Sequestration Is Government’s Ultimate Interference In The Defense Market

Defense officials know that their acquisition system isn’t a free market but they often like to pretend otherwise. This has been the case most notably over the past four years. Confronted with declining defense budgets and rising costs for defense goods and services, Pentagon leaders have become almost desperate in their search for efficiencies. Under the banner of Better Buying Power Initiatives, the Department of Defense (DoD) has attempted to reverse the trend in defense programs towards longer development cycles, higher unit costs and a lack of innovation. Central to these efforts has been the endeavor to inject greater competition into the contracting process. Defense officials have seen what competition does in the private sector, improving productivity and efficiency, lowering costs and spurring innovation and long for those same benefits in the acquisition of defense products and services.

The essential problem with this approach is that defense acquisition is not a free market. In fact, it is about as far from a free market as you can get. The government controls almost every aspect of the environment in which defense companies operate. In this context government is not merely DoD or even the Executive branch. It also includes Congress. Together, they control the budget, requirements, contract type and terms, administrative burden, stability, tempo, accounting procedures and even pay scales. They set the rules that determine the contracting environment and they change them willy-nilly. If Apple had attempted to design and sell the IPhone according to the rules that apply to defense contractors each one would have weighed ten pounds, cost thousands of dollars and been years late to market.

Beyond the rules and procedures, government also sets the tone for the environment in which acquisition takes place and the relations with the private sector. For years, the relationship has been growing increasingly difficult, contentious and even hostile. Whenever a program goes wrong, the government imposes more regulations, oversight and controls on industry. It never asks what are the costs involved to both parties for each additional increment of control. In addition, the blame for missteps in programs or cost increases is almost always laid at the contractors’ door. At the same time, the Pentagon continually struggles to keep its own house in order. DoD is incapable of conducting a simple financial audit of its accounts. The Government Accountability Office has repeatedly criticized DoD for failure to make good on its most basic responsibilities other than fighting. Every two years, GAO puts out its High Risk Series that chronicles the department’s ongoing failures in such areas as financial, supply chain and contract management, as well as weapons systems acquisition, business transformation and business system modernization. By the way, it is the same set of topics year-in and year-out. Yet, it is the contractor that receives the lion’s share of the blame when something goes wrong.

Sequestration is the best example of how government distorts the defense marketplace making it impossible for well-intentioned defense officials and the private sector to provide goods and services that meet the warfighter’s needs. Sequestration isn’t an accident; it is the product of negotiations between the Executive and Legislative branches that eventually became the Budget Control Act of 2011. It was a piece of legislation specifically designed to be so bad, so crazy that it could never come into force. Yet, we are some 17 days from seeing it go into effect. Even if we can somehow avoid sequestration, DoD is likely to be required to operate for the remainder of the fiscal year under a Continuing Resolution that limits defense spending to FY2012 levels and severely restricts the Pentagon’s ability to move funds between accounts, initiate new programs or restructure bad ones.

DoD needs to recognize that it is government that has created the current acquisition system and the dysfunctional environment. The defense industry cannot change problematic legislation, regulations and policies. As evidenced by the Budget Control Act, it cannot stop government from passing laws that both the Executive and Legislative branches know are bad. If any group has a right to be aggrieved about the acquisition system it is industry.