The Pentagon's high-level panel of outside advisors, known as the Defense Science
Board, is expected to brief the defense secretary next month on how the department's
procurement policies affect the financial health of contractors.
Overall, this appears to be a useful exercise, triggered by some unexpected
developments in the industry. One was the financial woes experienced by two
of the Pentagon's top contractors, Lockheed Martin and Raytheon Company. The
realization that even large, powerful firms are vulnerable in the financial
markets caught Pentagon officials unprepared.
"I have asked the Defense Science Board to look at ways in which we might
either alter, modify our contracting policies, find out ways in which we can
be helpful to the industry ... They will come back to me with recommendations
by mid-March or April," said Defense Secretary William S. Cohen during
a recent breakfast with reporters.
It seems odd, however, that the Pentagon would kick off a comprehensive policy
review during the final months of the current administration. These are the
sort of efforts that, typically, have more credibility at the outset of an administration's
four-year term.
But the Pentagon's acquisition chief, Jacques S. Gansler, offered enthusiastic
support for the panel's work, even if it comes during this time of "short-term
transition," Gansler told an industry conference sponsored by the American
Institute of Astronautics and Aeronautics (AIAA) in Washington, D.C.
"We are going to listen to experts from all fields: Congress, universities,
Wall Street, government, representatives from commercial and military industries,"
he added. Key topics to be discussed include research and development, price-based
contracting, industry competition and accounting standards. A broad spectrum
of issues, indeed.
The DSB group, chaired by Philip Odeen, of TRW Inc., will look at possible
changes in procurement policies and practices in order to "strengthen our
defense industrial base, while gaining in cost and performance," said Gansler.
"They already have identified a number of promising changes that will simultaneously
benefit both the Defense Department and industry," said Gansler. He also
stressed that, "Our focus has to be on implementation tactics, not on studies."
That is hard for many industry executives to believe. Several industry experts,
in interviews, said the timing couldn't be worse. They cited not only the short
time remaining before the end of the Clinton administration but also the fact
that electoral politics are in play. In addition, the Pentagon is scheduled
to begin the mandatory Quadrennial Defense Review of defense requirements next
spring. The review will be a massive undertaking that will demand undivided
attention from the new leadership at the Pentagon.
"It's always tough when you are in the last year of an administration,"
noted Johnnie E. Wilson, retired general who ran the Army Materiel Command,
a nearly $20 billion operation that makes heavy use of contractors. Wilson is
president of Dimensions International, a high-tech firm in Alexandria, Va. "It's
going to be tough to make much happen this year," he said in an interview.
One problem that has plagued Pentagon policy-makers, suggested Wilson, is a
tendency to bite off more than they can chew. "What I have said to the
guys at the Pentagon is to select three to five things they want accomplished
this year and not talk about a whole menu of things ... Because you just can't
make major changes in the Defense Department.
"You really have to tighten priorities," he said. "Everything
can't be a priority."
AMC's current commander, Gen. John G. Coburn, also appears skeptical about the
prospect of substantive changes in procurement policies. "I have been around
this acquisition reform business for many years [and] my observation is that
you have a funnel effect ... You have a government bureaucracy that feeds an
industry bureaucracy," he told the National Defense Industrial Association's
tactical vehicle conference in Monterey, Calif. "The core competency of
many firms is their ability to respond to us. And they cannot change unless
we change," said Coburn.
That is an important point, given that one of Gansler's goals is to lure high-tech,
innovative firms to become defense contractors. "We need to encourage defense
initiatives that will bring in small firms to work with the Defense Department
... commercially oriented and traditional ones too," said Gansler. "Even
Wall Street might smile at such efforts."
But tailoring industrial policy to the whims of Wall Street could send Pentagon
officials into uncharted territory. This notion recently was reinforced by the
Army's top acquisition executive, Paul J. Hoeper. He believes the DSB panel
will provide a valuable assist "because it's going to inform the leadership
of the Pentagon about how companies work in a financial sense," he said
in remarks following a speech to the NDIA conference in Monterey.
Industry's high-stakes competition for capital is something "we don't
really know very well," said Hoeper. "We understand the general buyer-seller
relationship with companies." But, he noted, "companies do not just
compete for sales. They also compete for capital ... We don't understand that
terribly well at the Pentagon ... I do think the DSB panel will look at that."
New Conundrum
The financial markets turning sour on defense firms, however, should not be
a source of consternation, said John W. Douglass, president of the Aerospace
Industries Association. This is all part of the new "defense industry conundrum,"
he told the AIAA symposium. "Our defense contractors are suffering in the
stock market because they are being compared to commercial firms.
"The way business is done in commercial market allows for a better cash
flow situation," said Douglass. "We can't compete with commercial
firms. It isn't that the defense industry is sick. It's that the commercial
economy is booming."
The Defense Department, meanwhile, has upped its procurement budgets. And this
should be welcome news for the industry, said Cohen.
"Realistically, we can accomplish a lot by spending $60 billion a year
to help the defense industry," he told reporters. "So I think the
key is spending the kind of dollars we said we were going to spend.
"All of this is I think very positive," Cohen stressed. "We
meet at least twice a week with all of the major defense contractors and say
'how is your industry doing? What can we do to be helpful?'" ... I think
that's very positive."