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Industrial Base
Defense Contracting Methods Stifle Innovation
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By Sandra I. Erwin
The Pentagon’s new industrial policy guidelines call for the Defense Department to tap the commercial sector and niche small businesses for new technologies.
“Although innovations unique to national security often occur within the 'pure-play' defense industrial base, the vast majority of innovative and revolutionary components, systems, and approaches that enable and sustain our technological advantage reside in the commercial marketplace, in small defense companies, or in America’s universities,” said the 2010 Quadrennial Defense Review.
The QDR calls for establishing “requirements and pursuing specific programs that take full advantage of the entire spectrum of the industrial base at our disposal: defense firms, purely commercial firms, and the increasingly important sector of those innovative and technologically advanced firms and institutions that fall somewhere in between.”
Those “in between” companies offer many of the niche products and services that the Pentagon needs to counter the enemy’s rapidly changing tactics and technologies. At an AFCEA industry conference in February, Vice Chairman of the Joint Chiefs of Staff Gen. James Cartwright, USMC, lamented that current conflicts “have a duty cycle of about 30 days.” The Pentagon’s lethargic procurement cycle cannot keep up. "That's part of the frustration that you'll hear day in and day out both from myself and the Secretary of Defense [Robert Gates] as we try and move this department to a footing and a risk calculus that is commensurate with the war that we're actually in, not the war we'd like to be in,” Cartwright said.
But it is not clear how the Pentagon plans to go about changing the status quo. Small businesses and commercial firms typically have been skeptical of the Pentagon’s rhetoric because the procurement system remains stacked against those “in between” firms cited in the QDR.
“The reality is that the procurement process cannot be changed so dramatically as expressed in the QDR ... The utility and innovation of this unique sector of the defense industry must be better understood and incorporated in the short-term strategy,” said Muriel Jérôme O’Keeffe, president of JTG inc., a small woman-owned company based in Vienna, Va., that specializes in multilingual services and cultural analysis for intelligence and homeland security agencies.
There are potentially hundreds of firms fall in the “in between” category, but as a rule these companies are not able to score defense contracts unless they are subcontractors to the large primes, said O’Keeffe in a recent interview. “If you’re providing a niche service or product, it’s hard for small businesses to get contracts,” she said. “We depend on large companies for our survival.”
If the Defense Department is serious about recruiting agile small companies, it needs to change its business model so that it compensates contractors for performance, not for labor hours, O’Keeffe said. The government would get more bang for the buck if contracts were awarded for a specific product or service, to be delivered as soon as possible, as opposed to the government agreeing to pay for labor hours regardless of what is accomplished during those hours, she said.
But changing contracting methods so that the government pays for deliverables, instead of labor hours is not likely to happen overnight, she said. “It is going to be a big shift.” Government officials talk about their desire for better contractor performance but are not taking action to incentivize suppliers to produce faster. In areas such as information technology, companies sell labor hours, which is very different from selling a finished product, said O’Keeffe.
“At the moment, the procurement process doesn’t reward agility,” she added. “For certain high-tech products, the government should look at a different way of procuring the service.”
Another problem for small IT or analysis firms is that many of the niche services they offer have been bundled into larger intelligence or logistics contracts, so the Defense Department may not be able to draw on their talents unless it hires the prime contractor to do the work.
“After 9/11, anything dealing with cultural and language shifted into larger procurements and that expertise is now with large companies that provide larger services,” said O’Keeffe. That may not be the best deal for the government.
Information technology consultant Anand Datla offered similar observations in a recent article in National Defense. He said government contracts that pay for labor hours instead of performance are stifling innovation and hindering progress in areas such as cybersecurity. “The traditional acquisition economy is not giving the government the best value for taxpayer dollars,” he said.
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