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
- 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.
- 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 leaders and former military cyber experts told the Senate Armed Services Committee on that the Pentagon needs to adopt more commercial cyber security technology.
- The suggested that the DOD 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 the war fighting capabilities.
- Essentially, the gap in the practice and implementation of the DOD cyber security approach in the systems world, leaves them behind and effects work with the contractor's process as a result.
EFFECT ON DOD
- On September 20, 2018, the White House released the National Cyber Strategy.
- This new release came after the realization of the cyber industry and environment changes and put emphasis on shared responsibilities and rising expectations for government contractors, technology companies, the transportation and telecommunications sectors, and others.
- One of the aspects of the release, targets the Department of Defense's long requirement of increased cyber security from its contractors.(source 8)
- The release acknowledged that supply chain risk will be integrated into agency procurement and risk management processes, in accordance with federal requirements that are consistent with industry best practices.
- As part of the strategy, the government will also provide streamlined authorities to exclude risky vendors, products, and services, when justified.
- In addition, the strategy is aimed to consolidate acquisition strategies to improve cyber security and reduce overhead costs associated with using inconsistent contract provisions across the Federal Government.
- Moreover, recent changes in the procurement process management and compliance in the DOD, reflect updates to the audit compliance process to assess the contractor's performance in assuring the cyber security regulations in the procurement process to reflect full preservation of information throughout the contractor's procurement process.
- 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".
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.