DoD savings won't target industry profits

Tuesday - 7/19/2011, 6:48am EDT

Federal News Radio's Jared Serbu

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By Jared Serbu
Reporter
Federal News Radio

Defense acquisition leaders said Monday that a more austere Pentagon budget does not have to equal reduced profitability in DoD contracts.

The department needs a robust and healthy industrial base, and looking for savings in industry profit margins would be counterproductive, officials told a National Defense Industrial Association conference marking the first anniversary of DoD's Better Buying Power initiative. They sought to reassure industry leaders that even though the overall growth in the size of the Defense pie will inevitably slow or stop, the slice that makes Defense contracting a profitable enterprise won't disappear.

Frank Kendall, the Pentagon's principal deputy undersecretary of Defense for acquisition, told industry members the department is working to create an environment in which both DoD and its vendors share the same cost reduction incentives, and industry makes more profit when it satisfies the department's needs.

He said Defense companies need to be leaner, just as DoD seeks to be.

"The business environment that you'll be operating in won't be the same. It's going to be different," he said. "So what kind of relationship should we have as we go into this new era and adjust to the realities we have to face? My answer is that we need to have a win-win relationship. You are essential to us. A win-win, as I would define it, is that you are in a profitable industry where you can make reasonable margins if you do a good job at what you do. For us, it's a win if we get affordable products and services that allow us to support the force structure that we have. (Industry) profit is a very small fraction of our costs. We want to use profit and make profit available to you to get the lower overall costs that we need."

But Kendall acknowledged there were competing interests as industry works to maximize profits and DoD works to minimize costs. He said the Pentagon would be engaging in tougher negotiations than it has in the past, an instruction he said had been passed down the chain through the entire Defense acquisition workforce.

Nonetheless, Kendall and his boss, Ashton Carter, the undersecretary for acquisition, technology and logistics, said DoD was not seeking to take its cost savings out of industry profits.

"That's not the point. In fact it's not only wrong, it's backwards," Carter said. "Profit is the incentive that will get us, on the government side, the result we're looking for. We would be foolish to look there for economies rather than for leverage. In that way, our incentives and your incentives are aligned. Profit is not the point, cost is the point."

One example of items in the Better Buying Power initiative that Carter said could reduce cost on both sides is smarter use of industry's own research and development dollars. Though DoD spends a great deal of money either conducting or paying for R&D on its own, companies also fund industry-independent research and development (IIRAD) in the hope that it might produce technologies that the government might one day want.

But as one attendee at the conference complained, DoD's lack of communication over what research areas industry should be working on makes selecting IIRAD products akin to throwing darts at a dartboard.

"What we're trying to do is restore the dialogue that used to exist around the IIRAD program," Carter said. "That's a process of information exchange that stopped in the early 1990s, I think ill-advisedly. We're going to restart it again."

He said other efforts that can reduce costs for both government and industry revolve around better management of how DoD oversees contracts. The Defense Contract Audit Agency and the Defense Contract Management Agency have been given better-defined "swim lanes" so they don't duplicate one another's work.

Carter said industry associations had pointed out that the overlap in work processes between the two agencies was a source of waste.

"So now, you don't have two agencies doing the same thing, asking you for the same data to accomplish the same purpose," he said. Only one organization does a certain function, and you can clearly see who that is."

Kendall said DoD is taking other contracting reform steps that should lower industry's costs to prepare bids for major contracts. A new DoD directive will change the way Defense acquisition boards (DABs), panels of senior Pentagon leaders who must sign off on large programs, deal with the approval process.

Those top-level boards will now meet and approve a project before a request for proposals (RFP) is formally released to industry.