The defense industry is becoming more commercial and more globalized, and both defense contractors and the Pentagon need to use the ongoing acquisition reform efforts as an opportunity to adjust to these new realities, according to Textron’s [TXT] CEO.
To adjust to declining budgets, defense contractors need to be more agile and more innovative, Textron President and CEO Ellen Lord said at the Defense One Summit on Wednesday–but the Pentagon needs to help them do this. She said companies want to invest more internal research and development (IRAD) dollars on innovating, but instead the government is responding to declining budgets by dragging out procurement programs, which costs contractors too much money.
“We in industry dedicate teams to focus on those procurements, and then they get slowed down and what happens is often you have a team of dedicated people that you don’t want to put onto other things because you want them on that one contract, and it can take up to two years sometimes for what should have happened in six months,” she said. “Those are discretionary dollars that aren’t being spent on IRAD that really need to be.”
In addition to keeping procurement programs on track, the Defense Department could also help by returning to more firm fixed-price contracts, Lord said. Other contract types that seek to determine cost versus price disincentivize efforts to become leaner and more efficient, and they involve so much overhead costs that profits for the contractor shrink.
“We as industry invest capital in our plant, in our equipment,” Lord said. “We invest to be more efficient, and what we find is we’re unfortunately sometimes being penalized for that because you have a new baseline and you can’t make profits anymore because you have a new price baseline of essentially where you found some efficiencies.”
The end result is that contractors would rather not invest in efficiencies and keep their price higher so that the government will award a higher cost contract, which ultimately is bad for the defense budget and bad for taxpayers.
Lord also advocated for less reliance on the traditional acquisition process–where service officials write requirements and then bring in several competitors for testing and analysis before finally selecting a winner after however many rounds of downselects–and instead using a more commercial approach where appropriate.
She said there was little incentive to innovate on major platforms like aircraft and ships because there was virtually no chance of the military being able to just buy that platform. Companies would have to sell internationally to profit from their innovation, and the foreign military sales process can be quite cumbersome to navigate.
Instead, Lord said, “I think there’s a great opportunity to look at acquisition a little bit differently. Instead of always bubbling up from a requirements process with lots and lots of and lots of stringent requirements, perhaps there’s an opportunity, again from the commercial point of view, to say what the need is and be able to take products that are developed by industry and not come up through that requirements process.”
DoD’s ability to see something they like and just buy it would incentivize industry to get creative to fill current and upcoming technology gaps, she said.