Can Defense Contractors Afford Their Customer’s Eccentric Behavior?

Over the past two decades, the list of major defense acquisition programs that have been cancelled after years of development or pushed to production only to have their numbers cut has become distressingly long. It doesn’t matter which service is sponsoring the effort or which contractor is involved. This phenomenon also is not closely tied to trends in defense spending. In fact, a number of major programs such as the F-22 fighter, Future Combat System, Comanche helicopter and Crusader artillery system were terminated even as the defense budget was undergoing rapid increases.

One factor explains most of the problem: time. Major defense programs take too long to reach fruition. The extended development process adds to total costs. More important, as time passes, circumstances change, threats evolve and technology advances (particularly in the commercial world). When a program takes ten or fifteen years just to get to a production decision is it surprising that it no longer meets evolving requirements or that it incorporates outdated technologies?

A related factor is the requirements process. Bluntly put, the Department of Defense (DoD) imposes too many requirements at every stage of the acquisition process. The more requirements imposed at the start of a program, the more time it takes to meet them all, the more resources are consumed and the greater the risk that the military environment will change — rendering the program irrelevant. Also, in many instances, the requirements are onerous and controlling, compelling companies to design and produce systems in ways that are inefficient, increase sustainment costs and may even compromise actual performance in the field.

There is an exception to this trend. It centers on special programs that are exempted from some or all of DoD’s traditional acquisition processes and procedures. A good example of a major successful program that operated outside the usual restrictions is that for MRAP/MATV vehicles. DoD procured and deployed some 25,000 vehicles in the time it usually takes to just get a company on contract. But the number of successes of this type can be counted on one hand.

Smaller programs, often for special customers, have shown a greater propensity to deploy capabilities rapidly. Special customers are able to get around the traditional requirements process and acquisition system. These customers are also willing to take the 80 percent solution now with the idea that they will come back later for upgrades or version 2.0.

It seems significant that these successes often are achieved by small to medium-size companies such as Insitu, Sierra Nevada, ManTech, IRobot and Cobham. This is due, in part, to the agility of smaller firms, their ability and willingness to take risks and the limited need to invest their own capital. It also is a function of the ability of small to medium-size companies to make a viable business out of one-off specially-built products.

The large defense firms cannot afford to operate like their smaller brethren, at least when it comes to major acquisition programs. If they are going to invest large amounts of company funds for design teams, factory floor space and advanced production technology they need to have the prospect of major procurements at the other end of the acquisition process. This ties the large defense companies to the services, their major customer, and consequently to the burdensome requirements process even if they have a better idea. The situation also makes them reluctant to criticize the services even when they make bad decisions or write poor contracts.

Pentagon officials complain that the defense industry lacks the agility, productivity or cost-effectiveness of their commercial counterparts. If DoD behaved like commercial customers, the defense industry could operate more like Apple, Google or Microsoft. Even commercial sectors subject to a fair amount of government regulation such as the automotive industry have more leeway than the defense sector. In fact, if the services just behaved like those special customers I referenced above, much of the problem would be resolved.

The problem is that the loyalty (I might even call it subservience) shown by the major defense companies no longer serves them well. They face increased risk as acquisition timelines stretch out and requirements change. They can no longer count on a significant number of new starts coming along that will make up for the termination of a current program. When a service or Congress alter procurement plans or reduce funding it is the companies that take the hit for rising unit costs. This can produce a so-called death spiral in which rising unit costs then lead to further procurement cuts until a program becomes unaffordable. In addition, the position of the large original equipment manufacturers in the aftermarket is increasingly under assault from both smaller firms and government depots. It looks increasingly as if the major defense companies cannot afford to work for their single biggest customer.