Pentagon's No. 2 Drops Not-So-Subtle Hints to Industry

In public appearances at defense-industry events this week, Deputy Defense Secretary Ashton B. Carter sought to deliver a friendly message that the Pentagon feels contractors’ pain when it comes to the looming budget cuts.
But he also offered industry a reality check on the challenges companies will face in doing business with the Pentagon in the foreseeable future.
Regardless of whether Congress reaches a budget deal to avoid a 10 percent cut to Pentagon spending next year, defense contractors have to get serious about lowering the prices they charge for their products and services, Carter said.
The expectation that “high performance” systems will win contract awards even if less-costly and less-sophisticated alternatives exist must be banished from contractors’ thinking, he said. “Affordability requirements for programs is en par with performance,” Carter said Sept. 19 at the Air Force Association’s annual convention at National Harbor, Md.
The Pentagon’s new procurement policies, known as “better buying power,” are intended to protect U.S. taxpayers from price gouging, he said.
Carter worries that procurement officials and contractors are still living in the world of the post-9/11 era of ever-rising budgets. Weapon systems’ cost estimates are based on “self fulfilling historical estimates” that assumed expenses would soar, instead of being based on what systems should cost. The better-buying guidance is intended to change that mentality, he said.
“This is joint project for us [the government] and industry,” Carter told a Sept. 20 Politico forum in Washington, D.C.
“The era we enjoyed for 10 years is over,” Carter said. “What it means for managers is that you can’t fix [problems] with money. You need other management tools.”
The Pentagon is now requiring that buyers of contract services take a “basics of good buying” crash course. Services make up at least half of the $400 billion worth of contract awards the Defense Department makes each year.  
“A lot of our people who procure services are not procurement experts,” Carter said. They will be taught fundamental skills such as how to write requirements, include financial incentives in contracts, run competitions and conduct market research.
Government officials and contractors also will have to end chronic bad habits, such as funding science projects that don’t result in useful products for the military. “The challenge in science and technology is getting something fielded. … It's an age old story,” Carter said at the Air & Space forum. “Our principal frustration is that you can do a lot of research and development, but it never goes anywhere,” he said. “We have to work on that.”
Carter also hinted that, no matter how much political clout a company might have, the Pentagon intends to stand behind “tough decisions” that are made by program managers, even if that displeases the contractor.
Case in point is the F-35 Joint Strike Fighter, whose price tag continues to rise. JSF Program Executive Officer U.S. Air Force Maj. Gen. Christopher Bogdan, told Air & Space conference attendees Sept. 17 that poor relations between his office and JSF prime contractor Lockheed Martin Corp. pose significant obstacles to the success of the program.
Carter said he supported Bogdan’s stance “100 percent.” The Pentagon wants all three variants of JSF and remains “committed,” Carter said. “But we have to control costs,” he added. “We need a government-industry team that can work together.”
On the issue of corporate restructuring, Carter warned that the Pentagon has no plans to reverse existing policies against the mergers of large prime contractors. Without specifically commenting on the possibility that European giants EADS and BAE Systems might merge, Carter said the Defense Department is not going to green light mergers simply because companies might be worried about future budget cuts. “We understand that our industry needs to be successful and dynamic,” he said. “We encourage companies to make individual business decisions based on what's economically sensible [but] we do have some limits,” he cautioned. “We want competition, we have security concerns. … We look at each transaction one at a time.”
In another bit of news that is likely to disappoint U.S. arms makers, Carter said there is still a long way to go in reforming the export-control system. Administration officials — including Andrew J. Shapiro, assistant secretary of State and head of the Bureau of Political-Military Affairs — havetouted recent reforms that are intended to help U.S. companies increase overseas sales. But Carter said that administrative reforms at Defense and State are still not enough, without help from Congress, which must approve the removal of items from the highly restrictive “munitions list.”
There is “tremendous frustration with how arcane our export control system is,” said Carter. “Even if we succeed at making the DoD part of the system everything that it should be — intelligent, prompt, responsive, thoughtful, aware of the needs of different countries — we are just one player,” Carter said at the Politico forum. “We can’t do anything without Congress. … It is difficult to get everyone pointed in the same direction.”
There are so many hands in the pot, Carter said. “It takes an extraordinary, collective, simultaneous act to get anything done. That is annoying.” Within the Defense Department, he said, “We have done a great deal over the last three years to get our processes aligned [but] I cannot give you much optimism about elsewhere. … Congress has views of its own.”
Despite the many challenges that contractors face, Carter reminded the audience, the Pentagon is on their side. “Industry is a core part of everything we do,” he said. “We don't build anything in the Pentagon, we rely on industry to make things for us.”
Photo Credit: Air Force

Topics: Aviation, Joint Strike Fighter, Defense Department, DOD Leadership, Procurement, Acquisition Reform