What s In it for WE David Mortensen
Vested Outsourcing A game changing approach to outsourcing that Leverages win-win thinking associated with Game Theory / Behavioral Economics Is centered around buying results instead of tasks and/or activities Creates a contract that follows 5 Rules Uses incentives to transform the work to achieve tradeups versus conventional cost/service tradeoffs When properly implemented, helps buyers pay less and get more and suppliers do less and make more profit Based on research from the University of Tennessee Follows a structured implementation model to help companies outsource better Transformational when applied Endorsed by the International Assn of Commercial and Contract Management and the Outsourcing Institute Being associated as the business concept of the decade similar to Lean and Six Sigma
Vested Outsourcing A Hybrid Business Model Approach Research by the University of Tennessee has found the most successful deals used a hybrid approach Relational/ Behavioral Economics Approach Shared Value Approach Vested Outsourcing Outcome Based Approach The Parties Share Value (rewards) Grow the Pie / WIIFWe Outcomes Drive Economic Value 3
4 The 5 Rules of Vested Outsourcing
Making the Impossible POSSIBLE ROCKY FLATS CASE STUDY
Rocky Flats Case Study: Making the Impossible Possible Situation: Legacy of Cold War A radioactive mess 15 miles from Denver 1,000 pounds of plutonium missing Site of worst industrial fire in US history Most dangerous building in the world Shut down after joint FBI & EPA raid Secrecy, suspicion and protests 6
Rocky Flats Case Study: Making the Impossible Possible FOCUS ON THE WHAT NOT THE HOW Cold War Legacy Plutonium Trigger Site The Goal (WHAT): Clean it up & safely dispose of all wastes Close it ahead of schedule and turn it into a wildlife refuge Complete work Under budget GAO gave them a 1% chance of succeeding 7
Rocky Flats Case Study: Making the Impossible Possible WIIFWE What s in it for WE? Avoid the outsourcing paradox You ve hired a service provider because they can do it better, you design a contract as if you are the expert You strictly define how the work is to be done Must be willing to allow and enable service provider to make significant changes to improve overall processes and work flow A sound Vested strategy limits the number of yearly goals.
Vested Means Shared Interest in Outcomes WIIFWE What s in it for WE? M&I Contract Management and Integration 1995 RFLI Rocky Flats Local Initiatives brought in all local communities that were being impacted. Used them as well as regulators and DOE to set goals for the site. Vision ended up being closedown and get rid of all buildings then morphed into becoming a wildlife refuge. M&O Contract Management and Operation 1995 70 years 36B 1997 15 years 14B 1999 10 years 8B 2001 Tech bubble burst partnership among 70 communities and Rocky Flats to entice companies to come to Colorado (100K jobs by 2008) Success! 102K jobs by 2007
Vested Means Shared Interest in Outcomes WIIFWE What s in it for WE? People were working themselves out of jobs height of closure 5K staff - Partnership with employees training center Partnership with municipalities job fairs, etc to get people reemployed worked with Metro Denver Economic Development Council Most staff in 1995 were operations workers. Retrained to close project while deploying training programs to retrain into next job once Rocky Flats were closed.
Rocky Flats Case Study: Making the Impossible Possible FOCUS ON THE WHAT NOT THE HOW FOCUS ON THE WHAT NOT THE HOW Department of Energy Perspective: Here is what I want done Close Rocky Flats! Rather than telling the contractor day in and day out, minute by minute, what the expectations were, we set a single performance expectation. The contractor was responsible and accountable for delivering performance the government was responsible for providing the things the contractor needed to complete its work
Rocky Flats Case Study: Making the Impossible Possible FOCUS ON THE WHAT NOT THE HOW Kaiser-Hill Perspective: Under previous contract types, the DOE owned the work logic, so if you wanted to change that, you had to have permission to change the work logic. If we want to change that logic now, we just change it We figure out the how. We figure out the work logic. We get the work done
Rocky Flats Case Study: Mission Accomplished FOCUS ON THE WHAT NOT THE HOW Clean: Rocky Flats National Wildlife Refuge established in 2007 Closed ahead of schedule: 60 years ahead of initial baseline 14 months ahead of project schedule Under budget: $30 billion under initial projection $500 mm under project budget 13
Pricing Model Incentives Optimize for Tradeups! Cost Pass Through Base Minimum Fee Fee at Risk Target Fee Incentives Stretch Incentives Project costs were passed through Minimum Mgmt Fee 3.77% 5.23% of Fee at risk Fees paid for achieving Performance Targets Penalties for missing Performance Targets Cost Share (KH kept 30 cents for every $1 under target budget and lost 70 cents for every $1 over budget) 9% Stretch incentive fees 11.6% Maximum Fee 14
Rocky Flats Case Study: Incentives Were Key! Pricing Model Incentives Optimized for Trade-ups Min & Max were revised to provide greater incentive Kaiser-Hill earned the maximum fee GAO, after saying they only had a 1% chance of succeeding, complained that Kaiser-Hill made too much money because the average DOE deal paid 4.1%... Target Fee Minimum (achieve Desired Maximum Fee Outcome) Fee Profit Percentage 3.77% 9% 11.6% 1 st Contract $ M (original) 150M 358M 460M 2 nd Contract $ M (revised) 75M na 560M 15
Results after 10 Year Contract Completion 283 million sf of land decontaminated; now a wildlife refuge Pollution per gram of soil decreased from 651 cpi to 28 cpi (44% below target) Safety rate improved by over 400% and $300k rebate from insurance 1995 =900 employee grievances 2005 = a handful Over 200 innovations, including Glove Box decontamination from 1 per year to 3 per day Taxpayer: I WIN Saved $30B Have a Wildlife Refuge WIIFWe I WIN With a better environment Kaiser-Hill I WIN With a higher profits Total cost is $30 Billion less than initially projected Completion date is 65 years earlier than projected saving $100m in security per year alone! 5 year contract with 5 year sole source extension 20% of profits paid to ALL employees even union workers involved 11.6% profit margins due to incentives above DOE average of 4.1%
A Short Video.... http://www.youtube.com/watch?nr=1&v=vcspmidpesq&feature=en dscreen 17
So what Partnerships are working today? CENTENNIAL, CO
Scope of Work Public Works Administration Information Technology, Records Management Capital Asphalt and Concrete Improvements Program City Wide Customer Service / Call Center Streets and Roads Maintenance Right of Way Maintenance (Weeds, Signs, Dead Animals) Pothole Repair and Roadway Maintenance Snow and Ice Management Program Concrete Maintenance Minor Bridge Maintenance 19
Scope of Work Traffic Services Traffic Sign Inventory and Maintenance Pavement Markings (Striping) Street Sweeping Pavement Management Transportation Planning Services Geographic Information System (GIS) Right of Way Permitting and Inspection Municipal Code Compliance/Enforcement Engineering Inspection Program for Development Projects Emergency Response 20
CENTENNIAL, COLORADO FOCUS ON THE WHAT NOT THE HOW Performance Standards - Snow and Ice Control All Primary Streets (Priority 1) shall be maintained to Near Normal/Mostly Clear condition. All Secondary Streets (Priority 2) shall be maintained to Near Normal/Mostly Clear condition. All Collector Streets (Priority 3) shall be maintained to Partly Covered or better condition. When authorized, Residential Streets shall be maintained to a Covered or better condition.
Outcome based.focus on the What..Not the How Investment in Snow Route Optimization Deployed during February 4 snowstorm Initial time to plow network decrease of 28%. After subsequent refinements time savings exceeded 40% I don t know what you guys are doing, but the difference is amazing Littleton Public Schools Transportation Director after deployment of optimized routes
David Mortensen david.mortensen@ch2m.com 720-286-0112