Podcast #2: The 80/20 Rule
November 30, 2014
[Paul] Hello, and welcome to the Contracting Officer Podcast. This is the podcast for people who want to learn about the government market from the contracting officer’s perspective. Today, Kevin and I will talk about the differences between how the government buys and how you buy in your personal life or for your company. The end goal is the same, and some of the steps are the same, but the reasons why are often different. We’ll discuss the 80/20 rule and how it applies to the buying process regarding your relationships with the sellers and the processes used to buy – but the 80 and the 20 actually get flipped when the government is the buyer. Finally, we’ll cover why the government is required to openly compete their requirements. And with that, let’s get started. [Paul] Ok, Kevin. Let’s talk about the difference between how the government buys and how you buy. [Kevin] Ok. In simple terms, the government buys in some of the same ways we do, but the big difference is they’re required to compete lots of things. They’re required to set aside certain amounts of contracts for companies such as small businesses. They’re required to re-compete contracts they’ve already awarded. And if you think how different this is to how we buy services – when I buy a car, or I buy a customer relationship management software, or I hire an accounting firm for my company, all of those things, there’s no strict set of rules. I can go down and talk to my friend who happens to own the dealership and just buy the car on the spot without checking any prices or any other relationships, or I can go hire a CRM system based on how cool their website is. It’s that simple. [Paul] So you don’t have to buy your car from a small business dealer this time just because you bought from the largest dealer in the city last time. [Kevin] Good question, because I actually don’t have to, like a contracting officer has to go out and determine, can a small business even do this? Can a certain group of companies, who may not even be in my local area, do this work? And how different is that than what you and I do when we buy everything from our computer to – we don’t compare Apple’s requirements (I happen to have a Mac, right? So you compare what I needed, and I decided, you know what, I like Mac’s software better). Technically speaking, it does a lot of the same things as a PC, but I just happen to like it better. And you don’t shop on price with a Mac, because they set their prices. [Paul] So the end goal is ultimately the same, but how you get to the end goal might have to be different if you’re a government contracting officer? [Kevin] Correct. The end goal is: “to acquire goods and services at a combination of the best price, best service, and the best “solution” (which is the technical solution). So depending on what you’re buying, it could be the process is going to be different, but the reality is, whether or not you have to compete it, (FYI: “yes” is more often than not the answer), and then if you don’t, there’s a specific set of rules you have to go through. So the end goal is to get a great product or service, and to support your user. So if you’re a buyer for a large company, who is not a government contractor, your process to buy software is going to be very different. Things like – here’s one – as a contracting officer, you’re only allowed to take (last time I checked) a $25-value gift from a company who may actually sell you something at some point in the future. Well, compare that to the commercial market, where wining and dining (maybe I’m oversimplifying) – spending time networking with potential customers, it’s a completely different environment. There are no rules, there’s no – ok, there are few rules; there’s a lot fewer rules – about how that relationship works. So the reality is the end game’s the same, you want to get a great product and great service, but to get there, it’s a different process. It’s a different mindset. You have things like the Competition and Contracting Act that says you have to compete everything, unless for a certain set of circumstances which you then have to document. [Paul] So you’re talking about non-government contracting companies of course, right? If I work for a government contractor, I’m also not allowed to accept large gifts in order to influence the procurement process from my subcontractors or vendors, correct? [Kevin] That’s correct. And that’s another difference, that even as a subcontractor, in the government market the rules are going to expand and flow down to you. Like the term “flow down clause” – that’s kind of a lot of the things we’re talking about here. What I’m referring to is the almost hyperbole of the two ends of the spectrum: you have a completely commercial company and a completely government contractor. Your worlds are different. And you can step in both worlds, but understand that the rules in each world are very, very different. [Paul] Ok, let’s talk about the parts of the worlds that are the same. I understand the steps are the same for how you buy for your own company and how the government ends up buying something, so let’s walk through some of the things that are actually the same in the process. [Kevin] The biggest one is that you need to have a requirement. What do you actually need? What are you buying? So I’ll use the example of the CRM system again: If the government is looking to buy an equivalent of a CRM system, say SharePoint – they need a SharePoint system to manage data – how much data do they have? What does it have to interface with? How many users are going to be on the system? What is the expected cost for it? What is the budget for it? All those things that you and I when we go out and buy a CRM system to manage our relationships with our customers, we still need to do the same thing. What’s your budget? Do you need SharePoint at one end of the spectrum or do you need a free version of SugarCRM at the other end? And you need to decide, what is that requirement? So that’s going to be the same. The level of detail . . . on one hand, one could argue that the government is going to have a higher level of detail; I would argue that as a business owner, you want to have a good level of detail what your requirement is even if you’re not a government contracting officer, you need to really understand what you’re trying to buy. So I would say that needs to be more the same. And the other part of it is understanding “what is your competitive process?” Are you going to get three bids and just take the lowest one (which would be lowest price technically acceptable)? Or are you going to get a technical and a past performance volume and also get a price and then compare the three? For example, I’m actually in the process of hiring an editor for my book right now, and I went onto Elance, and I laid out my requirement – it’s a thirty thousand word book, I need to have it done in approximately two weeks, it’s about government contracts, it’s called Save Your Time: Whether or Not the Government Market is for You. So you go through that, and I laid out what I need from them. I need them to edit it, and I need them to give me an understanding of whether the chapters need to be reordered, etc. I gave them as much detail as I could. What I got back, of course, was a range of prices, some were three times as high as the other ones, but I also got explanations of how they’re going to do it – that would be their technical approach. And then if they had ever done it before. In fact, one of my requirements was that you have to have edited business books before. Well, that’s past performance. So the process is the same. It exists everywhere, and whether you’re putting out something on Elance or you’re trying to figure out which guy you should hire to remodel your house, write your requirement, figure out if you care (and how much you care) about past performance, and how much weight you’re going to put on technical approach. Those steps are the same. [Paul] Sure. So the process of getting different quotes and surveying the market is different between the government buying process and your own buying process, but you’re doing the same thing. How you go about receiving those quotes, how you go about requesting those quotes might be different, but you’re still comparing different offerings that meet your requirements. [Kevin] Correct. And one of the other (what I consider to be) similarities is that you come up with a competitive range. And the difference, of course, is that in the government you have to tell everybody how you’re going to determine said competitive range, but the reality is that if you start out with ten companies, you’ve got ten bids – going back to the editor, I’ve got ten different editors (I think I actually ended up with 24, if you can believe that) – and then based on my criteria I took some of the top off and some of the bottom off, and now I’m in a competitive range of five people. It’s the same idea, it’s just that the steps are a little bit different; I don’t have to document it as much, I’m not required to write them a dear-John letter, I’m not required to give them as much specificity in the equivalent of the Section L and M (which are evaluation criteria) – “This is the kind of thing that I’m going to take you off of the list for.” [Paul] Ok. Let’s talk about how you actually are going to pick which one of those editors that is going to work on your book. You wrote an interesting blog post about the 80/20 rule and how it applies to the process of government buying and how it’s actually flipped between process in buying versus relationship in buying between what you would do buying on your own and what you would do buying as a government contracting officer. Tell me about that. [Kevin] So the 80/20 rule we came up is based on the fact that as a business owner – 80% of the sales our company gets as a service provider is based on relationships. People understand what we do, they understand we support small businesses, they understand we’re passionate about helping companies navigate the market. That’s how most commercial companies work. I bought my Apple computer based on the fact that I get their culture, I understand why they do what they do, I understand how the style is very clean, and honestly, I know a lot of people who have worked at Apple, I understand what the overall end game is and that’s to make a great product that does just enough. [Paul] So you’re actually operating somewhat on your personal feelings about the product. [Kevin] Exactly. And you use that for when you hire your accountant – that’s a relationship. You’re trusting them to do your taxes, you’re trusting them to potentially keep track of your personal finances. That’s what a relationship is. The 20% is, there’s still a process. Regardless of how strong the relationship is with an individual service provider, regardless of how much you like the company, there is a point at which you’re not going to pay five times as much for their support, you’re not going to tolerate sub-par service. In service contracts in particular, we tend to stick with a company longer because of a relationship. Well, you can’t do that in the government market. In the government market, that relationship is only 20% whereas in our commercial providers, it tends to be closer to 80%. Flip that on its head for the government market. In the government market, you understand the needs of the government customer. You’ve done some targeting, you know this particular agency has the right needs for what you do. Let’s say you’re an operations and intelligence company, and your staffing support specifically helps specific agencies that do operations and intel (say Special Operations Command, for example). So you understand their culture, you understand what’s important to them, you understand the difference between that culture at Special Operations Command and what the VA does. They’re very different goals. You understand what this program manager is looking for. That’s the 20%. However, 80% of whether or not you get work with them is through the process. It’s, “Do you understand how to put a proposal together?” “Do you understand how to respond to a Section L and M?” “Do you understand that if your proposal is late, you’re out?” It doesn’t matter how good your relationship is. [Paul] So you mean if I’m a government contracting officer, or a program manager, I just can’t call up my friend who has a company that provides that service and say, “Hey, Bob, we need you to come do some work for us”? [Kevin] Correct. You can call them up, you can probably give them a heads-up on the fact that you want them to bid, there are some cases where that actually can happen through a justification and approval process for unique circumstances but that’s a podcast for another day, but in general terms, that is a completely different structure because the 80% process which goes through the market research – here’s another one. Going back to Special Operations Command, let’s say you understand what SOCOM does, all those great things, but you’re a women-owned small business, and they set aside to contract for a group of service-disabled veteran-owned small businesses – it doesn’t matter how good your relationship is with that contracting officer. It doesn’t matter how good you know their structure – you aren’t eligible to bid. The process kicked you out from the beginning. So if you didn’t see that coming, or if you weren’t involved in helping to structure that set-aside by helping with the market research, etc…then you’re out. And again, let’s go back to the commercial market. You walk into this potential customer’s office and say, “Come on, we’ve been friends for a long time, at least give me the chance to bid.” And more often than not, they’re going to go, “Ok.” A contracting officer can’t do that. If you come in as either the wrong type of small business or as a large business, and it’s a small business set-aside, you are legally not able to swing at the ball. You don’t even get to step up to bat. [Paul] So that’s quite a difference from my own buying process where I can literally select any vendor or any company I want to do the job. [Kevin] Correct. [Paul] So the 80/20 rule as applied to the government buying process tells me that despite the fact that I have relationships with different companies if I’m the contracting officer, despite the fact that I know what they’ve done in the past, despite the fact that they might be providing other agencies fabulous service, when they come in and submit a proposal, if they don’t follow all the rules of the process to the T, I can’t award with them, even if I know they have the best price and the best solution and the best history of doing the job. If their proposal is late, if they haven’t covered everything I asked for in the RFP or RFQ, I still can’t award the contract to them. [Kevin] Yes. And here’s a great example of that. I had a contract as a contracting officer for some equipment, we’ll leave it at that, and the company who had a much better solution – this was a small business set-aside, best value source selection, so we were able to trade off between their technical, past performance, and price – and they had a significantly much better solution, technically. Past performance was phenomenal, the customer (the user) really liked the product (we did a physical evaluation of it and tested everything. They blew everybody else away. But their price was 50% higher. And during the competitive range I told them, “Your price is significantly higher.” So understanding the process got them so far, but the reality was I could not justify paying 50% more for a product, because it was better, but it wasn’t twice as good. In the end, the product we got was good, it wasn’t great, but then again it was, well, two thirds the price. So think about how that plays out as a taxpayer. You’re thinking, “Yeah, I can’t make that leap.” So when you wonder about how important is the process, it’s not about simple things like, yeah, obviously, if “you’re late you’re late”, but understanding the nuts and bolts of when you get a letter from a contracting officer that says, “Your price is significantly higher,” that’s a big red flag. That’s not shave 2% off your price and keep going. It’s a big deal. And those are the kinds of things in the process that people need to understand, and that’s kind of one of the benefits of this podcast. [Paul] Ok. You touched upon a couple bigger-picture government words there – best value competition, competitive range – we’ll cover those in detail in later podcasts. [Kevin] Yes. I think we’ll have a lot of that going around as we build more of these. [Paul] Alright. So tell me about another difference between the processes. Say I’ve had the same people mowing my lawn for the past five years, and I love what they do, they show up on time, they do a great job, they don’t mow it when it’s raining outside – can I just keep giving them a contract year after year, keep renewing their contract? [Kevin] Yeah, that’s a good way to say it. Everything, every service provider, every product that we have on the government side, it’s got to be recompeted unless you get official approval through a specific process to not. So the simple example would be the guy or gal that mows your grass, your accountant, or the guy that comes to my house and sprays for bugs (he’s been doing it for fifteen years and he comes once a year). I have no idea if I’m paying ten bucks more to him than I would with somebody else. I haven’t looked, because I don’t have to look, because it’s just not worth my time. As a contracting officer, you have to look as little as every year and as often as about every five years. But think about how that plays out for you as a user – you had this great product, going back to my product I was telling you about before – you had this great product, you’ve been getting it from the same vendor for the last five years. You like it. You’ve gotten used to it. But guess what? The contract is expiring, and we have to recompete it. We have to write the requirement and make adjustments to it depending on if things have changed, and we have to recompete, and you may end up with a completely different vendor with a completely different product that makes that same solution. So think of it in terms of the stuff you have in your house. My printer – if my printer keeps working, I’m going to keep it, right? But if the service provider who comes out and fixes and does the adjustments to my printer to make sure it works at the volume that I need, I have to hire a new guy every five years. It doesn’t matter if I’m happy with that guy, I still have to compete it every five years. [Paul] That sounds incredibly inefficient. That sounds like a great topic for another podcast as well. The reasons why the government does go about making you recompete every five years or more often than that. [Kevin] Correct. And it’s a great topic for later, I’ll give you one little tidbit – competition is supposed to be inefficient. And if you think about it, it’s very efficient to just give it to the same company over and over and over again. But, if you want to be a government contractor, that system doesn’t really serve you, does it? That’s a great topic for later. [Paul] So let’s sum up what we talked about today. The government, commercial companies, and even you yourself personally buy some of the exact same products. We talked about some of the similarities and differences between how you buy and how the government buys. The end goal is very similar – you’re trying to get something that meets your requirements and gives you the best possible performance for your buck. Kevin also talked about the 80/20 rule, where when you buy for yourself, 80% is the relationship with the sellers and maybe 20% is the process that you go through to buy it. When you’re the government buyer, that’s flipped and it’s more 80% process and 20% relationship. [Paul] We hope the discussion today helped you understand a little bit more about why the government goes about doing what they’re doing. If you have topic suggestions, feel free to send us a note at firstname.lastname@example.org or email@example.com or enter your comments directly into the site www.contractingofficerpodcast.com. Thanks a lot, and we’ll see you soon.
One often-overlooked difference between the federal market and the commercial market is that federal market sales are won more by process than by relationships. Contracting Officers (COs) cannot buy based on relationships alone. Relationships matter (see FAR Parts 3 and 9), but relationships are usually not the most important factor. The relationship is 20% of the decision. The other 80% is the competitive process.
Compare this to the commercial market. Here the ratio is reversed. Our relationship with a company is often 80%, or more, of our decision to buy from them. The other factors such as price and past performance do matter, but not nearly as much as our relationship with the seller. How did you selected your doctor, your homebuilder, your banker, your car dealer, your airline, your computer, your grocery store? Was the decision to buy from a particular company driven by relationships with friends, customers, or because you bought from them before? I bet so.
Understanding this Relationship-to-Process ratio in the government market is key to winning. The relationship you build with an agency, a program manager, or even a contracting officer will only get you so far (about 20%). You win in the other 80% (the competitive process). Even on existing contracts, regardless of how good the incumbent’s relationship is with the customer, the CO must eventually re-compete it.
Both relationships and process matter. Just be sure to get your ratio correct. You will win more often by aligning your time and resource around 80% process and 20% relationships.
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