Complex Contracting: Why Success is So Hard To Come By

In Complex Contracting. Government Purchasing in the Wake of the US Coast Guard’s Deepwater Program, Brown, Potoski, and Van Slyke (hereafter BPV) offer researchers and practitioners valuable advice for enhancing the likelihood of success for designing and managing complex contracts. Their prescription starts with the basic differences between simple and complex products. Simple products are characterized by certainty. Sellers know about the cost of production and buyers can determine the value of the purchase. When parties are dissatisfied with the deal, either before hand or after the agreement is signed, they can move on and seek new partners. The invisible hand guides the parties to a win–win outcome. But in the real world products are often complex. Buyers and sellers lack complete information about the product or how the exchange will occur. One or both parties must make specialized investments. Every part of the purchasing process is complicated from finding the right partner, to crafting the contract terms, to maintaining partner communications. In a world of complex contracting, the market does not function in the textbook ways expected. As a result, complex contracts are plagued by an incentive structure that guides self-interested parties to noncooperative behavior. The parties must find a way to alter this fragile state to achieve a win–win outcome. This is the essence of the complex contracting dilemma.

Many government purchases involve complex exchanges. Consequently, public managers at all levels of government increasingly rely on complex contracts to address an array of policy problems; upgrading outdated infrastructure, improving a flawed welfare system and privatizing parking meters are just a few examples that have received attention in books, journal articles and in the press (e.g. Goldsmith and Kettl 2009). In such cases policymakers often look to the private sector, the perceived knight in shining armor, equipped to innovate, less hampered by bureaucratic rules and often ready with cash. The projects that underlie complex contracts are often novel and challenging, and the stakes are high for politicians, practitioners and the citizenry. No doubt the private sector looks like the best solution at the time, especially when government has failed to solve the “wicked problems” on its own. Yet once these projects get off the ground those in the trenches find out that promises are far easier to make than to fulfill. If the novelty of the project and dynamic environment were not challenging enough, the sheer scope of the work usually demands the cooperation of different partner types, many with competing interests. Government becomes one player of many in a web of business and nonprofit contractors and subcontractors. Political maneuvering becomes the norm and conflict is difficult to avoid. Even when partner interests align, there is the very difficult task of effectively coordinating interdependent tasks. The know-how necessary to get the job done is typically tacit, not easy to communicate and dispersed among multiple parties.

The scenario just described underscores the importance of understanding the nature of complex exchanges and the strategies that may be key to achieving performance expectations. The topic is just as important to researchers as it is to government decision makers and to public managers committed to making these projects successful. Complex contracts connect public, private and nonprofit sectors in unprecedented ways and thus stretch the boundaries of governance; their success or failure will undoubtedly affect the wider debate on which tools of governance should or should not be deployed to pursue public purposes.

BPV use the US Coast Guard’s experiences with an acquisition program called Deepwater as a backdrop to explain the challenges of complex contracting. In short, Deepwater comprised a $24 billion dollar commitment and a unique plan involving a lead systems integrator—a sort of super general contractor. The lead systems integrator played a large part in deciding what the Coast Guard needed. It also designed the fleet and managed most of the contracting details, thereby assuming much of the traditional supervisory role of government in contracting. But this innovative approach did not earn accolades from Congress or the public. Following a storm of negative publicity the Coast Guard announced its intention to end the contract after 5 years into the partnership. To explain what went wrong with Deepwater and why most complex contracts incentivize noncooperative behavior, BPV employ insights from transaction cost economics, agency theory, relational contracting and game theory. The authors combine theory with rich contextual data assembled from the Deepwater experience to propose the use of governance rules and relational strategies for transforming perfunctory behavior into consummate behavior to increase the chances of achieving win–win outcomes. An extensive reference section underscores the authors’ reliance on first-hand accounts for their narrative and on seminal works for their theoretical building blocks. Moving back and forth between the Deepwater narrative and theory, the authors do a superb job at bringing clarity to a conceptually tenuous topic.

The authors tell an interesting story with Deepwater and in the process remind public administration and management researchers of the value of a narrative for theory building. Much of the existing research on contracting is quantitative, which cannot explain the dynamics of partner expectations and how misunderstandings can lead to uncooperative behavior and contract failure. In tracing the contract relationship as it unfolded in Deepwater, BPV offer affirmative evidence on the crucial role of building and sustaining cooperation in complex contracting. Beneath the Deepwater story, readers also get a real sense of how institutional dysfunction, relationships and politics can combine to affect contracting outcomes. The authors’ approach is uncommon in contracting research yet much needed. The application also moves beyond the traditional concerns about accountability in outsourcing, focusing more on the functioning of contracts and how contract design can facilitate or hinder adaptation and coordination. Relying more on qualitative information than data analysis, the book stops short of developing measurable constructs for testing. Still, BPV offer an excellent foundation of a theory for predicting outcomes (successes and failures) in high value, complex contracting, implicitly inviting more research on outcomes that result from different contract structures. Comprised of 268 pages, the text is accessible to graduate students, yet also meaningful for researchers and advisable for practitioners and policymakers. BPV are a source we can trust for contracting advice as the trio is already known and respected for their contracting research (e.g. Brown and Potoski 2003, 2004, 2006; Brown, Potoski, and Van Slyke 2006; Van Slyke 2007).

The Deepwater story will likely remind readers of other well-publicized complex contracts that did not live up to their initial promise and hopefully spark discussion over how we might improve outcomes in future endeavors. For example, BPV note the city of Boston’s 20-year effort to rebuild its transportation infrastructure that ended far behind schedule, nearly $20 billion over budget and collapsing tunnel walls. As another example, policymakers in Indiana had a grand plan to privatize the welfare system with an IBM-led coalition. The $1.3 billion dollar “Modernization Project” was abandoned in 2009 only three years into the 10-year contract. Four years later in 2014, the parties remain entangled in litigation. The words of Judge David Dryer who presided over the Indiana Superior Court proceedings offer a compelling reason to consider the advice BPV offer in their book: “The story represents a ‘perfect storm’ of misguided government policy and overzealous corporate ambition.” “Overall, both parties are to blame and Indiana’s taxpayers are left the apparent losers” (Dryer 2012).

Finally, Deepwater and similar experiences raise a host of critical questions for new governance. As BPV see it, cooperation failures are mainly rooted in diverging interests, a problem that can be reconciled with governance rules that fashion the right incentives. Where governance rules fall short partners can find opportunities to communicate and to show a cooperative spirit, thus rebuilding the relationship over the course of the contract. However, complex contracts often fail for another reason- coordination problems. Specifically, decision makers and leaders often underestimate what it takes to coordinate reciprocal, sequential, and pooled tasks with multiple and differentially-skilled work groups (e.g. Thompson 1967). This begs the question: What skill is more important in achieving contracting success, the ability to secure cooperation or to manage the coordination of unstructured and interdependent tasks? Another set of questions is prompted by transaction cost economics (TCE). Specifically, applying TCE reasoning to many complex contracts suggests some projects were not good candidates for privatization or outsourcing in the first place: The required specialized investments layered an already fragile relationship with significant risks; the degree of uncertainty was too high and the need for task coordination and control too great. In short, the deck was stacked for failure. Still, BPV propose that lose–lose situations can be transformed into win–win outcomes as long as the parties understand each other and the right governance rules and relationship strategies are in place. But if these projects should not have been outsourced in the first place can they really be saved by all the best intentions and cooperative mutual adjustment? Can cooperation right a wrong governance choice? And, should we really expect cooperation among partners when their interests are not aligned? Isn’t such an expectation actually contrary to what we appreciate and value in markets? BPV’s book is groundwork for rich classroom discussion on these questions and for further research exploration on a timely and critical governance topic.

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