Best Value Business Model

Kenneth T. Sullivan, PhD, MBA Arizona State University

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PBSRG’s Research Results

• Worldwide as a leader in Best-Value Systems 18 Years 210+ Publications 550+ Presentations 1500+ Projects $5.7 Billion Services & Construction 98% Customer Satisfaction Various Awards (PMI, NIGP, IFMA, COAA, IPMA) Clients: Federal, State, Local, School Districts,

Private

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Tested Application Areas• Construction & Design/Engineering

– Large GC, infrastructure, municipal, laboratory, education, hospital, financial, large specialty, etc.

– Small GC, renovation, repair, maintenance, roofing, demolition, etc.– DBB, CMAR, DB, IDIQ, JOC, Low Bid, IPD– Development, supply chain

• IT– Networking, Data Centers, Software (COTS, custom), ERP, etc.

• Facility Services– Maintenance, industrial moving, custodial, waste management,

services, etc.• Business, Municipal, & University Services

– Dining, Document Management, Multi-Media Rights, Fitness Equipment, Online Education, Bookstores, Material Recycling, Furniture, etc.

• Health Insurance, Medical Services• Manufacturing

International Efforts & Partners

Fulbright Scholarship-University of BotswanaPIPS tests

RMITTeaching IMTPBSRG platform

Tongji University

6+ yearsInfrastructure€1.8B plus €1B

BrunsfieldComplete Supply Chain

University of Alberta

United States -65 clients

University of Alberta – Best Value Performance

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Project Value Cost Savings

Schedule Impacts

Satisfaction / Performance

1. Custodial Services (campus-wide)

$18M $2M10%

5.5% performanceImprovement

10 (out of 10)

2. DB Construction (Research Facility)

$30M $8-12M25%

14-18 months 9.7 (out of 10)

3. Design Services (Building Redevelopment)

$4M $500k12%

0% Cost & Schedule CO’s

$190k in Value Added Options

IT Industry Performance

The Standish Group, Chaos Reports - Collects case information on IT failures. Has studied over 70,000 projects in 15 years (Eveleens and Verhoef, 2010)

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GROUPCOST

OVERRUNSCHEDULE OVERRUN

Standish (1994) 189% 222%Johnson/Standish (1996) 142% 131%Standish (1998) 69% 79%Standish (2000) 45% 63%Johnson/Standish (2002) 43% 82%Johnson/Standish (2004) 56% 84%Organization W (2002) 113%Organization X (2006) 1001%Organization Y (2006) 67%

Average 202% 111%

CRITERIA 1994 1996 1998 2000 2004 2006 2009 AVERAGEPercent Successful (OT/OB/HQ) 16% 27% 26% 28% 29% 35% 32% 28%

Percent Unsatisfied 53% 33% 46% 49% 53% 46% 44% 46%Percent Failed/Cancelled 31% 40% 28% 23% 18% 19% 24% 26%

• 28% Projects are Successful• 46% Projects are Unsuccessful• 26% Projects Completely Failed / Cancelled• 202% Average Cost Overrun• 111% Average Schedule Overrun

“The Greatest Risk that I always face, is how to

accomplish all of the things that our sales team promised

we could do.”

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Best-Value Concepts

What Percent of RFP’s Are 100%

Accurate?

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Who Should Know More About

Performing/Installing the Services Required?

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

Should Do

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“Experts” vs. “Non-Experts”

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• Has more experience• Has a higher success rate• Needs very detailed instructions on how to do the task• Needs others to tell them what to do• Requires minimal management of their services• Able to complete the project/task faster• Can see the project from start to end• Can clearly layout a plan of how they will accomplish the project/task• Able to provide simple/understandable explanations of the options• Able to see all the potential risks before they occur• Proactive• Are more efficient• Are more expensive• Are always looking out for everyone’s best-interest

Vendor 1

Vendor 2

Vendor 3

Vendor 4

Perf

orm

an

ce

High

Low

Ris

k

High

Low

Perf

orm

an

ce

High

Low

Ris

k

High

Low

Impact of Minimum Requirements

Vendor 1Vendor 2Vendor 3Vendor 4

High

Low

Perf

orm

an

ce

Owners

“The lowest possible quality

that I want”

Vendors

“The highest possible value that you will get”

Minimum

Potential Problems

High

Low

Perf

orm

an

ce

Maximum

We Know: Vendors are Not a Commodity

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…but how do we know who to select?

Best Value Objectives• Minimize cost, increase efficiency

– Transfer Risk• Outsource to experts (not just transfer risk...but minimize

risk)

• Have a “Supply Chain” mentality

• Minimize risk of non-performance– Complete to the expectations w/ no changes– High Client satisfaction / No Finger pointing

• Minimize the need for client management, direction, and decision making.

• In return, the vendors can maximize profit by being more efficient

What we have observed:Best Practice for Risk Mitigation and Performance Optimization

• Best ways to mitigate risk and have success on a contract or project

– Compete & Identify best value experts • Ability to identify and minimize risks differentiates

expertise

– Use the expert team to set a plan that considers risks & constraints

• Experts optimize plan within constraints (ID if anything not reality)

• Work as a team to define roles and responsibilities• Transfer the risks and control to the experts to manage the

project

– Hire/select the experts

– Let the experts do their work and report weekly on any deviations to the plan

Best Value Model

Best Value Model

AwardContract

Best Value Model

Selection• Hiring or selecting who will create the plan

and execute it

• The quality of the plan and its execution is directly linked to the individuals creating it and doing the work– Quality of Plan = Minimization of Risk & Cost

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What are we trying to accomplish?

Scenario 1 Scenario 2

Question:

If Purchasing wants to buy a “green circle”, in which scenario is hiring the right “green circle” easiest to justify?

Blind Rating

Risk AssessmentProject CapabilityValue AddedFinancialsPPI

Filter 1Current

Capability

Filter 2Interview

Key Personnel

Filter 4Cost

Reasonableness &Dominance Check

Filter 5Pre-

Planning & Risk Min

Weekly Reporting & Post-Rating

Time

Qua

lity

of V

endo

rs

Filter 3Prioritization

(Identify Best Value)

Awar

d

High

Low

BV Process

Measurement of Risk & Performance During the Contract

Selection – Value Based PropositionSelection dictates the maximum capacity to achieve a quality

plan

Procurement methodologies to identify expertise:• Risk and Value focused RFP Process• Simple, brief, anonymous evaluation process• Evaluation of key project personnel

– Proven Past Performance Information– Ability to identify, prioritize, and minimize risk– Interviews of project delivery personnel– Focus on specific project needs– Minimize marketing information

• Cost/Financial

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• Plan 1 – We will use our 20 years of experience in working with

mechanical systems to minimize the risk of the heating and cooling system design.

• Plan 2– We have identified the design of the heat/cooling system as a

risk. It has not been used before in the area. Will ensure that the system performance and installation is verified in the pre-award period.

– We have bid using best rated mechanical contractor in the area (rated at 9.8 out of 10.0, next best rated 9.1)

– Mechanical contractor identified modifications to the design to improve output and sustainability of the system with the following impacts (mechanical system cost minimized by 15% - see VA#1)

– Mechanical system will be provided by one manufacturer, and will be commissioned by the manufacturer, contractor, and general contractor, who will take full responsibility of commissioning the system

Example of SolutionsRisk: Design of Heating/Cooling SystemType: Project Capability

• Plan 1 – Vendor will evaluate existing Owner software platforms to

ensure integration and availability of the Online Self-Service Solution

• Plan 2– Online Self-Service Solution Not Available – Web coding

errors during implementation or ongoing support and updates render online student solution unusable.

– Vendor provides a Portal Framework for all online self-service solutions. This Portal does not require any 3rd part web development software or web development expertise by the Owner.

– This approach minimizes risk of error and downtime that would normally occur if the Owner was required to use html templates, dedicate a web developer, or have to modify html code directly.

– The Portal Framework has been used on three previous projects with zero downtime events.

Example of SolutionsRisk: Availability of Online Self-Service Portal for Online Housing ApplicationsType: Project Capability

• Plan 1 – We will work with the user to minimize the impact of noise

from demolition.

• Plan 2– We have planned to demolition during off hours and

weekends. This will have a slight impact on our cost (less than 1%), but the impact to customer satisfaction justifies this.

– We will also install rubber sheets on the floors to diminish noise and vibrations.

– Both solutions can be performed within your budget. – Both solutions have been used on multiple previous projects

w/ high levels of customer satisfaction (9.4/10).

Example of SolutionsRisk: Noise from DemolitionType: Project Capability

Example of Solutions Risk: Loss of Radio Flagship in Major MarketType: Risk Assessment• Plan 1

– We will work very hard to maintain excellent affiliate relationships. If we lose a radio station (e.g. it changes its format) we will move quickly to replace the lost station. If we cannot quickly replace a flagship station, we can be very creative and could even consider purchasing all local inventory from a new flagship station.

• Plan 2– In the past 10 yrs, on over 50 accounts, 7 radio stations format

changes have occurred. The following solution is optimal.– We own and will maintain two radio contracts covering the area,

where signals can be switched if required. The flagship station will be the station with the stronger signal and greater coverage.

– If a station is lost we will have a equal replacement within 2 months. If within two months a replacement is not contracted we will purchase inventory from another station or discount the cost of an inventory purchase and add it to our payments to the client.

• Plan 1 – Coordination with [water company] is critical. We will

coordinate and plan with [water company] as soon as the award is made to make sure that we get water to the site to irrigate the fields.

• Plan 2– We will coordinate and schedule the water with [water

company]. However, based on past experience there is a high risk they will not meet the schedule (the water company does not meet schedule over 90% of the time).

– We will have temporary waterlines setup and ready to connect to the nearby fire hydrant to irrigate until [water company] is ready.

– We will also have water trucks on-site if there is problems with connecting the lines.

Example of Solutions Risk: Getting water to the siteType: Risk Assessment

• Plan 1 – Our internal food safety standards are recognized as being far

more stringent than government regulatory requirements. In the unlikely event of a food-borne illness, our strong relationships with local, state, and national health agencies will ensure and 24-hour response.

• Plan 2– If a food safety issue arises, vendor will effectively minimize

the client’s risk of exposure by: – 1) Vendor’s system will issue a safety alert and related

directives to 10,000+ units and all ASU email accounts in less than 15 minutes.

– 2) The vendor will place a lock within in its foodservices purchasing system on any food with risk so it cannot be purchased,

– 3) The vendor will remove all potentially harmful products within the first hour of notice.

– 4) The vendor will identify as many purchasers as possible through credit receipt names and the client system to notify them individually. Warnings will be placed around campus within two hours of discovery.

Example of Solutions Risk: Safe Food Supply/Food Born IllnessType: Risk Assessment

Value Add Plan1. Provide ways to keep project at or below

budget– Modifications to requirements to meet budget– Specific cost ($) savings– Supported by metrics (high performance)

2. Increase customer satisfaction

3. Increase performance

Scope is Above Budget

Owner’s Budget ($$)

Owner’s Scope

(-$ value add)

Intent Doesn’t Match Scope

Owner’s Budget ($$)

Owner’s Scope

Owner’s Intent

(+$ value add)

Example: Value Added Items• Instead of purchasing “Named Licenses”, the

Agency may want to consider purchasing “Concurrent Licenses”. In a “Named Licensing” model, the software designates a license per user and only that particular named user can use/access the license. If that named user is in meetings, on vacation, or not using the system, the license is not utilized. In a “Concurrent Licensing” model, the server keeps track of the total number of licenses and loans the licenses to users as they log in. If a user is inactive, the server releases the license and allocates the license to the next user. The advantage is that the Agency is not required to purchase licenses that are not being used, which can result in approximately 25% savings in cost.

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Example: Value Added Items

• Reroofing this building will not stop all water leaks. The majority of the leaks are caused by cracks in the parapet walls, broken/missing glass, and poor caulking. For an additional $10K and 3 weeks in schedule we can replace and repair all of these items.

Best Value Interviews:Identifying Expertise

1. Why were you selected for this project?

2. How many similar projects have you worked on? Individually and as a Team?

3. Describe a similar project you have developed/worked on to the current project.

4. What is different about this project from other projects that you have worked for?

5. Draw out the process for this project by major milestone activities.1. Identify, prioritize, and how you will minimize the risks of this project.2. What risks don’t you control? How will you minimize those risks?3. What do you need from the client and when do you need it?

6. How are you going to measure your performance during the project?

7. What value do you bring to the project in terms of differences based on dollars, quality, expertise, or time?

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Best Value Model

How to Clarify a PlanWhat is it / Why is it important?

• Period of time allotted before work begins to the entity doing the work:

– Present their project/service plan

– Set a plan for its delivery / clarify that their plan is accurate

– Identify the risks and issues that could cause the plan to deviate

• Identify what you don’t know and when you will know it and how the plan could change based upon what you discover

• Set plans to minimize those risks from occurring• Address all the concerns and risks of the client

How to Clarify a Plan What is it / Why is it important?• Period of time allotted before work begins to the entity doing the

work:

– Know how they are being successful and adding value (measurement)

• What metrics you will use and how you will report them• What is the current baseline condition we are comparing

against

– Identify what you need from the client and have a plan for getting it

– Have completely aligned expectations between all parties so everyone knows what is going to transpire and what they are supposed to do

– Coordinate the schedule

Clarification / Preplanning Period

Sta

rt

Very High Level

Cost Verification

Included in Proposal

Excluded from Proposal

Major Assumptions

Major Client Risks/Concerns

High Level

Project Work Plan

Client Risks/Concerns

PA Schedule

Uncontrollable Risks

Response to all risks

Roles and Responsibilities

Value Added Ideas

Coordination

Review Functionality

Technical Level

Performance Reports / Metrics

Additional Documentation

Technical Details

Project Schedule

High level demos

PA Document

End

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Clarification / Preplanning Period

Importance of Pre Planning- University of Alberta• Bad news is really good news if found out during

Pre-Planning (Pre-Award / Clarification period)• Execute the project in advance of actually executing the

project

• Ex: DB Balmoral Facility – Cyclotron• Highly sensitive schedule & budget• Formal pre-planning enabled the team to optimize the

facility and minimize surprises that could have driven other changes.

Importance of Pre-Award

Pre Award Impact – Major Risks Identified & Mitigated

• Actual Building dimensions• Field review revealed significant square footage difference from bridging

documents• DB proposed floor layouts to incorporate additional space & minimize cost

impact

• Cyclotron Vault Design• Wall thickness, foundations, piling, shielding• DB proposal minimized schedule impact

• Existing structure concerns• Field review revealed cracking on perimeter concrete beams• DB proposed to address structural issues during roof deck replacement

Best Value Model

Measured Environment• Must be simple and dominant

• Must be for the purposes of positive accountability

• Transparency and openness

• Measuring against a plan (or expectation created by the individual/team doing the work)

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Weekly Risk Report• Excel Spreadsheet that tracks only unforeseen risks on a project

• Client will setup and send to vendor once Award/NTP issued

• The final project rating will be impacted by the accuracy and timely submittal of the WRR

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Unforeseen Risks

PERFORMANCE SUMMARY• Vendor Performance• Client Performance• Individual Performance• Project Performance

RISK MANAGEMENT PLAN• Risk• Risk Minimization• Schedule

WEEKLY REPORT• Risk• Unforeseen Risks

METRICS• Time linked• Financial• Operational/Client

Satisfac.• Environmental

Measurement of Deviation from the ExpectationManagement by Risk Minimization

Filter 1Past

PerformanceInformation

Filter 2Current

Capability

Filter 4Prioritization

(Identify Best Value)

Filter 5Cost

Reasonableness &Dominance Check

Filter 6Pre-

Planning & Risk Min

Time

Qua

lity

of V

endo

rs

Filter 3Interview Key

Personnel

Awar

d

High

Low

Measurement of Risk & Performance During the Contract

Post Project Rating

Update PPI

Initial conditions

Final conditions

Project Management Model

Time

Laws Laws

M1

C1 M2

C1: Client Expectations based decisions and various factors – may or may not be “realistic”

M1: Measured expert plan that more accurately describe the initial conditions replaces C1 – converts to a predictive contract

M2: RMP/WRR measures deviation & performance to plan

M3: Final performance measurement

M3

What is different• Value focus, simple, transparent, risk-based, measured,

expertise-driven

• Leverage experience of industry experts to minimize risks and increase efficiency

• Select and give advantage to high performers in the procurement process, consider value (cost & ability) (the capability of the key PEOPLE you hire will correlate more to project success than any other factor)

• Proper preplanning BEFORE contract is signed

• Risk-based, value-based contracting

• Consistent measurement of risk and performance with accountability loops

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Best Value One and a Half Day Seminar December 5-6, 2012

Halifax, Nova Scotia

For more details visit us at:

www.pbsrg.com/seminars

How to minimize cost Increase Efficiency in your Organization Best Value process details Risk management, pre-planning & performance

measurement Workshops, examples, etc. CEUs for all professions and designations Early bird & group rates available

What you will learn

Don’t Delay Register Today!

Comments / Questions

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