Lockheed Official: White House Looking to ‘Rightsize’ Defense Industry Regulations

Photo: Lockheed Martin

President Donald Trump’s promises of deregulation could extend to the defense industry, although the specifics are still unknown. The White House already has kicked off a deregulatory agenda in other sectors, and the CEOs of top Pentagon contractors expect the president to take action in the defense sector as well. 

“I think there’s a healthy discussion going on between the industry and the administration around the issue of regulations, and what’s appropriate,” said Leo Mackay, senior vice president for internal audit, ethics and sustainability at Lockheed Martin Corp.

Lockheed CEO Marillyn Hewson has participated in several meetings with other industry executives and administration officials. Trump has asked defense CEOs to find ways to ramp up manufacturing operations in the United States and create jobs. “A big aid to that would be rightsizing regulations,” Mackay told National Defense in an interview.

He cautioned that companies are not asking for widespread deregulation but for a thorough review of regulations that add costs and that do not demonstrably serve a useful purpose. The industry does not want to be left to its own devices, he noted. “There’s a place for regulations. But it’s this administration’s view that industry may be overregulated,” Mackay said. “We’re engaging with the administration and other companies on how that could be changed to be more constructive.”

It has been widely documented that red tape makes up about 20 percent of the cost of Pentagon weapon systems, he said. So the idea is not only to help the industry create jobs but also to lower the cost of what the government buys. The administration has reached out to industry for suggestions on how to do this, although reforms will not happen overnight. “This is on their timing,” Mackay said.

Large government contractors like Lockheed have created huge organizations internally just to keep tabs on their own compliance with increasingly complex regulations. 

Mackay, for instance, is responsible for what Lockheed calls “integrated assurance.” Companies are “backing into a realization that although they have a CFO who deals with the SEC, a general counsel who deals with legal issues, there is an internal governance and compliance area” that needed to be beefed up, he said. It’s one of Mackay’s jobs to “assure the CEO and the board that we are actively compliant with the laws and regulations that apply to our industry,” as well as internal audits, ethics, enterprise risk management and corporate social responsibility efforts. “If you don’t plan to meet all these obligations in a coordinated fashion, there’s a very good chance that you may not,” he said. “I think you’re going to see more firms starting to do something like this.”

Prime contractors such as Lockheed are especially challenged because they oversee a massive network of sub-tier suppliers and have to assure the government that everyone follows regulatory mandates such as screening systems for counterfeit parts, cracking down on human trafficking and preventing materials extracted from war-torn countries known as “conflict minerals” from getting into U.S. weapon systems.

“It’s a team sport,” said Mackay. Lockheed provides subcontractors with “supplier tool kits” and webinars that explain codes of conduct. The company participates in the Defense Industry Initiative, a consortium of 77 defense contractors focused on ethics and integrity in business dealings with the Defense Department.

The regulatory picture in Pentagon procurements will remain cloudy for several months, or until the administration completes a reorganization of the acquisitions office and fills high-level jobs. Mackay, like others in the defense industry, is hopeful that future reforms will not be a repeat of past efforts.

“There’s an unfortunate tendency when we get waves of acquisition reforms: We don’t do a very good job clearing out existing reviews and we generally add on, so the process gets lengthened,” he said. “We need to clear out existing underbrush before you put in a new structure.”

Mackay was especially critical of recent efforts to impose “fixed-price” contracting on new technology developments. Firm fixed-price deals make sense for production contracts, but “at other points in development other contracts like ‘cost plus’ are more advisable. It has a bad name, but is more appropriate for new technology.”

Proposals to use fixed-price contracting as the default option is an example of “bad ideas that have a long track record of not working and are advanced as innovative thinking,” he said. “If you’re developing new technology, fixed pricing is not a good idea. There’s a lot of evidence that says that’s the case.”

Critics who claim these rules are put forth to prevent contractors from overcharging the government should be reminded that the Defense Department closely scrutinizes companies’ internal cost data and audits every program. “They know our cost structure. We negotiate incentive fees, award fees, return on sales. None of it is hidden. They have all the data,” he said. 

Mackay said the system works better when there is “healthy respect for both government and industry program managers’ discretion, and giving people the authority and responsibility and letting them do their jobs, and hold them accountable for the results.”

Topics: Defense Department, Defense Contracting