How the Department of Energy and Kaiser-Hill Transformed a Nuclear Weapon Wasteland to a Wildlife Refuge Following 5 Simple "Vested" Rules

Transcription

1 How the Department of Energy and Kaiser-Hill Transformed a Nuclear Weapon Wasteland to a Wildlife Refuge Following 5 Simple "Vested" Rules University of Tennessee Kate Vitasek Faculty, College of Business Administration DENVER FALL 2014 SU MMIT

2 Evaluation How-to: Why? Your feedback drives SIG Event content By signing and submitting your evaluation, you are automatically entered into a prize drawing How? Option 1: App 1. Select Schedule 2. Select Schedule by Day 3. Select Day 4. Select Session 5. Scroll to Description 6. Click on the Evaluation link Option 2: Browser 1. Go to 2. Select Session (#32) DENVER FALL 2014 SU MMIT

3 How the Dept of Energy and Kaiser-Hill Transformed a Nuclear Weapon Wasteland to a Wildlife Refuge Following 5 Simple "Vested" Rules

4 About the University of Tennessee s Research UT Ranks #1 in the world in Supply Chain Management Research Original research funded by United States Air Force Research accolades include: 5 Books and 8 white papers (2 with SIG) Featured on Bloomberg, NPR, Fox Business News, and CNN International Supply Chain Council s Academic Advance Award World Trade Magazine s Fab 50 concepts impacting world trade 4

5 Learning Objectives Understand how conventional outsourcing agreements can drive perverse incentives See real examples of how the Dept of Energy applied the Vested "5 Rules Learn how to take a quick, easy and free benchmarking survey can help you see how you stack up to each of the 5 Rules 5

6 Learning Objectives Understand how conventional outsourcing agreements can drive perverse incentives See real examples of how the Dept of Energy applied the Vested "5 Rules Learn how to take a quick, easy and free benchmarking survey can help you see how you stack up to each of the 5 Rules 6

7 Conventional Approach There Is an Inherent Flaw in the Conventional Outsourcing Business Model Specify Buy Quantities / Manage demand Pay for each on a Unit Price or Transaction basis Assume all risk for: right product right locations right time right quantities Customer satisfaction System uptime COMPANY OUTSOURCE MANAGER HIGH RISK CONTRACT MFG CALL CENTER WAREHOUSE PROVIDER LOW RISK IT SERVICE PROVIDER The more we sell, The more profit we make! 7

8 Modern Approaches As outsourcing exploded in the 1990s and 2000s and sourcing became more complex as services grew, companies began to realize they were faced with the Watermelon Effect. A good supplier might be doing what they were asked and achieving the metrics, but the business was not achieving its needs. Watch out for the Watermelon Scorecard An Outcome Based approach emerged. 8

9 Is There a Better Way to Outsource? The significant problems we face cannot be solved at the same level of thinking we were at when we created them. Albert Einstein 9

10 Vested Approach Both Parties Are Vested in Each Others Success The less I use, the more profit I make! The more innovative I am, the more profit I make! SHARED RISK/REWARD Specify Performance Outcomes Prioritize internal efforts SHARED RISK/REWARD Develop Solutions Motivated to improve processes and decrease costs 10

11 MINIMAL Vested Is a Hybrid Business Model Shifts from a conventional buy/sell business model focusing on transactions to an outcome based business model focusing on results Moves beyond saying strategic supplier to developing carefully crafted collaborative agreements Creates value through winwin solutions economics (grow the pie, not fight over the pie) LEVELS OF DEPENDENCY INTERDEPENDENT LOW SHARED VALUE Source: 2013 Vested HIGH 11

12 Why Vested Works WIIFWe Drives Supplier Innovation Vested is the creation of a mutual symbiotic deal where all parties win. All parties become aligned to the same quantifiable objectives The rules of the game are clearly spelled out through the contract Contract incentives balance risk/reward, encourages supplier innovation I WIN with higher service levels PROCUREMENT GOAL PERFORMANCE PARTNERSHIPS THAT OPTIMIZES FOR MUTUAL DESIRED OUTCOMES I WIN with lowest possible costs I WIN with higher margins/profits BUSINESS CUSTOMER SUPPLIER 12

13 Learning Objectives Understand how conventional outsourcing agreements can drive perverse incentives See real examples of how the Dept of Energy applied the Vested "5 Rules Learn how to take a quick, easy and free benchmarking survey can help you see how you stack up to each of the 5 Rules 13

14 To Help Tell the Story CASE STUDY 14 Source:

15 Making the Impossible Possible CASE STUDY Situation Legacy of Cold War A radioactive mess 15 miles from Denver 1,000 pounds of plutonium missing Site of worst industrial fire in US history Most dangerous building in the world Shut down after joint FBI & EPA raid Secrecy, suspicion and protests 15

16 Defining the Rules of the Game 16

17 Rule 1 Outcome vs. Transition Based Business Model 17

18 Shared Vision & Shared Goals CASE STUDY In their words 18

19 No One Had Ever Done This CASE STUDY The Desired Outcomes: Clean turn it into a wildlife refuge Closed ahead of schedule Cost under budget Safe workforce and removal of nuclear waste GAO gave them a 1% chance of succeeding 19

20 Rule 2 Focus on the WHAT, not the HOW 20

21 Focus on WHAT, not HOW CASE STUDY How could the DoE develop a detailed Statement of Work If it s never been done before With a learn as you go to experiment and conquer approach Guardrails set the tone: Safety standards Environmental standards National security standards Extensive 3 rd party scrutiny 21

22 Flexibility of Work Scope Was Key! CASE STUDY The foundation was grounded in the actual contract. Seek ways to accelerate cleanup actions and eliminate unnecessary tasks and reviews, by requiring that the Parties work together. Proved the flexibility to modify the work scope and schedules, recognizing that priorities may change due to emerging information on the site conditions, risks and resources. 22

23 Infinity Room Problem CASE STUDY Invention of capture coating aerosol sugar fog spray 23

24 Rule 3 Clearly Defined and Measurable Desired Outcomes 24

25 Clearly Defined Desired Outcome CASE STUDY In their words The safe closure of Rocky Flats by 2006 is a top priority. Bill Richardson Former Energy Secretary United States Source: on,_new_hampshire,_march_18,_2006.jpg 25

26 About the Metrics CASE STUDY Guardrails set the tone Safety standards Environmental standards National security standards Extensive 3 rd party scrutiny High-level contract measures (2000 Contract Extension): Closed completely closed Clean clean up Rocky Flats and safely dispose of all contaminants (known and unknown) Under budget in less than 6 years for less than $3.94 billion Safe a variety of worker safety metrics About the process Out-year performance measures established for planning purposes but flexible Standard and Stretch measures 26

27 Rule 4 Pricing Model with Incentives That Optimize the Business 27

28 Pricing Model with Incentives CASE STUDY Cost Pass Through Base Minimum Fee Fee at Risk Target Fee Incentives Stretch Incentives Project costs were passed through Minimum Mgmt Fee 3.77% 5.23% of Fee at risk Fees paid for achieving Performance Targets Penalties for missing Performance Targets Cost Share (KH kept 30 cents for every $1 under target budget and lost 70 cents for every $1 over budget) 9% Stretch incentive fees 11.6% Maximum Fee 28

29 Other Elements of Pricing Model CASE STUDY Approximately two times market Target Fee incentivized Kaiser-Hill take on capital risk Kaiser-Hill financed its own investments in technology and solutions Gained financial flexibility and speed If investments in innovations paid off they could earn approximately two times the average DoE fee Kaiser-Hill committed to share (and did share) 20% of profits with workers a critical success factor DoE agreed to bear cost of any delays caused by DoE or other agency (and adjust budget accordingly) 29

30 What Makes It Work! CASE STUDY In their words Source: 30

31 Rule 5 Insight vs. Oversight Governance Structure 31

32 Transparency & Inclusiveness CASE STUDY In their words 32 Source:

33 Insight vs. Oversight CASE STUDY Transparency Legacy of secrecy and hidden disasters had created deep mistrust among all stakeholders Inclusiveness Federal, state and local governments Watchdog, environmental and peace activists Academic institutions and health care providers Local and regional business groups Employee unions Media Extensive outreach by Kaiser-Hill and DoE leaders 33

34 Utilizing Technology to Govern CASE STUDY The Project Controls System Included graded reporting requirements for all subcontractors Built on Kaiser-Hill s project management databases Project broken down into components, with costs, timelines and risks associated with each Used industry-standard Earned Value (EV) techniques EV earned when activity was 100% complete 34

35 And Most Importantly Adopted WIIFWe 35

36 The Results Are Real! 36

37 Mission Accomplished CASE STUDY Clean: Rocky Flats National Wildlife Refuge established in 2007 Closed ahead of schedule: 60 years ahead of initial baseline Cost under budget $30 billion under initial projection Safe 800% improvement in safety record 37

38 Results CASE STUDY 283 million sf of land decontaminated; now a wildlife refuge Pollution per gram of soil decreased from 651 cpi to 28 cpi (44% below target) Safety rate improved by over 800% and $300k rebate from insurance 1995 = 900 employee grievances 2005 = a handful Over 200 innovations including Glove Box decontamination from 1 per year to 3 per day I WIN with higher service levels I WIN with lowest possible costs PROCUREMENT Does Vested Really Work? Overall reduced GBS Cost as Total cost is $30 billion less a percentage of sales by 33% than initially projected Speed Completion to market date 2x faster is 65 years earlier than projected saving $100m in security per year alone! 5 year contract with 5 year sole source extension 20% of profits paid to ALL employees even union workers involved 11.6% profit margins due to incentives above DoE average of 4.1% I WIN with higher margins/profits BUSINESS CUSTOMER SUPPLIER 38

39 It Was All about Belief! CASE STUDY In their words Source: 39

40 Learning Objectives Understand how conventional outsourcing agreements can drive perverse incentives See real examples of how the Dept of Energy applied the Vested "5 Rules Learn how to take a quick, easy and free benchmarking survey can help you see how you stack up to each of the 5 Rules 40

41 The Vested Agreement Elements MASTER SERVICES AGREEMENT (MSA) Non-disclosure Non-compete Limitation of Liability Termination /Renewal Other Vested Agreement Structure RULE 1 RULE 2 RULE 3 RULE 4 RULE 5 Element 1 Element 3 Element 4 Element 6 Element 10 BUSINESS MODEL Element 2 STATEMENT OF OBJECTIVES (WHAT) Element 5 DESIRED OUTCOMES PRICING MODEL Element 7 GOVERNANCE STRUCTURE SPECIAL CONCERNS SPECIAL SPECIAL & REQUIREMENTS CONCERNS & REQUIREMENTS CONCERNS & REQUIREMENTS SHARED VISION STATEMENT OF INTENT WORK SCOPE & ALLOCATION (HOW) PERFORMANCE MANAGEMENT PLAN GUARDRAILS & ASSUMPTIONS RELATIONSHIP MANAGEMENT FRAMEWORK OPERATIONAL PERFORMANCE REPORTING RISK ASSESSMENT Element 8 TRANSFORMATION MANAGEMENT FRAMEWORK QA PLAN MARGIN MATCHING Element 9 Service Provider Owned INCENTIVES EXIT MANAGEMENT PLAN A Vested agreement is structured as follows: A Master agreement is combined with subordinated schedules or exhibits that individually outline each of the 5 Rules and 10 elements of Vested Vested

42 Take an Easy and Free Benchmark Assessment! Access the 10 Elements free benchmarking survey at. Enter link here 42

43 Want to Learn More? me at Visit our dedicated website at Kate Vitasek Faculty, Univ. of Tennessee Graduate & Exec Education 43

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45 Session #32 How the Department of Energy and Kaiser-Hill Transformed a Nuclear Weapon Wasteland to a Wildlife Refuge Following 5 Simple "Vested" Rules Kate Vitasek University of Tennessee kvitasek@utk.edu DENVER FALL 2014 SU MMIT