Let’s Get Really Serious About Acquisition Reform

I recently attended the latest of the numerous—perhaps one should say countless—panel discussions on the subject of acquisition reform. This panel was a bit broader than most as it included a former Capitol Hill staffer familiar with legislative adjustments that have been both proposed and passed over the past several years; an academic who is a noted authority on the defense budget; a Defense Department acquisition official; and a Wall Street analyst who covers the defense industry. About 60 individuals were in attendance, which is a rather good turnout for the topic.

The observations provided by the participants in this event were much better than usual, and the panel did an admirable job of staying on the topic, which is always difficult given its complexity. Nonetheless, the discussion reinforced in my mind that we are not really discussing the topic in the correct context.

Acquisition reform, as commonly discussed, is far too narrow. What we need to be discussing is reform of the defense marketplace. If the government—both the executive and legislative branches—can focus on that perspective, acquisition reform will follow. If not, then all such discussions will continue to be merely constant commentary echoing the 170 or so reports and studies that have been dedicated to the problem over the past four decades.

At events such as this recent one, government representatives always see the problem through the narrowest possible lens. They routinely suggest that big gains can be made through minor tweaks to an acquisition process they regard as quite normal. Recently, at another event, a senior Defense Department acquisition executive suggested that a big part of reform was revisiting who within the acquisition process was best placed to be the “milestone declaration authority.” This discussion demonstrated the narrowness of the department view and its fealty to the existing process.

The fundamental problem that needs to be addressed in acquisition reform is that broader changes need to be made to make the defense marketplace more attractive for companies in the defense business to stay—and for those not in it to enter. Recent trends are far from encouraging.

In his seminal book The Wealth of Nations, famous Scottish economist Adam Smith described the attributes of a functioning market. In Smith’s view, such a market would have many customers and many providers, few regulatory restraints, low barriers to entry, perfect information available to consumers and providers, and prices that are representative of the value to the customer rather than the cost of the producer. Today’s defense market bears little resemblance to this notional market. Essentially, it is the inverse of it.

Today’s defense marketplace is monopolistic. It has basically one customer and a handful of providers. The massive amount of federal acquisition rules and regulations, which the Government Accountability Office has measured to be about 180,000 pages and growing, combines with a unique situation in which the market’s single customer is also its most active regulator. Largely because of the regulatory demands, high barriers to entry are in place. Information in the market can be quite fragmented because of changes to requirements and security classifications. Lastly, the customer is a very intrusive auditor much more focused on the cost of the products rather than the value they provide to its endeavors.

In short, the contemporary defense marketplace is highly distorted—so distorted that Adam Smith probably would not even classify it as a market. As a result, firms continue to exit this market in search of others that are less regulated, less risk-averse and, significantly, more profitable. This last point largely explains the recent decision of United Technologies Corporation to essentially exit the defense market, shedding its low-margin Sikorsky helicopter unit to focus on its much more profitable commercial elements such as Carrier air conditioners and Otis elevators. The Defense Department expressed displeasure at this move; but unlike with a merger, it has no authority to block a divestiture—a condition reinforced by a recent Justice Department finding. The Defense Department has limited ability to force a firm to stay in the defense market, and under the current acquisition structure it has little to offer to get firms to enter it.

The current acquisition process does what it is intended to do. As one senior Air Force acquisition officer once commented, “We have developed a system designed to ensure nothing bad happens quickly. Unfortunately, it also ensures nothing good happens quickly either.” Two former Defense Department leaders recently gave the system grades of "A-" and "B to B+." Current efforts at "Better Buying Power" are laudable, but in the broader context remain minor tweaks to a massive process that needs fundamental change.

The place to start is to move away from efforts that focus on changes to the existing process. Instead, the focus should be on determining the major muscle movements needed to make the defense market an attractive place for companies to join and continue working. This requires a clear-eyed examination of what a functioning marketplace actually is and what motivates a provider to be part of it. In the absence of such a perspective, acquisition reform will continue to be the subject of future discussion panels and congressional hearings, while the acquisition process itself will continue to stimulate company exits from the defense market in favor of others that Adam Smith would more easily recognize.

M. Thomas Davis, the Forrestal-Richardson Defense Industry Chair at the Defense Acquisition University, is a former corporate vice president with General Dynamics Corporation and a past assistant professor of economics at West Point, the U.S. Military Academy.