MARKET RESEARCH: STARTING THE MANAGEMENT OF RISK AND OPPORTUNITIES PROCESS

For years the commercial sector has undergone more extensive presales research than has the government. This is because in the private sector, there is a belief that if you wait until the receipt of the solicitation to learn about a proposed contract to get organized, you have missed the window of opportunity. The private sector believes in re-screening potential suppliers to eliminate the ones that are not qualified to perform according to the requirements. This was because government buyers traditionally assumed that firms in the private sector would aggressively seek opportunities to do business with the government. This assumption, in addition to a policy requiring publication of business opportunities in the Commerce Business Daily before issuing the solicitation, ensured that the most qualified companies would compete for the government’s business. This is not a valid assumption. As we saw in Chapter 1, not everyone wants to do business with the government.

Figure 3-6 The Tradeoff Process

On the other hand, government has only recently emphasized the need to be more proactive in the area of market research. Market research is more than merely advertising in the Commerce Business Daily to satisfy the need to consider using a commercial product and having the necessary documentation in the sole source file. Dr. Ralph Nash, Jr., professor emeritus of law at the George Washington University Law School, points out that buying practices of commercial buyers of the same product normally demonstrate an understanding of the market. “In my ideal world the CO would come to the acquisition planning meeting with full knowledge of the market (as well as information on all acquisition strategies), while technical people would come to the table with full knowledge of the needs of the agency.” The federal government deals in almost every commercial market. To have an effective market research program requires initiative and knowledge of what companies within each of these markets are selling. Market research has not been included in training programs because it has only recently been considered a subject most COs should know about. Previously, it was assumed that the sellers would seek out the government. In the post–Cold War environment, where the industrial base for many of the government’s requirements has decreased, the CO must be more proactive in seeking alternative sources of supply.

The government’s primary objective is then to obtain the best-value products or services that are available from the private sector. Today, acquisition doctrine emphasizes the use of commercial products to provide the ultimate user with the latest technology at lower cost. This is also seen as a way to simplify the acquisition process. Policy also emphasizes defining acquisition objectives in the form of performance objectives and then giving contractors the latitude to determine how to achieve the performance standards—and the incentives to achieve them.

Performing market research is a prerequisite to developing new requirements documents. It is also required before soliciting offers that are expected to exceed the simplified acquisition threshold of $100,000 or when adequate information is not available and the circumstances justify the cost. (Outside the United States or in the event of a peacekeeping or humanitarian operation, the threshold is $200,000.) When making micropurchases, agencies are required to consult readily available sources, such as catalogs, to ensure that the goods or services purchased will meet the government’s needs at a fair and reasonable price.

Genesis of Market Research

Goods and services available in the commercial market are key sources of products that will meet the government user’s requirements. The method by which the CO and other members of the acquisition team determine what is available in the commercial market is part of the market research process. The position of market research in the overall requirements determination process is highlighted in Figure 3-7. Analysis of the commercial marketplace was first mentioned as being a part of the acquisition process in a 1982 policy document issued by the Office of Federal Procurement Policy (OFPP). It was not until passage of the Competition in Contracting Act (CICA) in 1984 that market research became closely associated with acquisition planning. In that act, government agencies were directed to perform market research to ensure that they obtained competition. In the Federal Acquisition Streamlining Act of 1994, Congress mandated that the executive branch do a better job of conducting market research.

Figure 3-7 Market Research Position in the Requirements Determination Process

The use of commercial products to satisfy government needs has been promoted in policy statements for some time. The May 1990 edition of the FAR defined commercial products as “items sold or traded to the general public in the course of normal business operations at prices based on established catalog or market prices.” Many felt that this definition made procurement of commercial items too complicated because it was often interpreted differently by the various agencies. FAR 2.101 now defines a commercial item as “any item, other than real property, that is customarily used for nongovernmental purposes and that...has been sold, leased, or licensed to the general public, or has been offered for sale, lease, or licensed to the general public.” In addition, a commercial item is defined to include:

• “Any item that evolved from an item described (above) through advances in technology or performance and not yet available in the commercial marketplace, but will be available in the commercial marketplace in time to satisfy the delivery requirements under a government solicitation

• Any item that would satisfy a criterion (described above) but for...modifications of a type customarily available in the commercial marketplace and minor modifications of a type not customarily available in the commercial marketplace made to meet Federal Government requirements.”

Support services for a commercial item are also included in the new definition if they are the same as those offered concurrently to the general public and federal government under similar conditions by the same work force. Commercial services are deemed to be included in the definition if such services are “offered and sold completely, in substantial quantities, in commercial marketplace based on established catalog prices for specific tasks performed under standard commercial terms and conditions.”

A non-development item is also included within the definition of a commercial item if the procuring agency determines that the item was developed exclusively at private expense and has been sold in substantial quantities, on a competitive basis, to multiple state and local governments.

The Market Research Process

In addition to the CO, other members of the acquisition team who should be involved in market research include representatives of the user, technical personnel from the buying activity, price analysts, and industrial specialists. Small business specialists can also assist the process if required. Areas to consider when determining what type of information is needed include the complexity of the requirement (including an understanding of the state of the art), how much time is available until the user suffers harm, the dollar amount, and past experience with the item or service. A tradeoff process should be followed when determining the amount of market research to undertake. One must determine the value of the information to be gathered on the suitability of items offered in the commercial market and the insight into the business practices of the market, and then compare this information to benefits of the time that could have been spent on other acquisition tasks.

Buyers can accomplish the following from market research:

• Determine if the items being considered achieved commercial market acceptance or have recently been satisfactorily supplied to a government agency to satisfy the same or similar requirements.

• Determine how best to satisfy the stated need and predict the probable trend in technology development of the product line. Are there other sources or highly technical alternatives that will meet the user’s needs more efficiently? This includes information on the existing commercial products and potential suppliers. What is the possibility of incorporating commercial items into the product at the component level? The iterative nature of the market research and definition of needs is illustrated in Figure 3-7. The point to be made is that market research often uncovers alternative means to satisfy the requirements that lead to amending the definition of need.

• Obtain data on the prevalent business practices of the industry—generally accepted methods in the industry related to production lead times, the production process, structure of the distribution system, and product support history of items delivered to the customer. The buyer can learn which buying practices of the industry, including types of contracts, are normally used. They can find out about industry practices regarding delivery and acceptance and information related to billings and discounts, variances in performance from different sources, logistics support cost of products of the various vendors, past performance history, bonding requirements, and information on which to make the determination of responsibility by the CO or the Certificate of Competency and Determination of Eligibility from the Small Business Administration.

• Determine if potential contractors can comply with the proposed terms of performance and have the financial resources necessary to do so. They can learn about labor laws and regulations that apply to the supplies or services needed.

• Gain an increased understanding of the risks and opportunities associated with the acquisition. How well did the same or similar goods or services meet the buyer’s needs? Was the supplier competitive? What types of problems were encountered?

• Gain information for use in determining if the potential contractor is responsible and if it is debarred or suspended from doing business with the government.

• Develop information that can be used during discussions, source selection, and negotiations. This includes information on patents, copyrights, and ownership of technical data. The buyer can also obtain price-related factors such as seasonal, cyclical, lease versus purchase, mode of transportation, and type of contract.

The 1994 rewrite of the FAR removed many of the restrictions that previously had constrained exchanges of information between the government and the potential seller. This change in policy was intended to encourage joint planning by the buyer and seller on a strategic basis. However, discussions between the parties are nevertheless constrained because of the restrictions contained in the Procurement Integrity Act, the Trade Secrets Act, and 10 U.S.C. 2305. Industry is very protective regarding what information is disclosed, during discussions, especially if they view it as being proprietary or if they see it as the source of any competitive advantage they may have.

In the rewrite of FAR Part 15, one-on-one meetings between the parties have been identified as a primary means of exchanging information. Policy outlined in FAR 15.306 (e) requires that information revealed during the pre-solicitation conference also be furnished to potential offerors not able to attend the conference and be included in the next release of information. Industry has asked what standard is to be used to determine what information is necessary to prepare the proposal. It has also expressed a concern about safeguarding proprietary information obtained during meetings that are not necessary for the preparation of the proposal.

The rewrite of Part 15 of the FAR also formalized the process by which possible offerors are invited to submit a capability statement or similar information to the government prior to their receipt of the proposal. These inputs are analyzed and the respondents notified regarding the likelihood that they would be viable competitors. This revision to the FAR also is careful to note that all respondents, regardless of the government’s conclusion, may participate in the resultant acquisition.

Table 3-1 shows possible sources of market research information.

The pre-solicitation notice and pre-solicitation conference are often used as preliminary steps in negotiated procurements to develop or identify interested sources, request preliminary information based on a general description of the supplies or services involved, explain complicated specifications and requirements to interested sources, and aid potential contractors in submitting proposals without undue expenditures of effort, time, or money.

The requirements determination process culminates with the prospective user determining which of the supplies or services will be provided using government capabilities or which will be purchased using the contracting process.

Table 3-1. Sources of Market Information

The Make-or-Buy Decision

One of the early decisions that must be made is if the requirement will, or can, be satisfied by the government utilizing its own capabilities. There are only two choices: Will the work be performed by the government’s own employees, or will it be purchased or leased? This question involves many interest groups in both the public and private sectors. For the government, the decision involves productivity, equity, jobs, and the question, “What is our mission?” An inherently governmental function includes activities that require either the exercise of discretion in applying government authority, or the making of value judgments in making decisions for the government.

Figure 3-8 shows how the make-or-buy decision fits into the overall requirements determination process. It shows the make-or-buy decision occurring after market research has been completed. Nothing would preclude this event from overlapping or being done concurrently with market research.

In his 1954 budget message to the Congress, President Eisenhower stated that it was government policy to rely on the private sector during peacetime for obtaining goods and services. He announced “... a policy of shifting from in-house operations to state, local, and private enterprise.” Later the Bureau of the Budget (the forerunner to the Office of Management and Budget) published the following policy statement:

Figure 3-8 The Make-or-Buy Decision in the Requirements Determination Process

It is the general policy of the administration that the federal government will not start or carry on any commercial activity to provide a service or product for its own use, if such product or service can be procured from private enterprise through ordinary channels....

As a matter of policy, there are functions so intimately related to the public interests that they mandate performance by government employees. These inherently governmental functions include the act of governing, i.e., the discretionary exercise of government authority, interpretation and execution of the laws of the United States, and monetary transactions. They do not include gathering information for providing advice to government officials, building security, mail operations, operating cafeterias, housekeeping, operating and maintenance facilities, and warehouse operations.

Probably the most important question for the buyer to have answered when determining if the requirement will be outsourced is if there will be sufficient administrative or technical expertise available within the government to perform and supervise the work. Another consideration in making the make-or-buy decision is if it would be the least costly alternative. Making a cost comparison is complicated because it involves determining both direct and indirect costs.

The decision the CO and the acquisition team must make involves answering the following questions before progressing to further defining the requirement and developing the solicitation:

1. How should the project be subdivided between internal sources and contractors?

2. Should the requirement be contracted for as a system or group of subsystems, with the government acting as the systems integrator?

3. Are the specifications and other technical documents regarding the allocation of responsibilities and risk between the government and contractors sufficient and available?

4. Have all likely commercial sources been identified? Should additional sources be sought?