2. Leveraging Knowledge to Craft and Administer More Effective Contracts in a 21st Century Acquisition Environment 2 Breakout Session #D19 Name Denise A. D. Bedford Date: July 31, 2012 Time: 11:15 am – 12:30 pm

3. Legacy and Emerging Challenges for Contract Management 3 Crafting the best contract and how best to manage it is a well developed area of expertise designed to meet the needs of both buyer and seller in an advanced industrial economy. As we enter the 21 st century, we know that business and how we contract for business are changing. We face new challenges while legacy challenges remain. This presentation will consider how strategies and methods from the field of knowledge sciences might help both buyers and sellers to turn these challenges into opportunities.

4. Goal of Knowledge Management 4 Knowledge sciences is an enabling discipline. It is relevant to all business functions, and is first and foremost aligned with a business goal. We always start a knowledge management effort by asking what is the problem you need us to support? The goal of any knowledge management effort – regardless of size, budget, business function, sector, etc. is to help the organization act… “ as intelligently as possible and realise[s] the best value from its knowledge assets, i.e. to create a learning organisation that is capable of measuring, storing and capitalising on the expertise of employees to create an organisation that is more than the sum of its parts” Bollinger and Smith, Managing organizational knowledge as a strategic asset, Journal of Knowledge Management Vol. 5, No. 1, p 8-19

5. Presentation Focus 5 How might we use knowledge management strategies and methods to turn legacy and new contract challenges into opportunities? How can we create a contract environment in which the knowledge of both buyers and sellers is leveraged, and new opportunities for contract design and oversight emerge? Before we talk about contracting challenges, I’d like to “level set” our understanding of what we mean by knowledge management.

6. Knowledge Management – Goals and Focus

7. Third Generation Knowledge Management 7 Many of you will probably remember all of the hype about KM that arose back in the late 1990s – when KM gained notoreity with the popularization of technology and the realization of the importance of information management. This is what we call 1 st generation KM. From about 2002-2008, KM moved into 2 nd generation. 2 nd generation KM shifted focus to people and interactions – the true source of knowledge and the processes that actually generate, validate and mobilize knowledge. We’re now in 3 rd generation KM. This includes all of 1 st and 2 nd generation, but it is an exponential leap into semantics, knowledge representation, an entirely new knowledge architecture and technologies. In 3 rd generation KM, we find some elements of earlier AI theories and ideas. Today’s Knowledge Sciences – a formal discipline that has grown up around the practice of KM – includes 10 facets.

8. 10 Facets of Knowledge Management

9. Implications for Contracting 9 All three generations of KM have value to contracting. Our task is to align the methods with the business challenges. What challenges do we find in contracting that might be supported or turned into opportunities by using knowledge management methods? We see two kinds of challenges – – legacy which are historical and inherent in our current contracting environment – New challenges resulting from major trends

10. Legacy Challenges

11. Legacy Challenges – Contract Design and Response 11 Requirements analysis and validation – checking, validation, redundancy management Analyzing requests in terms of requirements and intent Discovery and assembly of existing and new knowledge to formulate proposal – reduction of labor intensive preparation work to reduce long turnaround times Interpretation challenges - lack of standard language used in proposals, contracts and service agreements Lack of smart systems to help manage proposal creation Lack of systems support for pricing compliance and validation Contract development and exemptions tracking

12. Legacy Challenges – Contract Monitoring 12 Reducing and mitigating risk in existing contracts Labor intensive manual methods for contract monitoring and tracking Labor intensive contract reporting and lack of use of contract reports Contract scope creep management Management of individual contract components Tracking and validating need for product and service customizations or specializations Leveraging external knowledge to validate contract amendments Automated tracking and notification of contract milestones Automated detection and alerts regarding contract risks

13. Legacy Challenges – Contract Work 13 Disconnected contract work and client relationship management Heavy management involvement and overhead Fragmentation of logical teams across seller/buyers Lack of agility to support strategic sourcing – based on product or service type and client base Lack of incentive to support seller training and learning Alignment of contract documentation and operational procedures Capture and documentation of contract decisions

14. Legacy Challenges – Contract Work Transfer and exchange of knowledge gained while performing contract work Capture and sustainability of relational capital – knowing who your sellers people are and what they know Configurable operational and contract workflows Engaging the seller in business goals and strategies – at strategic and tactical levels Engaging seller staff directly in successes and failures

15. New Challenges

16. Paradigm Shift Impacting the Work Environment 16 At the same time we’re trying to address the legacy challenges, four trends are redefining the context in which we contract and work 1.The shift from an industrial to a knowledge economy 2.The rapid development of semantic and knowledge technologies – covering both Web 2.0 andWeb 3.0 3.The virtualization of work and the working environment 4.Shift from application-based, information-centric architectures and technologies to open and knowledge-centric architectures and technologies. These trends amount to a paradigm shift for contract management and any form of contracted work.

17. Trend 1: Shift from Industrial to Knowledge Economy 17 For the purpose of this research, we adopt the following definition of the knowledge economy (United Kingdom Dept. of Trade and Industry 1998): “A knowledge economy is one in which knowledge is a key resource. …[economy] in which the generation and the exploitation of knowledge has come to play the predominate part in the creation of wealth. It is about…. the more effective use and exploitation of all types of knowledge in all manner of economic activity.” At the outset we should acknowledge that most of the framework, processes and rules for contracting today derive from an industrial economy model and context

18. Implications for Contracting 18 The shift from an industrial to a knowledge economy positions intellectual capital as the central factor of economic growth and production. In a knowledge economy: – knowledge powers transactions, production and consumption. – there are heightened incentives to create, share, mobilize and preserve all forms of knowledge – The primary agents in a knowledge economy are the individuals who possess the intellectual capital – Open knowledge markets support knowledge transactions and allow knowledge producers and consumers to establish the value of knowledge based on a particular context. It is the individual person that engages in knowledge exchanges and transactions, learns, acquires new knowledge and validates or invalidates knowledge.

19. Industrial to Knowledge Economy 19 We must adapt contracts if they are going to continue to serve as business agreements. Right now they are designed to support industrial era products and services. Do not address intellectual capital, dynamic working environments, need for knowledge capture and transfer, continuous learning and new cultures which do not reinforce hierarchies. Some parties will not want to control who knows what, who creates what, etc. -- in the knowledge economy. Control may inhibit innovation. In contrast, contract design and conditions are targeted to FTE’s, to predefined timelines, and to known outputs – known assets, definable prices, and delivery dates. This changes with intellectual capital and knowledge work. Intellectual assets are multi-dimensional, and value is contextual and situational.

20. Implications for Contracting 20 We are accustomed to judging contract performance against established norms and expectations not against dynamic environments where people are learning and creating new each day. Contracts often have long timelines. Is a long-term contract reasonable for the buyer or for the seller? What does a seller sacrifice in the knowledge economy by committing to an organization for a specified period of time? How stable is the buyer? While the timelines and overall compensation structures in new contract mechanisms may vary, the essential design is still grounded in predictable and known results. Does the buyer have an interest in, or obligation to, build intellectual capital on the seller’s side?

21. Implications for Contracting 21 Contracts are mini-projects – contract management begins when the contract is signed and ends when the intellectual property is disposed of, when we capture lessons learned, and when there is a “formal” close out of the project. Is formally declared intellectual property the only thing we are concerned about? How must we adapt contracting to apply to knowledge work? Is there a beginning and ending date? Contract design and award mechanisms are heavily grounded in competition rather than collaboration. Work environment is increasingly collaborative and network based. The new contract designs which qualify vendors to then bid on task orders is entirely well aligned with this challenge. However, there is little opportunity for collaboration and innovation – time pressures and working constraints.

22. Implications for Contracting 22 All sellers and buyers need to learn continuously. Knowledge is growing continuously. What happens when the seller learns faster than the buyer? What does contract management mean in that case? Challenge is projecting out services and products in any length of time because of the fact that everyone is continuously advancing. Increasingly important to have technical representatives fully integrated into the work. Does it makes sense to have a technical representative who monitors the contract from time to time. If we want the best products and services we will need to have built in opportunities to update what we expect contracts to deliver. Contracts need to be agile. Perhaps we have more open ended contracts with periodic updates

23. Trend 2: Virtualization of Work and Working Environment 23 People will work where and when they want to work. Workers will do their work in an environment that is designed for them. Workers will have personalized agents that find information for them regardless of where it lives. The new virtual environment supports dynamic people-to-people connections. It leverages and builds upon the two previous trends to support collaboration and facilitate the development of knowledge-centric cultures. Much of this new work environment exists beyond any one institution’s information management or information technology infrastructure. In this new virtual working environment, knowledge must flow beyond the application in which it was originally created or stored. Furthermore, knowledge is made accessible to other environments and applications.

24. Implications for Contracting We can no longer wait to capture lessons learned at the end of a contract – they must be integrated into operations and embedded in knowledge systems Does a formal closeout have value to knowledge work? Is a variance from contract specifications a value or a cost? Communications are now captured electronically – may be the case that there are few in person communications. Follow-up may become much easier when it is with people, but follow-up with systems and machines may be a bit more complex

25. Implications for Contracting 25 Sharing and working in teams is the norm. The social aspect of work and learning has as much value to younger workers as financial rewards. buyers may need to think about other kinds of rewards if they want to attract the best and the brightest. Working in open spaces where meetings and communications flow when and where they need to Move into the cloud will appear simple compared to the situations we encounter when we move work into composable and user defined spaces Communications may be remote and virtual – makes communicating easier but also potentially more informal. Open communications are the norm – holding secrets, hoarding knowledge less likely.

26. Trend 3: Operationalization of Semantic and Knowledge Technologies 26 The rapid development of semantic and knowledge technologies –including those that power Web 2.0 and Web 3.0 – is the second trend. Web 2.0 focuses on interaction, the engagement of people and communities. Web 2.0 provides the context in which knowledge transactions occur.Web 2.0 supports unobtrusive capture of semi-tacit knowledge or knowledge that is un-reviewed, serendipitous and closer to raw. The new collaborative and social environments make it much easier to discover and capture all forms of knowledge at an earlier point in the knowledge life cycle Semantic technologies have the potential to expand the scale and scope of knowledge transactions. Semantic and knowledge technologies enable us to capture and leverage more knowledge at a faster pace and to leverage the capacity of machine-based agents. Semantic and knowledge technologies provide the tools and opportunity to encode human knowledge so that it is available to a broader population.

27. Implications for Contracting 27 Knowledge becomes a complex object. Skill sets that support this type of work are just now emerging – contracting for these services is high risk. What contract designs are best suited to managing risk on the part of both the buyer and the seller. High risk to hand off the support for smarter technologies entirely to sellers – this means that both buyers and sellers need to have equivalent levels of understanding Buyers run the risk of becoming increasingly less knowledgeable about the products and services they procure if they are not actively engaged in the work.

28. Implications for Contracting 28 Might buyers need to have an equivalent number of staff to the sellers in order to maintain knowledge parity Alternatively, more sophisticated staff are needed to maintain the buyers technologies – where knowledge is embedded as it is created throughout the life of the contract Knowledge that exits with sellers – in particular knowledge about operations and technologies – becomes a serious risk the more sophisticated the technologies become

29. Trend 4: Shift from IT to KT 29 A fourth trend is a fundamental shift from traditional information architectures and information management technologies to knowledge architectures and knowledge management technologies. The challenge this trend presents is as profound and fundamental as the challenges referenced above. Our current infrastructure is solidly grounded in the information management technologies that were developed from the 1980s through the early 2000s. These technologies served us well during those decades but they represent a pre-semantic and pre-knowledge mindset where information is packaged, stored and locked down, rather than a viewpoint in which knowledge is dynamic, continuously evolving and free flowing.

30. Implications for Contracting 30 Defining who is the seller may be a little more challenging as we move into a knowledge architecture. There will be many layers of knowledge technology products and services, and it will all need to work together. Managing contracts in this environment will become increasingly challenging – need for architecture and alignment will be a focus in itself The actions of one seller may have impacts on the actions of others. How to assess performance may be a challenge. Some of the products and services may not be directly visible. We may not understand the risks until we have a situation.

31. Opportunities

32. Alignment of Challenges and Facets 32 Our brief review surfaced a total of fifty-five legacy and new challenges in contracting. This may be an underestimate of the challenges faced as most were stated in general terms. The fifty five challenges aligned with all ten facets of knowledge management Four of the facets, though, accounted for 38 ( %) of the challenges If you want to invest time and effort in enhancing contracting, look at Knowledge Embedded Operations, Collaboration and Communities, Organizational Learning, and Knowledge Asset Management

33. Alignment of Challenges and Opportunities Knowledge Management FacetAlignment of Contracting Challenges Knowledge Operations18 total 15 legacy and 3 new Collaboration and Communities9 total 6 legacy and 3 new Organizational Learning6 total 2 legacy and 4 new Knowledge Asset Management5 total 4 legacy and 1 new Intellectual Capital4 new Knowledge Architecture3 legacy Knowledge Strategy3 new Knowledge Technologies3 legacy Organizational Culture and Communications3 new Innovation1 new

34. Knowledge Embedded Operations 34 It might be easy to misconstrue these challenges as Knowledge Technologies. However, the critical success factor in addressing all of these challenges is the capability to take the knowledge of buyers and sellers and to embed it in the systems or workflows that support operations and contract management For example, building or applying a technology that enables buyers and sellers to analyze and vaiidate requirements manually is a partial solution. Designing a smart system to think like they think, to embody what they know and to analyze information is a much more effective solution. Developing smart applications that represent how experts would analyze contract requirements and prepare proposals would make it much more efficient for sellers to respond to solicitations. Smart data applications that can compare offers and check for variances and validation are more than technologies – they are workflows that contain the embedded rules and financial knowledge.

35. Knowledge Embedded Operations 35 Similarly, operational workflows that support contract preparation and from the base components enable approval of decisions, identify and report compliance and exception conditions. Contract risk management and mitigation is feasible if knowledge is embedded into operations. Contract conditions are rich sources of knowledge that can be translated to operational procedures and possibly workflows. This is not a simply technology project, but a knowledge capture, engineering and embedding task. The rules that are embedded into contracts, the rules that are builtt into oeprational procedures should be accessible outside of individual applications. Rules representation has value across applications – and offers the potential to standardize decision making and improve the quality of performance Labor intensive and suboptimal manual contract monitoring should be augmented with smart applications. This means, though, that what the contract monitor or the technical representative knows needs to be captured and engineering into operations and applications.

36. Knowledge Embedded Operations 36 Knowledge embedded operations also offer the potential to both manage customization and rigidity of products and services. By providing greater access to and knowledge of sources, they can support agility. By managing knowledge of product characteristics and requirements, they can help buyers and sellers to manage the need for customization. Workflows and applications need to be ‘light weight’ going forward – what will be rich and deep will be the rule and knowledge bases that they leverage. Workflows and knowledge bases need to be developed distinctly – not tightly engineered into a single application.

37. Knowledge Embedded Operations 37 Loose coupling. As we learned not to embed our data into programs, we now know how to embed our knowledge and rules tightly into an application. Tightly integrated solutions will be too right for the future work environment. It is the rules and the knowledge that need to change. Whose knowledge is embedded will present new challenges for ownership and rewards. Sellers learning from sellers, buyers learning from sellers, and sellers learning from buyers.

38. Collaboration and Communities 38 We should consider how to incorporate communities of practice and collaborative environments in all of our contracts A contract provision might provide incentives for explicit knowledge exchange between sellers and buyers in regular operations. Contract provisions might also include integration of operational systems and client relationsihp management applications. Or possibly the capture of knowledge within CRM applications. New contracts might consider scaling back on the heavy involvement and multiple layers of contract management for both buyers and sellers in favor of direct engagement of staff on both sides of the contract. This would likely stimulate exchange of knowledge.

39. Collaboration and Communities 39 While training staff to understand and respect their different responsibilities in terms of authority and decision making, communities and collaborative spaces can be leveraged to mitigate fragmentation within business capabilities. In addition, contract management staff should be permissioned or designed into collaborative spaces, and be recognized as members of the operational community. Communities of buyers and sellers can help to engage staff in efforts to define and achieve common business goals. When collaborative spaces exist, and when cross-contract communities work in those spaces, it is much easier to identify and track relational capital. In the knowledge economy, relational capital is one of the most valuable assets – who you know, who they know, and what they know

40. Collaboration and Communities 40 Stronger teams are likely to form when they can work in open and collaborative spaces. These spaces can be both digital and physical. If the work is remotely performed, every effort should be made to provide a common digital environment – at the very least, common digital spaces for social activities. As work becomes more efficient, as transactions occur more seamlessly, the lines distinguishing buyers and sellers will blur. This means that there is an increased need for all buyers and sellers to be absolutely clear about their legal obligations within the contract environment. This means that the contract management and oversight personnel must take on a more active role within the operational environment. The remote, occasional oversight task is not likely to continue in the new working environment.

41. Organizational Learning 41 Contract conditions may tend to constrain the knowledge and information that is leveraged for decision making. Having open channels to external experts and information can be an important source of learning, review and validation. Most organizations now incorporate continuous learning for their employees. Buyers and sellers both need to adopt continuous learning attitudes – it is the only way to grow intellectual capital. We will also see an equalization of knowledge regarding business operations and systems across buyers and sellers. Establishing collaborative working environments where knowledge flows is essential. Staff on both sides must understand their different roles, but the distinctions must be tacit rather than explicit – otherwise learning will be suboptimal and knowledge will not flow.

42. Organizational Learning Procurements should be designed with organizational learning at the heart – multiple awards for teaming may be a future norm. Knowledge hoarding is reinforced and supported by contracts that award to single proposers. Perhaps we should consider a future where the buyer selects multiple sellers who are expected to collaborate rather than to compete. Social media and the propensity for younger workers to work together. How do our business models shift to support this? What kinds of reward systems do we need to invent to allow this design to succeed? How does organizational learning and intellectual capital valuation figure in to our procurement models? Where does it fit in the contract performance structure?

43. Knowledge Asset Management 43 This is largely a legacy challenge which is addressed by 1 st generation knowledge management. The good news is that our knowledge management applications – particularly those which incorporate new knowledge architecture aspects – are more than capable of addressing these issues. The challenge is to ensure that there are knowledge architects in addition to technologists involved in designing the solutions. The solutions should reflect the way that buyers and sellers want to work. This includes management of contract documentation and records compliance, the “single sourcing” of contracts – managing the individual contract pieces, aligning contract documentation with business operations and integrating it into business operations. It also includes capturing contract decisions and rules as knowledge assets and ensuring that they are routinized. Business intelligence processes and products are also critical knowledge assets.

44. Observations and Discussion

45. Wealth of Opportunities Contract design, monitoring and management is a core business operation which is ripe for knowledge management strategies and applications. Contracting is a knowledge rich business operation today, and promises to be even richer in the future. In order to reflect the world of business and the way that business works, it is critical that contract and knowledge management professionals collaborate to develop smart solutions and environments.

46. Thank you!