy consulting firm.

Why big procurements struggle and what can be done about it
There’s a wealth of constantly evolving IT products available that can be leveraged to answer some of the most difficult missions in government. Six different government entities took similar approaches to that business problem by creating large, long-term, high-volume, billion-dollar contracts by essentially vetting an initial group of government-savvy manufacturers and resellers. This process gave them each a contract where these companies compete on a daily basis for government IT commodity requirements by offering the latest technology at the best prices.

These contracts, which are task order contracts, have long been a very successful and useful tool. Many of these contracts are in their second or third iteration. And all of these contracts were opened again for competition in this decade, offering an opportunity for new technology resellers and manufacturers to earn a spot on these contracts and force existing awardees to compete again to maintain their position.

These procurements were conducted by six different contracting offices, working with completely different program offices, over the course of four years. Some of the solicitations contained traditional evaluation factors such as past performance and management approach, and some discarded with these factors entirely. Some used a multi-phased approach that rejected proposals in stages and others attempted to do all their evaluations at once. Some of these procurements were made up of smaller contracts that separated businesses based on their size and socio-economic profiles, while others lumped all contractors together.

However, there are a few commonalities that each of these procurements share. Each procurement required bidders to propose products that fit a profile of specifications given by the government. In each solicitation, the products covered a wide spectrum of technology, from basic personal computers to enterprise-class equipment. Many of the procurements had a long list of products, sometimes hundreds of items long.

The flexible nature of these contracts means the government is not obligated to buy any item from that original list, and it is widely known that proposing items against this list is done primarily for proposal evaluation purposes, and has little to do with post-award activities. Because these contracts allow you to regularly change your catalog post-award, you can propose a product with the initial submission that is compliant and cheap, but you know to be inferior and undesirable, with the intention of replacing it or putting another item on the contract post-award.

That’s because each of these contracts has a mechanism known as “technology refresh” and “technology insertion,” which allows bidders to update the list of products they offer after award. These mechanisms are necessary to keep pace with a rapidly changing technology market. It is important to remember that the government is not buying any initial products with the creation of these contracts. They simply serve to initiate the vehicles that will later fulfill billions of dollars of competed delivery orders after award. This creates an environment where the initial pricing submission has little basis in reality. [See, Are we hard wired to corrupt our procurement systems?]

In every case, the government used this initial list of products as a pass or fail measure for the technical evaluation factor. That means a bidder had to provide a combination of technology products that met every single specification the government marked as mandatory to be eligible for an award. The list of requirements attached to a single product could sometimes be 20 or 30 specifications long. When you multiply this list by the dozens or sometimes hundreds of products, you end up with individual pass/fail elements that can go well into the thousands.

The vast number of requirements caused significant delays during the proposal phase and much longer delays during the government’s evaluation and award periods. In many cases, the technical requirements for a product were initially unclear, impossible to fulfill, or specific to a single manufacturer.

Because these were pass/fail requirements that could invalidate an entire bid with one deficient response, bidders asked questions to clarify requirements. The delays and frustrations during the proposal period were nothing compared to what actually happened when the government began evaluating proposals. In a perfect world, with plentiful and skilled resources and no gray areas, it would take an evaluation team several months to properly evaluate and document the number of proposals received. At best, the products list evaluation method is a time consuming endeavor, and at its worst, it’s a liability for litigation.

Most often, evaluators compare the prices of bids by looking at the entire price of a bid, known as a total evaluated price (TEP). Because the price of some products are significantly less than others (for example, an LCD monitor and an enterprise-class storage system), certain products, based on their price and quantity, end up contributing much more to the TEP than other products.

In industry, we call this “weighting,” meaning that one product “weighs” more than others as far as its impact on pricing. Extreme weighting give rise to a pricing methodology known as gaming.   All of these procurements had weighting issues.

With these options, each bidder is presented with a much lower risk when understating prices. Bidders know to understate the price on the most heavily weighted items - it’s grade-school math.

This gaming approach has become the standard rather than the exception on these large procurements. This has created a downward spiral with each bid, as prices move lower and lower, becoming less and less realistic while testing business ethics.

The government is fully aware that gaming happens. It’s not a practice that was created by the technology commodity industry and it has been practiced for some time. There is an entire acquisition regulation dedicated to gaming, which the government addresses as “unbalanced pricing.”

They define this in FAR 15.404-1: “Unbalanced pricing exists when, despite an acceptable total evaluated price, the price of one or more contract line items is significantly over or understated as indicated by the application of cost or price analysis techniques.” The government has the right to reject offers for unbalanced pricing.

Once the government makes it over the solicitation hump and has an actual contract these contracts can be greatly beneficial to the government. They are dynamic and responsive to technology needs and can often be updated much faster than a GSA schedule. The competitive aspects of the contract drive down prices on products while also offering technology solutions the government might not have previous considered.

I believe there is a middle ground.

The proposed list of products should be vastly simplified, in both number of products and specifications. If the likelihood of a contractor having to deliver on their initial list of products is very low, then it should be reduced to a simple exercise for both industry and government. Using a much shorter list of products that are widely available and compliant with government standards, like laptops and monitors and servers, will ease several pre-award problem areas.

The key is to make the product evaluation portion simple. The government should rely more heavily on subjective evaluation factors like corporate experience, past performance, and written technical and management approaches. Detailed corporate experience and past performance information are reliable sources for evaluation in this industry as it’s not something that is often fabricated.
To me, the difficulty with this approach is that the government has given up trying to get the supplies it needs, because it cannot specify the products needed in the quantities needed fast enough to meet the demands of the consuming end users. The information from the using agencies is streaming at the procurement officers through a fire hose, or the pit stop re-fueling systems used in the Indy 500 races. With the scale down of procurement staff, there is not enough procurement broadband to deal with it all.

To deal with it, the government has turned to trying to get the supplies it needs to getting intermediaries, who get the supplies it needs. Thus, a solicitation for things turns to a solicitation for services. This may be a thoroughly rational approach, but it has flow on consequences that should be ameliorated. (Not to mention the hint of a inherently governmental function factor: see, To procure or not to procure: is that the question?

Mr. Shafer says, "Anyone who has spent time developing proposals for federal contracts will tell you that much of the evaluation process is subjective, except when it comes to pass/fail evaluation factors. Those should, by definition, be black or white." What is really being said here is that product evaluation for supplies is more objectively testable ("black or white") than the evaluation of service providers (which "is subjective").

Mr. Shafer endorses this approach because it focuses on the old-boy network of tried and true service providers. The problem I have with that is there is nothing in this approach that weeds out the gamers he mentions, and the more the same network is relied upon the narrower that network gets. 

To provide the integrity that is essential to have confidence in outsourced procurement services, critical solicitation and contract administration over the service-providers should be ramped up, and the mix of service providers should be competed far more than once a decade or so ("all of these contracts were opened again for competition in this decade"). And, maybe, it would not hurt to decentralize some of the commodity purchases ("IT commodity requirements") to more users.

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