Aligning Margins and Performance at DoD

Stan Soloway, president and chief executive officer of the Professional Services Council (PSC), wrote a piece recently about the issues defense contractors face and the tough times that lay ahead for industry as the federal budgets continue to shift and shrink. Mr. Soloway’s piece was in conjunction with the PSC’s recent Marketview 2012 conference, and as he states, I agree they deserve continued attention and discussion.

While the road ahead will be rocky and uncertain, if it is navigated properly by both government and industry, a stronger government-focused industrial base could emerge. But it wasn’t until the last panel of the conference, which focused on the changing policies and strategies the military departments are using to procure services that the challenges associated with achieving that goal became most evident.

Said one government panelist: “If you’re thinking about margins, you’re thinking about the wrong thing. The fiscal environment is such that you should only be thinking about booking revenue, not margins.”

A moment later he said, “We have decided that the vast majority of what we buy is appropriately bought on a low price, technically acceptable basis” and “We are going to require that any component that seeks to use a ‘best value’ approach justify their reasons for doing so.”

And finally, “If you bid too low, know this: We’re going to hold you to your contract and demand that you deliver what you promised.”

What seems to be lost at DoD is that low-price, technically acceptable (LPTA) is only going to worsen what is an already difficult situation when it comes to program performance and outcomes. As mentioned, most programs of significance (budget-wise) are severely underperforming on all three of the “triple constraints,” yet now we want to further reduce prices and lower margins to the point where firms need to make even tougher decisions about the market. The model for rapid acquisition was the Mine Resistant Ambush Protected (MRAP) armored vehicles, where capability and innovation were delivered quickly into the field. The ultimate success factor for this program was a blank check, where capability and not margins was the focus. This world has been flipped on its head, and now similar results are expected with constrained budgets, with no regard to profits. Industrial base be damned!

Also lost on the conversation is the double-whammy of performance, from both an execution and ratings standpoint. I have yet to see the type of accountability one of the panelists mentioned, as the price needed to win a competition is often driven lower than a realistic cost (or should-cost for that matter). It is sanctioned “buying in,” so modifications and increased funding allow for the completion of the requirements and what the customer needs. Performance suffers, and the firm “underperforming” at the unrealistic price needed to compete also stands to suffer with a past performance rating.

Further exacerbating the problem is some officials are arguing for firms to not be given the chance to challenge these poor ratings. Poor results for the taxpayer are assured in this environment.

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