GM Could Teach DoD About The Incentives For Long-Term Contracts

Senior Department of Defense (DoD) officials have made greater access to commercial technologies from non-defense companies a central feature of their plans for the promotion of defense innovation and the continuation of U.S. military-technological preeminence. According to these officials, the locus of innovation has shifted from the government, particularly DoD, to the private sector, generally, and to companies without significant defense business, in particular.

As anyone who follows defense acquisition policies knows, there is a yawning chasm between DoD’s vision of making commercial companies a major part of the defense technology and industrial base and the barriers the defense acquisition system creates for those companies entry into the defense marketplace. Meeting the requirements of federal acquisition regulations, creating a unique, parallel accounting system, collecting certified cost and pricing data for an entire supply chain, and potentially risking loss of commercial intellectual property are powerful disincentives for commercial companies to do business with DoD. The Pentagon leaders want access to 21^st century commercial technologies and production capabilities, but they want to do so using the acquisition policies and practices of the last century.

A case in point is the acquisition leadership’s mania for competition in contracting. Although there is scant evidence that continuous competition actually reduces the costs of major end-items, this belief has been enshrined in current acquisition philosophy and embedded in all three versions of Better Buying Power. Competition is viewed as almost always beneficial. Consequently, more competitions and shorter contract performance periods are viewed as positive outcomes.

General Motors learned a lesson the hard way about placing competition ahead of long-term, stable relationships with its suppliers. Decades of pressuring suppliers to reduce prices and conducting revolving competitions created a hostile atmosphere across the supply chain and disincentivized collaboration. The Wall Street Journal reported that now GM is radically reversing course. It is looking at establishing long-term contracts, up to a decade in length, to reduce costs and improve access to innovative technologies. According to a GM official, “by locking suppliers into longer-term contracts and looping into vehicle designs earlier in the process, the auto maker can expect suppliers to share more innovations and better processes that help save money. We want them to double down on us.” In other words, GM is taking into account in its contracting framework the sub-contractors incentive structure.

The lesson from GM’s experience with shaking up its supply chain in order to foster greater competition that Pentagon acquisition officials should take to heart came from one of the car company’s long-time suppliers: “If an auto maker has great relations with the suppliers, the suppliers provide them with the innovation and support. However, if they are getting beat up by a buyer, they aren’t going to give them anything.” Message to Under Secretary for AT&L Frank Kendall: call off the dogs.

GM could teach DoD another lesson, one about the opportunity costs associated with trying to establish smothering controls over the private sector. According to a report in Automotive News, this new framework provoked a serious backlash. “Some suppliers and their attorneys interpreted the new terms and conditions as giving GM far broader authority to recover warranty and safety-recall costs, to take over suppliers’ intellectual property rights and to access their financial information.” After a few months of discussions with its suppliers, GM rolled back its new framework. It realized it was a waste of effort to be fighting with its suppliers over access to intellectual property and pricing information, when what it really wanted to focus on was collaboration on technology, quality and reducing waste so as to lower costs.

Sound familiar? These are precisely the issues raised by companies doing business with the Pentagon over the department’s ongoing efforts to take corporate intellectual property, to acquire certified cost and pricing data on commercial items and to force companies to accept fixed price contracts on new-start programs that greatly increase their vulnerability to cost overruns. What the Pentagon wants is exactly the same as GM’s desires – technology, quality and lower costs. But acquisition policies drive the conversations with industry in an entirely different direction, encouraging an adversarial relationship, increasing costs, slowing down innovation and disincentivizing participation in defense programs.

The Obama Administration has a better chance of getting Iran to entirely renounce all nuclear activities and embrace Israel than the Pentagon has in accessing commercial technologies and innovations while retaining its obsolete, stultifying and burdensome acquisition practices. The acquisition system must recognize and work with the incentive structure that drives commercial companies for whom DoD is a marginal customer.