Value-Based Principles

Value-Based PrinciplesJohn Savicky

Arizona State University

How Do We Transfer and Minimize Risk, Increase Accountability, and

Increase Performance?

Best Business PracticesLeadership Experts & Leadership Philosophies

• Various fields (Automobile Manufacturing, Commercial Manufacturing, Self-Improvement, Martial Arts, Business, Management, Law, Government).

• Leadership experts included: Edward Deming, John Maxwell, James Allen, Marcus Buckingham, Jim Collins, Noel Tichy, Jack Welch, James Kouzes, Lee Iacocca, Peter Drucker, Sun Tzu, Tom Peters, Abraham Lincoln, Bruce Lee, Niccolo Machiavelli, and Rudolph Giuliani, etc.

• Topics:– Continuous Improvement – Theory of Constraints– Information Worker– Lean Manufacturing– Just in Time– Six Sigma– Supply Chain Management

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Define

Measure

AnalyzeImprove

Control

4

Impact of Information

EventInitial Conditions

Final Conditions

Time Time Time

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How Does This Relate To Procurement?

Delivery of the Project

Selecting a Vendor

Project Complete

Time Time Time

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Is Our Goal To Obtain 100% Information?

Delivery of the Project

Selecting a Vendor

Project Complete

Time Time Time

Obtain the Least Amount of Information

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Objective of Minimum Standards

Contractor 1

Contractor 2

Contractor 3

Contractor 4

Perf

orm

ance

High

Low

Risk

High

LowHigh

Low

Perf

orm

ance

Minimum

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Perf

orm

ance

High

Low

Risk

High

Low

Who Will Be Selected?

Contractor 1Contractor 2Contractor 3Contractor 4

Contractor 1

Contractor 2

Contractor 3

Contractor 4

Perf

orm

ance

High

Low

Risk

High

Low

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Perception on Standards

ASTM Standard Setting

ASTM Standard Setting12

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All Products Meet the Standard

PHYSICAL PROPERTY Standard B CInitial Elongation 100% 100% 200%Initial Tensile Strength 150 psi 150 psi 450 psiFinal Elongation 100% 100% 200%

$2.00 /SF $4.00 /SFCost:

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What Will Manufacturer ‘C’ Do?C

Initial Elongation % (break) D412 200% 100%Min.Initial Tensile Strength (mass Stress) D412 450psi 150psi Min.Final Elongation % Weathering D412 200% 100%Min.

Permeance E96. B 3.52.5 U.S. perms

MinWater Absorption (mass) D471 <1%

Delete requirement

Weathering (5000 hours) G53

No cracking No cracking

Adhesion C794 3 pli 2pli min.

Fungi Resistance G21 No growthDelete

requirement

Tear Resistance D624 30 lb/in 20 lb/inLow Temperature Flexibility D522 Passes Passes

Viscosity D2196115-130

KU35,000-

50,000cps

Volume Solids D2697 57 - 66% 57-80%

TEST PROPOSEDPHYSICAL PROPERTY

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Specification Data Sheet

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Can We Create an RFP That is 100%

Accurate?

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Detailed Instructions

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Hold On…The Warranty Will Protect Us!!!

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Warranty

The only roof system you’ll need for the next 30 years.

Backed by the industry’s most resilient guarantee – an unsurpassed 30-year

warranty against whatever the future brings.

MANUFACTURER X

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Warranty Exclusions / Fine Print

• Warranty exclusions (fine print) are rules that protect the manufacturer if any problems arise.

• Exclusions will limit the manufacturers liability.

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Roof Warranty Exclusions“Warranty is void if....”• “Failure to use reasonable care…”• “Damage caused by ponding water or improper

drainage…”• “Damage by abnormal use of the roof…”• “Damage by unusual occurrences…”• “Failure to provide routine maintenance…”• “Deterioration due to ordinary weathering…”• “Damage caused by falling objects…”• “Unauthorized modification…”• “Other than occasional traffic on the roof…”• “Damage from by chemicals, animals, insects, or plant

life”• “Change in building use or purpose…”

OutsourcingGoing In For Brain Surgery…

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Would you? Find the cheapest surgeon? Ask that surgeon if they can lower their price? Would you tell them that they should do it faster? Would you tell them how to perform the surgery / what tools they can use? Would you tell them that you have a better way of doing the surgery? Would you tell them which nurses/doctors they can use? Would you hire other individuals to tell/direct the surgeon how to do the

surgery?

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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Right Information At The Right Time!!

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Reexamine How We Analyze• Purchasing a new SUV

– How many full-size people can fit?– The MPG or capacity of the gas tank?– The type of safety equipment?– The type of headlights we getting?– Darkness of the tint?

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• Purchasing Uniforms for Troops– Durability - How long the material will last?– Location of where material is made?– How many pockets the uniform has?– The ability of the uniform to be warm/cold?

Dominant Information

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10 OZ$3.75

A B C

10 OZ$3.50

10 OZ$3.99

Which would you buy?(If you need to buy Cocoa Puffs)

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10 OZ$3.50

A B C

12 OZ$1.25

14 OZ$2.99

“Dominant Information”

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Scenario A Scenario B

Industry Structure

NEGOTIATED

LOW

HIGH

VALUE-BASED

PRICE-BASEDUNSTABLE

LOW HIGHCOMPETITION

PERF

ORM

ANCE

Industry Structure

NEGOTIATED

LOW

HIGH

VALUE-BASED

PRICE-BASEDUNSTABLE

LOW HIGHCOMPETITION

PERF

ORM

ANCE

Value & Performance Vendors Maximize Profit Vendor Accountability Minimized Management & Inspection Minimal Technical Information Dominant Performance Metrics

Treat as a Commodity Volume Based No Accountability / Finger Pointing Management & Inspection Minimum Standards & Technical Data No Performance Metrics

Which Party Mitigates Risk?

NEGOTIATED

LOW

HIGH

VALUE-BASED

PRICE-BASEDUNSTABLE

LOW HIGHCOMPETITION

PERF

ORM

ANCE

Value & Performance Vendors Maximize Profit Vendor Accountability Minimized Management & Inspection Minimal Technical Information Dominant Performance Metrics

Treat as a Commodity Volume Based No Accountability / Finger Pointing Management & Inspection Minimum Standards & Technical Data No Performance Metrics

VENDOR

OWNER

What Quadrant Are We In?• Do you spend a lot of effort preparing technical requirements?• Do your contractors require a high degree of management?• Do your projects require a high degree of inspection?• Do you transfer the risk of the project success to the contractors?• Do you transfer all control of the project to the contractors?• Are contractors coming back to propose on all your projects?• Do you focus on getting the longest warranties?• Do you focus on writing the best contracts?• Are projects completed on-time?• Are projects completed without change orders?• Are contractors maximizing their profits?• What is your level of performance?• What is your level of competition?

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Price-Based Definition• Cost is the primary factor for award

• Can be used in any Delivery Method:– Design-Bid-Build– Design-Build– Construction Manager at Risk

• Can be referred to as:– Low-bid– Negotiated-bid– Qualifications-based– Best-value

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Price-Based…• Do not use expertise to mitigate risk

• Bid only what you see in the estimate

• Be as low as possible to get job

• If you find issues, don’t tell anyone until after award

• Use change orders to mitigate risk

• No dominant performance metrics (or provide very confusing metrics)

• Drives away high performers

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Industry Structure

NEGOTIATED

LOW

HIGH

VALUE-BASED

PRICE-BASEDUNSTABLE

LOW HIGHCOMPETITION

PERF

ORM

ANCE

Value & Performance Vendors Maximize Profit Vendor Accountability Minimized Management & Inspection Minimal Technical Information Dominant Performance Metrics

Treat as a Commodity Volume Based No Accountability / Finger Pointing Management & Inspection Minimum Standards & Technical Data No Performance Metrics

How Do We Get Here?

How Do We Transfer and Minimize Risk, Increase Accountability, and

Increase Performance?

Factors For Success• Fair (state/follow rules)

• Open

• Impartial and Transparent (minimize evaluator bias / provide debriefing)

• Efficient (minimize efforts)

• Award based on value

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Increasing Accountability and Performance• Need to be a “good” client

• Need to focus on “win-win”

• Need to create an environment that gives the advantage to high performers

• Hire the best people and let them do their job

• Need to minimize traditional functions– Management– Direction– Control

Constraints• Your people are your greatest constraint.

• Your timeframe and goals must be tailored to the capabilities of your people (vendors are more capable of adapting)

• Just because you understand, does not mean your staff understand.

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