Byron Callan Highlights Foolishness Of Defense Efficiency Concepts

For the last several months, defense acquisition chief Ashton Carter has been using the example of consumer electronics to illustrate how inefficient the Pentagon’s weapons suppliers are. While makers of smart phones and tablet computers routinely achieve double-digit gains in functionality and cost-effectiveness each year, Carter complains, weapons producers often show no improvement at all over time. Why can’t military contractors deliver the kind of gains that consumers have come to expect from major electronics brands, the acquisition czar asks.

Byron Callan of Capital Alpha Partners has an answer: the consumer electronics companies have all moved their manufacturing operations to China and other places where they can find skilled workers for a dollar per hour. They also can source their parts and software anywhere in the world to get the best price and performance. But as Callan points out, “Mantech is not going to be moving its tech support work to a center in Bangalore, India.” Defense companies are forced to assemble their products and source their inputs at trusted sites, mostly domestic, that invariably are high-cost by comparison with overseas suppliers.

In this simple observation, longtime defense analyst Callan highlights how fatuous much of the current reform talk is within the Pentagon’s acquisition apparatus. The Obama Administration has populated that apparatus with academics, military officers and career bureaucrats — in other words, people who have no real experience in the rough-and-tumble world of business. Not surprisingly, they don’t understand how to get best results from industry, and in particular they don’t understand how the government is often its own worst enemy in seeking greater efficiency.

Secretary Carter is saying all the right things about assuring that the defense industry sustains a reasonable rate of return so its costs of capital do not exceed those of similar industries. However, there is no way military contractors can return the favor by matching Google’s productivity gains as long as they are burdened by thousands of regulations that require them to hire disadvantaged businesses, use mil-spec parts, source domestically and document every minor variation from plan in triplicate. Imagine where Apple would be today if it was required to comply with defense acquisition rules. The I-Phone would weigh five pounds and only be cleared for use in a SCIF.