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Strategic partnering with government? Snowball’s chance

By Kiah Consulting

Monday May 23, 2022

Talking about building strategic partnering relationships is the flavour of the month, especially in Defence where there always seems to be a search for a model that works better than what is happening now. I don’t think that is a bad goal, by the way, but we don’t seem to have come very far.

Achieving a strategic relationship between a vendor and a government buyer has a snowball’s chance of success if we do the same things we have always done. I have just experienced it again. A strong and laudable intent to establish a strategic partnership, bound to fail as it is using the same old contracts, is managed the same old way, and has the same performance criteria in place.

We dress change in the emperor’s new clothes: such as Defence’s review of the ASDEFCON templates, used as a foundation for many agency contracts. It was implemented by people who have had only one experience, that of a government buyer, relying on revolving door consultants who fail to bring any new experience to the table.

Snowball’s chance. If you don’t know what different looks like, how can you do something different?

In whose interest?

It is rare to see government-industry relationships that are true partnerships.

Partners have common goals, share risk, and have linked outcomes. Industry’s role is to sell, to separate government from its money in return for goods and services (I will grant, in most cases, this is done fairly). But the drive, in any business that is not privately owned, is to build value to the business, not value to government.

Their marketing might be to espouse purpose, their ethic in delivery might be high, and their work built on foundations of strong relationships. However, only select private ownership allows for owners to be driven by purpose, while broad ownership follows Nobel prize winning Milton Friedman’s economic theory that the purpose of business is to maximise profit for shareholders.

These are often good companies to engage with, but your interests are not their interests. Individuals, particularly those in the Defence industry who have transitioned from government to the private sector, often claim their over-riding focus is the best outcome for the buyer.

They are kidding you, and themselves. If they do act that way, their tenure with their employer will be short.

The art of building a partnering arrangement between government and industry is to find ways that align interests. It is easy to build statements that agree to partnering behaviours, but from an industry point of view, any partnering agreement with government will implement the essence of enlightened self-interest. That is, they will ask themselves “how can we support their goals in a way that helps further our interests?”

Templates don’t work

Templated contracts don’t work in this space, principles do. Templates are fine for repeatable, standard transactional relationships. While the terms and conditions of these templates are usually fine, the problems lie in the design of the relationship, including the statement of work, and the payment and performance regime.

The key word here is design. As a government buyer, you need to design the agreement so that your goals are aligned with the vendor’s interests. In other words, you need to design the deal for success for both parties.

Good deal design needs to be considered from the very start of a project. If you are sourcing through competition, you want all parties to come to the table ready to negotiate in the structure and environment that will give you the best deal. In this way, you build success into the design of the deal, not retrofit it in the negotiation or post-contract signature.

Of course, designing a deal for success before approaching the market requires you to have a clear idea of what success looks like to you, and to your potential partner(s).

Good deal design also means bringing the right players to the table, in the right frame, to negotiate the right deal. These are not separate activities – they are a continuum – and they are exceptionally difficult to achieve using the common government competitive tendering and contracting practices.

Keep doing the same thing, following the same templates, and you will get the same outcome. The definition of madness.

Relationship contracting?

Every complex contract needs a relationship approach designed for that particular deal: behaviours, escalation, dealing with disagreement – and most importantly – a commitment to doing things within timeframes. This is a big ask for government agencies who for too long, on the advice of too many lawyers who are legally sound but commercially unsound, have avoided as much responsibility in contract as possible, pushing all the obligations back to the vendor.

If you want a strategic partnership, the buyer must understand that they are part of the success. They must shoulder obligations that will maintain momentum and contribute to the deal’s outcome. Otherwise, it is a transactional, one sided, purchaser-provider agreement.

Both purchaser and provider are part of the delivery chain in a strategic partnering agreement. That means obligations on both sides, and an acceptance of the consequences of not matching in delivery.

Relationship contracting isn’t about having six-monthly or annual catch ups and singing ‘Kumbaya’ together. It is about being clear on behaviours and expectations, and building approaches for respectful conversations about mutual obligations and responsibilities.

Performance-based contracting

Relationship and performance-based contracts are often talked about as two different contracting styles. I don’t get it. Aren’t relationship and performance both built into even the most transactional of contracts? Of course, they are. If you don’t deliver, I don’t pay. Simple performance. You deliver, I pay, we are both happy. A good relationship.

Typically, performance-based contracts link margin with delivery. Late in delivery, lose an element of margin. That’s the definition of lose-lose! I lose because you’re late, and you lose alongside me.

Given that the overriding interest of a company is profit, it seems that this approach cannot help but generate an adversarial and protectionist relationship. The vendor is going to find ways to protect their margin, to look for every excuse as to why it’s not their fault. Any proposal that they make under your contract is going to be ‘margin safe,’ which may not be in your best interest.

I have even seen one pundit of “performance-based contracting” suggest that such a model is akin to behavioural economics – it is nudging the vendor’s behaviour. One might question what behaviour it is “nudging” towards.

Successful performance-based contracting not only requires you to link the vendor’s outcomes and interests to your own, but it must also support the relationship and the delivery, not fight against it. It must be based on relationships and performance criteria that drive success rather than simply punish failure.

How can you do better?

We don’t know the answer to your particular need, but we have an approach to help you find it. It is multidimensional strategic deal making – building a strategy to bring the right players to the table, in the right frame, and discovering and aligning the interests of all the internal and external parties, whilst executing on the engagement.

It is an approach built on the work of Harvard and Edinburgh Business Schools and developed by us from our experience working with Defence and the public sector. We know it works because we have seen it work.

If what you have been doing isn’t working, or you would like to have a chat about how to avoid the traps of the past and step in a new direction with a strategic partnership or complex procurement, please reach out- consulting@kiah.com or +61 2 6230 5347.

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