Negotiating Value in a Price-Only World Part 2

Federal Government Negotiates and Gets Value

Today, Rocky Flats is a National Wildlife Refuge. It was established in 2007, and is managed by the U.S. Fish and Wildlife Service. The 5,237-acre refuge was once a nuclear weapon depot, a legacy of the cold war. Prior to 2007, it was a radioactive waste site just 15 miles from Denver. At one point there was 1,000 pounds of “missing” plutonium. A joint F.B.I and E.P.A raid shut down the government’s clean-up efforts.  Getting to We[1] explains in detail the financial model and incentives. This is a brief description.

The D.O.E. set the goals as:

  • Clean it up & safely dispose of all wastes,
  • Close it ahead of schedule and turn it into a wildlife refuge, and
  • Under budget.

No vendor had been able to reach those goals. The G.A.O gave the project a 1% chance of succeeding (meeting the goals).  The joint venture Kaiser-Hill won the right to clean up Rocky Flats.

Kaiser-Hill Decreased Costs and Risks

Kaiser-Hill invented methods for treating 76 different kinds of waste never before encountered and for which no regulations existed. Further, Kaiser-Hill developed safety innovations that resulted in 60 million hours of work with no life-threatening injuries and no environmental releases.

There were many innovations. Kaiser-Hill developed a demolitions process to remove concrete from steel reinforcements designed to withstand aerial bombing attacks. It also developed glycerin-based spray to remove airborne Plutonium and other contaminants and designed a robot-operated plasma arc torch to break up large contaminated equipment.

Rocky Flats was restored to a Wildlife Refuge in 2007. It closed 60 years ahead of initial baseline schedule and 14 months ahead of project schedule. The project was also under $30 billion under initial projection budget and $500 million under project budget. And, that was after the D.O.E. paid Kaiser-Hill millions in incentive payments for reaching these goals.

Federal Regulation To Aid in Value Discussion

The FAR—Part 48 Value Engineering is a little used, but powerful tool to aid the government in getting value from vendors.

FAR — Part 48 Value Engineering

48.101 — General.

(a) Value engineering is the formal technique by which contractors may

(1) voluntarily suggest methods for performing more economically and share in any resulting savings or

(2) be required to establish a program to identify and submit to the Government methods for performing more economically . . .

(Emphasis added)

Consider using this tool to help drive vendor performance. This language can lead to discussions on the four types of value. In other words, the vendors can suggest ways to perform more economically by decreasing costs and risks.

Show the math

This is the final and most critical piece of the value conversation. Business leaders will be skeptical that you have actually negotiated value unless you show them the math. It’s not enough to talk about decreasing risk or increasing the benefits. You have to prove it. Develop a simple business case to support your assertion that you have negotiated value. If you cannot put a dollar value to the type of value, important stakeholders may push back by demanding price concessions that actually erode value.

Here is an example of the math supporting decreasing costs. A software provider demonstrated that its solution could reduce the cost to develop a contract with a supplier by reducing the time a contract manager needs to develop a contract. The software provider calculated that freeing up 2 hours of time per contract equals $100. At $100 x 1,000 contracts annually equals $100,000 in savings that could go reduce overtime costs, or go to other projects. While this is simple, it is effective at proving value.

Vendors are typically in the best possible position to help customers demonstrate numerically the value of working with them.  Ask the vendor to develop the mathematical value proposition, include metrics in the contract to track the math and incent vendors to meet the metric.

Are you ready to negotiate on value?

Here are some questions to make a value conversation tangible.

  • What’s the realizable value to decreasing your costs and risks?
  • What’s the realizable value to decreasing your counterpart’s costs and risks?
  • What is the realizable value if a vendor could increase the benefits or opportunities to the buying company by meeting the buying company’s customer’s needs or expectations?
  • How will you track or measure savings/benefits?

Be sure to show the mathematical calculations and track those calculations.

 

[1] Id.