In weapons systems acquisitions, however, there are three important differences in buyer-seller relationships:
One, the buyer represents the only market, for the product and he takes the initiative in design.
Second, the buyer will at, times protect the seller against, catastrophic loss to preserve the defense industry base.
Third, the buyer sometimes specifies business practices to le followed by the seller that is, he is involved in the seller’s managerial decisions.
That was former Comptroller General Elmer Staats. The three featuers of acquisition add up to a non-market decision making process. Harvard researchers Merton Peck and Frederic Scherer claimed in 1962 that a market for weapon systems was flat out impossible.
I think something with market-like features is possible in defense acquisition, though of course non-market decisions are still important.
First, the government is the single buyer. I don’t believe that new technologies, like missile defense, will allow defense to be privatized or whatever by selectively protecting only those citizens who pay. The government has to be involved, at least as far as I can see. But that doesn’t mean the DOD has to be a single monolith buyer.
Back in the 1940s and 1950s, as Peck and Scherer noted, we had a multi-buyer system of acquisition. The chiefs of the Navy bureaus and Army technical services has a gerat deal of autonomy and clout, leading to rivalry (e.g., Navy Aeronautics and Navy Ordanance to build missiles) and cooperation (e.g., Navy Ships and Navy Ordnance to provide ship armaments).
The effort to coordinate all defense buying under a single centralized plan (i.e., the PPBS) both destroyed the multi-buyer nature of defense. It also forced defense officials to outline completely every defense activity before it was undertaken. This led to preordained system specifications — often at the underhanded suggestion of contractors — which became locked in stone in order to measure performance to plan, rather than allowing iterative updates to discover superior plans.
Second, the government buyer protects the contractors from losses. This is unofficial policy. It was done through excessive change orders and other claims for the most part until 1970 when the DOD bailed out Lockheed from the C-5A contract (and also covered its complete failure on the L-1011 Tri-star airliner — see the podcast with William Hartung for more on the Lockheed bailout).
Up until the Lockheed, the largest single bailout was $5 million. Lockheed, with zero expense control and technical failures, was able to extort well over a billion overall in the final package. No one expects that the government will not make contractors whole for their contractual failures. This, obviously, doesn’t have to be the cast. For Lockheed in 1970, the banks actually set aside billions to cover the expected Lockheed losses.
Now that the banks have divested from defense contactors and they are even bigger now than they were then, it is politically more difficult to let a firm fail, or break it up. Of course, the government encourages contractors to be overly optimistic by requiring these massive, winner-take-all, contracts in which the incredible detail is really for show rather than a sound planning policy. We still operate with contracts which have the essential features of the C-5A Total Package Procurement (TPP) contract.
Third, the government specifies the business practices of the contractor. This is less often noted, but nevertheless important. The government requires specifictypes of accounting, management, planning and scheduling, slews of reports, various certifications, and so forth. The government cares more about tracking every money outlay to specified ends more than it cares about whether the ends are the right ones, whether they work, and whether they could have been accomplished with less cost.
All this has the effect of forcing contractors to adopt what are actually poor business practices. After all, you don’t see Facebook, Amazon, Google, etc., using these antiquated — Taylorist — practices. The business systems still in place today are basically the same as was implemented by Robert McNamara’s systems analyst “whiz kids” in the 1960s. It assumes that defense contractors are primarily working in industrial era processes, with reproducible goods coming down the manufacturing line.
The worst part about government dictation of management systems is that it locks antiquated practices in stone, rather than letting firms experiment with new and more powerful methods.
The business system regulations is a leading cause for why defense contractors simply cannot compete in commercial markets. They are hamstrung. They are relegated to high cost practices. Even separating business units to put defense management on the side ultimately doesn’t work unless the contractor is at the 2nd or 3rd tier, where the regulations are far less. Prime contractors just don’t have a chance. Boeing used to be an exception. Not so clear anymore that it is.
And so, while the market for defense systems today looks nothing like a market, that doesn’t mean that is a fact of life. Policies have forced it into the undesirable direction. A way out is possible. The problems of the single buyer, bailouts, and excessive regulations are all related to pre-specifying centralized plans years in advance, then attempting to ensure that the plans are met as specified by the contractor, and finally when the plans turn out to be misguided, bailing out the performer.
Source: “COMPETITION IN DEFENSE PROCUREMENT.” July 14, 1969. HEARING BEFORE THE SUBCOMMITTEE ON ANTITRUST AND MONOPOLY OF TIlE COMMITTEE ON THE JUDICIARY UNITED STATES SENATE, NINETY-FIRST CONGRESS, FIRST SESSION, PURSUANT TO S. Res. 40
Leave a Reply