The Commoditization of Human Capital

The Department of Defense prides itself on having the best military members in the history of the world. It’s commonly said that our people in uniform today are so good, we could “beat them with ours,” then trade equipment with the enemy and “beat them with theirs.” Paradoxically, while DoD regales the quality of its uniformed workforce, that same department is aggressively working to “dumb down” its contracted workforce, actively driving the best and brightest away. A fairly recent trend by the Department of Defense (DoD) is something I call the commoditization of human capital. My assertion is that this phenomenon is caused by a misapplication of certain acquisition procedures within the US government. This is a peculiarly American malady caused by peculiarly American acquisition regulations—none of our international friends suffer from it. If you are a warfighter, you need to understand this because it has probably already affected the quality of your support. "With one hand, at the highest levels of government, politicians decry the reduction in middle class income as an artifact of business greed, while with the other hand that same government inappropriately uses LPTA procurement methods to actively and precipitously drive its contracted workforce compensation downward, oftentimes in increments of 30% or more, thereby driving our most talented people away." To understand this phenomenon, it’s important to begin with a primer on something that may seem rather arcane, but is important to understand: the two methods the government uses of evaluating proposals within the “Best Value” section of the Federal Acquisition Regulations. One is called “Tradeoff Process,”[i] and the other is referred to as “Low Price Technically Acceptable” (LPTA).[ii] I make this distinction because people frequently mischaracterize “Tradeoff Process” as “best value,” when in fact both the “tradeoff” and “LPTA” methods are contained within the “best value” provisions of the FAR, because both are considered methods of determining best value to the government for a given acquisition. And there are legitimate uses for each. The tradeoff process is appropriate when the government wants to establish a trade-space of performance, when it may be acceptable to pay more for improved quality or an extra bit of capability. Tradeoff is also appropriate when it’s not possible to precisely define the minimum standard of performance (because it’s “fuzzy”), or when requirements will likely evolve over time hence the minimum standard of performance is not static. Tradeoff allows the government to say, “we will know what we want when we see it.” In contrast, Low Price Technically Acceptable (LPTA) is appropriate when the government explicitly does NOT want to pay more for performance or quality beyond a well-defined minimum standard. LPTA was created as a method to procure commodities where the minimum standard for performance is fixed and easily defined—things like toilet paper, raw materials, or even mass-produced desktop computers, but not complex technology systems. With LPTA you will simply ensure competing offers meet the minimum standard of performance, and then you will simply select the cheapest among them. Pure and simple. However, over the past few years LPTA has increasingly been used in inappropriate ways for more and more complex programs. This misapplication of the LPTA method, including expansion to the repeated acquisition of some of DoD’s most critical contracted workforces, started off rather innocuously by using the LPTA method to acquire low-end labor services like grass-cutting and janitorial services on federal installations. Then it expanded to more critical missions like base security. And then, like so many things in government, once a line is crossed, it’s difficult to establish limits, so procurement of the Low Priced Technically Acceptable “back” evolved into procurement of the Low Priced Technically Acceptable “brain.” This had the effect of transforming the acquisition of knowledge-based services to a state where knowledge was treated like a commodity. Pretty soon LPTA was being used to acquire some of the most profound high-end knowledge-related services in government. Some examples: A multi-billion-dollar government IT contract that included the requirement to conduct cyber defense of perhaps the largest integrated network in the world, with almost a million user accounts, tens of thousands of devices, and perhaps millions of network nodes. Shockingly, the department decided to compete this contract as LPTA— a good idea only if the Chinese and Russians were using their “LPTA workforce” to attack this network. But of course they’re smarter than that, doubtless using their best and brightest to attack our LPTA networks. Some combatant commander staffs have contracted out for highly experienced operational planners to augment their workforce for some of the most important operations being conducted in the world today. The intent was to hire planners with decades more experience than the active force, thereby elevating the experience level at a much lower price than a very senior active duty force would require. Sadly, in some cases the contracting agency decided to procure “LPTA brains” for these jobs. Of course, once you begin the commoditization of knowledge, you quickly run into a commoditization of thought. Are our adversaries’ operational planners using an LPTA workforce to out-think us? Or are they developing their strategies to neutralize America using their best and brightest? A US government agency recently competed an extremely sophisticated and one-of-a-kind program where the number of people who knew how to keep the system running could be counted on two hands. Again, it was competed LPTA. The only hope to keep this thing running was to retain the existing workforce, but because it was competed LPTA, this critical program quickly became a “race to the bottom,” severely threatening the operational reliability of this critical capability. Want more examples? Just ask any defense contractor. There are hundreds. This is the grand irony—with one hand, at the highest levels of government, politicians decry the reduction in middle class income as an artifact of business greed, while with the other hand that same government inappropriately uses LPTA procurement methods to actively and precipitously drive its contracted workforce compensation downward, oftentimes in increments of 30% or more, thereby driving our most talented people away. How many readers of this journal would be able to accept a pay reduction of 30% tomorrow and still pay their mortgage? This results in an LPTA brain drain. Our best people, those who have other options they can draw on, other job opportunities they qualify for, refuse to be victim of the LPTA bludgeon. Instead, they leave LPTA programs to find work with an agency that is willing to pay them what they are worth. The folks who remain behind in LPTA fallout are frequently those who have no other alternatives. Even Frank Kendall’s Better Buying Power policy papers has acknowledged that LPTA methods are being misused and has directed that this trend be arrested. Yet it still keeps happening. Why? I believe there are two main causes: · The first is the phenomenon where an overzealous and usually fairly junior acquisition official decides he is going to “make his bones” by proclaiming he will save the government a bunch of money. There have been noted examples where LPTA was used inappropriately, later resulting in a “failure to perform” termination for the “winning” contractor. In fact, nobody wins in those cases, since there needs to be substantial negative operational impact before the contractor is terminated. In other cases, the LPTA program merely limps along on life support, sometimes augmented by additional funds from operational users needed to reduce operational impact. This causes the true cost of the LPTA decision to be hidden because the money required to repair degraded performance is usually patched together from a myriad of different accounts (usually operations and maintenance accounts of the affected users). Often, the money lost in the resulting turmoil exceeds the money the government thought it would save with the LPTA strategy. Of course, the acquisition official that made the decision never actually has to live with the consequences of their decision; it’s the supported warfighter who suffers. · The second cause was revealed to me by a government program manager as we approached final RFP for an important program. I told him “You have to know that doing this LPTA is crazy.” His response: “I have no choice. My requirements folks on the service staff cannot articulate improved capability that they are willing to pay extra for, and I’m not allowed to write requirements. Lacking the requirements I can use for a tradeoff decision, I have no choice but to do this LPTA.” That got me thinking back to my days as a Pentagon requirements officer. When we needed to describe the performance trade-space for a submarine or a satellite, what did we do? We called Electric Boat. We called Boeing. And while those companies did not define requirements, being able to tap into the best engineering workforce allowed us to map the “speed vs. cost vs. payload” curves—something we did not have the talent to do ourselves. Then we could model operational tradeoffs—something we did have the capability to do—to define the requirements. What has changed since those days? The Organizational Conflict of Interest (OCI) rules. Today if a company helps the government map out the requirements trade space for a program (knowledge program or otherwise), it’s likely that the Pentagon’s OCI zealots will proclaim that the company will not be allowed to compete for the “big prize,” to design and manufacture the system being acquired. Refusing to risk the big prize, the companies that know how map those trades often refuse to help in the requirements definition phase. So today’s requirements officer—the modern day me—is frequently left to his own devices to just figure it out, something they are untrained and ill prepared to do. Lacking trade-space requirements from the operators, the acquisition community has no choice but to default to LPTA. It may be that that the new OCI rules, which sound great in an academic context, limit the department’s ability to accurately define requirements, and therefore may be doing more harm than good. Why isn’t industry screaming to high heaven over these changes? Because the number of companies that benefit from this misapplication of LPTA is greater than the number “harmed” by it. Specifically, when LPTA is invoked, the FAR specifically prohibits the government from using lack of past performance in a particular area of work in their assessment of whether a company is technically acceptable to perform on a future contract. So if you are trying to break into a new area of work where you have absolutely no experience or capability to perform, you want that program to go LPTA. To win you have to write a compelling proposal that explains how you could do the work despite the fact you never have done similar work, and then you just have to bid the lowest price. In execution, the LPTA winning company will often fail in its attempt to “learn on the job” after contract award. The warfighter is then left to clean up the mess. Want to be an airline pilot but never actually flown an airplane? Just hire a good writer and pray the competition goes LPTA. When appeals from Frank Kendall are ineffective in stopping the misapplication of LPTA methods, I fear that nothing will. LPTA has become the crack cocaine of the acquisition community— no matter who tells them they shouldn’t do it, once they get introduced to the “LPTA drug,” they just can’t stop because competing a program on an LPTA basis takes the brain-work out of the analysis. LPTA takes the thinking out of acquisition. It allows a procurement activity to skip those vital but difficult up-front steps like defining cost/performance tradeoffs and thinking about what it is you really value in an acquisition. More provocatively, it’s simply lazy acquisition. And although the contracting officer may get his medal for making claims of savings that will evaporate over a very short period of time, nobody else wins, certainly not the warfighter. I fear nothing short of Congressional intervention, or perhaps industry simply refusing to play, will reverse this trend. Our people are our most important resource. Their brains are not commodities. It’s time we stop treating them like they are. [i] FAR Part 15.101-1

[ii] FAR Part 15.1.1-2

The Commoditization of Human Capital