Incentives

One of the central challenges faced by the R-TOC program is the development of incentives. A wide range of organizations involved in the development, production, use, and support of the system must become engaged in identifying opportunities to improve readiness or reduce logistics cycle time. Yet, normal DoD budget, requirements, and contracting practices may not provide strong incentives to program managers, contractors, users, or logistics support providers to develop ownership cost reduction measures.

It is widely recognized that the contractors may be a particularly fertile source of initiatives to improve readiness and reduce support costs and cycle time. But traditional cost-based contracts provide little if any incentive for a contractor to identify and propose cost savings measures. The R-TOC program has focused a great deal of attention on incentives. In particular, the R-TOC program is examining ways to maintain incentives for ownership cost reductions after a contractor logistics support contract has been awarded.

At the 4th Quarterly R-TOC Forum (held in November 2000), R-TOC Pilot Programs shared their experiences with incentives and discussed lessons learned that may be more widely applicable. Incentives discussed included award term contracts, the threat of recompetition, and a variety of measures to share cost savings.

DoD has issued an Incentives Guide, which provides policy guidance on the use of incentives, discusses why they are of interest to DoD, and describes various types of incentives. Much of the Guide is directly relevant to the R-TOC program. The Guide states that:

Suppliers should be rewarded for adopting business processes and principles designed to reduce costs and cycle time while maintaining schedule, achieving performance expectations, and maximizing efficiency. DoD business strategies should focus on the overarching business considerations related to each acquisition strategy and address the following objectives:

• Use incentives tailored to the specific business case to achieve maximum benefit for both parties
• Assess the most critical issues related to specific acquisitions and design incentives to ensure optimal results
• Design strategies to reflect an understanding of the business case from industry's perspective. Profit, earnings per share, cash flow, and return on investment are important industry considerations in entering into business relationships
• Recognize and reward contractors that strategically focus on efficient and effective management practices, thereby reducing unneeded capacity and maximizing overall value to the customer (e.g., lean industry practices and best practices should be recognized and rewarded ä
• Recognize that a requirement's structure drives business solutions. Match the essential program objectives and potential incentive arrangements early on, and communicate objectives to industry
• Agree on incentives and remedies to ensure successful business relationshipsä