AT&L’s Drive To Increase Competition Among Defense Companies Is Producing Perverse Results

The defense sector does not operate like a classic free market. There is a single monopsony buyer — the government, a relatively small cadre of companies, many barriers to entry, controls over information, limits on profits and unconscionably long product cycle times. If anything, the top down, command style of management by the Department of Defense of defense acquisitions bears a very close relationship to the old Soviet economic system. Like the old Soviet state planning authority, GOSPLAN, the defense acquisition system tries time and again to mandate outcomes and is continually surprised by the perverse results of its efforts.

In the Soviet Union, the objective of enterprise managers and factory bosses was not to do good work, create something that customers would want to buy or produce a good product at fair value. Instead, it was to figure out how to appear to be fulfilling the plan while taking no risks and avoiding blame. There was an old joke about a factory that made nails. When GOSPLAN declared that the quantity of nails produced was to be the factory’s performance objective, the response was to make millions of thumb tacks. If gross weight of output was the metric, the factory produced one very large nail. The desires of the customer were never considered in large part because it never mattered if they were satisfied. Never in the 70-odd years of the Soviet Union did its leaders ever factor in human behavior, anticipating that the enterprise managers and factory workers might try to game the system. Moscow’s approach to directing economic activity was truly the definition of insanity: doing the same thing over and over expecting different results.

DoD’s efforts to reform the defense acquisition system suffers from many of the same problems that doomed the Soviet economy. The incentive structure is wrong, many of the metrics are misplaced and the leadership of the Pentagon consistently fails to take human nature into account when it formulates policies and sends out directives. In particular, senior leaders do not seem to think much about how the acquisition workforce responds to new mandates and metrics. Those lower down the ladder have a natural tendency to focus on satisfying the demands of those above them rather than assisting those below. Avoiding mistakes, dodging blame and moving on to the next assignment before something bad happens is more important than taking risks to see that a program is successful. The best way to do this is to do exactly what the Offices of the Secretary of Defense and of Acquisitions, Technology & Logistics (AT&L) say in their directives, interpreting the language very literally and behaving accordingly.

The recent experience with the Obama Administration’s efforts at acquisition reform is illustrative of the problem. The Better Buying Power Initiative stressed the importance of fixed price contracts and increased competition as ways of lowering costs and improving performance. What did the system do in response; it sought to apply fixed price contracting in a mechanistic fashion. If some fixed price contracts are good more must be better — or at least more won’t get you into trouble. As the Under Secretary of Defense for AT&L remarked in a recent meeting “People thought that that had become the right kind of contract to use for almost everything.” The acquisition workforce didn’t make this assumption because they are stupid. Far from it. They did what they did in the hope of making their superiors happy and to avoid risk.

A similar story is taking place in the area of competition for contracts. DoD has set targets for each of the military services regarding the percentage of contracts that need to be awarded competitively. Talk to industry and they will tell you they are constantly getting requests for multiple proposals with the contracting officer’s acknowledging that recipients are likely not interested in bidding, but they are under pressure to meet these goals. There are many stories of program managers creating a competition by encouraging and even helping to create a second bidder for a particular product or service. This draws out the contracting process and often wastes both public and private funds if the second bidder is only marginally qualified. The third perverse thing that the acquisition system is doing is shortening the period of performance on service contracts to as little as a single year. This creates churn in the contracting process, adds to costs and even risks poor performance. A winner has only a year to recoup the costs of competing, learn the business and gear up for the next competition. But this approach does improve quantitative performance numbers against which the performance of acquisition officials is measured. What is particularly ironic about this phenomenon is that in some areas, such as parts repair and overhaul, many contracts are still awarded non-competitively.

Whether it is a Soviet-era factory producing nails or a DoD contracting office generating blizzards of requests for proposals, the result is the same: bad outcomes for the nation.