The way that the defense industrial base has been progressing since World War II, one future that appears to have a reasonable likelihood is that we will see two types of participating business units under major contractors: (1) Program aligned; and (2) Multi-functional support. This will be a brief introduction to an industrial prophecy should trends continue.
(1) Program aligned.
We’ve certainly seen a consolidation across the defense industry to where there are two or possibly three competitors preserved to become prime for a substantial weapon systems program. The competition, however, has been preserved consciously, in an effort to spread the work and forestall any complaints about monopoly and calls for anti-trust.
This facade has become more tenuous over time, especially in the Air Force. In the past twenty-plus years, we’ve had one fighter aircraft development (F-35 // LM), one bomber (B-21 // NG), one tanker (KC-46A // Boeing), one utility (C-130J // LM), one trainer (T-X // Boeing), and so forth.
We’re also starting to see an alignment of production plants and programs. Most all of Lockheed’s Fort Worth plant is devoted to the F-35, its Marietta plant is mostly devoted to the C-130, and its Palmdale plant mostly for the F-22.
Why this trend? Well, as with many things, I point to the program budget.
The program budget demands an alignment of program and organization such that an official’s financial authority parallels his/her administrative authority. This pushes us towards the uni-functional program office structure.
We used to have strong in-house bureaus/technical services that helped coordinate weapons development. But when the program became prior to the multi-functional organizations, their funding came in “bits and pieces” from programs which they had no say in (program budgets moved power from the in-house production chiefs to the service staffs and OSD). These organizations, to be accountable for expending budgets to the correct programs, also had to re-jigger their accounting to be on a program basis.
This was actually a big deal. The program budget’s intention and consequence was to force the DOD into an organization of ad-hoc program offices planned by the service staffs who contract the entire work out to a single prime contractor.
Notice, however, that the budgets come in by program, and accounting requirements are also required by program. Neither the in-house bureaus/technical services nor the private contractors actually managed themselves that way. Basically what happened was that the government development centers got pushed into the S&T world and all Programs of Record were outsourced to a single prime contractor. Accounting by program was outsourced to the private sector.
While government organizations aligned with programs using the program office structure, they couldn’t do that for contractors who performed several programs in one plant. But using cost and management reporting requirements, the contractors were forced to budget and account by program, in addition to their normal classifications of control. It strained planning and accounting systems. This added a second layer of books for the contractor, who also preferred to administer itself by organization and object.
Over time, as fewer programs of larger scale were created by the government, the contractor’s businesses became more concentrated. And as more oversight was required of the contractors, it just made life much simpler for contractors to align their organization with the government program as well. That aided in budgeting, accounting, reporting, and so forth, because the misalignment caused them to get hit over the head by DCAA, the GAO, and others.
(2) Multi-functional support.
Another trend has been the rise of Interorganizational Transfers. For example, most of he big prime contractors have business units for major platforms (like Aerospace, Land Systems, Sea Systems, etc.), but they also have cross-cutting units for electronics, cyber, and other component needs.
A major program contract will be awarded to the prime contractor at, say, Lockheed Aeronautics for an aircraft program. They will then sub-contract to another business unit within Lockheed, such as Rotary and Mission Systems. The business units are treated as separate “profit centers” and so the process creates a clean cut charge for business insight. (Note: regulations have caps on “pass-through” profits.)
These multi-functional business units will be primes on some programs, but they will also support many of the other programs from other business units. This simplifies their reporting and accounting process. And any DOD audit of a major program usually has to stop at the prime level. So if the aircraft system is getting oversight heat, then the various other business units contributing the the aircraft system using Interorganizational Transfers will not be in as much danger. They are treated like a subcontractor, and so the DOD would have to go after them separately.
Conclusion.
There’s much more to the story, but this was an attempt to give the barest bones explanation of why the future of the defense industry will be a mix of program aligned plants within business units, and multi-functional second-tier business units which will be “shielded” from too much oversight by Interorganizational Transfers.
From a DOD perspective, program alignment with plants is desirable because they can feel that they have the insight to “plan” the defense industrial base at the top level.
One thing that comes to mind here is that Marc Andreessen says that the best software firm will win out on hardware firms over time. But it seems that the DOD incentivizes contractors to bury their software units underneath hardware units which will get the major development awards. It is difficult to see a world where Lockheed’s Mission Systems is the prime on a fighter aircraft to Lockheed Aeronautics.
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