Team Efforts Win Favor at Pentagon, but Doubts Emerge
Amid the rancor of defense procurement reform, the Pentagon has taken an initiative in contract awards that promises to change the industrial organization of aerospace.
In virtually all of the largest defense programs started in recent years, awards have gone to teams of prime contractors, a development that has linked individual firms with a maze of joint venture agreements.
For the first time, the fortunes of the major aerospace and weapons firms have become broadly interdependent, creating the potential for major political, technological and financial effects on the industry.
And while the Pentagon has sought to promote competition in recent years and has used teaming as a means to achieve it, teaming may ultimately have the opposite effect by reducing contractual risks to firms, homogenizing the industry’s technology base and enhancing the political power of contractors.
“You are going to see more and more teaming on the big, high-risk programs, where the government is looking to offload a significant share of the development cost,” said John O’Brien, president of Grumman. “You are blending all kinds of motivations for doing it--technological, financial and political.”
In the past, an industry team usually was composed of a single prime contractor--an airframe manufacturer, for example--and a group of subcontractors and suppliers it had enlisted to build the constituent parts of a complex system.
But in the modern version, teams of two to three airframe manufacturers are sharing the primary tasks of design, engineering, testing and manufacturing.
The issue of defense industry teaming and joint ventures has received little national attention. Overpriced spare parts, defective equipment and fraud have garnered far greater attention in the debate over reform of the defense procurement system. But, ultimately, widespread joint ventures could have a more lasting impact.
So far, defense officials say they find little or no cause for alarm and look to teaming as an important method to further their own efforts to reduce defense spending and increase competition.
In a recent interview, Deputy Secretary of Defense William Howard Taft IV said: “There is some reason to believe that in particular projects teaming may be the only way to get a strong competition. The project may be so complex and have such a degree of financial risk that a spreading of that risk among two partners or three partners, rather than a single prime, may be the only way you can have two bids or three bids.”
In a broad sense, said Rear Adm. Stuart Platt, the Navy’s chief officer for ensuring that adequate competition exists among contractors, “the country is driven to financial mergers, and this teaming is a form of merger.”
And defense firms have been ready and willing to form teams because it significantly abates their risk on big contracts. “If I had my choice between having one-third of three programs or one whole program, I’d take the three. If you have one big program and it gets canceled, you can be out of business.”
But a wide range of aerospace executives and analysts raise troubling questions about what effect teaming agreements may have in the long run, especially to the extent that the Pentagon plans to use teams to help absorb weapons costs that the Pentagon cannot afford.
“There are a lot of important issues that have never been addressed, and yet we are proceeding wholesale with this new policy,” says Michael N. Beltramo, a defense industry consultant and former Rand Corp. researcher who specialized in defense procurement competition. “We have never gone this way before.”
In a study prepared this year under contract to the Navy, Beltramo wrote that “a joint development approach to new weapons systems acquisitions . . . is rapidly becoming the rule rather than the exception, without the support of empirical evidence or cogent theory to suggest its eventual success as a cost-saving measure.”
Starting quietly a decade ago, the Pentagon has been steadily increasing the amount of its work that goes to teams. Now, virtually every major defense program involves teams.
The largest manifestation of teaming came only a week ago, when the Air Force awarded two contracts for development of a new jet fighter--the Advanced Tactical Fighter (ATF)--to five large prime contractors that had aligned themselves into two teams.
In addition to the ATF, the Air Force has teams working on the Stealth bomber, the Navy on the Advanced Tactical Aircraft (ATA), the Army on the LHX helicopter program, NASA on the space station and a joint services organization on the V-22 Osprey tilt-rotor aircraft, among many others.
Competitors and Teammates
In many cases, a company finds itself as a competitor to another company on one program and a teammate on a different program. Or it may be a teammate to a company with which it must compete in commercial markets, a development that worries some analysts for its potential to pollute private sector competition.
Northrop, for example, competes against Boeing on the ATF program, but it is teamed with Boeing on the Stealth bomber. And yet, Stealth technology is supposed to be a part of the ATF.
In addition, Northrop is teamed with McDonnell Douglas on the ATF program but competes against McDonnell on the ATA program. Northrop is teamed in ATA with Grumman, an archrival of McDonnell in Navy aircraft business.
The tangled web goes on and on.
“You talk about incestuous relationships, just look at the ATA and ATF programs,” said one top aerospace executive in Los Angeles. “If General Electric and Westinghouse talk about the price of light bulbs, the Justice Department would be after them, but here are the leaders of the aircraft industry dividing up the military market.”
(The industry executives interviewed for this story declined to speak on the record, citing recent cases in which Pentagon officials have attacked industry officials for expressing opinions that were at odds with official government policy.)
Defense industry joint ventures might be compared to a “competition” in which Buick teamed with Lincoln Mercury to produce a luxury car that would compete against one made by Oldsmobile and Plymouth--or to one in which Chevrolet teamed with Jeep to build a compact car to compete with one built by Ford and Dodge.
A Common Interest
In such a setup, would any car buyer believe that General Motors, Ford, Chrysler and American Motors did not have a common interest in protecting each other?
One variation of teaming that the Pentagon has encouraged in some cases involves putting two competitors together on a team to jointly develop a product and then breaking up the team so the two will compete for the production contract.
The Air Force followed that approach in the production of a new jet engine, forcing General Electric to teach Pratt & Whitney how to produce its F-404 engine.
“We have two strong U.S. companies that dominate the world market for jet engines, and to give one an insight into the other’s management and production system is crazy,” Beltramo said. “It goes way beyond a defense issue.”
The Pentagon’s overall approach to teaming has been informal. The defense procurement system is run on the basis of the Defense Acquisition Regulations, a massive compendium of bureaucratic rules. But the regulations say virtually nothing about how or when or why to administer teaming arrangements.
So, many of the military leaders who preside over individual defense programs have been cooking up teaming concepts without a recipe.
In some cases, Pentagon officials have directed industrialists implicitly or explicitly to form teams to bid on large programs.
“They take you to the side and say something like, ‘Your ideas are good, but they’re a little weak in this area and have you thought about bringing in this other company to help you out?’ ” one chief executive said.
“In teaming, are there hard and fast rules? No,” said Anthony DeLuca, the Air Force’s competition advocate. “Every program is run on its own. We have joint ventures, leader-follower, licensing, sales of technical data packages.”
No single aspect of teaming is causing more concern than when the Pentagon encourages it as a method of getting defense contractors to absorb more of the cost of weapons development. Historically, the Pentagon has paid contractors the full cost of developing weapons, but increasingly the government wants contractors to share the cost burden.
Taft, the deputy secretary of defense, said the Pentagon intends neither to increase profit margins nor otherwise make up to the contractors for these additional costs.
“Our idea is to get the product we want, when we want it, at the lowest price,” Taft said.
In the ATF program, for example, the Air Force issued two contracts for $691 million each to cover the building of two prototype aircraft by each team. But those contracts fall short of the expected cost of the ATF prototypes by as much as a couple of hundred million dollars, according to some Wall Street estimates.
Risks Are Questioned
What will happen if the Air Force has to cancel the ATF program? Does it not have an obligation to the contractors that it enlisted to spend their money for development?
“It is an assessment that each company makes for itself,” Taft said. “It’s an assessment they make when they do business in the private sector, as to whether they should invest their own funds, what are the risks involved, what are the opportunities for profit.”
The industry argues that the defense market bears no resemblance to any commercial marketplace, if only because the government exercises complete market power as the sole buyer.
“The government can do it onceor twice, canceling a contract after it has obtained a pledge of investment, but they will kill the industry if they do it consistently,” the chief executive said. “They are circumventing the prerogative of Congress, because they are supposed to be working by annual funding, but here they are getting multi-year investment commitments from industry.”
In the long run, the imposition of development costs on the contractors may very well drive the defense industry closer to the Pentagon rather than further from it.
“In doing this, you cement a much more politically powerful military industrial complex,” said one corporate officer in Los Angeles. “In the past, we had to protect programs because our future profits depended on them. Now, it is almost a fiduciary duty to our shareholders to protect these big programs because a cancellation would prevent us from recouping our investment in later production stages.”
Thus, for the first time, the largest and most powerful companies will share broad common interests in protecting specific programs, and they will have the political muscle to do it more effectively than in the past.
In most cases, teams have operations located across congressional district lines, enabling them to align consortiums of congressional votes. In the ATF program, for example, Lockheed, General Dynamics and Boeing are on one team.
Political Support
That single team can count on political support from the California, Texas, Washington and Missouri congressional deligations, which have a total of 89 House members, more than 20% of all the votes.
“When we decide to team, one important factor is what political assets a company can bring to an agreement. I hate to say that, but it’s true,” said the chief executive of one prime contractor.
Defense officials seem little troubled by this prospect.
“The contractors are more astute about that (political strength) than I am,” Air Force Secretary Edward C. Aldridge Jr. said in an interview. “They look upon that issue stronger than we do.”
Often, however, defense contractors use their political power to force on the Pentagon products that it does not want. One recent example of that was Fairchild Industries’ T-46 trainer, which was kept alive by Congress despite the Air Force’s clear-cut desire to kill the program.
What’s more, politics will not solve technical problems and it will do little to keep the industry at the forefront of world technology, two other issues of concern.
By sharing technology in joint ventures among the handfuls of aircraft, communications, radar, defense electronics and weapons firms, the industry will homogenize its technology to some extent.
Leadership Diluted
If Northrop, for example, has emerged as the leader of Stealth technology, each time it secures a teaming agreement with other firms on a program involving Stealth, it dilutes whatever leadership it has gained.
Gen. Lawrence A. Skantze, chief of Air Force procurement, remarked: “The homogenization issue is there.” But in the scheme of things, he added, it is not an important-enough concern to offset what is gained--specifically combining the best technology of the best firms in the industry.
Added DeLuca, the Air Force competition advocate: “Technology is pushing us to the point where we have to maximize our brain power.”
One way a defense contractor could combat homogenization would be to hold back the best technology and keep it in-house.
“The question is whether they are really going to cooperate when they are teamed or whether they are going to hold back things,” Beltramo said.
The answer to that question comes from the president of a large defense electronics unit in Southern California.
“I don’t tell my competitors anything I don’t have to when I am teamed with them,” he said in a not-for-attribution interview. “And that inhibits the application of creativity.”
The history of the aerospace industry also suggests that its greatest achievements were guided by single individuals who had an idea or a philosophy that leaped over everything else. Men such as Kelly Johnson of Lockheed in aircraft or Howard A. Rosen of Hughes Aircraft in satellites created things that made history.
“What people forget in this big industry is that if you go back far enough, there was a Jack Northrop or an Alan Lockheed--guys who believed in something,” one industry official said. “These teams are the final death of that spirit.”
He added: “When the government induces teaming, it becomes another step in the intellectual nationalization of the industry.”
Sounded Warnings Malcolm Curry, executive vice president at Hughes Aircraft and a former Defense Deparment official, has sounded warnings that recent Pentagon financial policies already are heading the industry in that direction.
A recent plan to reduce government financing of independent research by defense contractors will tend to stifle innovation and make research highly regulated, Curry said.
“Consequently, we will lose the most important form of competition of all--the competition of ideas,” he wrote recently in the Armed Forces Journal.
“It could mean the defense industry will become in effect an arm of the Defense Department. The only step then remaining is the ultimate formal nationalization of the industry.”
