Narrative: Too Much Resistance to Non-Disruptive Innovation

Situation

A government customer he frequently sold to told Lawrence he wanted to fund research to automate picking out targets of interest in Unmanned Aerial Vehicle imagery. That customer was sure Lawrence would like the idea--he was already authorized to spend the money, he knew the research he needed was cutting-edge, and he wasn't planning to require contractors to deliver upon any particular requirements to get paid. There was only one catch. That customer's organization refused to issue any more contracts paid by the hour, so customer planned to spend a fixed sum of money to buy "some research", trusting that Lawrence's defense contractor would do their best even if not held to particular requirements. It all sounded reasonable to Lawrence.

Task

Lawrence and his team wrote a draft proposal to expand the capability of their target detection algorithms by investing a fixed number of hours with a price exactly matching what his customer said he would fund. Though he was not an expert in government contracts, Lawrence had worked and won several of them and carefully crafted a statement explaining that his fixed-price proposal would be complete and payable the instant the number of hours proposed were expended; he included the phrase "regardless of what progress (if any) had been realized".

Conflict

To prepare the proposal, Lawrence enlisted the help of Joe, a contracts expert with his company and someone whose signature would be required. Joe stated that Lawrence had an incorrect view of fixed price contracts. Wondering if Lawrence had ever worked one before, Joe informed Lawrence that fixed price contracts involve risk to contractors. If contractors don't finish the work specified within their proposed budget, they must continue working, even if they eventually take a loss on the contract. Joe recommended:

1. that the proper contract type was Time and Materials, not fixed price, and
2. that Lawrence have a strong business case and risk mitigation plan to subject if he wanted to continue on the fixed-price route

Lawrence wondered if Joe had listened to him. The customer was not trying to offload risk to their company. The customer trusted them, wasn't allowed to issue any more contracts that year paid by the hour, and so was willing to pay a fixed price for mere expenditure of effort, not any specified achievement. It was still a fixed-price contract with an extremely easy to meet (and easy to get paid for) goal. As long as they were careful what contract they agreed to, it was a good deal for both parties.

Innovation Hypothesis: Too Much Resistance to Non-Disruptive Innovation

This is an example of the Innovation Hypothesis Too Much Resistance to Non-Disruptive Innovation. There isn't anything all that disruptive about what Lawrence and his customer want to do and what Joe opposes. Actually, this sort of thing happens all the time in government contracting. Joe is correct at some level; no, this isn't the textbook example of a fixed-price contract. But it's perfectly compliant with the Federal Acquisition Regulation that says how the government and its contractors are allowed to buy and sell. If Lawrence and Joe's company can't figure out how to help a customer in this case, which is slightly out of the ordinary but by no means disruptive, there's no way they'll be able to meet customer needs in the new and different ways which will set them apart from their competition.

Wrong Action

Joe opposes the proposal. Joe is a solid contracts professional and his management backs him. Because the proposal is small and unexpected, its loss will have little impact on annual financial projections; business leaders decide to take the high road and trust their contracting organization that this is a bad deal.

Lawrence breaks the bad news to customer. His company considers the structure of the contract too unusual and risky and he can't do the work.

Wrong Result

Lawrence's customer has fewer options now but the same problem. Picking out targets of interest in UAV imagery is still a critical battlefield need. The money allocated toward it still needs to be spent. If anyone in his government organization reallocates or fails to spend the money, it looks like they don't care about the problem the combatant commanders they support say is important.

Lawrence's customer writes a contract to a competitor who has an inferior algorithm that solves the same problem. That customer accepts the contract, and uses the money to improve their algorithm. Later the competitor bids against Lawrence's company for a much larger UAV software contract. Lawrence's company loses that larger contract also in part because, by that point, his customer is more familiar with the competitor's software.

Better Action

Joe has never heard of a contract like this before, one that calls itself a fixed price contract but pays once the contractor works a certain number of hours. He's heard of contracts that pay by the hour. He's even heard of Fixed Price Level of Effort (FP-LOE) contracts, but this isn't that either.

He doesn't want his company stuck in a dispute once the hours are gone, the software doesn't do what customer wants, and customer doesn't want to pay. He's been there before. Almost everyone who has worked a government contract before has been there, and it's expensive and awful.

But Joe also knows that he has a responsibility for growth, innovation, and meeting customer need. He also knows that his management will back him, and if he ultimately needs to kill the deal to keep the company out of trouble he can.

"OK," he tells Lawrence. We'll try to submit the proposal. But here are the rules:

1. "I get to talk to BOTH your customer and his assigned government contracting officer. I hear myself that all they want is a block of hours and they understand they're taking a risk that the software won't get any better at all once they spend their money.
2. I write the clause that says the government pays as soon as we're out of hours. Both my management and staff counsel sign off on it.
3. If any of that doesn't work or I'm nervous about anything at all, we don't submit a proposal, the deal fails, and you don't fight me on it."

Lawrence says "no problem" and they do all that work together.

Better Result

It all works out, engineers use the contract to improve the software, customer is happy with it, and the company gets paid.

When it comes time to bid the much larger UAV software contract, customer remembers how much they like Joe and Lawrence's software. Their company wins the larger contract and improves its revenue numbers substantially.

Discussion and Conclusion

This looks like a stupid story. What company would ever do the "Wrong Action" here? Answer: every Aerospace and Defense company I've ever been associated with. I didn't make this up...I've seen it happen multiple times. In narratives and case studies, the right and wrong thing to do seem obvious. But they're not obvious in real life.

Spare a thought for Lawrence's executive who gets a one-line email from his trusted contact in contracts. It reads...

"So-called fixed-price contract Lawrence is pushing is risky, misguided, and worth pocket change. We caught it early and have educated him."

Would you be ready to dig in further and see this as a threat to your growth plans? Armed with this narrative, I hope you will.