The Navy is taking over management control and reducing Lockheed Martin’s role in the sea service’s largest missile-launching system as part of an effort to cut costs.
Instead of paying Lockheed to acquire and integrate the components of the Mark 41 Vertical Launching System, as it has since the 1980s, the Navy is buying the mechanical launch platform directly from London-based BAE Systems, formerly a Lockheed subcontractor.
Lockheed, based in Bethesda, will continue to provide and install electronics, which account for about 55 percent of the missile launcher’s production cost, said Toan Nguyen, the Navy’s program manager for the system. BAE’s portion accounts for the other 45 percent.
“We are the system integrator now,” Nguyen said in an interview Sept. 12. “All the work done before by the contractor, now the Navy team will have to do it.’ ”
The Navy has spent about $1.5 billion on the system’s production contracts since 2004, Stephanie Collins, a Navy spokeswoman, said in a Sept. 15 e-mail. The system has been ordered for 112 U.S. Navy ships to launch missiles including Tomahawks and Evolved Sea Sparrows, both made by Waltham, Mass.-based Raytheon, she said.
The shift to in-house integration will result in significant savings because the Navy will avoid fees Lockheed charged to acquire equipment and labor costs it billed for overseeing BAE’s work, Capt. Timothy Batzler, the Navy’s major program manager for surface ship weapons, said in a Sept. 12 interview.
The Navy estimates it will save more than $1 million per launch module, Collins said in an e-mail. The Navy has ordered 1,336 shipboard modules since the system was deployed in 1986, she said.
The new acquisition strategy follows principles for achieving “better buying power” outlined in a memo to acquisition officers last year from Ashton Carter, at the time the Pentagon’s top weapons buyer, Nguyen said.
Program managers “should be scrutinizing every element of program cost” and “dissecting overheads and indirect costs” to find ways to improve affordability, according to the September 2010 memo from Carter, who was confirmed Sept. 23 as the deputy secretary of defense.
Other military acquisition programs could see similar changes as contracting officers respond to Carter’s directives, said Loren Thompson, a defense analyst at the Arlington-based Lexington Institute, in a Sept. 19 interview.
“All the services are under pressure to reduce overhead by removing fee-on-fee arrangements. The question is whether the government understands all the skills and costs associated with taking over the task,” he said. “You can’t simply assume they will understand all the technical issues that come with being a systems integrator.’’
If the Navy’s procurement strategy for the missile launcher becomes a trend throughout the Defense Department, “it will reduce the profitability of major defense contractors who counted on systems integration to be one of their core competencies,” he said.
A shift toward government-led systems integration could create opportunities for smaller contractors that focus on services, said Todd Harrison, a defense analyst at the Washington-based Center for Strategic and Budgetary Assessments.
“It would bring in a slightly different crowd of contractors,’’ he said in a Sept. 20 interview.
The government may find that it lacks some skills required for systems integration and could turn to companies including Northern Virginia firms such as SAIC, Booz Allen Hamilton and CACI International that provide systems engineering support and don’t manufacture weapons, Harrison said.
“They would be a fallback option’’ to assist the government as it takes over primary responsibility for systems integration from the private sector, he said. Larger contractors such as Lockheed, Raytheon and Northrop Grumman typically perform systems integration only when the entire integration function is outsourced, Harrison said.
The Navy may add workers at its Warfare Centers, which are responsible for equipping the fleet, because of the changed missile-launcher acquisition strategy, Batzler said. The program office staff responsible for acquiring the launch system doesn’t expect to grow, he said.
Lockheed, the world’s biggest defense company, received an $80 million contract and BAE received a $55 million award in June to supply at least three Aegis destroyers with 36 launch modules and provide an additional module for an on-shore facility.
The system is used on CG 47-class cruisers and DDG 51-class destroyers and is part of the Missile Defense Agency’s Ballistic Missile Defense Program.
The launchers are used on more than 80 ships belonging to U.S. allies, Collins said. The Navy will serve as its own system integrator for future foreign sales, she said.
While the Navy’s larger role reduces “the amount of material Lockheed Martin procures and manages for the MK 41 VLS production contracts,” the company remains responsible for assembly, testing and delivery of the system, said Dana Casey, a Lockheed spokeswoman, in a Sept. 15 e-mail.
She declined to say how Lockheed’s profits from the system would be affected.
“This is a natural progression,” Kelly Golden, a spokeswoman for BAE, said in a Sept. 15 e-mail. “The real benefit is to the U.S. Navy. That’s why they pursued this approach in the first place.”
She declined to say how the change would affect BAE’s profits.