To Defeat Today's Threats, the Pentagon Needs Innovative 'Mid-Tier' Contractors

By Murphy, Michael W. | National Defense, June 2010 | Go to article overview

To Defeat Today's Threats, the Pentagon Needs Innovative 'Mid-Tier' Contractors


Murphy, Michael W., National Defense


Defense Secretary Robert Gates has shown courage in making game-changing decisions such as canceling major weapons programs and holding officials accountable for their performance.

There is another area of critical concern to the nation's security that Gates, as well as the leaders of U.S. intelligence agencies, have yet to tackle: How to ensure that the government gets the most value out of its industrial base so that the United States can defeat the threats it faces today and in the future.

Considering the enemies the U.S. military now must confront, national security is dependent upon the ability to "beat our enemies to the punch." The insurgents and extremists know they cannot take on the U.S. military conventionally so they quickly adapt their tactics and equipment to counter U.S. forces, weapons and techniques.

The nation's defense and intelligence industrial base, meanwhile, is not structured to provide the speed, innovation and flexibility that are now required to stay ahead of the threat.

Uncompetitive contracting practices, the Pentagon's own explicit consolidation push in the 1990s, and its current blind passivity in allowing the large primes to acquire critical mid-tier contractors have created an oligopoly in the defense and intelligence sectors where only a handful of firms dominate the market. But much of the innovative technology and responsive services that the military and intelligence community need reside in mid-tier firms.

Mid-tier companies generally are characterized as those bigger than government defined "small businesses" but have less than $1 billion to $2 billion in revenue. By comparison, the largest four defense focused prime contractors averaged $34.1 billion in revenue over the last 12 months.

These smaller companies are unable to thrive because of government practices such as "bundling" work into mega-contracts that favor big companies. Under the current dynamics of the market, those mid-tier firms often end up being acquired by the large primes who have tens of billions of collective acquisition capital. This trend over time drains competitive forces and innovation out of the marketplace.

The problem was well articulated by a House Armed Services Committee report on acquisition reform that was published in March.

"The length and scope of weapon system programs has accelerated defense industry's consolidation around a handful of aerospace firms that now control large amounts of production capacity across the entire span of the defense acquisition system. Only the largest firms have access to the resources and expertise to bid on the most complex programs, and it is difficult for firms of all but the largest size to survive losing them. As a result, competition is reduced at the front end of programs, and all but eliminated in the sustainment phase. ... Small businesses are largely locked out of the process or accorded contracts only on the goodwill of one of the larger firms.

"Mid-tier companies are either absorbed or decide to abandon defense acquisition for the more competitive commercial sphere, especially after a large weapon system competition loss. Winning or losing individual contracts becomes such a critical matter that the incentives to protest contract awards are overwhelming. ... The end result of this process is the gradual erosion of competition and innovation in the defense industrial base."

The overall result is a government mid-tier "blind spot" which puts in jeopardy the very sources of innovation and responsiveness necessary to defeat adaptive enemies.

Federal agencies appear to be unaware or indifferent to how their procurement practices create structural limitations to mid-tier and subcontractor growth. The government has defaulted to allowing "market forces" to contract the industry around a handful of 20th century weapon systems manufacturers with large internal bureaucracies necessary to manage their economies of scale. …

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