Appendix A of the DoD Performance Based Logistics (PBL) Guidebook provides defense acquisition workforce members a concise laydown of the key tenets of successful PBL product support arrangements. Among these primary characteristics intended to drive optimal outcomes, tenet #3 is to “provide significant incentives to the support provider that are tied to the achievement of outcomes (for aspects of performance that are within their control).”

The PBL Guidebook goes on to state that “an incentive is anything that encourages or motivates somebody to do something. With respect to PBL arrangements, it is any term or condition that encourages the desired product support integrator and/or provider behavior to deliver the relevant Warfighter outcome (for aspects of performance that are within their control). The incentive may be related to contract type, contract length, or incentive fees (or penalties). A FFP contract provides the strongest incentive for the provider to control costs. However, FFP contracts do not share these savings with the Government, and without additional mechanisms (e.g., Contract Data Requirements Lists (CDRLs)), they do not provide the information needed by the Government to understand actual costs for negotiations on future PBL contracts. Another powerful incentive is the ability to receive extensions to the duration of the contract (award term) with good performance. This provides stability to the provider’s order book and adds shareholder value. Incentives that focus on profit may not be applicable for public facilities, but increased percentage of available workload, promotions, bonuses, and spot awards are all possible incentives along with the desire to positively impact Warfighter outcomes. Whatever form the incentive takes, it should be sufficient to ensure the desired behavior and outcome over a range of conditions.”

The principles outlined here for the use of “significant incentives” or incentivizing performance in general is a subject that we expanded on in an ACQuipedia article deployed earlier this year entitled “Incentives - Motivating Achievement of Desired Product Support Outcomes.” Clearly this topic is of interest to the defense acquisition workforce, as the article has seen over 2,000 page views in its first ten months since publication.

Speaking of incentives, I recently observed an interesting non-DoD idea to motivate desired behaviors. This "win-win" approach illustrates use of positive incentives designed to facilitate desired outcomes on the part of two parties who might otherwise risk being forced into a less than satisfying win-lose outcome. For those who may have traveled recently and participate in an unnamed lodging chain’s rewards program, you may have been offered the option of foregoing housekeeping services for one or more days during your stay in return for earning reward points for each day you do not receive those services.

Why is this intriguing? The customer has the ability to chose whether to participate -- and for how long. Both parties have the option to opt out. There is no undue pressure, or sense something they once provided has been lost. The hotel chain seeks to incentivize guests to help them reduce their labor and utility costs. The guest (only if they choose to accept the opportunity) assumes responsibility for reusing their towels, not having their rooms cleaned for one or more days. This means the hotel does not have to have housekeepers make beds, change sheets, vacuum the floors, or take the trash out. Either the guest takes care of these things -- or these tasks are simply not done. The responsibility, the decision, and any potential inconvenience is shifted to the guest. The guest in turn is rewarded for each day they opt not to avail themselves of housekeeping services.

The hotel benefits by reducing their costs and housekeeping requirements. The guest benefits (if they choose to accept it) by earning points that can be redeemed for future rewards. Akin to self-service checkout aisles in a grocery store, pumping your own gasoline, or making a withdrawal from an ATM machine, the onus is shifted to the customer to do for themselves what the store, gasoline station, bank, or in this case, hotel, once did for them – while retaining a full service option if they so desire.

Interestingly enough, rather than live in a 'pigsty', the guest may actually be motivated to take care of these tasks as if they were at home (illustrating “ if you wouldn’t do something like leaving trash or towels on the floor at home, why would you do it on travel?). This provides an interesting counterpoint to the old expression most frequently attributed to Tom Peters and Air Force General Wilbur “Bill” Creech) that “nobody ever washes a rental car”. Desired behaviors are incentivized. Both parties are encouraged to work together. Both parties have the potential to benefit. Both parties have a stake in the transaction. Both parties take ownership and responsibility. Both parties have the ability to choose to participate. Both parties seek a positive outcome.

Flip side would be the win-lose model, where instead of a positive incentive or a reward (e.g., carrots), the hotel leverages negative incentives (e.g., sticks) such as imposing a “housekeeping fee” – in essence charging guests an additional fee to clean their room (for some reason, airline baggage fees come to mind). While his scenario might facilitate desired behaviors, the penalty approach also risks transforming what had been a win-win approach into win-lose arrangement. Longer-term, the provider (hotel) risks their customer viewing the transaction (and the organization itself) in a negative light, not to mention potential for decreased customer satisfaction, adverse impact on past performance assessment, and gradual erosion of their customer base.

What do you think? Which approach delivers better results? Which is more effective? Achieves desired outcomes? Delivers enhanced performance? Reduced costs? Satisfied customers? Satisfied providers? Potential for repeat customers? Long-term relationships? Positive feedback? Are there potential unintended consequences or second and third order effects? Are there third parties (such as the housekeeping staff) affected by such incentives?

And just as importantly, are there lessons here that could be applied to performance-based DoD product support arrangements?  What conclusions could we in the life cycle logistics and defense product support arena draw from this simple, yet potentially powerful illustration of incentives in action?