For High-Tech Firms, Allure of Defense Contracts Is Tarnished by Red Tape

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* The Pentagon is by most measures a government contractor's promised land. Last year it spent $400 billion on products and services.

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But even in today's struggling economy, the prospect of scoring a big defense contract is not enough for many companies to want to do business with the Defense Department. That is especially true among high-tech firms, which, coincidentally, are the ones the Pentagon is most interested in recruiting.

"We must do more to encourage commercial firms that are in the leading edge of technology to supply products to the Defense Department," says Brett Lambert, director of industrial policy at the office of the undersecretary of defense for acquisition.

The U.S. military is saddled with aging technology and is in dire need of modernizing. Many of the innovative products the Pentagon seeks--particularly IT and electronics--are being financed by the private-sector.

"Among the companies we represent, many of them have zero interest in bidding for defense contracts," says Patrick Wilson, director of government affairs at the Semiconductor Industry Association.

Some businesses simply don't want to spend millions of dollars creating an in-house bureaucracy to handle government work. Others fear that their prized intellectual property will be compromised once it is turned over to the government. For many firms, the mountains of red tape are too high to climb.

"They look at the ratio of what it takes to comply with all of our procurement rules, and it's just not a good investment," Wilson says. In the high-tech sector, firms compete aggressively for the best engineers, who may not stick around if they have to work on plodding government programs, he adds. "You don't want to put them on a project that's going to require four bureaucrats for every one engineer."

Decades of acquisition reforms have created a maze of regulations that require companies to hire expensive legal staff to help them navigate through. For large defense contractors, new rules are relatively easy to absorb. But small businesses often struggle to cope, says Rep. Jim Moran, D-Va., whose district is home to many defense contractors. "Congress has to reduce the barrier to entry for small and mid-tier commercial firms to inject needed competition and innovation into the defense base," he says. Moran's comments may strike many as ironic, since Congress has been blamed for piling on layers of laws that overlap with existing regulations and, not surprisingly, exacerbate the complexity of complying with the rules.

While he calls for change, Moran notes that the Pentagon's byzantine procurement system exists for a reason. "With all the scrutiny being applied to federal spending, they're not going to take a chance," he says. …