Too Much Competition Can Reduce Incentives For Innovation

Governments, like individuals, can suffer from the effects of too much of a good thing. This is the case when it comes to the degree and intensity of competition for Pentagon contracts. The current leadership of the Department of Defense sees increased competition as a way of reducing costs. Unfortunately, too often, what the drive for more competition produces is too many companies chasing too few contracts. As a consequence, even if prices come down so too will quality, reliability and trust between the government and the private sector.

To attain cost reductions across successive competitive procurements, more and more solicitations were structured so that the winner was determined based on the standard of the Lowest Price Technically Acceptable offer. Under LPTA bidders had to meet a minimum threshold with respect to competence and proposed work programs. Factors traditionally employed in determining best value to the government (a bidder’s past performance, technical approach, management plan, ability to exceed minimum requirements, etc.) are not considered. Consequently, LPTA solicitations became “price shootouts” that allowed minimally qualified bidders to become credible candidates and produced a race to the bottom as bidders focused on cutting capabilities in excess of those needed to meet minimally acceptable performance standards.

A similar phenomenon is occurring as a result of the expanded use of indefinite duration/ indefinite quantity contracts (ID/IQ). This approach can make sense in cases where the Pentagon wants to purchase large quantities of different commoditized goods and services. Programs such as the Defense Logistics Agency’s Tailored Logistics Support Program, Naval Sea Systems Command’s SeaPort-Enhanced and the Army Sustainment Command’s Enhanced Army Global Logistics Enterprise have demonstrated a remarkable ability to streamline the procurement and supply chain process while simultaneously improving responsiveness and reducing costs.

There is a darker side to ID/IQ contracts. In too many cases, winning such a contract does not mean a company actually gets any work. An ID/IQ is often just a gate pass with the real competition taking place for task orders. Companies often do more marketing after they win in order to get money for task orders. Some ID/IQ contracts require that all winners bid on every task order regardless of their competence in that specific area or the likelihood that they can recoup their costs should they win. These requirements impose costs on both the government and companies.

DoD also is shortening the period of performance on many contracts. In general, short contract performance periods significantly increase overhead cost, may lead to permanent proposal activity interfering with performance, and in many cases could actually result in less competition because proposal costs and startup investment that must be recovered over the short contract may make it impossible for potential new bidders to make the business case for participating. In addition, because inherent maintenance intervals of capital equipment are often measured in years, short contracts for sustainment support can reduce or even eliminate the incentive to invest in durability and performance improvements since investments cannot be recovered during the period of the contract. Thus, short contracts have poor potential for reducing costs over the equipment life cycle.

Ironically, too much competition or the wrong kinds of competition can result in the loss of something that the Pentagon values very much: innovation. In a perfect market, relentless competition drives down price by forcing companies to reduce all nonessential costs, including investments in R&D to produce new products. As William Lazonick pointed out in a recent article in the Huffington Post, “The basic problem with the theory of perfect competition is that, as consumers and workers, not to mention as taxpayers, we want some firms in an industry to transform technologies to generate higher quality, lower cost products than their competitors. We do not want firms to maximize profits subject to given technological conditions.” Over the past few years, the Pentagon has encouraged private defense companies to invest more of their own resources on innovation. But DoD’s policy of relentless competition as exemplified by the increased use of LPTA, ID/IQ and shortened contract performance periods runs directly counter to its desire to promote innovation.