New Wave of Procurement Reforms Could Soon Hit the Pentagon

Members of the House Armed Services Committee are proposing a series of procurement, contracting and auditing reforms that seeks to help businesses access the nearly $400 billion a year defense market.
A newly released report, titled, “Challenges to Doing Business With the Department of Defense,” criticizes the Pentagon for mismanaging its supplier base and for creating unnecessary “barriers to entry” to commercial companies that traditionally do not do business with the government.
Burdensome regulations and arcane auditing requirements are driving many companies to quit the defense market, and are deterring new suppliers, the report said. As a result, the panel will be asking the Pentagon to study options for outsourcing auditing responsibilities to independent agencies.
The co-chairs of the panel — Rep. Bill Shuster, R-Pa., and Rep. Rick Larsen, D-Wash. — interviewed 150 business executives over the past six months and hosted seven roundtables around the country. What they heard was a consistent message: Pentagon procurement regulations discourage companies from seeking defense contracts.
During a meeting with reporters on Capitol Hill March 21, Shuster and Larsen said they worry that the Pentagon is at risk of losing valuable suppliers because it has little insight into the problems of its industrial base. Their proposed bipartisan reforms are likely to be part of the fiscal year 2013 defense authorization bill.
Shuster said the Pentagon erroneously treats the defense industry as if it were a free enterprise when in fact it is not a market-driven sector. It only has one customer and the customer sets all the rules, Shuster said. “Developing a long-term strategy is essential to supporting a strong industrial base,” he added.
Larsen said HASC plans to ask the Defense Department to provide a semi-annual update on the state of the supplier base. The Pentagon already is working on a sector-by-sector analysis, but Larsen said that so far the effort appears to be inadequate. “They are going to have to dig deeper,” said Larsen. “I saw the list they had for my district. I could have easily tripled that. For whatever reason they are not in the Pentagon’s database,” he said. “We need to get deep and accurate picture of the industrial base.”
Rather than view small businesses as a source of untapped innovation and useful technology, the Pentagon sees them as a quota requirement, as it is required to award 23 percent of annual contracts to small businesses. The panel wants to raise the goal from 23 percent to 25 percent.
“We make the case that they’re not reaching the goal now,” said Larsen. “The Pentagon also needs to not look at the small business goal as just a number to make,” said Larsen. “We want to see a quality effort to expand the role of small business.”
The auditing reforms that Shuster and Larsen propose are likely to spark controversy, as they are a radical departure from the way the Defense Contracts Auditing Agency does business. But Shuster said he believes a FINRA-like model — where a financial industry-funded agency is in charge of enforcing regulations — could be applied to defense in order to relieve an overstretched DCAA work force. This approach would still allow for high-level government has oversight, he said. An outside group can “do things more efficiently,” said Shuster. “We are going to have to study this.”
Larsen cautioned that outsourcing auditing functions does not mean backing off anti-fraud initiatives. But when he heard that a company four years ago spent three days tracking down $58 he knew something was wrong. “That’s the other extreme,” he said. “Perhaps there’s a happy medium.”
Other reforms will target Pentagon-funded research that never materializes into actual products. The Defense Department spends a billion dollars a year on so-called small-business innovation research projects, and yet “a lot of stuff dies,” said Shuster. “We want to assist small companies in commercializing.”
Export-control reforms also are mentioned in the panel’s report, although that issue falls outside HASC oversight. Regardless, the panel wants to push Congress and the administration to help ease export-controls that keep U.S. companies from selling products to foreign customers.
“We want to show support from this panel on this issue,” said Larsen. He heard from a company in his district that sells air conditioning units that the paint job, which the firm does for the Defense Department but would also like to sell overseas, would require compliance with the International Traffic in Arms Regulations.
The defense contracting and auditing environment is as bad or worse than it was 10 years ago, said Shuster. “Program managers are more risk-averse than they were 10 years ago,” he said. “And I don’t know that we can legislate that.”
Lawmakers would like to see “changes in requirements so companies want to do business with the government,” said Larsen. “Without some long-term vision from the Department of Defense on the industrial base, we could face portions of the base at risk of withering away.”
Intellectual property protections are another big beef with small businesses. The Pentagon has to make a better effort at protecting companies’ intellectual property, said Larsen. Businesses are not as worried about foreign spies stealing their sensitive data as they are about the Pentagon sharing it with competitors, said Larsen.
Asked about the prospect that his panel’s proposals will lead to real change, Shuster recognized that it is an uphill climb. “It’s a beast over there that is tough to move.”

Topics: Business Trends, Business Development, Doing Business with the Government, Defense Contracting