Contractor distrust costs DOD billions, study says

In a time when defense officials are hunting everywhere for savings, a new study has found what might be the missing element that could save the Defense Department billions of dollars: Trust. 

DOD's distrust of defense contractors has led to the creation of a significant bureaucracy, according to several university researchers, who released a report in May. DOD currently spends $400 billion each year acquiring products and services from its contractors. About $100 billion of the money is spent on administrative costs, according to the study, based on interviews with 80 defense contractor executives.

By cutting what the report's authors consider to be unneeded bureaucracy, defense officials could reduce the department's costs by 20 percent. That could save roughly $20 billion each year, according to the report.

The report was written by Russell Crook, an associate professor of management at the University of Tennessee, David Patterson, executive director of the UT National Defense Business Institute, Dave Ketchen, a Lowder Eminent Scholar at Auburn University, and James Combs, a professor at the University of Alabama.

After interviewing the executives, who came from more than 60 government suppliers, the team determined that 75 percent of money goes toward designing and manufacturing a product for sale to the government. The other quarter of money pays transaction costs, such as administrative and legal expenses when writing a request for proposal and monitoring costs later on in the procurement.

Based on those interviews, researchers arrived at some understanding of what drives up the costs.

For one, the adversarial relationships between buyers and suppliers have introduced costs in bidding and negotiations in contracts and slowed down the process of coming to acceptable terms and agreements. Think: standoff.

“What’s more, high turnover in the core buying or supplying team can fuel dissent in relationships that are already on shaky ground, or reboot solid relationships and turn them adversarial,” the researchers wrote.

In addition, vague contract requirements raise costs. Defense officials and contractors spend time ironing out differences in a changing interpretation of the requirements that could have been spelled out clearly sooner. 

The department has an inflexible modification process, according to the report.

“The main villains are the development, collection, and generation of unneeded reports, documenting, and maintaining compliance processes, as well as educating and training staff on compliance processes,” the researchers determined, according to the report.

“From the contractors’ perspective, the Department of Defense requires too many reports, and it micromanages how contractors do their jobs,” Ketchen said.

However, Ray Bjorklund, former assistant deputy director for procurement and logistics at the Defense Information Systems Agency in the 1990s and now vice president and chief knowledge officer at Deltek, said that what constitutes unnecessary regulations is often a matter of opinion. Some rules that may seem burdensome are actually necessary, he said. Overall, regulations are to protect the parties on each side of the contract. Without them, the two sides could not reconcile any disparities, he said.

In the report, the researchers gave four suggested solutions:

• Relational contracting.  A company should not be considered as a one-time supplier. Relational contracting is when buyers and suppliers make long-term commitments that build trust and cooperation. They wrote that suppliers would not put a valued relationship at risk, thus decreasing the need for oversight.
• Retain employees. The department needs to keep its best employees with the most knowledge in place. Agencies that can retain those employees are much more likely to be efficient and effective than agencies that have a lot of turnover.
• Monitor. Federal officials should monitor a company’s outcomes through performance-based contracting. Transaction costs go down, “because outcomes are easier and cheaper to monitor than behaviors,” they wrote.
• Adopt best-value contracting. DOD needs to take a best-value approach to contracts. The private sector has been moving away from stressing one metric. Instead, companies are considering a set of factors, such as cost, quality, flexibility, and speed. Researchers wrote that best-value supply chains focus on delivering the maximum total value added to the customer.

“Contractors believe that everyone could save money if the Department of Defense would focus on outcomes rather than processes and let the contractors figure out the best way to deliver good results,” Ketchen said.

In 2010, then-Under Secretary of Defense for Acquisition, Technology, and Logistics, Ashton Carter, issued the Better Buying  Power Initiative. He told defense officials to performance through progress payments and set up a Preferred Supplier Program for the department. Carter also recognized a qualified acquisition workforce as a means to efficiencies.

Bjorklund agreed that trust is important -- business partnerships have to be based on trust, he said -- but sometimes that trust is broken and things fall apart, which is when a well-developed set of rules can be a lifesaver.