For years we at the Lexington Institute have been sounding the tocsin about the impact of bad regulations and misguided acquisition policies on the cost of defense goods and services. We published a study that argued that the Department of Defense could save tens of billions of dollars a year by reducing the regulatory burden on the private sector, expanding the scope of public-private partnerships, making greater use of commercial best practices in areas such as logistics, IT and supply chain management and being a smarter buyer. We have vociferously opposed this administration’s efforts to insource work being performed by the private sector arguing that government claims of cost savings were, at best suspect and more likely outright fabrications. Often we have felt like the one-eyed man in the country of the blind.
But recently other voices have begun to make themselves heard. The Center for Strategic and International Studies published a report last year which took the Pentagon to task for its inability to account for its costs of doing business. The Congressional Budget Office published a study affirming the overall higher price of government workers than their private sector counterparts. The Defense Business Board has sharply criticized DoD’s personnel policies.
Now another study has been published which confirms what we have been asserting. The July issue ofContract Management contains the report of a study titled “Cutting Fat without Cutting Substance.”(*) The authors conclude that 25 percent of the cost of goods and services to the federal government and large companies are transaction costs which could be substantially reduced. According to the authors, the four main cost drivers are: vague requirements, inflexible processes for modifying requirements, unnecessary reporting and compliance requirements and adversarial supplier-buyer relationships. If you go back through the Lexington Institute’s Early Warning blog for just the last few months you will find every one of these topics identified as a major DoD cost driver.
What solutions does this study propose? The first is greater reliance on relational contracting. Lexington calls this public-private partnerships. Their second and third recommendations are to monitor outcomes not behaviors and to move to a best value approach in contracting. We refer to this, in part, as using performance-based logistics agreements and incentivizing the private sector to improve performance. The fourth is to retain key people in relationships.
The irony here is that this study was sponsored by the U.S. Air Force and conducted at the University of Tennessee’s National Defense Business Institute. The Air Force has had an unusually difficult time managing its acquisition and contracting activities of late. Perhaps when a study they paid for tells them the same things the private sector and think tanks have been saying for years, both the Air Force and OSD will pay attention.
(*) T. Russell Cook, David J. Ketchen Jr., James G. Combs and J. David Patterson, “Cutting Fat without Cutting Substance,” Contract Management, May 2012
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