DoD Buzz

What's An Efficiency?


One answer to this came yesterday from Lt. Gen. Patrick O'Reilly when he told reporters that his approach to finding them at the Missile Defense Agency would involve competing $37 billion in contracts that have been sole source.

Now that doesn't sound like an "efficiency" to me, but it certainly is a savings, and it is one that companies can't claim is eating into their profit margins without seeming churlish. After all, doesn't everyone in America love competition? And it is certain to spread throughout the four services as they seek fast and relatively painless -- but effective -- ways to bring down their budgets so they can show Defense Secretary Robert Gates that they heard him when he called for $100 billion in savings over the next five years.

Into the savings or efficiencies morass wades the Aerospace Industries Association, many of whose members fear that Gates' push will erode their profits. AIA, one of the most powerful lobby groups in Washington, focuses on contracts as its first recommendation, but competing sole-source deals is not one of its recommendations. This is not surprising since most of its largest members benefit handsomely from sole source contracts, especially in the worlds of space and intelligence.

But AIA also argues that the defense industry suffers from the lowest profit margins of any major American industry. It cites a February 2009 study by the Institute for Defense Analysis, “Defense Department Profit and Contract Finance Policies and Their Effects on Contract and Contractor Performance.” AIA says "the report states that the margins for the defense industry are lower than companies in other sectors."

AIA suggests more multi-year procurements,which they argue can save more than 10 percent. Congress has traditionally been reluctant to approve multi-years without a strong political or fiscal rationale. And the administration resisted mightily efforts by the Hill to force an F-18 multiyear down its throat.

The industry lobby group also pushes for more long-term "performance- and outcome-based product support contracts," which would mean more PBL deals, something the services view with increasing suspicion. And AIA likes the idea of buying more commercial off-the-shelf equipment.

Their Nr. 2 recommendation is to shorten the time and limit the amount of data that must be provided when a company pursues a contract.

The current "process is lengthy and cumbersome and often results in unfairly low returns for contractors. Contracting Officers assume a reasonable price can only be based on the submission of voluminous cost data..." they say in their paper.

The AIA paper says comapnies had to submit the huge amounts of paper for airplane contracts "even though all three aircraft have extensive incurred cost history." How much paper? The C-17 was 63,000 pages; the F-22 multi-year was 94,000 pages and the F-18 was 20,000 pages. Solution? You guessed it: reduce the amount of data and paper required.

Finally, AIA wants the government to make its oversight process more efficient. Combine the work of different organizations within the Defense Department so companies know what rules they are playing by and only have to respond to one set.  Fix the arms export regime and only do audits when data indicates they are really necessary. Oh, and fix the requirements process, please.

Whose vision of what constitutes an efficiency will win? My bet is, in the shorter term, on the government. Changing government processes and regulations takes time and even Robert Gates has only a limited store of that precious commodity.

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