UK MOD partnering tools and techniques

Publication date: 2002

This supplier guidance has been reproduced from sections of "Smarter Partnering: Additional Practical Guidance about Partnering Arrangements between MOD and its Suppliers - A document produced by MOD and industry".

• Introduction
• Soft Issues Bid Evaluation Tool (SIBET)
• Earned Value Management (EVM)
• Target Cost Incentive Fee (TCIF)
• Open Book Accounting (OBA)
• Gainshare
• The Sponsored Reserve (SR) Concept
• Risk
• Shared Data Environments (SDEs)
• Convergence
• Sustainment

There are a number of general tools and techniques which can help to enhance the partnering relationship between buyer and supplier in UK Ministry of Defence (MOD) procurement. A project may choose some, or all of these tools as part of its overall partnering strategy. The combinations will vary from project to project. All the tools and techniques included here help to build on the transparency, openness and trust which are an essential part of the partnering relationship. They will help to engender the ‘no surprises’ culture which also aids the further development of this relationship.

SIBET is a Pre Qualification Questionnaire (PQQ) and Invitation to Negotiate (ITN) evaluation tool developed by the MOD in conjunction with QinetiQ and the University of Bath to evaluate soft issues. Soft issues have become increasingly important in Defence acquisition as we have entered into more long term, close partnering relationships with our suppliers. Soft issues cover such things as:

• Understanding the culture of the organisation
• Trust
• Attitude to change
• Commitment to co-operative working practices
• Communication

Project teams entering into long term contractual relationships need to have an understanding of their potential partner’s culture and intentions. SIBET is intended to help tease out these issues in a clear, objective and auditable way with a marking scheme that defines the level of acceptable evidence in order to score a particular range of points.

Evidence produced for SIBET evaluation could form the basis of the long-term partnership building on strong points and trying to eliminate the weak. Some suppliers are flowing SIBET down their supply chain.

SIBET is part of a suite of evaluation tools which operate in similar ways: take an issue, weight it and mark it. SIBET tries to quantify and give an objective view of issues which have always been taken into account, but which were not generally marked formally in the past. Industry has comparable tools to SIBET which are employed in similar circumstances.

Earned value is an objective measurement of how much work has been accomplished on a project. Earned value provides a balanced management oversight amongst performance, resources and time factors on a programme. EVM is a management and planning/monitoring tool that relates resource planning to performance, cost and time requirements. It is a technique employed by some companies to manage their own programmes.

The major objectives of using earned value on a contract are to have effective internal management control systems used by the supplier, and to permit the buyer to rely on timely information produced by those systems to determine the status of the programme on the contract.

Using the earned value process, the contractor’s management team can readily compare how much has actually been completed against the amount of work planned to be accomplished. Variances can be identified and adverse trends should prompt management action to correct them as they emerge - there should be no surprises that are too late to address.

The application of EVM and the nature and scale of reporting will depend on the value and duration of the contract and the pricing methodology adopted for the contract. It is expected that EVM would apply to the sort of long term, high value contracts with which partnering is associated. Where contracts are fixed price, then it may be that reporting will be by reference to ratios, indices and trend analysis. Where contracts are cost based, such as target cost incentive contracts, then more detail may be apparent.

EVM is best operated in an open and trusting environment, in a no blame culture, encountered in long term partnering arrangements. It is a management tool to encourage problem solving rather than a reporting, auditing or financial management tool or even a contractual tool. The information disclosed should be used to monitor and solve problems arising on the contract to which it relates and for no other purposes.

Earned value management improves on normal project management by requiring the work in progress to be quantified in an objective manner. The planned value, earned value and actual cost data provide an objective measurement of performance enabling trend analysis and evaluation of cost estimate at completion within each significant work package. On major projects the application of good management tools will aid in the selection of the right course when managers need to make financial, resource and time allocation decisions.

Target Cost pricing is just one of a range of contracting techniques to be given equal consideration as a means of managing pricing risk (and sharing its consequences) and of providing financial incentive to continuing cost improvement. It can be used on its own or in association with other incentives associated with improvements in the performance or delivery of the output.

Definition of a basic TCIF arrangement

A pricing mechanism that enables a target of costs and profit to be set (usually) within agreed levels of confidence for the costs. Admissible costs incurred are paid and cost savings achieved below the target cost are shared in accordance with an agreed ratio or share line so that the contractor may increase his profits and the department may share the savings per the share line ratio. Costs in excess of the target costs are shared on a similar basis, although it is possible to have a second share line for cost in excess of the target. It is usual for there to be an agreed maximum price. Costs beyond a maximum price fall to the contractor; these contracts are known as Maximum Price Target Cost arrangement. Where the arrangement does not include a maximum price this is known as Cost Plus Incentive Fee. In some instances there is no restriction on profit achievable when the outturn costs are less than the target cost.

OBA is a generic expression, which does not have an agreed definition, where each partner may agree to give the other a degree of access to his accounting data . The level of access, the manner in which it is to be delivered and the use to which it may be put must be agreed, on a case-by-case basis to reflect the circumstances of the partnering arrangement and the need for access to certain data to monitor performance or benefits arising.

OBA can help to underpin the relationship of openness, trust and confidence on which any partnering relationship should be based.

It is crucial that the contract addresses data access arrangements in an explicit manner and does not rely on vague and undefined phrases which could be open to misinterpretation.

Just as crucial is for the partners to agree the purpose of, and the value to be gained from, OBA. This will include the relationship, if any, to pricing and payment conditions in the contract. As an example, no party should use the Open Book Accounting process to make claims. However, where an omission such as a legal breach or overpayment is discovered further investigation will be pursued which may lead to a claim. The change process that covers claim submissions will be dealt with elsewhere in the contract(s) management.

The principles for the arrangement are:

• The access arrangements should be no more than are adequate for the need.
• OBA, whatever the level of mutual access, does not mean unrestricted or uncontrolled access to raw data, unless so agreed.
• The degree of reliance placed on information must be carefully assessed and be consistent with the contract terms.

OBA should not, in itself, be used as a mechanism to make changes to agreed contract prices, but it can be used to inform a process of efficiency savings. The pricing regime adopted at the outset of the contract remains paramount. Therefore, in a firm or fixed-price environment, cost overruns would not normally be referred to MOD for reimbursement in a partnering arrangement nor would MOD normally seek a price reduction in the event of cost under runs.

Gainshare is a process which allows the review and adjustment of existing contracts, or a series of contracts, where the adjustment provides benefits to both parties. It is a mutual activity requiring the agreement of both parties to the contract adjustment. Consideration of the Gainshare proposal will be limited to the areas affected by the proposal.

Gainshare is not an opportunity to re-open contract negotiation but is limited to new opportunities to share in efficiency gains. Either party may bring the ideas to the table and the gains will be shared in accordance with the situation that pertains to that gain.

The sharing of benefits provides an incentive on both parties to a contract to explore Gainshare possibilities. This mutuality underpins the partnering ethos.

The Reserve Forces Act 1996 (RFA 96) created a new category of reservist whose legal obligations for reserve service, military training in peacetime and call out are entirely linked to his or her civilian employment with an employer who has an arrangement, with MOD, for the provision of SRs. This permits MOD to require contractors who provide services, to maintain an element in their workforce that can be called out to provide services on operations in uniform as Service personnel.

The aim of the concept is, by means of a contract for services, to permit skills found in industry to be used by MOD in peacetime and under operational conditions. The call out of SRs permits the deployment of contractor’s staff to deliver skills in circumstances where the use of those personnel in a civilian capacity would be inappropriate or unsafe.

The SR concept enables some support currently provided by regular Service personnel to be let to contract as well as permitting operational support of future equipments to be undertaken by industry, subject to VFM considerations. Crucial to the Services’ acceptance of this type of support will be confidence that SR manpower will be reliably available when and where required and be militarily as well as technically competent to perform the task. Whilst reserve service is underpinned by legally enforceable liabilities and both technical and military training must be catered for in the contract, ultimate confidence will be developed through successful partnering between the buyer and the supplier. A “can do” relationship must be established through PPs at all levels from shop floor or service unit to higher management or command. This “can do” culture can be described as one where all parties are actively engaged in ensuring that the objectives of that business are met effectively whatever the external challenges at that time. Both buyer and supplier must ensure that every endeavour is made to establish and maintain an open and helpful dialogue on all aspects of SR manpower and to support staff in both the civilian and military aspects of their employment.

The issue of risk is key to ensuring that a partnering arrangement is viable. It follows therefore that risk should be identified and managed effectively.

In a partnering agreement joint risk management is key. There should be a Joint Risk Management Team who identify, quantify, assign and manage the mitigation of those risks through an agreed allocation of the identified risks.

Risk must not be ignored. A partnering agreement should not be used as a way of deferring key risks that are identified before the contract is let. A partnering relationship will not flourish where there is uncertainty about the allocation and management of perceived risks. This will in turn mean that the gains which may accrue from the closer more trusting relationship will be at risk.

In a partnering relationship it is essential that there is a jointly owned and managed risk register which identifies which party is managing which risk. Management of individual risks should be undertaken by the party best placed to manage that risk. This is an element which helps to establish a ‘no-surprises’ culture. If issues are dealt with openly, honestly and appropriately there will be less risk to the relationship and the project. In addition the price will reflect the appropriate attribution of risk.

SDEs are the means by which a group of people can share information electronically. It will allow access only to authorised users and will exclude others. SDEs are created through consensus in which the parties will agree what they will share and will trust each other on how the information is to be treated. The issues to be agreed are the information to be shared, its uses, assurance on the quality of the data input, and the degree of access control and security, liability, IPRs, ability to change data and operating procedures.

SDEs may be used to hold static information such as reports, standards, references or common data; or it may be the repository for dynamic information such as plans, risk registers, commercial transactions or work in progress. All organisations which embrace electronic business will require SDEs if they share information with partners rather than merely exchanging information to support transactional processes. Major organisations with well- developed enterprise resource planning or product data management systems, operating across the supply network, will be critically dependent upon SDEs.

In any true partnering relationship the establishment of SDEs should be relatively straightforward because the fundamental requisites of trust, commitment and mutually shared objectives will already be in place. The agreements must be underpinned by adequate contractual recognition of the confidentiality and liability issues which will normally be in the approved DEFCON and DEFFORM format. There should also be a document to spell out the working arrangements. An information services provider, possibly third party, should be involved at a very early stage of planning.

Convergence is a process which is an alternative to the ISOP (Invitation to Submit Outline Proposal) process. It involves the MOD and its short listed suppliers in a constructive dialogue on the nature and substance of the capability which the MOD is seeking to acquire. It is a lengthy procedure but can provide a more sustainable input to the ITN stage of acquisition.

Convergence can be defined as a process for exploring progressively uncertain areas of project scope, definition and acquisition strategy, through an open exchange with industry and other stakeholders utilising papers, workshops and presentations. The process aims to encourage continuous dialogue between the Authority and suppliers.

It follows from the nature of Convergence that close working relationships are established at the earliest possible stages of the acquisition.

All partnering forms will require effort to sustain the momentum of the initial enthusiasm. This effort should enable the joint benefits that flow from a partnering relationship to be realised. There are a number of mechanisms which the parties to the relationship can employ to ensure that they are maximising the opportunities, for both parties, to achieve the greatest benefit.

The pre-contract negotiation should establish the form that the sustainment mechanisms will take. For example, establishing a joint committee and working group structure which will encourage the optimum flow of information throughout the joint organisation. Addressing such items as the joint risk register will assist in the communication of issues and ensuring that issues do not become disputes. This may include any or all of the following:

Transition Change Management Team (TCMT)

A partnering relationship is unlikely to happen without nurturing. This is especially true at its inception. Once the PPs and the legal aspects of the relationship have been cleared, it is time to ensure that the relationship starts on a firm footing. A joint TCMT is intended to aid this process. As with all change management, it pays to devote additional resource at the start to ensure that the PPs are clear to the entire joint organisation. The aspirations of the joining parties must be clear to the organisation if they are to obtain the mutual benefit to which they aspire.

Joint Management Boards

A Joint Partnering Management Board, also known as a Review Board, is a means to ensure that partnering is taken seriously throughout the joint organisation. It may include the senior commercial, financial and strategy elements of both organisations which have decided to partner. It should have formal Terms of Reference and constitution. It must meet regularly and be the lead for the direction which the partners jointly wish to go. The form and regularity of meetings will be dependent on the partnering objectives.

Joint Improvement Teams

The Joint Management Board will usually need to be supported by a number of dynamic and flexible joint teams to take forward specific issues, manned accordingly, and disbanded once the task is completed. Although some of these might need to be of a more permanent nature (for example once the contract is let a permanent finance team might well be required to monitor expenditure etc) it is important to avoid setting up a cumbersome committee structure. It is likely that such teams would consist of no more than two to four people.

Deciding on the number and nature of these teams and when each needs to be set up will be a matter for the JMB. Examples of the sort of topics which might be covered are:

• Monitoring and measuring performance
• Finance
• Health, safety quality and environmental issues
• Value management
• Change management (including personnel aspects)
• New culture
• Risk management

Source: UK MOD
Publication date: 2002

Related Defence Supplier Guidance

• UK MOD partnering procedures
• Effective partnering between the UK MOD and industry

To find out how your company can build successful partnering relationships with the UK MOD, contact Jeffrey Strategic.