Kelman: Contracting is a balancing act

I recently got a call from a reporter who was writing a story on reverse auctions. I had advocated eliminating the ban on such auctions when I was in government, and I serve on the board of advisers for FedBid, which sells reverse auction services. “Don’t reverse auctions create an adversarial relationship between government and industry by increasing pricing pressure on vendors?” the reporter asked.

I responded by saying there’s no greater advocate of cooperation between agencies and contractors than me, but cooperation doesn’t mean lying down and playing dead. Industry doesn’t interpret cooperation that way, and the government shouldn’t either.

The reporter’s question revealed a common misunderstanding about the nature of interactions between government customers and industry, and it is shared by many people with otherwise opposing views about contracting. In a classic book, “The Manager as Negotiator,” David Lax and James Sebenius argue that every negotiation has elements of creating value and claiming value.

Negotiation can create value by making both parties better off than they would have been without that relationship. Creating value is possible because each party to the negotiation usually has different preferences. A customer might value speedy delivery and a vendor can provide it inexpensively. Likewise, a customer might not value certain bells and whistles that are relatively expensive for the vendor to provide.

In this example, a deal specifying speedy delivery and no bells and whistles creates value compared with the alternative in which the vendor delays delivery but provides the bells and whistles.

Here is another example: If government is clear and consistent about its requirements, it creates value by getting what it wants faster and cheaper — and saves the vendor money and aggravation.

A trusting relationship creates value by making it easier to share information across organizational boundaries. Studies show that trustful relationships increase the odds that a project or program will be successful.

Good vendor performance creates value by satisfying government and enabling the vendor to build a good track record. Creating value is what people mean when they talk about a win-win relationship.

But contract negotiations also involve dividing up the pie, or claiming value. Speedy delivery with no bells and whistles might be better than the alternative. But once the parties agree on that value, they still need to settle on a price.

Many people, including some journalists and politicians, view government/vendor relationships solely on the basis of claiming value. If the vendor makes money, the government must have lost.

In the old days, contracting officials often seemed to think it was better for a contract to fail than for a contractor to make too much profit. That dysfunctional attitude explains the current opposition to share-in-savings contracting.

In addition to creating value, the government/vendor relationship involves claiming value. The government can’t play dead here. Vendors certainly don’t.

As Lax and Sebenius wrote, claiming value often complicates efforts to create value in the first place by inhibiting trust and information sharing. Managing that challenge is what good contracting is all about.

Kelman is professor of public management at Harvard University’s Kennedy School and former administrator of the Office of Federal Procurement Policy. He can be reached at steve_kelman@harvard.edu .