Iron Triangle Showing Signs of Dysfunction

11/2/2011
By Sandra I. Erwin

Military contractors have been the target of lawmakers’ wrath of late, for budget overruns, for bungling programs, for overcharging the government and for untold other sins. Pentagon officials, at the same time, are being chided for failing to take action to protect suppliers when budgets decline.
A hearing this week of the House Armed Services Committee’s defense business panel on “challenges within the defense industry” may be proof that the vaunted Iron Triangle may be losing its grip.
Two Pentagon officials were summoned to hear lawmakers’ complaints about the Defense Department's industrial policies toward small businesses. Many companies, members of the panel groused, are cash strapped, laying off employees and being shunned by investors who fear Pentagon budgets are drying up. Panel members wanted to know what the Pentagon is doing to help shore up the industrial base.
The chairman of the defense business panel, Rep. William Shuster, R-Pa., seemed troubled by the idea that the Pentagon regards the defense sector as a capitalist Darwinian industry where the market decides who lives and who dies. That was the panel’s take from anOct. 24 hearingwhere analysts from the Center for Strategic and Budgetary Assessments testified on a new study that calls for the Pentagon to protect critical segments of the defense industry before companies fall victim to the budget ax.
Brett Lambert, deputy assistant secretary of defense for manufacturing and industrial base policy, took issue with the CSBA study. “It is a mischaracterization that we have thislaissez-faire” attitude, he said. “When possible we want to allow the market to work.” But that is not always possible or appropriate, he added. Some industries, such as nuclear submarine makers, require “intervention and nurturing.” But when it’s commercial products, he said, “We prefer the market to work.”
Shuster didn’t appear satisfied with than answer. “What are the segments we need to have core competency?” he asked.
The answer will not be known, said Lambert, until his office completes a comprehensive survey of more than 25,000 companies that do business with the Defense Department. So far, more than 5,000 have responded. Coincidentally, Lambert had a list of every company from each panel member’s home state that had filled out a survey. The gambit worked, as each member on the panel asked Lambert how many companies he or she was representing.
Lambert said it could take several more weeks to collect the data and analyze it. His sense is that the Pentagon has no reason to worry about its prime contractors, a handful of mega-corporations that have relatively easy access to capital and cash reserves. 
“The real fragility we’re seeing is in the lower tiers,” said Lambert. The trouble is that when a subcontractor is in financial trouble and unable to produce a key component for a weapon system, the Pentagon doesn’t find out until later in the development. That is “when we need to intervene. We try to adjust programs to we create sustainable rates of production,” Lambert said.
“But don’t we have to do that early on?” Shuster rebutted. 
That would be a sensible approach, Lambert acknowledged, but he informed Shuster that procurement officials have “soda straw visibility” of the industrial base and rely on prime contractors to deal with supplier problems. “We need greater insight,” Lambert said. “We need better data at lower tiers."
Shuster then brought up other industry grievances: A perceived hostility toward defense suppliers, contracting officials’ refusal to talk to vendors and an onslaught of auditing requirements that overburden small businesses. These are “huge hurdles,” Shuster said, that “I don’t know that we can legislate.”
Lambert recognized that doing business with the Pentagon can be “difficult.” Is the only industry where customers can’t talk to suppliers, he said. “It’s the culture.” Within his office, however, “We’ve increased efforts to talk to industry,” Lambert said. “We have an active dialogue at the CEO level with large and mid-size companies.”
The co-chair of the panel, Rep. Rick Larsen, D-Wash., also voiced frustration about the Pentagon not doing enough to help small companies in the defense industrial base. He said the Defense Department’s industry outreach offices appear more consumed by compiling statistics rather than understand suppliers’ concerns and communicate to them what the military needs them to produce.
Andre Gudger, director of the Defense Department’s office of small business programs, said he is aware of these complaints and has been making an effort to host “roundtables” with business leaders. 
Rather than just focus on “set asides” or mandatory percentages of contract awards that must be given to small businesses, Gudger’s office is seeking to align programs with actual Defense Department needs. “We are becoming more program centric,” Gudger said. The Pentagon, for instance, would like to see more participation by small businesses in fulfilling growing demands for green energy technologies. 
Members still appeared skeptical. They kept asking questions: How can small businesses cope with the onerous auditing and certification requirements? How can they stay in business when Pentagon programs tend to stretch over a decade, or longer, and suppliers do not receive regular payments?
Gudger said a recent change to the Pentagon’s financial system allows for accelerated payments to any small business that has a prime contract. Instead of having to wait for 30 days, they receive payments in 20 days. Most small businesses, though, will not benefit from this rule because they are subcontractors to larger primes. 
Echoing a complaint often heard from contractors, Rep. Allen West, R-Fla., suggested that the best way to help industry would be for the Pentagon to clearly convey its requirements for new equipment and services. “Do we have a strategy that articulates the requirements to the defense industrial base so they can develop the right kinds of capabilities?” West asked.
Lambert agreed that government-industry communications are not functioning as they should. Maybe if the Defense Department better explained what it needs, it wouldn’t have to spend billions of dollars designing weapon systems that never get produced, he suggested. “I think there is no doubt that in the last decade we spent billions and never produced anything,” Lambert said. “Our defense industrial base requires production.”
He compared Pentagon procurement planning to an EKG chart. “We ask companies to build up rapidly and then draw down rapidly.”
In response to this issue, Lambert’s office is now more “engaged in program reviews,” he said. Whereas in many programs industrial base implications are not factored in selecting a contractor, now such considerations are in play, said Lambert. 
The struggles of the industrial base, however, cannot be blamed entirely on the Defense Department. Congress, too, is responsible for fomenting instability and causing disruption to business plans.
Gudger said that lack of long-term reauthorization for programs such as small business innovation research and technology transfer programs has created “uncertainty and reluctance to make investments if they don’t know if the program will be around.
“When programs get short-term reauthorization, companies don’t know if that means the program will go away, if the technology will be of interest to DoD,” he said. “These things hamper them from making the investments we would like to see them make.”

Topics: Business Trends, Doing Business with the Government, Defense Department, DOD Policy, Defense Contracting

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