Industry influence on DoD acquisition strategies

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Case Studies: DoD Acquisition Strategies

We found cases in which the industry has influenced the DOD's acquisition strategies to benefit the procurement process and address issues raised by the industry. The cases we presented came from industry changes in market structure and cyber security.

MARKET STUCTURE CHANGES

INDUSTRY INSIGHT

  • The case of the merger between Lockheed Corporation and Martin Marietta Corporation was announced on the last day of FY 1994.
  • The defense industry recognized the benefit of combining efforts among competitors and partial competitors to improve the procurement structure in the merging efforts between companies in the industry.
  • The DOD side is often committed to covering the overhead of defense contractors. The presence of significant excess capacity not only raises per unit costs, but increases prices. Specifically under cost-plus contracts, a decline in production rates can lead to very large increases in the prices that the DOD pays, since the DOD is obligated to cover the contractors’ fixed (overhead) costs, which will be spread over substantially fewer units. This means that unless defense contractors can shed unneeded capacity, DOD has to pay higher prices for the goods and services that it procures.

EFFECT ON DOD

  • Following the years the DOD were reported to have encouraged consolidation between contractors as a response to expected future budget cuts, following the end of the Cold War. Among the additional M&A deals we found the merger between McDonnell Douglas and Boeing (1997), and the acquisitions of Hughes Aircraft and Texas Instruments by Raytheon (1997).
  • Results of a study covering the merger suggested that the increased concentration driven by mergers decreased the level of competition in the award of procurement contracts.
  • Also, it was found that more concentration caused a shift from the use of fixed-price contracts towards a higher reliance on cost-plus contracts.
  • Following the years we observed a shift in the DOD position, as the interim rule requiring acquisition plans for each major defense acquisition program (MDAP) to include measures to ensure competition. The benefits of mergers are out there, but need to be carefully managed.

QUOTES

  • In a statement, Norman R. Augustine, chairman and chief executive of Martin Marietta, said the combined company would seek "the aggressive elimination of duplicate costs."
  • In March 2009, President Obama signed a memorandum that declared that “sole-source contracts, contracts with a limited number of sources and cost-reimbursement contracts, create a risk that taxpayer funds will be spent on contracts that are wasteful, inefficient, subject to misuse, or otherwise not well-designed to serve the needs of the Federal Government or the interests of the American taxpayer.”

CYBER SECURITY

INDUSTRY INSIGHT

EFFECT ON DOD

QUOTES

  • Deputy Defense Secretary, Patrick Shanahan, said that cyber security would likely join quality, cost and schedule, as one of the critical measurements the DOD uses when assessing contract bids. It’s just like we wouldn’t pay extra for quality, we shouldn’t pay extra for security".
  • Shanahan also said, “So part of this is just to recognize that we’re in a new world, and security is the standard; it’s the expectation; it’s not something that’s above and beyond what we’ve done before.”
  • Dmitri Alperovitch, co-founder and CTO of cyber security firm Crowdstrike, said The Department of Defense faces a similar challenge to the private sector. The very same threat factors that are targeting the private industry today to steal intellectual property and sometimes carry out destructive attacks are trying to break into DOD networks to conduct espionage and degrade our war fighting capabilities".

Research Strategy:

After reviewing the publicly available information, including GOV reports, statistics, academic and GOV researches, we found that despite the quantitative relevance, the national defense spending has received somewhat limited attention by empirical economics research. We came to realize that the key point in the DOD procurement and acquisitions process often comes up to "who the DOD procures from" and "how does the DOD procures".

For the market structure changes, we identified a major case in the early 90s where the industry raised the issue of overhead costs, efficiency and mutual efforts as an issue that needed to be addressed by the DOD. The DOD agreed on the changes that needed to be made in the market structure of the major defense contractors, and following the case of Lokheed-Martin merger, followed the example by allowing additional contractors to merge. That being said, recent research and statements of high ranked officials show that the DOD also recognized that the changes need to be addressed carefully, backed by tight supervision and management, in the form of approval committees and monitoring.

As to the cyber security aspect, recently the cyber security industry and experts expressed the need for updates and changes to the DOD's cyber security regulations and implementation in the procurement channel and supply chain management. Consequently, and aligned with the industry suggestions, we saw the reaction of the DOD, as state officials made changes to the procurement channels in the form of cyber security audit additions, and plans of major pillars to improve the cyber security aspects of the procurement channel, to allow a more responsible management of work and procurement with contractors.
For the quotes, we were able to identify industry leaders quotes on the issues. On the DOD side, we were not able to find direct quotes of DOD acquisition executives. We assume that the lack of quotes from the DOD relies on publication restrictions or publication guidelines. We accommodated the gap with high ranked officials and Defense Secretary Officials, as we found that most official releases are made by high ranking officials.
Sources
Sources

Quotes
  • "“The Department of Defense faces a similar challenge to the private sector. The very same threat actors that are targeting private industry today to steal intellectual property and sometimes carry out destructive attacks are trying to break into DoD networks to conduct espionage and degrade our warfighting capabilities,” said Dmitri Alperovitch, co-founder and CTO of cybersecurity firm Crowdstrike."
  • "“The DoD lags behind the mature, state-of-the-art commercial technology,” said Francis Landoff, senior partner at Core Consulting and a 30-year veteran of the National Security Agency (NSA)."
  • "“I have observed, as a rule, that companies with exciting new technical approaches in cybersecurity, backed by prestigious and savvy venture capital investors, struggle to get meetings with the Defense Department, much less a chance to demonstrate their product and make sales. This is true even when there appears to be genuine government interest,” Landoff said."
  • "“Network defenders are losing the cybersecurity battle because they’re bringing people to a software fight,” said John Davis, Federal chief security officer at Palo Alto Networks, adding, “It’s like bringing a knife to a gun fight.” He advocated for more automated tools, expanded testing programs, and incentives for companies to share threat intelligence."