Since the 1990s, the defense sector has consolidated substantially, transitioning from 51 to 5 aerospace and defense prime contractors. As a result, DoD is increasingly reliant on a small number of contractors for critical defense capabilities. Consolidations that reduce required capability and capacity and the depth of competition would have serious consequences for national security. Over approximately the last three decades, the number of suppliers in major weapons system categories has declined substantially: tactical missile suppliers have declined from 13 to 3, fixed-wing aircraft suppliers declined from 8 to 3, and satellite suppliers have halved from 8 to 4. Today, 90% of missiles come from 3 sources.
That was from the Feb 2022 report from USD A&S, “State of Competition within the Defense Industrial Base.” When people talk about whether competition exists in DoD, they often do one of two things: (1) count the number of suppliers able to produce a given item or class of items; and (2) measure the percent of defense contracts labeled “competitive” in the database of contract obligations (FPDS). Neither of these is particularly rigorous or helpful without going multiple levels deeper into the context.
Counting Suppliers
First, with emerging technology it isn’t clear that there are these firms with well-defined production specialties. Certainly there are tons of stories of how companies have pivoted their product lines. Nintendo, for example, started by selling cards.
Perhaps 50 years ago, companies had specific machine tools and processes used for specific outputs. But if you look at software development today, the capital is more flexible. A machine learning kernel, for example, can be trained to perform a number of different applications. What matters is the enterprise toolkit, data flows, business processes, employee talent, etc. In a way, asset specificity has gone down.
Susan Alderson at a recent MRAP event said something along similar lines:
What I’ve seen over the years is that where there used to be a finite set of money to buy five things. Now, each of those five things actually represents a category of things. I used to have goggles. Now I have night vision goggles. Now I have sand goggles. Now I have sun goggles. Now I have chemical goggles.
There will be competition for AR/VR goggles, and those are swallowing up what used to be distinct product categories. Not only might Facebook, Google, and Microsoft be contenders to take away something like night vision, but night vision providers could start expand into other consumer goggle products.
In the chart below, DoD shows consolidation by product area. But it is obvious they are missing quite a bit, particularly in launch vehicles and satellites which has a huge surge of commercial entrants. It’s almost hilarious that they qualified “expendable launch vehicles” so that SpaceX is excluded — no launch company in their right mind would go for expendable launch because it way behind the times. Reusability is the only way forward.
A similar problem is apparent elsewhere. There are a number of new entrants to fixed-wing aircraft world (e.g., Boom, Blue Force, and Hermeus). Companies like Kratos and General Atomics in particular have a lot of experience with high performance UAVs which makes them competition adjacent. While DoD probably wouldn’t buy foreign aircraft, Saab, Dassault, and others are literally competing with US companies on the foreign military sales market. Textron is another example of a company that makes fixed-wing aircraft (the trainer), and it also has an autonomous combat vehicle hitting the market. These qualifications go on and on.
(By the way, DoD misspelled “Northrop” — common mistake,)
So-Called Competitive Contracts
Second, measuring competition using the percentage of contracts or task orders that use competitive procedures (e.g., full and open opportunity) really says little about competition at all. It is a good example of looking for your keys underneath the lamppost rather than where you might have dropped them. Before getting into that, here’s what DoD had to say:
The DoD competition rate based on dollars obligated is typically in the 50-60% range; if based on the number of contract actions, the competition rate would be consistently in the 90% range.
… The competition scorecard provides dashboard-like presentations to help components track and analyze competition trends in portfolio groups for major weapon system platforms (e.g., aircraft, ships, and land vehicles), electronic and communications equipment, and their associated sustainment phases. Historically, these portfolio groups report competition rates in the 15–40% range for dollars obligated, which has a significant impact on DoD’s overall competition rate since these weapon systems and major equipment account for a sizeable portion of the total dollars obligated.
So why are these figures misleading? Well first, and most obviously, government can negotiate with suppliers one-on-one within a competitive context. This often happens on the commercial side. The buyer can perform market research, reach out to a handful of select companies, and negotiate to the best deal. Or, depending on the switching costs, the buyer can simply go with the market leader. The buyer’s interests are preserved so long as the buyer has the freedom to switch suppliers without undue harm.
Indeed, many companies will actually maintain multiple sources. 81% of companies in a Gartner survey reported having two or more cloud suppliers. Whether or not any individual requirement was awarded via a formal competition for proposals does not indicate whether the company has maintained competition overall.
Another point is that DoD chooses the terms on which the competition is performed, as well as what companies are allowed to compete. The extreme duration to contract award, the significant bid and proposal costs, the submission formats, types of cost/pricing data, and so forth, are all major barriers. These costs are routinely reimbursed for incumbents, but are huge “loss-leaders” for new entrants.
Just because a request for proposals is put on the street doesn’t mean it nontraditionals have a reasonable shot of winning — even if they have the best solution by far. And the fact that the Competition in Contracting Act was passed in 1984 and yet competition in reality has continued to decline means that forcing up statistics on “competitive” contracts has been a policy failure. Indeed, it presents a major barrier to defense program offices to get to the suppliers they know can deliver the best value. CICA is unfair even in the eyes of government.
Commercial Solutions Openings, by the way, are an amazing source selection vehicle that permits real competition. CSOs can stay open for long periods of time, use written proposals or oral presentations, result in one or many awards, and allow for quick, merit-based selections. In other words, companies can submit white papers to an open CSO and government can negotiate with whatever suppliers they want using streamlined procedures. Contractors don’t have to respond to preconceived defense requirements; they can offer differentiated solutions. Government doesn’t have to prespecify source selection criteria; it can award based on merit. A major embrace of the CSO concept could really push the needle on competition.
The DoD report did mention expansion of CSOs as an element of one of its top five recommendations, but this is an area that has very little discussion going on right now.
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