Reform empowers Air Force, Navy

One of the most basic underlying themes of the reinventing government movement has been greater empowerment of the federal workers to use their heads to come up with ideas for how to make government work better and cost less. A highly educated, generally public-spirited federal work force had for too long been kept in the thrall of a rote, bureaucratic system that failed to make sufficient use of the most important talents they brought to their jobs: their intelligence and commitment.

When we empower people, we need to recognize that sometimes they'll make mistakes. But we also need to recognize that they often will be able - unencumbered by the wails of "but we've never done it this way before" - to find better ways for the government to do business.

Two recent stories about changes in the way the military services are buying commercial off-the-shelf software illustrate the potentials of the empowerment philosophy. One comes out of the Standard Systems Group (SSG), Montgomery, Ala., which buys COTS hardware and software for the Air Force. A second comes from the Navy's Space and Naval Warfare Systems Command (Spawar), San Diego. Both stories should be of interest to information technology and procurement folks governmentwide because they represent buying strategies other organizations can use as well.

SSG has a deal with Lockheed Martin Corp. to buy Microsoft Corp.'s Windows and Windows NT operating systems and software for Air Force customers. The deal has an interesting feature called "tier pricing." The Air Force has used this feature to solve a business problem in which vendors give significant discounts for large quantity buys, but the government doesn't know how big the demand for given products will be. Typically in these deals, the government makes no commitment to a sales volume, and vendors price their products, in a competitive environment, based on guesses about likely demand.

Faced with this situation, negotiations theorists would say a "contingent contract" is needed. An example cited in David Lax and Jim Sebenius' classic The Manager as Negotiator involves a negotiation between a utility company and a large customer about future electricity pricing. The two sides may have trouble reaching an agreement because they disagree about the future direction of oil prices. But by using a contingent contract, the two parties would set the future electricity price as a fixed percentage of the utility's retail price, rather than as an absolute number, so that uncertainty about the future of oil prices doesn't muck up the deal.

That's what SSG did. For each line item in the contract, the price for a unit purchased up to a certain amount is, say, "X." The price for additional units beyond that amount, up to a set cap, is X minus a percentage. The price of additional units above the cap is X minus a deeper discount.

With a contingent contract, SSG and the vendor agreed to a pricing structure without knowing in advance what demand would be. This technique could be applied widely throughout the government, not just for hardware or software but, say, for pricing telecommunications services.

Spawar used another innovative contracting tool in its recent Super-Minicomputer Contract with Litton/PRC Inc. for Lotus Development Corp. groupware software. The contract includes a trial period and an option period. During the first-year trial period, the Navy is committed to buying only 5,000 licenses at a pre-established discount. The purpose of the trial is to give the Navy an opportunity to see if it likes the software without requiring a commitment to roll it out if it doesn't. At the end of the trial period, the Navy may or may not exercise an option to buy as many as 500,000 additional licenses at a significantly higher discount.

This deal would have been impractical prior to procurement reform. The reason is that if at the end of the trial period the government had decided it didn't like the product, it would have had to spend a year or more fashioning a new procurement, which, in reality, meant the government really did not have a choice. With procurement reform, Lotus knows that the government can choose to leave if it is not satisfied, which probably lowered its bid price on the option.

Contingent contracts and trial periods are common business techniques used in commercial contracting by smart customers. The good news is that more and more the government is behaving like a smart customer as well. In my next column, I will discuss the spread of another smart business technique, called due diligence, among federal IT buyers.

--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.