1. The Challenges of Service Contracting Vernon J. Edwards Presented to the Cape Canaveral Chapter of the NCMA December 13, 2006

2. Copyright 2006 by Vernon J. Edwards 2 Table of Contents TopicChart Nos. What is a service?3 - 7 The challenges of service contracting8 Specification9 - 11 Source Selection12 - 13 Pricing14 - 16 Quality Assurance17 The Inadequacies of Current Policy18 The Professional Challenge19

3. December 13, 2006Copyright 2006 by Vernon J. Edwards 3 What is a service? A service is work done by one party for another in order to change some object in a specified way: some person or set of persons, property, or some set of circumstances. My definition is based on the work of T. P. Hill. See: “On Goods and Services,” 23 Rev. Income & Wealth 315. http://www.roiw.org/1977/315.pdf

4. December 13, 2006Copyright 2006 by Vernon J. Edwards 4 The Components of a Service Object, Process, Result Service Object Initial State Service Object Result State Service Process (Functions, Tasks) The service object as initially encountered by the provider The service object after the provider has done its work The ordered application of labor and capital to produce change (The source of costs) A buyer can specify a service by process or result. The service is the result, not the process. People who buy services have some result in mind, even if they have only a vague idea of the result that they want, and even if they specify process.

5. December 13, 2006Copyright 2006 by Vernon J. Edwards 5 Service Quality This is one of the most complex issues in service contracting. Quality may be based on process, result, or both. When a service entails a high level of human interaction, process is often as important as result. Moreover, a recipient’s subjective perceptions may be more important than objective reality. Quality often is not validly measurable in a quantitative sense. Attempts to quantify might result in emphasis on relatively trivial matters (e.g., the timeliness of reports instead of their accuracy or completeness).

6. December 13, 2006Copyright 2006 by Vernon J. Edwards 6 Categories of Services There are two basic categories: –Projects: one-time performance in which a specified result must be achieved within a specified time and budget –Operations: performance of repetitive or continuous processes throughout some period of time

7. December 13, 2006Copyright 2006 by Vernon J. Edwards 7 Variations in Services By tangibility of result By durability of result By complexity (number of objects, functions, or tasks) By degree of customization By process duration By place of performance By extent of interaction between provider and recipient By nature of interaction between provider and recipient Each variation and each combination of variables gives rise to unique challenges.

8. December 13, 2006Copyright 2006 by Vernon J. Edwards 8 The Challenges Specification Source Selection Pricing Quality Assurance

9. December 13, 2006Copyright 2006 by Vernon J. Edwards 9 Specification in General Specification is description. In order to specify something you must describe it, using words, numbers, and/or pictures. In order to describe it you must visualize it in some form. In order to visualize it you must either observe it or imagine it.

10. December 13, 2006Copyright 2006 by Vernon J. Edwards 10 Specification of Services In general terms, there are two ways to specify services: –by process, or –by result. Contractually, it is usually considered unwise to specify in both ways.

11. December 13, 2006Copyright 2006 by Vernon J. Edwards 11 Specifying Results When services are complex, the results desired might be manifold and unpredictable or unforeseeable under all conditions and circumstances of performance. In some cases — research and development, testing, services, and specialized operations —the result will not be acceptable unless the process is carried out in a specified way.

12. December 13, 2006Copyright 2006 by Vernon J. Edwards 12 Source Selection When selecting a contractor or subcontractor we usually consider (a) the qualifications of the competing firms, (b) their proposed products or services, and (c) their proposed prices. Products are tangible objects that either do exist or have existed, or are imaginable in tangible form and describable in more or less objective terms. Services are only imaginable. They do not exist until they are being or have been rendered. They are always custom to some degree. And even tangible results often cannot be preserved for examination by evaluators.

13. December 13, 2006Copyright 2006 by Vernon J. Edwards 13 Bases for Source Selection Evaluating the “Proposed Approach” Selections based on descriptions of the “proposed approach” to providing a service may not be reliable, since the description may be nothing more than the product of the marketing imagination. There is no way to prove that the approach will succeed, and the Government may not have the know-how to predict the likelihood of succeeding. Binding a contractor to use its proposed approach may turn out to be a costly mistake.

14. December 13, 2006Copyright 2006 by Vernon J. Edwards 14 Pricing Services There are two general approaches: –Market pricing: used for standard commercial services such as plumbing, automobile repair, and most professional services –Cost-based pricing: used for noncommercial services Pricing may be output-based or input-based. A fixed-price lump-sum construction contract is a classic example of output-based pricing. Time-and-materials and labor-hour contracts are classic examples of input-based pricing.

15. December 13, 2006Copyright 2006 by Vernon J. Edwards 15 Input vs. Output Pricing The expenditure of labor and material is not, in and of itself, the service. Labor and materials are inputs to the service. The service is the output of the labor — some change. Input-based pricing uses costs incurred or labor rates and incurred hours as the basis for payment. Output-based pricing uses the negotiated price of the achieved service result as the basis for payment.

16. December 13, 2006Copyright 2006 by Vernon J. Edwards 16 Output and Input Contracts Contracts that pay a pre-established amount upon achievement of the specified result are output contracts. Cost-reimbursement, time-and-materials, labor-hour, and fixed-price level-of-effort contracts are input contracts.

17. December 13, 2006Copyright 2006 by Vernon J. Edwards 17 Quality Assurance A number of attributes of services make them difficult to inspect: –Intangibility of result –Short-lived or ephemeral nature of result –Dispersed performance –Subjectivity of quality –Lack of true units or lots of results For these reasons, statistical quality assurance using random samples and acceptable quality levels (AQLs) may not be applicable. The buyer might be forced to choose between 100 percent inspection or nonstatistical sampling. It may be difficult for the buyer to establish effective remedies for nonperformance.

18. December 13, 2006Copyright 2006 by Vernon J. Edwards 18 The Inadequacies of the FAR The FAR was written for purchases of supplies (goods). Policies for the purchase of services are largely an after-thought. (Service contracting is considered a “special” category of contracting, even though the Government annually obligates more money for services than for goods.) Clauses for services often appear to be cut-and- pasted from clauses for supplies. (Compare the inspection clauses.)

19. December 13, 2006Copyright 2006 by Vernon J. Edwards 19 The Professional Challenge To think things through To develop a shared and comprehensive conceptual framework To challenge unrealistic or unworkable policies and mandated procedures To reject program “success stories” (such as Deepwater) that are unsupported by verifiable and relevant evidence To experiment and develop realistic and appropriate policies and methods