One-Stop Defense Shopping

By Dov S. Zakheim and Ronald T. Kadish
Monday, April 28, 2008

The Government Accountability Office reported last month on how things are going with nearly 100 major U.S. defense systems. Not well, it seems. They have exceeded their original budgets and are, on average, almost two years behind schedule.

The GAO report lays bare a festering problem in our nation's military procurement system: Competition barely exists in the defense industry and is growing weaker by the day.

It was a different story just two decades ago. In the 1980s, 20 or more prime contractors competed for most defense contracts. Today, the Pentagon relies primarily on six main contractors to build our nation's aircraft, missiles, ships and other weapons systems.

It is a system that largely forgoes competition on price, delivery and performance and replaces it with a kind of "design bureau" competition, similar to what the Soviet Union used -- hardly a recipe for success.

Consider just two recent events: In February, the Air Force announced that it would award its $35 billion KC-45A tanker program to Northrop Grumman and European giant EADS, over Boeing. The move has aroused considerable opposition, not just from Boeing but also from people, including some members of Congress, troubled by the fact that the new refueling aircraft would be designed and built in Europe.

Those disturbed by this scenario, and what it portends, should be even more unsettled by the announcement from Boeing and Lockheed Martin that they will "collaborate" on another major project: the Air Force's next-generation bomber.

The union of these defense giants has created an apparent dream team of engineering and manufacturing talent, not to mention political clout. It's an arrangement that some observers say constitutes the best -- and maybe only -- way to defeat their sole remaining competitor, Northrop Grumman.

Fewer competitors mean better odds of winning, even if they have to split the proceeds. And, conveniently, proceeds are likely to be enhanced when the firms don't have to be so concerned about being competitive on price and delivery.

Of course, one can hardly blame Lockheed Martin and Boeing; neither wants to be shut out of a program whose developmental costs alone are expected to reach $10 billion. But a partnership between two of the nation's three aircraft manufacturers makes it extremely difficult for the Air Force to run an effective competition.

These moves highlight an unfortunate reality: The United States is approaching an "arsenal system" for developing and producing its weapons -- that is, one in which the government manufactures its own weaponry. It's an antiquated model with modest benefits, but the way things are going even those will probably be lost.

The shrinking pool of U.S. manufacturers was the inevitable result of defense spending reductions after the Cold War. Shortly after Bill Clinton took office, then-Defense Secretary Les Aspin and Deputy Secretary William Perry called together the heads of the major defense contractors and told them that the Pentagon would soon need only half of their companies, perhaps even fewer, and could not afford to pay for unneeded factories and workers. Later dubbed the "Last Supper," the dinner meeting triggered unprecedented consolidation as defense companies such as Lockheed, Northrop, General Dynamics, Raytheon and Boeing gobbled up competitors.

Although the consolidations helped contractors survive the spending cuts, they now threaten to undermine the industry. That's because many in Congress and at the Pentagon want to impose stricter oversight and controls on weapons manufacturing and development while simultaneously demanding more competition -- driving the system to an immature and evolving "globalized" marketplace.

More regulations and bureaucratic restrictions on contractors are not the answer. Instead, we need a bold strategy to reverse consolidation and a vigorous debate of the consequences of globalization for U.S. security.

The military has an even greater need today for competitive diversity among its suppliers than it did during the Cold War; our nation must prepare for two very different types of war, one conventional and the other aimed at insurgencies and terrorists. This requires a larger, more diversified base of prime contractors and suppliers.

The advent of a new administration provides a golden opportunity to discuss how to reinvigorate the U.S. defense industrial base. Will our nation's leaders recognize this problem and find lasting ways to mitigate the effects of our consolidated defense market, or will we allow the new president and Congress to muddle through by forcing competition in a global market, legislating marginal solutions and tightening controls?

Even the best procurement process will not solve this problem. Unless we act soon, we may find that the only solutions available will be to nationalize the military industrial base or to "outsource" production of our weapons systems, with excessive portions of that work going overseas.

We are, carelessly and unwittingly, meandering down both paths.

Dov S. Zakheim and Ronald T. Kadish are vice presidents of the strategy and technology consulting firm Booz Allen Hamilton Inc. Zakheim, who leads Booz Allen Hamilton's work for global defense clients, was undersecretary of defense from 2001 to 2004. Kadish, who specializes in the company's work for U.S. Air Force, Defense Department and industrial clients, was director of the Missile Defense Agency from 2000 to 2005.

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