The report released by the Pentagon this week, titled the “State of Competition within the Defense Industrial Base,” tackles a serious subject that Defense News readers know is vital to national security. It is also a subject on which I have spent more than 40 years developing and implementing recommendations.
However, the report misses an important step by failing to articulate clearly the problems its recommendations are trying to fix. As a result, its recommendations cannot, by themselves, produce the results needed for better national defense.
Saying DoD needs “to spur increased competition” implies negative consequences from too little competition today, yet the report is based in part on a skewed view of limited data, including dollars awarded competitively.
The reality is there is already robust competition, with real national security benefits. The reality is also that defense-industrial base companies are as committed to DoD mission success as the forces they support, and they are in this business for the long run. For improvements that would help, let’s look first at DoD’s recommendations, then examine additional ones worth attention.
DoD’s recommendations
- Strengthening merger oversight
It is useful to assess merger impacts on contract-level competition, but global competitiveness matters, too. Mergers should also be assessed on how they support America’s worldwide national security interests, today and in the future.
- Addressing intellectual property (IP) limitations
Sharing IP matters most when doing so undermines the return on company investments in developing intellectual property. DoD should find ways to expand its access to intellectual property without undermining company’s returns on investment.
- Increasing new entrants and opportunities for small businesses
New entrants face a federal procurement system that is too slow and unpredictable. Fewer small businesses participate in the DoD marketplace because small business contracting policies and practices punish growth rather than reward it. A small business can win contracts and become too large for set-aside programs, but DoD offers too few full-and-open competitions for those just-graduated companies. DoD needs to provide both existing contractors and new entrants, including small businesses, more competitive opportunities, not fewer.
- Implementing sector-specific supply chain resiliency plans
Though needed, this recommendation focuses on reducing vulnerability in too few sectors. This area needs reduced risk, not increased competition.
Additional recommendations
For all the recommendations DoD included , there are more they should make.
- Acknowledge that, for many defense systems, DoD is the market.
Competition for major defense systems already exists when competing concepts and designs offer options for fulfilling military requirements. However, once designs are selected, DoD undermines competition by buying too few items to keep two or more companies in business. Insufficient production quantities drive up price and limit competition.
DoD sets requirements, creates the return that justifies innovation, and procures and operates the results. DoD is the market. To pretend otherwise is to deny reality and avoid responsibility.
- Reinforce real competition where it can thrive.
Half of DoD contract dollars go to services, and what was once a product is now procured as a service. From data storage to satellite launches, DoD does not need ownership to benefit. This $200 billion services market offers unrealized potential for DoD. For example, 70 percent of DoD system costs are in life-cycle support, sustainment and operations, yet there are too few opportunities for real competition.
In addition, excessive focus on low bids does not reward real competition, it reduces it. Competing on cost may raise competition percentages, but competing on results generates innovation and creates jobs.
- Encourage innovation through improved risk-return ratios.
Innovation matters, but companies can afford R&D costs only if there is a return on that investment. For commercial companies, risk is rewarded by possible returns, but government contracting limits returns, making the risk-return ratio too high.
The financial system funds innovation but demands returns. If contractors cannot produce them, funding will move to alternate investments. DoD policies and practices need dramatic adjustment to accommodate this reality.
- Focus on results, not input
The real competition in national security is not within defense contracting; it is with competing global views of governance and economics. Focusing on the percentage of competitively awarded contract dollars ignores real opportunities. Instead, we need recommendations that lead to real competition, yielding better results for national security — faster and at a lower life-cycle cost.
There are a host of additional issues that need attention, from improving DoD’s program and contracting workforce to accelerating contract award schedules. This DoD report should be the starting point for tackling those issues. In particular, DoD officials should spend more time defining the problems they are trying to solve and assessing ways to effect real change that addresses those problems. Those ways should include more robust analysis, proper focus, vision, and implementation of the areas where competition will really help. There is no better time to start than today.
David J. Berteau is president and chief executive of the Professional Services Council, an industry group. He previously was assistant secretary of defense for logistics and materiel readiness.
