Commercial space and six questions for a good story – Pt. 2 of 3 (wonkish)

First, there was a forest, then just a smattering of trees, and finally, just this one tree. On a specific day, at a specific time, someone came to the last tree. Maybe they paused. Then they chopped it down, too. This is a version of the tragedy of the commons, a parable where incentives create the worst of all worlds. Yet incentives can work the other way around, about planting the first tree, then more, not taking down the last one.

In the space sector, any obviousness about incentives is not the case. Early in my career, thinking through what a design decision really meant in the future was too often happening after the fact. The horses had not just left the barn. They were never there. As the eventual operator at Kennedy, we faced the dilemma of getting caught just reacting to another organization and their design’s future needs. We would be left to live with the consequences. As new projects came and went, it was obvious that we operators needed to act fast to emphasize what needed to be on a project’s radar at the start, before the emails about how “mistakes were made.” This became all about what a design might specifically do better, so years away, it would be easier to prepare for launch. Right along came new technology beyond better designs for what we knew. Later, management buzzwords saw a heyday because a good process means good products.

Still, the years wore on, and something was missing, like asking why.

Just ask why

In the business of space exploration, incentives have never gotten the attention they should, being built into our “systems” with the rigor of how a team designs a spacecraft or an engine. Incentives in any sector are messy, with people and organizations pulling and pushing in different directions on a good day or, more likely, just in mysterious directions. Now, space sector incentives are in many ways just waiting to grow new forms – all a long time coming.

There is a way to look at commercial space with a checklist of ingredients. Yet even if we gather details that far, it’s impossible to avoid asking “why” partnerships and commercial space work. Quickly, a murky discussion arises about that incentive thing. In particular, what is a proper alignment of incentives?

A proper alignment of incentives

Discussions with people who played critical roles in commercial programs repeated a memorable phrase about “why” these programs succeed – “a proper alignment of incentives.” This is first hand from people who were there in the NASA partnership to get cargo to the International Space Station.

These subjects are always tricky. Engineers easily focus on why, if it’s about a design choice, physics, or materials, much less so when it’s humans and our motives. Asking why a particular commercial practice works well seems to ask for an opinion, not a fact. Nonetheless, there’s no escaping the discussion, a compulsion as strong as wanting to figure out which widget caused the rapid unscheduled disassembly or how to ensure it does not.

I have talked about partnerships and commercial approaches in space systems going beyond “what” into “how” and “when.” If we have some detailed ingredients, is there a method to the madness, a sense of the incentive that goes with each ingredient – all toward that proper alignment of incentives?

At first blush, the incentives seem to be only about costs – extremely dangerous when mixed with the laws of physics. Government and industry make an arrangement that appears to disincentivize cost overruns of the kind and scale that only the government shrugs off. Actually, there is more going on. Hand in hand with cost comes other less obvious but equally important benefits. The ingredients encourage safety through learning and reliability growth for improvements in quality at lower costs. This is the crux of “why” specific incentives arise in partnerships and “commercial space.”

“Why” as incentives in partnerships and commercial space

There are many possibilities for “why” certain ingredients in commercial approaches would work toward getting better results for NASA for less funding. Consider the incentives below as “why” paired to each commercial ingredient.

The next question is if these ingredients and incentives actually work. A single point is not a trend, and theory must meet reality. This brings us to “who”. Regarding a clinical trial, we have more than a few patients.

Stay tuned for Part 3.

Ingredients of Partnerships	Incentives
Contract is a Space Act Agreement or Other Transaction Authority	A fixed payment encourages honesty up-front in the job proposal, then attention to on-going costs later if selected.
Contract emphasizes “what” over traditional “how”, favoring innovation (versus discouraging it)	This should focus minds on results, allowing and encouraging innovation (instead of a focus on prescribing detail effectively allowing only a repeat of what came before).
Partner makes significant financial commitment – “skin in the game”	This should encourage longer-term thinking. There is no profit right now. This is an investment phase. Do good, or lose your own money if not selected.
Partner has a compelling business case for NON-government customers	Up-front, the partner must convince the government they have concrete plans beyond government customers. This forces resources and seriousness toward making this a reality.
Partner implements	This is always so, but here it’s clear. The partner is accountable even as the government remains responsible. (The difference between the homeowner and the roofing contractor. This distinction blurs in “cost-plus” contracting where the government seemingly wants to get on the roof and hammer nails, or instruct first hand on nailing.)
Government pays out funds only at “pay for performance” milestones	Paying for grass cut, instead of hours spent trying to cut grass, probably gets more grass cut for money paid.
Government management office is small	Like #2, this reinforces an emphasis on results, where too many cooks in the kitchen can end up with just activity.
Government management mindset as a co-investor	Wear the right hat for the job. An investor wants their investment to grow. This frames perspective, toward guidance, results and knowing when to walk away (rather than confusing your role with that of others in the company you invested in).
Government favors partners with strong NON-government business plans	This one takes the partners prior business case and elevates its importance early on, requisite to even proceed.
Government is advised by an outside advisory group	The incentive here is to encourage the kind of honest situational awareness that sometimes only a truly independent outsider will see.
Government commitment is clear – they will buy future services, product, data, etc.	The incentive for the partner gets very clear very fast, creating an attractive system on price, reliability, and safety. There is a chance to make good on that initial “skin in the game” by winning.
Government invests in many early partners – competition is high	The incentive to perform at the highest level is clear. Otherwise, the partner is not picked for later phases given the many options the government is helping along at first. (Compare this to major aerospace contractors just joining up and saying they do not want to compete against each other!)

Ingredients of Commercial Acquisitions	Incentives
Firm fixed price contracts	You have to create an attractive system to have won the bid. Now you have to deliver or lose money. The boss will not like that part about losing money.
Private partner retains property; the government does not own the hardware (government buys the ride, not the car)	This one allows the partner to use their system for other customers when not being used for the government customer.
Private partner business /pricing attracts non-government customers	This one encourages other customers other than government customers.
Government selects at least TWO partners for ongoing services	Each partner knows they can be replaced with relative ease. Ongoing competitions are also a part of this. No partner ever has a position so advantageous that the government has no option but to continue with them.

Also see:

• March 2021 – NASA and the Rise of Commercial Space: A Symposium to Examine the Meaning(s) and Context(s) of Commercial Space
• April 16, 2021 NASA Picks SpaceX’s Starship for the next lunar lander – under a fixed-price, milestone-based contract.

NASA invited offerors to demonstrate their commitment to the public-private partnership by providing a corporate contribution; these corporate contributions not only have the effect of significantly lowering offerors’ proposed firm fixed prices, but also show how each offeror intends to leverage its corporate contribution to enable its approach for commercializing HLS capabilities.

NASA Source Selection Statement