More feds giving due diligence its due

Over the past year or two, a new phrase has entered the federal information technology acquisition vocabulary: due diligence.

When the concept was just beginning to enter the federal lexicon, I wrote a column about the idea [FCW, June 22, 1998]. The phrase is adapted from the commercial mergers-and-acquisitions market. In that context, it refers to the process by which an acquiring company learns more about the financial and operational status of a firm it plans to acquire. Buyers use it to assure themselves that they know what they're buying and that there are no skeletons in the closet of the company being bought.

In the federal IT context, due diligence refers to activities that take place before the government's selection of a vendor - usually a vendor that will be changing, re-engineering or taking over a government-run business process - to allow the bidders to learn more about that business process.

Due diligence received regulatory encouragement - although there is no specific mention as such in the regs - in two changes in the 1997 rewrite of Part 15 of the Federal Acquisition Regulation. The first change was the endorsement of a two-phase source-selection process, in which an agency makes an advisory down-select early on to narrow the field to the strongest competitors. This is an important enabler for due diligence because due diligence is resource-intensive, and it is hard to ask an agency to allow 20 vendors to wander its halls for a few weeks seeking all sorts of information.

The second FAR change authorized one-on-one meetings between the government and an individual vendor, rather than the old regime of requiring communication during the procurement process to take place via bidders conferences or formal written questions. The new approach was necessary to allow the tailored environment of due diligence, in which vendors learn about what they choose to learn about. (Indeed, asking a good question about an organization's business process is a legitimate source of competitive advantage, as long as everybody has a chance to ask questions.)

Due diligence is of significant value to government and vendors. For vendors, they learn more about what they are bidding on so that they can craft a more responsive bid. Before procurement reform got started, groups such as the Industry Advisory Council pleaded for better communication between government and industry.

The advantages to government are similar. If a vendor knows more about the nature of the requirement, that knowledge reduces the risk that is otherwise factored into a vendor's bid. Frequently, it is unrealistic to ask vendors to bid a performance-based work statement and/or a fixed price unless they have learned more about the business process through due diligence. Due diligence also reduces unjustified advantages to the incumbent contractor - particularly an advantage because of incumbency rather than good performance - because an incumbent may have the knowledge that due diligence provides.

The good news: So soon after the phrase first started to be used, the practice has begun to spread in the federal IT environment. A recent successful example was in the competition for a seat management task order under the Outsourcing Desktop Initiative for NASA contract at the Goddard Space Flight Center. In the first phase, NASA developed a detailed inventory of computers at the center, according to Mark Silverstein, who ran the due diligence process at Goddard. During the due diligence phase, Goddard appointed a point of contact for each of the six ODIN vendors bidding on the task order. Through the facilitation of the point of contact, each vendor was permitted on its own, not through group vendor tours, to spend about six weeks meeting with whomever it wished, asking whatever questions it wished, about Goddard's computing environment.

Bids at Goddard ended up coming in dramatically lower than NASA expected: $2,000 to $3,400 per desktop, compared with a pre-bid estimate of about $8,000 a seat.

According to Silverstein, due diligence had positive quality impacts as well. "The vendors understood how our users use the equipment, so they could propose specifically what they meant by servicing a 'midlevel office computer,'" he said. "Without that knowledge, you just get a generic, cookie-cutter bid.

"Many of our users had great concerns about due diligence at the beginning," Silverstein said. " 'How will we get our work done with all the vendors running around?' they asked. After it was over, I went back and asked people how it had gone. They told me that the due diligence had been done in a professional and nondisruptive manner and that it enabled them to convey their concerns about seat management and to have a dialogue with vendors."

Due diligence can be more or less extensive, depending on an agency's situation. At one end, agencies can have one-on-one meetings with vendors to allow them to ask whatever questions they want. People who run the program involved in the competition should be present, along with contracting people, because they are in the best position to answer questions.

The Army Communications-Electronics Command at Fort Monmouth, N.J., did that last fall in connection with its big logistics modernization IT contract. Such events should become standard practice for major IT buys. At the other end of the spectrum, government should fund full-blown prototype development of competing IT systems before making a final vendor selection.

The spread of due diligence is yet another sign of how federal IT buyers are redirecting their energies to figure out how to get a better business deal for taxpayers. That's the best possible news from procurement reform.

--Kelman was the administrator of the Office of Federal Procurement Policy from 1993 to 1997. He is now Weatherhead Professor of Public Management at Harvard's Kennedy School of Government.