Developing capabilities in performance-based contracting : a pre-study of Swedish defence acquisition

Authors:

  • Kostas Selviaridis

Publish date: 2014-12-31

Report number: FOI-R--3995--SE

Pages: 98

Written in: English

Keywords:

  • performance-based contracting
  • capabilities
  • learning
  • defence acquisition
  • Swedish Armed Forces

Abstract

This pre-study and report is commissioned as part of the broader research program titled "Cooperation Program: Integrated Defence Logistics" which is managed and executed by the Swedish Defence Research Agency (FOI). The pre-study is a sub-project within Project 3 ("Effects-based defence logistics") and focuses on the development of performance-based contracting capabilities in the context of Swedish defence. This investigation is timely and highly relevant for the Swedish defence organizations given the paradigm shift from a transaction-based to a performance-based defence acquisition (Ekström, 2013) and the ongoing restructuring project. The latter entails changes in roles and responsibilities, mainly among the Swedish Armed Forces (FM), the Swedish Defence Procurement Agency (FMV) and the Swedish Defence Logistics Organization (FMLOG), in relation to defence acquisition and logistics activities. The pre-study is conceptual in nature and its purpose is to explore and increase awareness of the concept of performance-based contracting (PBC) capabilities, as well as to examine what types of capabilities the Swedish defence agencies should consider for implementing a performance-based defence acquisition and logistics model. In addition, the study aims at identifying relevant theoretical perspectives for empirically studying, as a next step, capability development in performance-based contracting. In connection with this dual purpose, three specific research questions have been formulated and answered: RQ1: What are performance-based contracting capabilities? In the context of Swedish defence acquisition, performance-based contracting capabilities are conceived as indirect or ancillary capabilities, as opposed to the direct, military capabilities of the Swedish Armed Forces that help them fulfil their strategic missions and purposes, i.e. defend Sweden and participate in international peace keeping operations as part of their international obligations. PBC capabilities are a specific class of indirect capabilities that are critical for successfully contracting for equipment and associated support services based on "availability" and/or "capability" outcomes. In particular, the following definition of PBC capabilities is proposed: "Performance-based contracting capabilities are the indirect know-how and capabilities that enable organizations to specify, evaluate and manage required performance, design appropriate performance-oriented incentives systems, and allocate and manage financial and operational risks associated with performance attainment. The development of these indirect capabilities entails articulation and codification of knowledge regarding performance-based contract design and management, considering also the broader context of the outsourcing decision". RQ2: What types of capabilities should Swedish defence agencies consider to design and manage performance-based contracts as part of the transition towards a performance-based defence acquisition model? Three key types of PBC capabilities are identified. First, performance-based contract design capabilities refer mainly to the "concept" and "development" stages of the defence acquisition process. They are related to know-how regarding the specification of required performance, the design of incentive systems and the identification and allocation of risks between the buying organization and the defence supplier(s). Second, performance-based contract management capabilities refer mainly to the "production", "use and maintenance" and "decommissioning" stages of the defence acquisition process. They mainly relate to know-how in implementing the performance-based contract, measuring, monitoring and managing supplier performance, monitoring the implementation of scheduled equipment refits/upgrades, administering financial incentive payments, as well as managing financial and operational risks in an ongoing fashion. Third, performance-based contract assessment capabilities cut across all the stages of the defence acquisition process. This category refers to capabilities of processing and managing knowledge (regarding acquisition and contracting) as well as capabilities of learning and improving by leveraging prior experiences and making use of lessons learned over time. These capabilities are important both during contract design (ex-ante) and contract management (ex post). Ex-ante capabilities include identifying and integrating the types of expertise required for successful project management, forming cross-functional acquisition and contracting teams, and (re-)using lessons learned from previous experiences with the same supplier, similar acquisition projects as well as commercial best practices. Ex-post learning and adaptation capabilities ensure appropriate design of PBC and rectification of any mistakes and/or omissions during the contract design phase (e.g. adapting performance and financial bonus/penalty levels). They also entail codifying any lessons learned in a structured way so that the collective know-how regarding PBC design and management increases over time. RQ3: Which theoretical perspectives and/or conceptual frameworks are useful for empirically studying capability development in performance-based contracting in the Swedish defence context, and why? Four theoretical perspectives have been highlighted as potentially relevant and useful for studying capability development in performance-based acquisition and contracting. These are the notion of indirect capabilities, the knowledge-based view of the firm, the dynamic capabilities perspective and the organizational routines approach (for details please refer to Section 4.4). Other theories such as the resource-based view, the extended resource based view and the alliance capability perspective are deemed as not applicable in the defence market context. This is because the assumptions underpinning those perspectives (e.g. highly competitive business environment, the centrality of sustainable competitive advantage and the leveraging of inter-firm alliances) do not fit the public sector context of defence acquisition. Taking into consideration the above theoretical perspectives and the current challenges and opportunities facing Swedish defence authorities, four specific recommendations for empirical research on PBC capability development are offered (for details please see Section 5.3): a) focus on the learning processes, structures and mechanisms by which Swedish defence agencies develop their know-how and capabilities in performance-based acquisition and contracting, b) focus on how individuals, specific divisions and even whole authorities (e.g. FMV and FM) come together to (re)combine and integrate their know-how and develop the new capabilities associated with the performance-oriented acquisition model, c) focus on the role of trial and error, experiential learning and experience/knowledge accumulation in PBC capability development and evolution over time, and d) focus on organizational routines regarding acquisition and contracting tasks within the relevant defence authorities

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