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					           PERFORMANCE BASED
              CONTRACTING

                        Supply Chain Management




www.vita.virginia.gov
www.vita.virginia.gov                             1 1
     PERFORMANCE BASED CONTRACTING
PBC – First, a procurement METHOD… then a resulting TYPE of contract
How is it a procurement METHOD?
• All aspects of the procurement are geared toward the PURPOSE of the
  contract, not the HOW the contract will be performed.
   – Encourages supplier to bring new approaches at a reasonable price by
     giving suppliers latitude in determining HOW to achieve contract purpose
     and providing incentives for suppliers to achieve purpose cheaper, faster.
   – PBC looks to the supplier to best organize resources to achieve contract
     purpose.
   – Not described as a procurement method in the VPPA.
   – Requires clear, specific, objective contract requirements and measurable
     outcomes.



  www.vita.virginia.gov                                                           2
                   PBC? What is it? Why?
•   DEFINITION: Method of contracting where Customer defines the results it is
    seeking, rather than the process by which those results are attained. Also
    included are the standards against which contractor performance will be
    measured, and positive and/or negative incentives.
•   BENEFITS:
     – ® Better prices and performance;
     – ® The customer is released from having to develop detailed specifications and
         define the process;
     – ® The contractor has more flexibility on how to achieve the desired results;
     – ® Less day-to-day surveillance is required; and
     – ® Contractors are motivated to be innovative and to save money (we must
         evaluate cost vs. benefit!).
•   What’s So New About This? NOTHING, in the commercial world. They long ago
    realized they do not have the expertise to tell their suppliers how to do the
    work.).
•   The burden is on the contractor to accomplish the required results. He measures
    his own performance by developing and implementing a Quality Assurance (QA)
    plan, plus the customer measures his performance against standards established
    in the contract.


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           PERFORMANCE BASED CONTRACTING
Key attributes of PBC:
    –   Outcome oriented
    –   Clearly defined objectives
    –   Clearly defined timeframes
    –   Performance incentives
    –   Performance monitoring


PBC Objectives:
    –   Maximize performance – supplier delivers based on best practices and customer’s desired
        outcome.
    –   Maximize competition and innovation – encourage innovation using performance requirements.
    –   Minimize burdensome reporting and reduce use of contract provisions that tie supplier’s hands.
    –   Shift risk to suppliers so they are responsible for achieving contract objectives through their own
        best practices and processes.
    –   Achieve cost savings through performance requirements.




  www.vita.virginia.gov                                                                                 4
           PERFORMANCE BASED CONTRACTING
•     Elements of a PBC
     –   SOW or other document describing requirements and customer expectations in terms
         of measurable outcomes rather than by means of prescriptive methods.
     –   Measurable Performance Standards – written definition of what is considered
         acceptable performance to determine whether contract outcomes are met.
     –   Quality Control Plan (QCP) – written document describing how supplier’s
         performance will be monitored and measured against contractually established
         performance standards.
     –   Incentives –
         • Written procedures addressing how met and unmet contractual performance
             standards will be resolved, escalated, remediated and/or remunerated.
         • Incentives may be linked to price or fee adjustments.
         • Incentives can be used, where appropriate, to encourage performance that will
             exceed the established performance standards.




    www.vita.virginia.gov                                                             5
            PERFORMANCE BASED CONTRACTING
In a PBC, the contract MUST include:
•     Everything buying or covered by the contract;
•     Volume assumptions for services (particularly if there are large variable costs involved.)
•     Reliability, availability and performance (RAP) requirements, methods of dealing with
      operational issues (escalation, help desk, hot line and severity levels) and conditions of
      use or change of use conditions/restrictions.
•     Dates/deadlines where specific deliverables are due at initial switch on, ramp up, ramp
      down or upgrade of service; e.g. year end, implementation dates, legislation changes.
•     Method of delivery (paper/fax/hand, means/source or object code.)
•     Time after which deliverables must be consumed or tested and still supported
      (obsolescence limits).
•     Documentation/manual and standards.
•     Definition of what is considered a service failure and what is considered an
      “enhancement” to the service.



   www.vita.virginia.gov                                                                      6
            PERFORMANCE BASED CONTRACTING
Critical Success Factors in designing a PBC:
•     Define agency baseline and what level of performance is expected.
•     Include provisions for flexibility and incentives
•     Craft a performance based contract or SOW that:
     –    Includes mechanisms for measurement, reporting, monitoring and supplier feedback
     –    Defines a system for revisions and reconciling deviations in expected performance
     –    Considers a transition period – use “hold harmless” clause during period.
     –    Monitors performance with regular reporting requirements
     –    Can be adjusted when needed.
•     Identify factors that might impact performance
•     Devise corrective action plan for performance deviations
•     Benchmark and compare.
•     Revise performance targets to continue to achieve progress.
•     Provide comparative performance data for suppliers – create a “race to the top” culture.
•     Communicate and reward success.


    www.vita.virginia.gov                                                                     7
              PERFORMANCE BASED CONTRACTING
Make SMART Performance Measures/Incentives Part of the Contract:
•    Specific
•    Measurable
•    Accountable
•    Results oriented
•    Time-bound


Before Contract: - AQL
Customer must determine acceptable quality level (AQL) so that the supplier can be
     measured and evaluated against this pre-established level during the contract.
AQL establishes minimum allowable variation or error rate from the standard.
AQL must be reasonable and determinable.
*During negotiations, customer may allow supplier opportunity to propose different target levels
     of standards of service along with the appropriate price adjustment.



     www.vita.virginia.gov                                                                  8
           PERFORMANCE BASED CONTRACTING
PBC Performance Measures Should Measure What’s Important:


•    TCO – Total Cost of Ownership
•    Quality of Goods/Services
•    Proposed technical performance
•    Financial stability
•    Cost of Training
•    Qualifications of Individuals employed/utilized by supplier
•    Risk Assessment
•    Availability and cost of technical support
•    Cost/Price


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               Performance Incentives
• Cost-based - Relate profit/fee to results achieved by the
  supplier in relation to identified cost-based targets.
• Award fee - Allows suppliers to earn a portion (if not all) of an
  award fee pool established at start of an evaluation period.
• Share-in-savings - Supplier pays for developing an end item
  and is compensated from the savings it generates. Established
  baseline of costs is extremely important.
• Share-in-revenue - Generates additional revenue
  enhancements; compensation based on sharing formula.
• Balanced scorecard -Used when performance is less tangible,
  i.e., quality of lead personnel or communication and resolution
  of issues.
• Non-performance Incentives - Specified procedures for
  reductions in payment when services are not performed or do
  not meet contract requirements.


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                   Payment Strategies
A payment strategy is not limited to incentive or award
  fees, but may include payments tied to performance
  and acceptance. For instance, a payment incentive
  schedule may include 100% payment for on-time
  deliveries that are validated to exceed or conform to
  performance requirements; while delinquent
  deliveries or those with diminished performance may
  have payment reductions based on calculated
  increments or percentages tied to % of service levels
  not being met.


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                      Non-$ Incentives
Non-Monetary
• Revised schedule
• Reduced oversight
• Positive performance evaluation
• Automatic extension of contract term or option exercise
• More frequent payments
• Lengthened contract term (award term contracting) or purchase
  of extra items (award purchase)
• Publish article(s) in agency newsletter or speak at agency
  seminars
• Letters of appreciation to individual employees may translate to
  bonuses
• Use trade space for licensing, access to agency officials, etc.


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                          PBCs and SLAs
Service level agreements (SLAs) are contracts which specify in
  measurable terms the services to be provided, the standards to
  be attained in the execution of those services and the
  consequences that occur in the event the standards are not met.

SLAs often include:
• Percent of time services should be available
• Number of users to be supported
• Performance benchmarks
• Schedule for advanced notification of system changes, upgrades,
  downtime
• Response time
• Usage statistics



  www.vita.virginia.gov                                      13
              Service Level Agreements
In developing and negotiating a successful SLA, the following should be considered
   and included:
• Definition of the agency’s business goals, requirements and scope of services
   being procured.
• A detailed service description, duration of services, installation timetable,
   payment terms, ts and cs and legal issues (i.e. warranties, indemnities and
   limitations of liability.)
• A repeatable process, with solid and accurate metrics’ capture and analysis, to
   measure the supplier’s progress and monitor performance.
• A documented reporting process that includes type, amount, format and a
   schedule of information to be reported by the service provider and procedures
   for how customer will oversee the agreement and ensure performance
   measures are met.
• Agreed upon procedures for non-performance in case of unforeseen
   circumstances.
• Detailed service expectations, performance levels, positive and negative
   incentive structure, escalation procedures and legal ramifications; i.e., breach
   and default.
• An executed contract that binds the agency and the service provider; the SLA
   will be a part of the contract.


  www.vita.virginia.gov                                                        14
       EXAMPLE – PBC- Software Development
Desired Outcomes          Required Service        Performance Standard            Monitoring Method         Incentives/Disincentives
                                                                                                            for meeting/not meeting
                                                                                                            Performance Standards
What do we want to        What task must          What should the                 How will we               What carrot/stick will
accomplish with this      be accomplished         standards for                   determine that            best reward good
contract?                 to give desired         completeness,                   success has been          performance or punish
                          result?                 reliability, accuracy,          achieved?                 poor performance?
                                                  timelines, quality
                                                  and/or cost be?
Enterprise Architecture   All functional          All architectural               Review test               Full payment for 100%
standards will be met,    requirements shall be   requirements shall be met.      results/analyses to       compliance. Payment less
along with functional     met; software           Functional requirements         ensure required           than 100% may be made for
requirements.             delivered shall         shall be prioritized to allow   functionality provided.   less than full compliance if
                          comply with             for not more than 1%            Obtain and analyze        less than full functionality is
                          enterprise              deviation for each              user feedback.            accepted.
                          architecture            requirement.
                          standards including
                          security
User guides and           Documentation shall     95% of documentation            Review documentation      For each % > 95, supplier shall
documentation are         meet agency             provided meets the stated       with IV&V to ensure       receive an extension of the
accurate, complete        requirements for        standards.                      functions and             software support agreement
                          accuracy,                                               operations properly       for an additional 3 month
                          completeness and                                        documented.               period.
                          ease of use




     www.vita.virginia.gov                                                                                                           15
                                       Example – cont’d
Desired Outcomes             Required Service         Performance Standard            Monitoring Method         Incentives/Disincentives
                                                                                                                for meeting/not meeting
                                                                                                                Performance Standards

Interfaces with all system   Software full            100% compliance required        Review system admin.      Full payment made for 100%
components and full          compatible with          for customer satisfaction,      Logs, noting service      compliance. Additional fees
functional to user.          existing LAN and         performance and utility.        interruptions, conduct    may be awarded if supplier
                             software suite.                                          IV&V, tests using         successfully reengineers
                                                                                      commercial                interfaces and improves
                                                                                      performance tests.        baseline performance.
Software can perform         Delivery dates in        Stated delivery date shall be   100% inspection           For each week ahead of
requisite functions,         contract are met or      met unless new completion                                 schedule the documentation is
delivered in accordance      exceeded.                date agreed to.                                           delivered, contractor shall
with the stated schedule,                                                                                       receive additional fee of .5%.
including shorter-term                                                                                          No additional fee paid for non-
milestones.                                                                                                     conforming deliverables.

All users shall receive      Data in existing files   95% of data transferred to      Review user               +/- .5% of total monthly price
training appropriate for     shall be transferred     new system suffers no           complaints, trouble       for each variance of +/- .5%
their intended use of the    to the new system        conversion errors and is        tracking, noting errors   variance from standard.
new software.                with minimal loss of     usable when new systems         due to data
                             productivity and data.   are made available.             conversion, improper
                                                                                      software function,
                                                                                      programming
                                                                                      problems.




     www.vita.virginia.gov                                                                                                              16

				
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Description: Supplier Performance Review Software document sample