In a recent speech at a defense and aerospace industry conference, Under Secretary of Defense Frank Kendall repeated the long-held view of the Obama Defense Department that major defense corporations should not be allowed to merge. Mr. Kendall and the rest of the Office of the Secretary Defense (OSD) leadership is concerned that if the handful of large prime contractors continue the process of consolidation started in the defense downturn of the 1990s, they will grow too big, become less innovative and try and impose themselves on the Pentagon. In Kendall’s view:
“With size comes power, and the Department’s experience with large defense contractors is that they are not hesitant to use this power for corporate advantage. The trend toward fewer and larger prime contractors has the potential to affect innovation, limit the supply base, pose entry barriers to small, medium and large businesses, and ultimately reduce competition – resulting in higher prices to be paid by the American taxpayer in order to support our warfighter.”
The Under Secretary’s position would be more credible if he didn’t represent the real 900 pound gorilla in the room. If power correlates with size and with excessive size comes excessive power, then the real problem isn’t the defense primes, but rather the Department of Defense (DoD). The Pentagon is a monopsony, the only buyer for most of what the defense primes sell. It defines the requirements, sets the terms of the competitions for contracts, demands total information about the costs and prices, prevents companies from selling their goods and services to others, limits the profits companies can earn and, should it so desire, cancel contracts at virtually any time for the convenience of the government. Talk about having a monopoly of power.
Moreover, during his tenure, the acquisition bureaucracy has grown in size, while the uniform military has shrunk. It has added new rules, regulations and bureaucratic hurdles for the companies. Even as Pentagon leaders go hat in hand to Silicon Valley to beg the IT gnomes to help the department become more innovative, Acquisition, Technology and Logistics (AT&L) proposes new regulations on commercial items, independent research and development and foreign exports that fundamentally undermine the business case for the private sector. DoD’s efforts to improve the speed and efficiency of the acquisition process have produced exactly “zilch” in the way of improved performance, lower costs or greater innovation.
It is clear that the Pentagon doesn’t want any equals in the acquisition system. It wants to dictate the terms of the relationship. The problem with this perspective is that DoD no longer has the clout it once possessed. Even the major defense companies are less reliant on defense dollars, doing more commercial business or selling an increasing percentage of their goods and services overseas. For the “new age” companies, such as Apple, Google, Amazon and Intel, from which the Pentagon hopes to acquire the innovative products for its so-called Third Offset Strategy, any defense contracts will amount to a few cents on the dollar to their bottom lines.
AT&L may be so large that it has lost sight of its mission: delivering dominant military capabilities to the warfighter. This is the rationale behind Senate Armed Services Committee chairman John McCain’s insistence that authority over defense acquisitions be devolved to the military services. AT&L has become too big, too bureaucratic, definitely too expensive and too removed from the warfighter. No one is ever responsible for something going wrong.
We might even go farther and get rid of many of the centralized functions in AT&L and OSD for contract negotiation and oversight, auditing and even testing and evaluation. Relocating these functions and most of their authorities under the various Program Executive Offices (PEOs), the organizations actually responsible for managing programs and delivering goods and services, would give the PEOs the resources to write better contracts, more closely and effectively manage the companies, anticipate schedule slippages and cost overruns and solve problems. Providing such authorities and resources is a major reason why organizations such as Joint Improvised Explosive Device Defeat Organization and the Rapid Equipping Force were so successful.
It’s not the companies that should be prevented from getting bigger, but AT&L. In fact, perhaps it is time to break up AT&L. It’s been an interesting experiment, but not one with a track record of success. Let’s try the McCain approach for starters.
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