The Naked Negotiator

In November 2007, The New York Times wrote an expose on the fiasco surrounding the federal government’s purchase of spy satellites.

In 1998, the U.S. spy satellite agency sought bids to build a fleet of inexpensive spy satellites. The two bidders, Lockheed Martin and Boeing were told the project would operate under a tight price-cap. The government procurement agency made price 50% of the rating score when scoring contract bids. Previously, price had rarely accounted for more than 25 percent of the company’s score.

The front runner based on experience had to be Lockheed Martin. They had years of experience building similar complex projects. By contrast, Lockheed Martin had no track record of building spy satellites.

To win the deal, Boeing came up with a revolutionary play which they claimed could be built for a bargain price.

The Satellite Agency accepted Boeing’s bid. Even so, creating high-concept technology on a fast schedule inside a tightly managed budget - was high risk.

Boeing’s formula to win the bid only on cost and correct the government’s sins with price changes was a train wreck waiting to happen. The project cost $2billion to $3 billion more than planned. The project ran years behind schedule until the government finally killed the project. (The government’s write-off costs have been estimated at $4 billion).

The New York Times investigation reveals that the “multiple failures that led to the program’s demise reveal weaknesses in the government’s ability to manage complex projects.”

Here are some lessons for would-be procurement negotiators.

1. If a price for a complex project looks too good to be true, it probably is.
2. Carefully manage your contractor’s incentives. Incentives for Boeing encouraged them to hide setbacks and dilly dally.
3. Tightly manage big projects. If necessary break them into smaller chunks. Use a traffic light audit system to alert you to problems.
4. Remember if the contractor has a problem, you have a problem. You need to build in contingencies for failure or an early exit.

I help a number of clients negotiate with governments at both the local and central level. It’s remarkable how often you hear suppliers, when formulating a bid comment, lets give them a low price and claw back our margin in “spec charges.”

Is there a flaw in the way many government agencies and big companies manage their big procurements? There is a lot of anecdotal evidence to suggest there is. For a sobering read on the perils of poor contract management, read the full NY Times article.

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