Value-Based Principles John Savicky Arizona State University

How Do We Transfer and Minimize Risk, Increase Accountability, and Increase Performance?

Best Business Practices Leadership Experts & Leadership Philosophies Various fields (Automobile Manufacturing, Commercial Manufacturing, Self- Improvement, Martial Arts, Business, Management, Law, Government). Leadership experts included: Edward Deming, John Maxwell, James Allen, Marcus Buckingham, Jim Collins, Noel Tichy, Jack Welch, James Kouzes, Lee Iacocca, Peter Drucker, Sun Tzu, Tom Peters, Abraham Lincoln, Bruce Lee, Niccolo Machiavelli, and Rudolph Giuliani, etc. Topics: – Continuous Improvement – Theory of Constraints – Information Worker – Lean Manufacturing – Just in Time – Six Sigma – Supply Chain Management3Define Measure AnalyzeImprove Control

4 Impact of Information Event Initial Conditions Final Conditions Time

5 How Does This Relate To Procurement? Delivery of the Project Selecting a Vendor Project Complete Time

6 Is Our Goal To Obtain 100% Information? Delivery of the Project Selecting a Vendor Project Complete Time

Obtain the Least Amount of Information

8 Objective of Minimum Standards Contractor 1 Contractor 2 Contractor 3 Contractor 4 Performance High Low Risk High Low High Low Performance Minimum

9 Performance High Low Risk High Low Who Will Be Selected? Contractor 1 Contractor 2 Contractor 3 Contractor 4 Contractor 1 Contractor 2 Contractor 3 Contractor 4 Performance High Low Risk High Low

10 Perception on Standards

ASTM Standard Setting

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13 All Products Meet the Standard $2.00 /SF$4.00 /SF Cost:

14 What Will Manufacturer ‘C’ Do?

15 Specification Data Sheet

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Can We Create an RFP That is 100% Accurate? 17

18 Detailed Instructions

19 Hold On…The Warranty Will Protect Us!!!

20Warranty The only roof system you’ll need for the next 30 years. Backed by the industry’s most resilient guarantee – an unsurpassed 30-year warranty against whatever the future brings. MANUFACTURER X

21 Warranty Exclusions / Fine Print Warranty exclusions (fine print) are rules that protect the manufacturer if any problems arise. Exclusions will limit the manufacturers liability.

22 Roof Warranty Exclusions “Warranty is void if....” “Failure to use reasonable care…” “Damage caused by ponding water or improper drainage…” “Damage by abnormal use of the roof…” “Damage by unusual occurrences…” “Failure to provide routine maintenance…” “Deterioration due to ordinary weathering…” “Damage caused by falling objects…” “Unauthorized modification…” “Other than occasional traffic on the roof…” “Damage from by chemicals, animals, insects, or plant life” “Change in building use or purpose…”

Outsourcing Going In For Brain Surgery… 23 Would you?  Find the cheapest surgeon?  Ask that surgeon if they can lower their price?  Would you tell them that they should do it faster?  Would you tell them how to perform the surgery / what tools they can use?  Would you tell them that you have a better way of doing the surgery?  Would you tell them which nurses/doctors they can use?  Would you hire other individuals to tell/direct the surgeon how to do the surgery?

It Is More Important For The Vendor To Know What To Do Than It Is For Client To Know What The Vendor Should Do 24

Right Information At The Right Time!! 25

Reexamine How We Analyze Purchasing a new SUV – How many full-size people can fit? – The MPG or capacity of the gas tank? – The type of safety equipment? – The type of headlights we getting? – Darkness of the tint? 26 Purchasing Uniforms for Troops – Durability - How long the material will last? – Location of where material is made? – How many pockets the uniform has? – The ability of the uniform to be warm/cold?

Dominant Information OZ $3.75 ABC 10 OZ $ OZ $3.99

Which would you buy? (If you need to buy Cocoa Puffs) OZ $3.50 ABC 12 OZ $ OZ $2.99

“Dominant Information” 29 Scenario A Scenario B

Industry Structure NEGOTIATED LOW HIGH VALUE-BASED PRICE-BASED UNSTABLE LOW HIGH COMPETITION PERFORMANCE

Industry Structure NEGOTIATED LOW HIGH VALUE-BASED PRICE-BASEDUNSTABLE LOW HIGH COMPETITION PERFORMANCE  Value & Performance  Vendors Maximize Profit  Vendor Accountability  Minimized Management & Inspection  Minimal Technical Information  Dominant Performance Metrics  Treat as a Commodity  Volume Based  No Accountability / Finger Pointing  Management & Inspection  Minimum Standards & Technical Data  No Performance Metrics

Which Party Mitigates Risk? NEGOTIATED LOW HIGH VALUE-BASED PRICE-BASEDUNSTABLE LOW HIGH COMPETITION PERFORMANCE  Value & Performance  Vendors Maximize Profit  Vendor Accountability  Minimized Management & Inspection  Minimal Technical Information  Dominant Performance Metrics  Treat as a Commodity  Volume Based  No Accountability / Finger Pointing  Management & Inspection  Minimum Standards & Technical Data  No Performance Metrics VENDOR OWNER

What Quadrant Are We In? Do you spend a lot of effort preparing technical requirements? Do your contractors require a high degree of management? Do your projects require a high degree of inspection? Do you transfer the risk of the project success to the contractors? Do you transfer all control of the project to the contractors? Are contractors coming back to propose on all your projects? Do you focus on getting the longest warranties? Do you focus on writing the best contracts? Are projects completed on-time? Are projects completed without change orders? Are contractors maximizing their profits? What is your level of performance? What is your level of competition?33

Price-Based Definition Cost is the primary factor for award Can be used in any Delivery Method: – Design-Bid-Build – Design-Build – Construction Manager at Risk Can be referred to as: – Low-bid – Negotiated-bid – Qualifications-based – Best-value34

Price-Based… Do not use expertise to mitigate risk Bid only what you see in the estimate Be as low as possible to get job If you find issues, don’t tell anyone until after award Use change orders to mitigate risk No dominant performance metrics (or provide very confusing metrics) Drives away high performers35

Industry Structure NEGOTIATED LOW HIGH VALUE-BASED PRICE-BASEDUNSTABLE LOW HIGH COMPETITION PERFORMANCE  Value & Performance  Vendors Maximize Profit  Vendor Accountability  Minimized Management & Inspection  Minimal Technical Information  Dominant Performance Metrics  Treat as a Commodity  Volume Based  No Accountability / Finger Pointing  Management & Inspection  Minimum Standards & Technical Data  No Performance Metrics How Do We Get Here?

How Do We Transfer and Minimize Risk, Increase Accountability, and Increase Performance?

Factors For Success Fair (state/follow rules) Open Impartial and Transparent (minimize evaluator bias / provide debriefing) Efficient (minimize efforts) Award based on value 38

Increasing Accountability and Performance Need to be a “good” client Need to focus on “win-win” Need to create an environment that gives the advantage to high performers Hire the best people and let them do their job Need to minimize traditional functions – Management – Direction – Control

Constraints Your people are your greatest constraint. Your timeframe and goals must be tailored to the capabilities of your people (vendors are more capable of adapting) Just because you understand, does not mean your staff understand.40