Rome '08 Workshop
How Industry and Government Must Work Together to Provide Best Value
Mr. Kent Schneider
AFCEA, the Armed Forces Communications and Electronics Association, does not compete in this global and transatlantic market but rather has about 1,700 corporate members, including every company at this table, who participate in that market. Since about one in four members is located in Europe, we feel as though we have a foot on each side of the Atlantic.
I would like to give you our total memberships perspective. And Id like to talk about some of the themes you have heard about already but with just a little different spin on them.
SOME STATISTICS ON RESOURCES AND BUDGETS
We heard earlier from a number of speakers about dwindling resources and tightening budgets. Let me give you some numbers so that you can put some scale to that. In the U.S., in the defense market, we have experienced 34% real growth in the 20012008 time frame, and that includes the supplementals that have been so critical to meeting obligations. However, if you look at the 20092013 budgets, the expectation is, if the budgets hold up, that we will have a decline in real terms of 3.3% per year. Similar pressures in Europe are now being experienced, with recent budget reductions on the defense side in Germany, the U.K., and elsewhere. Of course, compounding those issues are the facts that the allocation of resources has shifted and that personal costs and inventory replacement as a result of the persistent conflict we have been experiencing, and O and M costs are increasing as a percentage of the budget. So that means that modernization programs and other efforts to improve capability get pushed even farther back as a result of those pressures.
THE NEED FOR GOVERNMENT-INDUSTRY COMMUNICATION
To reinforce what Scott Harris was saying, globalization on the industry side is occurring at an incredible rate. Industry is expanding its market view. Why? Because budgets are declining everywhere, and as industries look locally, they do not see enough business to sustain themselves and so they start looking more broadly. The pace of change is also forcing industry to get farther ahead of what is going on. There needs to be more communication between government and industry because, in the absence of government vision, industry does not know where to go and does not know where to invest. It tries to get farther ahead, understand requirements, and invest earlier, and it is teaming because what it hears from government is that government wants total solutions. Most companies are not able to single-handedly provide that kind of capability so we are seeing more teaming and we are seeing teaming on a global basis.
We are also seeing companies intensify research and development. R&D spending in industry is going up in real terms every year and that is probably appropriate, particularly in the government space and the defense market, because government spending is going to go down. In real terms in the U.S., government R&D is going to be down 21.7% over the 20092013 period, and the only place where that slack is going to be made up is on the industry side.
Of course, cross-border M and A activity is at an all-time high. The defense industrial strategies of the European Union are forcing U.S. companies to acquire in Europe. Why? Because you say you want to buy local, so U.S. companies are acquiring local so that they can be viewed as a local player. On the other side of the Atlantic, the motivation is a little bit different. With the change and exchange rates, U.S. companies are selling at bargain ratesthe number three acquirer of public sector IT companies last year in the U.S. was QinetiQ North America, a U.S.-based company. However, the players at this table from Europe, EADS, and Thales have also been major acquirers along with BAE, VT, and a number of others.
PROVIDING BEST VALUE
Let me shift to the notion of best value. We have been talking about capabilities and optimizing capabilities and I will return the favor to Edgar Buckley and say that, yes, we in the U.S. believe that European industry needs to be strong and to have capability, and we need to team to provide best value. I think it is important to realizeand here I go back to Scott Harriss pointthat with globalization, industry provider choices are no longer continental. Today, it is inappropriate to think that we want to buy European or we want to buy U.S. or we want to buy Asian. That is because all companies are globalizing, and even if you do not buy from a global company, the likelihood is that you are going to buy from a global team, because we are going to team across the Atlantic or across the Pacific in order to provide total capability.
I would argue that purchasing decisions should be made on best value. The dilemma there is figuring out what best value isbest value, like politics, is local and should be comprehensive, but it should be on the table at the beginning of an acquisition. Previously, in referring to the Northrop Grumman-EADS/Boeing tanker procurement, someone mentioned that the problem is one of process. Well, the problem with the process was that the Government Accountability Office determined that the rules changed in the middle of the procurement, so best value was defined in the RFP and then defined differently in the final evaluation. I do not know whether that is right or wrong. History will tell when the process is done. The point is that this is not the first time that criteria have been applied that were not on the table at the beginning of a procurement. So it seems to me that you want to encourage global teaming, you want to get the best capabilitywe need the best capability for our warfightersbut we also have to define and make known at the outset what best value means for a particular procurement. It should be holistic and it should be open so that industry can make good decisions about where to engage.
CREATING A LONG-RANGE STRATEGY
We should not be reluctant to put all the criteria on the table. Those of you who have been doing business in Europe for some time will remember when Geoff Hoon was the Secretary of State for Defense in the U.K. and published what is known as Hoons Rules. Hoons Rules basically said that we are interested in quality capabilities but there are other things that interest us: We want to preserve intellectual property for the U.K., we want to grow jobs in the U.K., we want to advance the U.K. economy as part of this process. Well, all that is perfectly fair and everybody does that. The problem is that they dont all put it on the table. If you look at U.K. defense industrial strategy, you will see that many of Hoons Rules are now embedded in that strategymaybe not in exactly the same words, but the point is that it is about more than just an individual procurement, it is about long-range national strategy. I would argue that whether you talk about a national strategy or a coalition strategy for NATO, the same issue applies. And we need to put it on the table at the beginning and keep it stable through the acquisition.
We all need to move together to remove obstacles. ITAR has already been mentioned, and clearly ITAR can be a huge problem. When I was at Northrop Grumman, we won the contract in the U.K. to sustain and modernize the AWACS fleet and we teamed with a company called AAR in the United States to do supply chain. What we found was that every time we sent a major item back to the U.S. to be repaired, it had to be re-exported, because we had added value even though it came back exactly the way it looked before; we added value because when we sent it back it was broken and when it was returned to us it wasnt. So they said we had to re-export it, and then we could not meet the contract requirements. We ended up moving that operation for major repairs to the Netherlands.
What was the impact on the United States? It lost jobs. What was the impact on Europe? It gained jobs. And all this was because of an export policy that made no sense in the context in which we used it. We are all in favor of controlling the export of militarily sensitive items to make sure that they dont get in the hands of players we do not want involved. But we have to be realistic about what we control and how we do it.
Risk sharing is also an issue. It has been mentioned here, but a tendency of government when programs do not go well is to shift the risk to industry. When you do that, industry will raise the price to hedge the risk and, in the end, nobody will get best value. In the beginning, it is a good idea to talk about how you are going to handle risk. A procurement policy, of course, needs to be open and honest.
To close, what does industry need from government? First, it needs vision, because if we do not understand where government is going and we cannot position industry to support it, whether in Europe or in the U.S., we need government to define requirements and keep them stable. Most programs that fail do so because requirements drift over the course of the program and expectations are different at the end than they were in the beginning.
We also need short acquisition cyclesthey are much too long. It is a lot easier to maintain requirements over months rather than years, and this is particularly acute in the IT environment, as I am sure General Wolf and his panel will talk about.
We also need to share risk appropriately and portray the playing field honestly, based on best value. We must put it all out there up front and keep it stable through to the end.