For Defense Industry, Lure of Shiny Objects Rapidly Fading

By Sandra I. Erwin
The erstwhile dependable moneymakers in the defense industry no longer look like safe bets. Big-ticket weapon systems are being delayed, terminated, investigated or mired in endless reviews.

A cursory glance at the current Pentagon weapons-modernization plan suggests that the next generation of military whiz-bang technology is not arriving any time soon, and neither is the dependable cash flow that industry came to expect in new hardware production contracts.

For arms manufacturers, the future looks uncertain, at best. Various attempts over the past decade to design replacements for current weapons have failed. After the sense of urgency that existed during the Cold War evaporated, the Pentagon’s bureaucracies and Congress created a regulatory maze that, over the years, has turned procurement programs into Kafkaesque exercises of milestone reviews and requirements scrubbing. The problem, in this case, is not so much ponderous oversight but rather the absence of a clearly defined threat that guides the development of new technology. No replacement has yet emerged for the Soviet “evil empire” that spawned the development of most of the tanks, ships and airplanes that are still the mainstay of the U.S. military inventory.

The budget is always cited as a reason why programs are delayed. Yes, some relatively modest cuts are coming. But projections show the Defense Department still plans to spend anywhere from $110 billion to $120 billion annually on the procurement of new weapons over the next five years.

It’s Pentagon indecision and unhappiness with the state of currently available technology, more so than budget cuts, that are holding up production contracts for new weapons.

In the Army, major modernization programs — a new ground combat vehicle and an armed helicopter — are moving at a snail’s pace. The Navy’s largest class of surface combatants — the Littoral Combat Ship — keeps lurching from one crisis to the next. The mother of all problem-plagued Pentagon programs, the F-35 Joint Strike Fighter, can’t seem to escape trouble more than a decade into its development. The amphibious vehicle that the Marine Corps billed as its top modernization priority is back on the drawing board nearly two decades after it was conceived.

Amidst this cloud of confusion, some contractors might decide to wait for the good times to return, but most others are going to be following the money to what is increasingly becoming industry’s more reliable cash cows: Maintenance, repairs and logistics support.

The Defense Department spent $171 billion on logistics in 2010. The so-called “operations and maintenance,” or O&M, accounts are one of the fastest growing portions of the Pentagon’s budget, and receive far less scrutiny than procurement spending. Unlike acquisition programs that have political constituencies and are the subject of heated debate on Capitol Hill, the ever-growing O&M pie mostly goes unchallenged.

Of the $171 billion in logistics spending, about $79 billion is for weapons maintenance, and $68 billion is tagged for spare parts. That is enough cash to spark attention. In fact, a war is brewing inside the Beltway over how government depots and the private sector will share the wealth.

Sen. Saxby Chambliss, R-Ga., co-chair of the Aerospace Caucus, told an industry gathering that he expects depot-maintenance issues to gather steam as the Pentagon cuts back on purchases of new weapons and increases spending on repair and upgrades of existing hardware. Chambliss, who worries about jobs in his home state’s Robins Air Force Base logistics center, said industry and government are going to be competing for business. “The sustainment issue will grow in importance,” he said. In fact, industry groups are asking Congress to rewrite legislation that the private sector believes is tilting the playing field in favor of shifting more of the workload to public depots.

The logistics business, regardless, will continue to be lucrative for the defense industry because there are not enough government facilities to handle the huge anticipated workload as equipment returns from the war zones. Industry also has a virtual monopoly of the upgrades and modifications market, which involves complex reengineering of current systems and costly overhauls of information networks.

The business environment at large, meanwhile, is only going to get tougher for defense firms. Besides the depot maintenance brouhaha, industry is in for a bumpy ride as the Pentagon unleashes new regulations that are designed to crack down on vendor overpricing.

A federal procurement rule that came into effect in February allows the Pentagon to withhold up to 10 percent of a contractor’s payment if the supplier fails to prove that its accounting systems provide accurate enough information to government auditors. The so-called “business systems rule” already is causing heartburn across the industry.

Attorneys who represent defense contractors have cautioned that these new rules, which are intended to improve public trust in government, are creating a hostile business climate. Robert A. Burton, a former federal procurement official and now an attorney at Venable LLP, said the business-systems rule is an example of overreach that presumes every vendor is guilty until proven innocent.

Another controversial new measure would narrow the definition of a commercial item that is purchased by the Defense Department. Pentagon procurement officials contend that under current rules, vendors get away with selling overpriced commercial products and the government does not have the ability to challenge those prices. Legislative changes sought by the Pentagon would make it easier for the Defense Department to audit the company’s pricing data.

As one corporate executive put it, “Industry is getting more frustrated, and the government more distrustful.”

So much for all the catchy slogans about industry and government partnerships.

Topics: Defense Department, DOD Budget, War Planning, Procurement

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