Release of Mastering Performance Based Contracts

To My PBC Blog Readers,

Having worked and taught PBC to both buyers and sellers for over a decade I regularly get people asking me PBC questions such as; what is a PBC and should I use one?  What are the best KPIs (Key Performance Indicators)? What is an Award Term?  How do I best respond to and negotiate a PBC?

As many of you may know, to help answer these, and other questions, a few years ago I created this blog. My aim is to create a not-for-profit PBC Community of Practice (PBC CoP) providing both people new to the field of PBC and experienced practitioners a variety of useful information and a forum to openly discuss this topic.

From the content of this blog, I was encouraged to develop the book by collecting, improving and extending all this information, hopefully creating the first comprehensive PBC Body of Knowledge that people will find useful.

So, the day has finally come!  I am both excited and nervous about releasing my first book; Mastering Performance Based Contracts which is now available in print to buy  via Amazon.com.  You can follow the link here.  It is not available in e-book or kindle format given the 50+ colour diagrams to help the reader.

The only exception for this for is for those in Australia who want to buy the book through Amazon.com. Unfortunately, due to an ongoing dispute between Amazon and the Australian Taxation Office (ATO) it is currently unavailable for distribution here in Australia.  I am resolving this as we speak and have some copies in Australia available to buy in early November 2018.  Please contact me directly either via email to andrew.jacopino@fventerprises.com or via LinkedIn messaging email and I will let you know if they are still available and how to get them.  That said, I hope to have a local distributer within a couple of weeks for Australia.

While creating the book has a been a huge effort, our PBC journey does not stop here as the field of PBC continues to evolve.  As such, I will again start writing fortnightly and intend to routinely update the book as major changes occur.

I hope you enjoy it and welcome any and all feedback.

 

Regards
Dr Andrew “Jacko” Jacopino

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Mastering Performance Based Contracting Book Release and Attending IACCM America’s Conference

To My PBC Blog Readers,

Firstly, my sincere and humble apologies for my absence.  For me, it has been a very been time trying to finish the book, Mastering Performance Based Contracts, which will be released via Amazon.com next week. Unfortunately, due to the number of full-colour diagrams it will only be offered as a printed book.  I will send out the link when it goes ‘live’.

Additionally, I am very excited to add that I will be speaking at the end of this month at the International Association of Contract and Commercial Management (IACCM) America’s Conference which is taking place at St. Petersburg in Florida, USA from Monday 29 to Wednesday 31 October 2018.  I am honoured and privileged to be participating in both the Great Debate, which is debating that “emerging technology is a threat to the ethics and integrity of trading relationships”, and presenting on PBCs.  The topic of my PBC presentation is “Evolving Performance Based Contracts – Lessons Learned 10 years On” focusing on why PBCs have evolved over the past decade and describing how these practical changes can help organisations achieve business success and avoid long-term performance, financial and reputational damage.  I may even bring some books along for those interested in buying one.  Although I warn you, it may be hard finding one that isn’t signed!

Finally, since I am coming all the way from Australia for this conference I plan on spending the rest of the week (Thursday 01 and Friday 02 November 2018) in either the US or Canada catching up with various people and organisations.  This means there is an opportunity for readers in North America interested in discussing PBC further, or running a PBC course through IACCM (see the brochure).  So please don’t hesitate to contact me and let me know so I can schedule it in as I would love to see you.

 

Kind Regards
Dr Andrew “Jacko” Jacopino

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Unintended and Perverse Outcomes

A colleague from the Australian Department of Defence (thanks Hayley!) recently sent me a link to an article from the Canberra Times about “Losing our way: How the cult of the KPI has damaged our moral compass”.  This article is partly in response to recent revelations in Australia from the Banking Royal Commission and the Victorian State Police (one of the 7 Australian state / province police departments).

Evidence presented to the Banking Royal Commission showed that Commonwealth Bank staff had inappropriately set up thousands of children’s bank accounts (often called Dollarmites accounts) either using their own money or the bank’s money to meet aggressive targets tied to an incentive scheme.  Commonwealth Bank staff would do so when parents had signed up their kids for school banking, but had not deposited money into the account within 30 days.  If no deposit was made, the sign-up would not count towards sales targets and financial rewards.  For disclosure, my children have Commonwealth Bank Dolomites accounts, however, all deposits have come from their family (see Dollarmites bites: the scandal behind the Commonwealth Bank’s junior savings program for more information).

For the Victorian State Police, The Age newspaper revealed that Victoria Police officers falsified 258,000 roadside alcohol breath tests over 5½ years (about 1.5% of all tests carried out during that time) by inflating breath test bags themselves to meet quotas noting there were no financial incentive for officers to fake tests (see How the Victorian police faked breath tests for more information).

The reason I am bringing it up in a Performance Based Contracting (PBC) blog is that these outcomes are familiar traps for new PBC practitioners resulting in unintended or perverse outcomes.  Specifically, the pitfalls identified in the article mirror our PBC pitfalls being:

  1. Avoid using a single quantitative performance measure – instead, use a variety of objective / quantitative and subjective / qualitative performance measures including measures for enterprise performance and behaviours (see The Allure of a Single Measure and Objective vs. Subjective Performance Measures).
  2. Avoid using only monetary performance measures – instead, use a variety of rewards (positive – ‘carrot’ – incentives) and remedies (negative – ‘stick’ – disincentives) as part of your overall Performance Management Framework (PMF) including measuring at a variety of levels and rewarding enterprise performance and behaviours (see When is a KPI not a KPI).
  3. Avoid using stretch targets – instead, make sure the performance is achievable regardless of whether a reward or remedy (see Setting the Performance Levels (Part 1, Part 2 and Part 3) and Stretch Goals).
  4. Avoid ‘setting and forgetting’ your KPIs – instead, use the performance measures and PMF as part of an ongoing discussion on past, present and future performance requirements and achievements.

So as a reader of this blog I hope you concluded that these perverse outcomes were highly likely since, from a behavioural economics and performance management design perspective, they were all unfortunately setup to fail.

The key for each of you is to make sure that you learn the lessons described here and avoid the same pitfalls in the design of your PBC.

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Performance Based Contracting Book Update

Firstly, sorry for being offline recently.  I have been madly finishing the “Mastering Performance Based Contracts” book which I am pleased to say is undergoing the final touches before release, which is now scheduled for 1stSeptember 2018.

As part of the release of the book I will potentially be in Europe in September 2018 and in the US / Canada in November 2018 to run 1-day and 3-day Performance Based Contracting courses based on the book through the International Association of Contract and Commercial Management (IACCM).  The courses are being offered on both a public and private basis and can be tailored to suit specific audiences.

If you are interested please let me know and I will send you the IACCM point of contact or you can visit the IACCM website.

I will also be back to providing articles on the blog as of next Saturday.

Again, sorry for the absence but hope you enjoy the forthcoming book and courses.

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Supply Support Performance Measures – Part 3

In the first article we looked at the various performance measures we can use for Supply Support in Performance Based Contracts including grouping them into 3 main types; demand satisfaction performance measures, inventory holding performance measures and customer wait time performance measures.  In the last article we looked at demand satisfaction performance measures in more detail.  In this third and final article we’ll look at the remaining 2 groups of Supply Support performance measures (inventory holding performance measures and customer wait time performance measures) and give a simply diagram summarising which ones you should use and when.

Inventory Holding Performance Measures

Inventory holding performance measures need seller’s to maintain agreed stock levels at specified locations.  While this limits the seller’s freedom in how they meet a buyer’s demand, it does also minimise the seller’s exposure to inaccurate and uncertain buyer demand profiles.

Given this, inventory holding performance measures are typically used where buyers wants confidence in their demands by specifying both the required stock levels and locations.  One such example we have used is a performance measure called Minimum Asset Level (MAL), which is a measure of the number of stock items as a percentage of al stock items that are above the minimum stock level for each location.  The inventory check can be done on a continuous basis (i.e. 24 hours a day / 7 days a week) or periodic basis (e.g. at 9am each day).

In certain circumstances using inventory holding performance measures is the best approach.  For example, in some circumstances the holding of a minimum level of spares, especially those with low usage rates, is not economically feasible.  However, what if these low use spares cause a critical failure and long delay?  In asset management language, these low probability – high consequence items are called ‘insurance spares’.  For example, many Air Forces hold extra, very expensive spare aircraft engines if they are needed due to random failures such as Foreign Object Damage (FOD) including the accidental injection of a bird into an engine during take-off or landing.  While these events have a very low probability, when they occur they result in a very expensive asset being unavailable until a replacement engine is available.  Accordingly, many Air Forces will specify extra ‘spare’ engines to be held with the maintenance organisations for these events.  However, in the commercial aviation sector to solve this problem, an engine provider may combine (pool) spare engines for a number of airlines in the same region or airport to cut the costs to all airlines involved.

Successful use of inventory holding performance measures is dependent on accurately setting the stock levels and locations.  Setting the levels too high will result in higher stock holding cost, but will meet all demands.  Setting the levels too low will result in delays and increased costs based on the asset being unavailable for use.

Inventory holding performance measures are best used where failed delivery results in severe consequences where the buyer and seller have agreed stock levels and locations including the holding of low rate “insurance spares”.

Customer Wait Time Performance Measures

Customer wait time performance measures need seller’s to simply give an item within an agreed time period.  Unlike the previous two type of supply support performance measures this approach makes the seller reactive to demands significantly reducing the seller’s exposure to inaccurate and uncertain buyer demand profiles.  This focuses the seller on the timeliness between order and satisfaction, depending only on their processes for satisfying the demand which could be through procurement, manufacturing or repair.  One customer wait time performance measure example is Turn Around Time (TAT) which is measure of time from placement to satisfaction of a demand (e.g. a 30 day TAT means that it takes 30 days from the buyer placing an order to the seller satisfying the demand).  Successful use of customer wait time performance measures is dependent on seller’s processes for satisfying demands.

Customer wait time performance measures are typically used where there is a higher cost of holding additional (spare) items than the cost due to a delay in delivery of the item.  Similarly, customer wait time performance measures are also used where there are low number of demands, again with low consequence due to a delay.

However, customer wait time performance measures should not be used where there are severe consequences for failed/ delayed delivery and where there are stable and high numbers of demands.  In this case, demand satisfaction performance measures should be used.

Summary

These articles should guide the PBC practitioner to the best type of Supply Support performance measure for the specific PBC.  A summary of these descriptions, including when it is best to use / not to use, is provided in the figure below.  Given there is some overlap between the three types of Supply Support performance measures a performance test case should be developed and tested to make sure the ideal Supply Support performance measures are used.

Types of Supply Support Performance Measures

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Supply Support Performance Measures – Part 2

In the last article we looked at the various performance measures we can use for Supply Support in Performance Based Contracts including grouping them into 3 main types; demand satisfaction performance measures, inventory holding performance measures and customer wait time performance measures.  In this article we are going to look at demand satisfaction performance measures in more detail.

Demand Satisfaction Performance Measures

At the highest level of integration with the buyer’s business demand satisfaction performance measures focus on contracting for satisfaction of the buyer’s demand.  These represent by performance measures such as Demand Satisfaction Rate (DSR) or DIFOT which is simply the number of successful demands as a percentage of total demands (e.g. 98% DSR means the seller satisfied 98% of buyer demands based on the right number, type and delivery location of all items within the agreed timeframe).

A demand satisfaction performance measure gives the seller freedom of how to meet the demand in terms of quantity and location of items being demanded whether through:

  • just in time procurement, manufacturing or repairs;
  • holding stock in single or multiple warehouses; and
  • whether to allow sharing of stock between buyers using the same items (e.g. pooling spares).

However, to do this, the seller must have a good understanding of buyer demand profile, and importantly, the demand profile must be stable and accurate. The seller then uses this information, through a process called “spares determination” which typically involves dedicated software tools such as OPUS10, to balance the number and location of items vs. total cost of the inventory (including storage).

So while demand satisfaction performance measures seem a good outcome for both buyer and seller, the same aspects that makes it attractive also causes limitations that need  consideration.

Specifically, what if we only have limited knowledge on the buyer demand profile resulting in high level of uncertainty and inaccuracy?  For example, what if the seller bases their support on 50 demands per month, however, they are getting 100 demands per month?  Does the buyer expect that the seller can support this and if not, can the buyer apply commercial consequences (e.g. withholding profit) for a failure to satisfy these demands?  What about if it is the other way around with the seller expecting 100 demands but only getting 50 demands.  Does the buyer expect the seller to give back this reduction in cost?  At first glance you may think this is OK since the seller is easily meeting the demand satisfaction requirements.  However, what if those extra (spare) items have a shelf-life, like food, or become obsolete like ICT items (e.g. laptops and mobile phones)?  The reduced consumption now leads to waste and was this considered in the seller’s pricing or is this a cost for the buyer?

Additionally, unless the overall performance measure hierarchy includes lower level supply support performance measures, by only using demand satisfaction performance measures the buyer has limited insight and confidence into future performance.

Finally, while the buyer may agree to a very high level of satisfaction (e.g. 98%) this allows 2% failed deliveries.  But what if those few deliveries result in a severe or catastrophic consequence such as the only reason a large expensive container ship in port cannot leave or a passenger airline cannot make it’s scheduled departure? So what happens now?

The use of demand satisfaction performance measures sometimes requires that either the seller is given certain protections (e.g. if buyer demands go above a certain level they are not held accountable) or the seller places a higher price on the delivery of items reflecting this dependency, which in some circumstances, may make it unaffordable to the buyer.  In these situations, it is important that both buyer and seller understand the conditions placed on the performance measure.

Success in using demand satisfaction performance measures is highly dependent on knowledge, accuracy and certainty of the buyer’s demand profile. Given this dependency is best to use demand satisfaction performance measures where there is certainty and stability of demands.  Additionally, demand satisfaction performance measures are best used for higher numbers of demands where there are no severe consequences for small numbers of failed delivery.  Otherwise, the PBC practitioners should consider the next two types of Supply Support performance measures.

In the next and final article in this series (Part 3), we’ll look at the remaining 2 groups of Supply Support performance measures (inventory holding performance measures and customer wait time performance measures) and give a simply diagram summarising which ones you should use and when.

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International Association of Contract and Commercial Management (IACCM) “Ask the Expert” Presentation

For those of you who were unable to make it to my “Ask the Expert” webinar presentation on Performance Based Contracting on Wednesday 9thMay 2018 kindly hosted by the International Association of Contract and Commercial Management (IACCM), you can see the recording and slides via the following link .

A special thanks to Jennifer Goddard, who hosted me and ran the IT perfectly, and Mark Heminway, for putting all the advertising and notifications together.  Thanks to both of you for helping me.  It ran perfectly.

If you have a further interest in the topic of Performance Based Contracting please check out my blog at www.performancebasedcontracting.com which has more information and case studies, or feel free to contact me.

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