Jim Hasik joined me on the Acquisition Talk podcast to discuss a wide range of topics. He was a former naval officer and long time industry consultant, now with the Center for Government Contracting at GMU and Renaissance Strategic Advisers. During the episode, I ask Jim to reflect on why the Better Buying Power (BBP) initiatives rode into the sunset, how he views the proposed UTC-Raytheon merger, what he thinks about the revolving door and the “iron triangle”, the impact of Buy American laws such as those affecting the FFG(X) program, how we can bend the cost curve to put an end to the 16th of Augustine’s infamous laws, and what Peter Thiel meant when he said “competition is for losers.”
The episode also features a discussion of the B-21 Raider. Jim says there is not much publicly known about the manned bomber program, but argues that more consideration should have been given to making the system remotely piloted. He discusses the tradeoffs in platform design, and speculates on reasons why the Air Force chose to make it manned. Some issues include targeting mobile objectives, the role of culture, and survivability of remote piloting with the increasing vulnerability of space communications.
Jim provides a primer in the challenges of intellectual property as well, a topic which has seen some debate and new policy rollouts in the Army. He discusses three situations in which government may need to purchase intellectual property, including for repair, modifications, and system re-buys. In such circumstances, the original system developer may gain a monopoly position, but not in the traditional sense because it is a regulated monopoly dealing with a monopsony customer (single-buyer). Jim illuminates how a fair deal can be struck because government and contractors have different time-values of money.
Podcast annotations.
The reason that UTC and Raytheon thought this [merger] would not be difficult is because it’s not a horizontal merger of two firms doing the same things, and it’s not a vertical merger — I make airplanes and I buy the guy who makes my engines, which doesn’t really happen by the way but that would be a classic way to do it. It’s like Northrop Grumman. I buy a guy who makes my rocket engine [i.e., Aerojet Rocketdyne].
There are problems with the horizontal because the horizontal reduces competition across an industry, but there can be problems with a vertical merger if there is a practice we call vertical restraint, which is what Boeing is accusing Northrop Grumman of undertaking with respect to the Minuteman III replacement, GBSD, that’s why Boeing decided not to bid because they’re [Northrop] the only domestic supplier that can provide the rocket so they’re going to have an unfair advantage so I’m not going to bother. Well we have a consent decree from the Justice Department that says they’re not going to do that. Yeah, I think they’re going to do it anyway — this is Boeing saying this, not me.
But the one you’re a lot less concerned about in terms of anti-trust is what we call a conglomerate merger. You make cars and I make fried chicken and for some reason we think these would be good. That’s a gross exaggeration… In American antitrust jurisprudence, this is not typically a problem.
Jim goes on to say how the UTC-Raytheon merger is more like a conglomerate because they make different items. He brings up the concern that even though it doesn’t reduce competition in the classic sense, there could be a problem of power.
One interesting point, as I’ve written about before, is that UTC and Raytheon do not want to have any part of being defense primes building platforms. They prefer to build components such as engines for UTC and missiles or sensors for Raytheon. If they did amass power, then it would be felt only indirectly by government, which tends to have a harder time pushing down its regulatory power through lower tiers of suppliers. However, government does buy many subsystems/components as government furnished equipment (GFE). It could expand this practice if the pinch is felt.
It’s not clear that government regulatory powers, such as in the use of cost-plus contracts with full insight into allocations of expenditures, really would do much to create better overall outcomes. Earlier in the episode, Jim said something unexpected: that a regulated monopolist might not have lower prices than a regular monopolist. I suppose that can only be true if the regulation creates additional layers of cost. A firm prefers to make higher profits and not to spend more on the cost of production or compliance.
In the end, government seems like it prefers to see taxpayer funds spent on jobs and busy work — whether productive or not — which may be far greater than the desired profits of a monopolist. As former Comptroller General Elmer Staats said in 1969, “Estimates as to documentation costs range from 20 to over 50 percent of development costs, but reliable information is not available.” Professor Robert Judson put the figure closer to 50 percent.
Here is Jim discussing “should cost” studies and the acquisition workforce training that is required to make it work:
If I want know whether or not Eurofighter or Lockheed Martin or Saab or whoever it is that’s selling me fighter jets, should be charging me that much money, then the thought is I should figure out how much it should cost them to make it — not how much it does cost — but how much, if they were doing their job right, it would cost. How much it “should cost”…
What I meant by a little arrogant, is that it suggests that people in the acquisition bureaucracy know as much about how to build a tank or a ship or whatever might be as the people who are actually designing and building it.
Here is Jim’s post on the arrogance of should cost. The concept blends industrial engineering and cost auditing to evaluate contractor work in order to improve efficiency of sole source suppliers. It is contrasted to “will cost” which is a statistical analysis of historical costs and performance, regardless of efficiency notions.
Another problem with “should cost,” as conveyed by the US Navy in 1969 after they were the first to use the technique on the TF30 engine for the F-111B program, was that it could only be used in a production setting where most activities were routine by nature. Frank Sanders, Assistant Secretary for Installations and Logistics, and Gordon Rule, Director of Procurement Clearance and Control, said that it was “impossible” to use the approach in areas of research and development. After all, how could a third-party be expected to evaluate the “production” process of new ideas and new technologies which are nuanced and specialized? Disagreements cannot be resolved by reference to a source of demonstrated knowledge, leading to stalemated arguments. It is probably for this reason — in addition to having sufficient engineering talent in government — that “should cost” has not persisted as a policy.
Here are a couple other good parts:
Sometimes you need civilian leaders to give the military a swift kick in the pants periodically. This is best characterized by Franklin Roosevelts adage when he was Assistant Secretary back in the First World War: dealing with the Navy is like punching a featherbed. You spend a lot of time and effort, and you’ll get very tired, but in the end it pretty much looks like a featherbed…. I don’t think that’s purely true…
And here’s one on stealth:
A skunk works guy once told me about stealth, it comes down to basically four things: shaping, shaping, shaping, and materials. We have to remember that the F-117 was made out of aluminum.
Be sure to listen to the whole podcast. There are tons of insights not well represented here.
I’d like to thank Jim for coming on the Acquisition Talk podcast. Be sure to check out his books including Arms and Innovation: Entrepreneurship and Alliances in the Twenty-First Century Defense Industry and The Precision Revolution: GPS and the Future of Aerial Warfare. He has a new book coming out from Texas A&M based on his dissertation, MRAP: Marking Military Innovation. You can find his website/blog here, and he has also been featured on defense outlets like Defense News. Here is Jim on Government Matters discussing the revolving door. And don’t forget his essay on John Boyd, “Beyond the Hagiography,” and another good one on the defense reform movement.
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