Pentagon Values Strong Industry, But Can't Save Everyone From Going Under

The Defense Department and the U.S. industrial base have become mutually dependent during the last decade. The nation’s security relies on both.
 
Keen to sustain that relationship, Pentagon officials have launched a program to ensure that the health of the private sector is taken into account during every procurement program review.
 
But the recognition of mutual dependence is not a guarantee that the government can save every struggling firm from drowning in coming financial turbulence.  
 
In short, there will be a lot of bad news being doled out to prime contractors and their suppliers, Brett Lambert, deputy assistant secretary of defense for manufacturing and industrial base policy, said April 25 at a Center for Strategic and International Studies forum in Washington, D.C.
 
“The [Defense] Department needs to get out of the lifeguard business, which is where you have a critical sub-tier supplier … that all of a sudden one day they’re out of business and shut down. They’re drowning and … we would jump in.”
 
The U.S. defense industrial base has become more global, commercially focused and financially complex during the wars of the past decade. Sub-tier contractors have become ever more vulnerable to fiscal jolts felt by the primes they supply.  
 
A decade ago, 70 cents of every dollar paid to a prime contractor stayed with that contractor. Today, that model is “completely flipped,” Lambert said. For each dollar paid a prime contractor, 65 to 70 cents flows out within 30 days to subcontractors and suppliers.
 
“Every time you peel away a layer, you find another layer” of companies feeding the Defense Department’s needs for products and services, Lambert said. The web has become so complex and opaque that some seemingly insignificant suppliers are linchpins in huge procurement programs, he said.
 
“We have a number of firms that don’t even know they are supplying the defense department,” Lambert said. “Yet, if they go out of business, we can’t build what we need to build for the war fighter.”
 
Before the recent financial crisis hit the global economy, when the Pentagon could essentially write blank checks to industry, there was little dialogue between government and defense manufacturers, Lambert said. The only necessary discussion was whether a company had the capacity to meet the military's demand. If it didn't, the solution was to throw some money at the contractor so it could do so, he said.
 
Now, the Defense Department “can’t keep fixing million-dollar problems with billion-dollar solutions,” Lambert said. Rather than jumping in with a life preserver when a company is drowning, the Pentagon needs warning signs that the firm could go under in the first place. Officials need to identify options — other than financial intervention — to keep critical manufacturers economically viable, he said.
In conjunction with acting Under Secretary of Defense for Acquisition, Technology and Logistics Frank Kendall’s “Better Buying Power 2.0” initiative to streamline defense procurement, Lambert has rolled out “Sector-to-Sector, Tier-to-Tier” reviews.
 
Under S2T2, every major program review will now involve a look at the impact of programmatic decisions on the industrial base. In laymen’s terms, Lambert wants a detailed summary of what every program cancellation or delay will have on companies that are involved.
 
Nearly all sectors of U.S. industry have ballooned under the largess of a Defense Department fighting two simultaneous wars. That has left a homeward bound military with capacities that it no longer needs. Companies that once saw defense contracts as a growth opportunity now view them as a hedge strategy at best, Lambert said. Some of the fat must be cut, he added.
 
“We have a tremendous amount of excess capacity across all sectors. ... And we have to start rationalizing it,” he said. “It’s like having a kid that for 10 years you gave nothing but donuts to. Then you woke up one day and said ‘Hey, this kid is really big. I’m not going to feed him again until he gets small.’ That’s not how industry works.”
 
Lambert said Pentagon buyers are well aware that “at the end of the day, we don’t build anything,” and that national defense relies on a robust industrial base. At the same time, industry must be aware that not every contractor can avoid the reverberations of a downturn in defense spending.
 
“There will be trades, we should make no illusions,” Lambert said. “We will identify critical key suppliers that will go under because we will have made the assumption, based on our strategy moving forward, that that is no longer a critical capability to our future force. … Unfortunately there’s going to be a lot of bad news that’s given out to companies.
 
“Just because you are vital to one company or one capability, we may have alternatives. We may want to invest in the next-generation technology or it may very well be a decision that we can’t afford to support that particular effort.”
Photo Credit: Thinkstock, Defense Dept.

Topics: Business Trends, Doing Business with the Government, Procurement, Acquisition Reform, Defense Department