See jpeg.

I'm assuming the concave side of the locknut is for a spacer to sit in there, with the flat side facing the drop-out?

Any better ideas?

The concave side should face the dropout. The idea is for it to "bite" better by focusing the clamping pressure, same reason some locknuts have knurled surfaces.

+1 Also, the concave side is beveled, which is to allow one to slide the wheel more easily into dropouts that might be spaced a tad too narrow.