Now 'good enough' wins the defense contract

By Marjorie Censer
Sunday, March 13, 2011; 11:44 PM

The Air Force's decision late last month to award the long-contested, $35 billion aerial refueling tanker program to Boeing ended a competition that had been fraught with controversy. But analysts say the decision may have sent another message to the contracting community: The government isn't necessarily seeking the most capable or "best value" equipment, but rather good-enough equipment with a lower price tag.

Losing bidder European Aeronautic Defense and Space had "a more capable system," said Richard Aboulafia, a defense analyst with the Teal Group. "I don't think even Boeing would dispute that."

Yet, EADS still lost to the lower-priced Boeing proposal. The company's tanker is smaller, meaning it not only costs less but that it uses less fuel, which means it received credit for costing less to operate.

The movement within the government to focus on price and "good-enough" capability over ideal, envelope-pushing systems has been gaining momentum since Defense Secretary Robert M. Gates in 2009 called on the military to forget the "exquisite" platform and instead seek the "80-percent solution," equipment that's affordable and can be fielded quickly and in large quantities.

"They're not going to pay for bells and whistles," Aboulafia said. "That's the clear message here, and everyone should be heeding that message."

The idea of paying less to get less isn't only gaining traction in the halls of the Pentagon. In the information technology world, Vivek Kundra, the federal chief information officer, has been pressing contractors to provide smaller, functional pieces of an information technology system sooner, rather than take on a big contract and fail years later to provide a perfect, complete system.

The focus on cost isn't surprising, considering the tightened budgetary environment. Andrew F. Krepinevich Jr., president of the Center for Strategic and Budgetary Assessments, said price will loom increasingly large as the defense budget shrinks.

What Gates is saying is that "we've emphasized for so long high performance because we really haven't had to worry about cost," Krepinevich said. "Well, that's changed. Cost really matters now."

The Pentagon has been reserved in talking about how EADS and Boeing stacked up when it came to performance versus cost. At a press conference to discuss the award, Deputy Defense Secretary William Lynn, asked whether EADS's tanker provided a better bang for the buck, said only that the Defense Department "went through a process that evaluated war-fighting requirements, evaluated price, evaluated life-cycle costs.

"And the process yielded the result it did, with Boeing winning."

But some industry advocates and officials are pushing back against a cost-focused strategy as short-sighted and risky. They worry that the focus on cost will mean companies have little incentive to invest in new technology and that the government will in fact get less for its dollars.

Malcolm O'Neill, the Army's top acquisition official, acknowledged at a luncheon last week that he recognizes a troublesome trend developing in which innovation is not prioritized over price -- or what he called the "this is good enough" mentality.

"I fight that every day," he said. "It's a fear of getting the press [coverage] that this system cost more than it's supposed to cost [or] it took longer to get to the field."

O'Neill said he just rejected an Army solicitation because it failed to offer contractors any reason to push the technological envelope. The document said the contractor would assume all risk if the system it designed was more advanced than the level designated by the Army.

Pushing to the next technological level remains important to the Army, said O'Neill, who warned that aiming for an 80-percent solution has its own risks.

Instead, "you get 50 percent," he said. "That's the problem."

Officials at EADS, who sounded a warning note about choosing the less expensive tanker over what it considered the better value, remain on the fence about whether the Air Force procurement signals a sea change within the industry.

The tanker program has been one of the Pentagon's most contentious. In 2003, the Air Force planned to lease tankers from Boeing, but the deal was canceled after a procurement scandal that sent a Boeing executive and a Pentagon official to jail.

The Air Force relaunched the program and in 2008 awarded the contract to Northrop Grumman, partnered with EADS. That decision was overturned after the Government Accountability Office upheld a protest filed by Boeing. Northrop Grumman announced it would not participate in another competition, and EADS competed on its own this time.

Sean O'Keefe, chief executive of the North American unit of EADS, said the tanker solicitation was designed to get the best value -- but only within a very limited price range. As a result, he said, more innovative technology was not given credit.

But O'Keefe stressed that the Air Force was running a very specific procurement. The tanker program has taken years to get off the ground, and last month's announcement was the third effort to award the contract.

"I don't look at this competition and say, 'Gee whiz, it was the wrong way of doing it,' " O'Keefe said. "It was a way of doing it, but it has consequences."

Barry Watts, a senior fellow at the Center for Strategic and Budgetary Assessments, said he wouldn't assume other contracts will be evaluated the same way, citing the tanker program's "unique and ugly history."

Boeing declined to comment.

Defense contractors say they're not making a strategic U-turn yet. EADS, for one, still plans to invest as usual in researching and developing new technology, said O'Keefe.

But companies are looking to focus on programs where they already have proven technology and can make targeted improvements and innovations.

Lawrence B. Prior III, who oversees BAE Systems' services business, said the company isn't giving up on cutting-edge technology but that contractors are "making choices earlier, and not everybody's going to play in every competition."

The government sometimes has trouble making a case for selecting a pricier system, said Alan Chvotkin, executive vice president and counsel at the Professional Services Council, an industry association.

"My sense over time is that agencies have a hard time paying even a little more for a little more," he said. "I think that's a shame that we're devolving into a strictly low-price mentality."

Chvotkin said he wouldn't recommend that companies, facing a competitive market, depart from investing in new ideas.

"I don't think companies should jettison their [research and development] work; companies still have got to differentiate themselves in the marketplace," he said.

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