The defense department and other federal agencies engaged in technology work routinely hire outside consultants to assist government employees in monitoring contractor performance on programs. The work is called “systems engineering and technical assistance” (SETA), and it is an integral part of the acquisition process for managing development of military spacecraft, communications networks and complex warfighting platforms. But the government has recently tightened its rules for who can participate in SETA contracts, and the new standards are having a major impact on the way big military systems are bought.
The rules concern “organizational conflicts of interest,” a formerly arcane phrase now attracting so much interest that everybody in the contracting world is talking about OCI. The reason why is that the tightened rules are being interpreted in the National Reconnaissance Office, Missile Defense Agency, and other federal organizations to exclude big system integrators from participating in SETA work if they are also building systems for a given agency. Interpretation of the rules varies from agency to agency, but many offices are interpreting them strictly so that big companies like Lockheed Martin and Boeing are being excluded from SETA work they once would have done through their technical services units.
As the revised OCI standards take root, they are reshaping the defense sector. For example, Northrop Grumman elected to sell a unit called The Analytic Sciences Corporation because its extensive SETA work had become too hard to reconcile with the company’s role in designing and building major military systems. But while it makes sense to minimize contractor conflicts of interest, the new rules will have some unforeseen consequences. Imagine, for example, that NRO needs help in assessing work on next-generation signals-intelligence (eavesdropping) satellites. The agency doesn’t even admit it builds such satellites, so relevant technical expertise isn’t easy to come by outside a small circle of contractors with special clearances. If most of those contractors are now excluded from consulting by virtue of their role as system integrators and suppliers, where does NRO go to get its SETA support? Maintaining an in-house staff with all the necessary skills would be prohibitively expensive.
The new arrangements are providing a windfall for companies like Scitor, the privately-held technical services company that seems to have a site near every major intelligence agency. With system integrators locked out of providing many SETA services, the Scitors of the world have an array of new opportunities to pursue. But for the big system integrators, the OCI rules are a blow to bets they have made in the federal services sector — bets already being called into question by the Obama Administration’s insourcing campaign. The rules are also going to influence how the defense sector consolidates in a downturn, because if Scitor or SAIC or Booz Allen start doing a lot of work that Boeing and Northrop Grumman aren’t permitted to do, then the big hardware companies won’t be interested in buying them. Like everything else the government does, conflict-of-interest rules produce fallout that wasn’t fully anticipated when the rules went into effect.
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