Friday, November 13, 2015

DoD Isn’t Just A Poor Buyer; It Is Also A Bad Customer

Daniel Gouré, Ph.D.
Lexington Institute


November 12, 2015 - The focus of acquisition reform discussion has been on the image of the Department of Defense (DoD) as a bad buyer. That has been the unstated but clearly recognized meme underpinning the Pentagon’s efforts over the past seven years to institute reforms under the heading of Better Buying Power. The idea is that if the Pentagon had all the necessary information, appropriate metrics, effective planning and scheduling tools and proper testing policies it wouldn’t continually manage acquisition programs that were off schedule and over budget. Also, if it were a better buyer, DoD would be able to avoid being flimflammed by private industry which withholds information, overcharges, underperforms, isn’t sufficiently innovative and, worst of all, wants to profit from its relationship with the Pentagon.
There is a real sense of victimhood in the DoD-centric narrative. And, yes, there are instances of waste, fraud and abuse in defense acquisition. But far less than one might imagine given the hundreds of thousands of contracts the Pentagon signs annually. Nor is there strong evidence to back the idea that the source of DoD’s acquisition problems is its inability to subdue an all-powerful, rapacious and unethical private sector.
In reality, DoD is hardly the victim when it comes to programs that go south or the failure to spend its resources in a cost-effective manner. DoD is not just a buyer in the marketplace. With a $200 billion annual appetite for hardware, goods and services, it dominates the global defense market. It is the classic 800-pound gorilla. In fact, for a broad array of specialized products and services it is the marketplace. There are lots of companies, from massive original equipment manufacturers down to small, disadvantaged and minority-owned business, that are dependent on defense spending to stay in business. This alone gives the Pentagon extraordinary power in negotiating deals and demanding services.
As part of the federal government, DoD is in a position not merely to dominate the marketplace for defense goods and services, but to define and shape it. It does this in a number of ways. There is the Federal Acquisition Regulation (FAR), the massive set of rules that govern how government agencies and departments acquire things. DoD operates under a special Defense FAR (DFAR) Supplement that allows it to further shape the marketplace. Based on the FAR/DFAR, the Pentagon demands access to detailed information on how companies operate, their costs, what prices they charge other customers, how they spend their internal resources and even their hiring practices.
Then there is the requirements generating process. It is extremely laborious, often backward looking and relatively ignorant when it comes to the state of the art in relevant technology areas. There are endless examples of great concepts, technologies and even systems that would have solved significant operational and tactical problems that were rejected by the Pentagon bureaucracy because there was no validated requirement.
The Pentagon further shapes the defense marketplace by the way it conducts competitions and writes contracts. For example, as anyone familiar with Performance-Based Logistics knows, when you write a contract for sustainment based on time and materials, the costs tend to go up and performance doesn’t. When contracts for the exact same work are written to specify outcomes and incentives provided to the winner to improve performance, costs decline and performance goes up. Similarly, when all the contract values is lowest price that is what the program office gets and not value.
One wonders how it is that DoD, which bestrides the defense marketplace like a colossus, writes the contracting rules and conducts the oversight, so often finds itself not getting the goods and services it wants from a relatively captive industry.  Perhaps it is due, at least in part, to the fact that DoD is not a very good customer.
The business management literature is replete with discussions, lessons learned and horror stories about bad customer service and how companies can correct for this. But there is also a secondary literature on bad customers. Here are eight signs of a bad customer in the commercial marketplace provided by one such article:

  • ·       High contact frequency
  • ·       Swaps vendors in your industry and boasts about it
  • ·       Your staff complains about them
  • ·       Abusive to your staff
  • ·       Payment issues
  • ·       Tends to add or change the scope of work during project
  • ·       Constantly unavailable
  • ·       Tries to game the system

Virtually all of these apply to the Pentagon’s acquisition system. Some, such as swapping vendors, payment issues and changing the scope of work, are legendary problems in the defense marketplace. In other cases such as communications between customer and business, DoD demands continuous contact when it comes to oversight and auditing, but tries to stand aloof when it comes to making its needs clear. Overall these eight behaviors clearly lead to a loss of trust between customer and provider.
Companies dependent on defense business have learned to tolerate their customer’s bad behavior and work around his idiosyncrasies. However, this does not mean that they don’t tear their hair out at the lost opportunities not just for additional sales but to do the right thing for the warfighter, the taxpayer and the nation.
Companies not dependent on defense business – think Silicon Valley – have choices. These include radically reducing their exposure to a bad customer or even refusing them service. The Pentagon’s leadership needs to ponder that possibility.

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