ITM215-Case Study I (15 Marks)

ALTEX CORPORATION

BACKGROUND

Following World War II, the United States entered into a Cold War with Russia.

To win this Cold War, the United States had to develop sophisticated weapon systems

with such destructive power that any aggressor knew that the retaliatory capability

of the United States could and would inflict vast destruction.

Hundreds of millions of dollars were committed to ideas concerning technology

that had not been developed as yet. Aerospace and defense contractors

were growing without bounds, thanks to cost-plus-percentage-of-cost contract

awards. Speed and technological capability were judged to be significantly more

important than cost. To make matters worse, contracts were often awarded to the

second or third most qualified bidder for the sole purpose of maintaining competition

and maximizing the total number of defense contractors.

CONTRACT AWARD

During this period Altex Corporation was elated when it learned that it had just

been awarded the R&D phase of the Advanced Tactical Missile Program (ATMP).

The terms of the contract specified that Altex had to submit to the Army, within 60 days after contract award, a formal project plan for the two-year ATMP effort.

Contracts at that time did not require that a risk management plan be developed.

A meeting was held with the project manager of R&D to assess the risks in the

ATMP effort.

PM:"I'm in the process of developing the project plan. Should I also develop

a risk management plan as part of the project plan?"

Sponsor:"Absolutely not! Most new weapon systems requirements are established

by military personnel who have no sense of reality about what it takes to

develop a weapon system based upon technology that doesn't even exist yet.

We'll be lucky if we can deliver 60-70 percent of the specification imposed upon

us."

PM:"But that's not what we stated in our proposal. I wasn't brought on board

until after we won the award, so I wasn't privileged to know the thought process

that went into the proposal. The proposal even went so far as to imply that we

might be able to exceed the specification limits, and now you're saying that we

should be happy with 60-70 percent."

Sponsor:"We say what we have to say to win the bid. Everyone does it. It is

common practice. Whoever wins the R&D portion of the contract will also be

first in line for the manufacturing effort and that's where the megabucks come

from! If we can achieve 60-70 percent of specifications, it should placate the

Army enough to give us a follow-on contract. If we told the Army the true cost of

developing the technology to meet the specification limits, we would never get

the contract. The program might even be canceled. The military people want this

weapon system. They're not stupid! They know what is happening and they do

not want to go to their superiors for more money until later on, downstream, after

approval by DoD and project kickoff. The government wants the lowest cost

and we want long-term, follow-on production contracts, which can generate huge

profits."

PM:"Aren't we simply telling lies in our proposal?"

Sponsor:"My engineers and scientists are highly optimistic and believe they can

do the impossible. This is how technological breakthroughs are made. I prefer to

call it 'over-optimism of technical capability' rather than 'telling lies.' If my engineers

and scientists have to develop a risk management plan, they may become

pessimistic, and that's not good for us!"

PM:"The problem with letting your engineers and scientists be optimistic is that

they become reactive rather than proactive thinkers. Without proactive thinkers,

we end up with virtually no risk management or contingency plans. When problems

surface that require significantly more in the way of resources than we budgeted for, we will be forced to accept crisis management as a way of life. Our

costs will increase and that's not going to make the Army happy."

Sponsor:"But the Army won't penalize us for failing to meet cost or for allowing

the schedule to slip. If we fail to meet at least 60-70 percent of the specification

limits, however, then we may well be in trouble. The Army knows there will

be a follow-on contract request if we cannot meet specification limits. I consider

60-70 percent of the specifications to be the minimum acceptable limits for the

Army. The Army wants the program kicked off right now.

"Another important point is that long-term contracts and follow-on production

contracts allow us to build up a good working relationship with the Army. This is

critical. Once we get the initial contract, as we did, the Army will always work

with us for follow-on efforts. Whoever gets the R&D effort will almost always get

the lucrative production contract. Military officers are under pressure to work

with us because their careers may be in jeopardy if they have to tell their superiors

that millions of dollars were awarded to the wrong defense contractor. From

a career standpoint, the military officers are better off allowing us to downgrade

the requirements than admitting that a mistake was made."

PM:"I'm just a little nervous managing a project that is so optimistic that major

advances in the state of the art must occur to meet specifications. This is why I

want to prepare a risk management plan."

Sponsor:"You don't need a risk management plan when you know you can

spend as much as you want and also let the schedule slip. If you prepare a risk

management plan, you will end up exposing a multitude of risks, especially technical

risks. The Army might not know about many of these risks, so why expose

them and open up Pandora's box? Personally, I believe that the Army does already

know many of these risks, but does not want them publicized to their

superiors.

"If you want to develop a risk management plan, then do it by yourself, and

I really mean by yourself. Past experience has shown that our employees will be

talking informally to Army personnel at least two to three times a week. I don't

want anyone telling the customer that we have a risk management plan. The customer

will obviously want to see it, and that's not good for us.

"If you are so incensed that you feel obligated to tell the customer what you're

doing, then wait about a year and a half. By that time, the Army will have made

a considerable investment in both us and the project, and they'll be locked into us

for follow-on work. Because of the strategic timing and additional costs, they will

never want to qualify a second supplier so late in the game. Just keep the risk

management plan to yourself for now.

"If it looks like the Army might cancel the program, then we'll show them the

risk management plan, and perhaps that will keep the program alive."

QUESTIONS

1. Why was a risk management plan considered unnecessary?

2. Should risk management planning be performed in the proposal stage or after

contract award, assuming that it must be done?

3. Does the customer have the right to expect the contractor to perform risk

analysis and develop a risk management plan if it is not called out as part of

the contractual statement of work?

4. Would Altex have been more interested in developing a risk management

plan if the project were funded entirely from within?

5. How effective will the risk management plan be if developed by the project

manager in seclusion?

6. Should the customer be allowed to participate in or assist the contractor in

developing a risk management plan?

7. How might the Army have responded if it were presented with a risk management

plan early during the R&D activities?

8. How effective is a risk management plan if cost overruns and schedule slippages

are always allowed?

9. How can severe optimism or severe pessimism influence the development of

a risk management plan?

10. Can risk management planning be justified on almost all programs and

projects?

Assignment will be marks on basis of

• (write up)- 10 Marks
• Presentation-4 Marks
• References and Citations- 1 Marks