“The [Defense] Department has — just because of the nature of the way the budgeting process works, the way the legislative process works to provide funding — some perverse incentives, which are more about getting the money out the door than they are about ... getting value for it,” he said of the Pentagon’s acquisition approach. “We’re trying to get people to think much more about the value proposition.”
In an effort to push industry to be efficient, the Pentagon is trying to better design its program requirements to make sure contractors can stay within the maximum prices it sets.
Also, “we’re trying to make sure that industry has adequate time to respond when we put things out for proposal,” said Kendall, noting that incumbents often win because potential competitors don’t have enough time to get a grasp on a program and formulate their pitch.
Already, the Pentagon has seen “a really good response when we just took a little bit more time and gave people a little more information,” he added.
Still, some of these changes haven’t been easy for industry. As defense spending has slowed, contractors have increasingly looked to consolidation. By buying up other companies, contractors hope to grow their sales without adding overhead costs.
Kendall said that defense contractors have had to adapt, but said the Pentagon still opposes further consolidation among the largest contractors.
However, he said the department is open to acquisitions of smaller contractors. Many larger companies have been buying niche businesses focused in growth areas such as health information technology, cybersecurity and intelligence.
“We expect people in the other tiers to be doing things to try to position themselves for the future; it’s natural and it’s a healthy activity,” Kendall said. “So we’ll be looking at [merger and acquisition] activity kind of on a case-by-case basis.”
Some moves, in fact, could “improve the structure of the industrial base, but there are others that we might have problems with because they remove competition.”
Still, Kendall said the Pentagon is mostly taking a hands-off approach, hoping that the market — not the government — will be “the fundamental mechanism” shaping industry as defense spending contracts.