Can We Put a Price Tag on Collaboration in Defense Programs?

The Obama Administration came into office in 2009 determined to upend what it viewed as a too-cozy relationship between the private sector and the Department of Defense (DoD), and to inject more competition into the process of awarding contracts. There was a presumption on the part of incoming officials that too many defense companies, particularly the OEMs, had been allowed to establish quasi-monopolistic positions which allowed them to impose excessive costs on the Pentagon. The new policy, articulated in the Better Buying Power initiative, attempted to apply the principles of free market economics to the sphere of defense acquisition. The then Under Secretary of Defense for AT&L, Dr. Ashton Carter observed that the commercial telecommunications industry was routinely demonstrating double digit improvements in productivity and performance while lowering costs and wondered why the defense sector could not mirror such performance.

But how valid was it to compare behaviors in a free market, particularly one that has few externalities, with the way the defense sector works? The defense sector is not a free market. Defense is a collective, not a private good. It is a monopsony with but a single buyer, one that not only imposes unique standards, rules and behaviors on sellers but also retains the right to change those rules, contracted quantities, etc., as it sees fit. The Pentagon’s view is that the needs of the government take precedence over customary free market behavior, commercial best practices and even, on occasion, written contracts. Moreover, DoD has in place policies that even government officials will acknowledge are anti-competitive, going to great lengths, for example, to maintain a public defense industrial base and shield it from competition despite convincing evidence that these facilities are often more expensive than their private sector counterparts.

Clearly, DoD values other factors than just the existence of a competitive contracting environment or lowest prices in its treatment of the acquisition system. Contracts are awarded on the basis of best value which includes considerations of past performance, quality of products and services and even capacity to innovate. Some of these factors border on intangibles.

It is precisely because of the unique characteristics of national defense that trust, reliability and collaboration should weigh heavily in the government’s determination of value. Administrations come and go but the Pentagon and the responsibility to provide for the nation’s security is continuous. Value must be assigned to companies that have been in the defense sector for the long haul, have a proven track record, use their own money to make their own investments in infrastructure processes and people to improve their performance and who are disposed to treat their government client as a collaborator rather than just a customer.

Collaboration between government and industry can produce incredible results. The creation of the nuclear Navy and the “invention” of the nuclear submarine was the result of the long-term collaboration between that service and the nuclear reactor and shipbuilding industries. Of course it did not hurt that Admiral Hyman Rickover, who directed the original development of naval nuclear propulsion, controlled its operations for three decades as director of Naval Reactors. Today, there is no more collaborative relationship in the defense sector than that between the Navy’s SSP program and the two companies that together build the Virginia Class SSN, General Dynamics and Huntington Ingalls.

Or take the Navy’s Aegis program. Begun in the 1970s it has provided excellent results for some forty years, going through generation after generation of upgrades and improvements including the new Baseline nine combat system which supports not only both the new anti-air Standard Missile 6 and the anti-ballistic missile-capable Standard Missile 3 but also the Naval Integrated Fire Control-Counter Air system. The inheritor of the original Aegis program, Lockheed Martin, has continued the collaborative relationship with the Navy begun by the first program manager, Admiral Wayne Meyer, who famously told government and private contractors to throw their badges in the trash. A succession of Navy leaders, including recently Admirals Kathleen Paige and Brad Hicks at the Missile Defense Agency, maintained this close collaboration. This collaborative environment was a principal reason why the Obama Administration was confident in proposing its Phased Adaptive Architecture in 2010, the centerpiece of which is the deployment of the Aegis Missile Defense System Ashore in only five years.

Close collaboration and continuity on both the government and corporate side allowed these programs to take bold steps, manage a host of risks and resolve problems. Unnecessary or too frequent competition can stifle such a relationship. Government officials cannot be free and candid for fear of impact on perception of fair and open competition. Company personnel have to be concerned about holding some ideas and information back for the next proposal. As a result, the government may think it is getting a better deal by creating a more competitive environment but it may actually be getting much less than it bargained for.

It is hard to assign a value to long-term collaborative relationships between government and industry. Common sense says that it is worth a great deal.