Pentagon Panel Pushes Privatization

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Pentagon Panel Pushes Privatization

A report urges DoD to cut its non-profit research centers, possibly reviving SAIC-Aerospace merger

By Neil Munro

Staff Writer

The U.S. Department of Defense should compete the $1.2 billion in work that it pours annually into 11 nonprofit research centers, according to a draft of a long-delayed report by a Defense Science Board panel.

The report is being prepared by a task force, headed by industry official Gordon Englund, could boost prospects that Science Applications International Corp. will revive its effort to buy Aerospace Corp., which is one of the DoD centers.

Last August, SAIC announced its intent to merge with Aerospace Corp. but the deal was scuttled by Pentagon officials who deemed it was not in the best interests of the nation. Aerospace's core business is its center, whose impartial analysis to government managers will earn it $314 million in 1997.

According to the draft report, federally funded research and development centers, including Aerospace, El Segundo, Calif., and The Mitre Corp., based in Bedford, Mass., should be redirected to work on specific research projects that industry can't accomplish.

"The task force has concluded that the current system does not provide the best available service at the most reasonable cost," according to the draft report.

Other work performed by the centers, such as the provision of expert advice on technology and acquisition to the managers of U.S. Air Force space and electronics programs, should be contracted out to U.S. industry, said the draft.

"There are numerous other sources available to do much of the remaining work," said the draft.

The report's pro-privatization recommendations could help SAIC complete its purchase of Aerospace, which was blocked last November by the Pentagon, said industry officials.

The Defense Science Board and its roster of top-level industry and technology experts' recommendations typically have significant influence on policy decisions. The task force on FFRDCs was formed in November 1995 by Pentagon officials to draft a plan for privatization of the FFRDC's work, following an extensive review of the centers by the Defense Science Board.

The task force was scheduled to deliver its report in March 1996. However, the report has not been released because top defense officials "have continued to ask for revisions because it is very uncomfortable for them," said Bert Concklin, president of the industry-sponsored Professional Services Council, based in Vienna, Va., which has long campaigned to shrink the role of FFRDCs.

Defense Science Board reports are not always published quickly, partly because their deadline marks when they are to be delivered to top Pentagon officials, not when they are to be released to the public, said Pentagon spokeswoman Susan Hansen. Pentagon officials "don't change the [reports]. They may go back and ask the [authors] to look at things that were not answered to the satisfaction of the people who asked for the report," she said.

Neither Paul Kaminski, the Pentagon's acquisition chief, nor Art Money, the Air Force's acquisition chief, would comment on the Defense Science Board report or the Pentagon's decision to reject SAIC's proposed merger with Aerospace. However, Money applauded the SAIC buyout plan when it was first announced last summer.

"We cannot comment on something we have not seen," said Peter Alexandrakos, a spokesman for Mitre, which employs roughly 1,500 people in McLean, Va. Aerospace has 390 people near Herndon, Va., and another 2,600 in El Segundo, Calif. Other FFRDCs based in the Washington area include the Center for Naval Analyses and the Institute for Defense Analyses, both based in Alexandria, Va.

Duane Andrews, an SAIC vice president who championed the buyout deal, said he had not seen the Defense Science Board report. Asked about any renewed SAIC effort to buy Aerospace, Andrews said that "we have to try to make a better case for them to [approve the buyout], or the time needs to change where privatization and saving money become more important."

"We may continue to ask the Air Force [about a buyout]. But until they are prepared ... to let the deal go forward, we can't pursue the deal," Andrews said.

Before the November rejection, SAIC and the Air Force had already worked out a solution to the critical conflict-of-interest problem caused by the merger of for-profit SAIC with nonprofit Aerospace, said Andrews.

Part of the solution, officials said, was to segregate roughly 400 Aerospace experts into a special unit providing advice to program managers. By segregating the experts, and by ensuring that SAIC would not bid for any program supported by experts, top Pentagon officials would not have to worry that the experts' advice would be tainted by SAIC's corporate strategy, they said. The work performed by the unit could be competed among the rest of the defense industry after about five years, they said.

But Pete Aldridge, Aerospace's president, said he did not think any buyout deal was possible. Space technology companies such as TRW Inc., Cleveland, Ohio, and Hughes Electronics Corp., Los Angeles, came "out of the woodwork" saying that they had shared proprietary information with Aerospace for many years, he said.

"I don't think there is any way to solve that [conflict-of-interest] problem," said Aldridge, who backed the merger last year.

If SAIC had bought Aerospace, it would have created a new rival for TRW and Hughes in the commercial space business.

But according to Andrews, "in all the rest of the federal government, and in most parts of the Air Force, [officials] do not rely on FFRDCs to support acquisition and contracting matters."

In any renewed effort to buy Aerospace, SAIC officials will likely cite one passage of the draft report, which says commercial companies can simultaneously provide unbiased expert advice to one client while pursing profits in the marketplace. Companies such as Perot Systems Corp., Dallas, and McKinsey & Co. Inc., New York, "maintain long-term relationships with major clients which include access to sensitive data, strategic decisions, and technology developments," said the draft report.

"That's a pretty naive conclusion" because Aerospace's close relationship with potential rivals such as TRW and Hughes goes far beyond the work performed by systems integrators for their clients, said Aldridge.

In a Feb. 4 statement response to WT questions, Air Force officials said the conflict-of-interest problem had not been solved before the buyout was rejected.

"The Air Force does not anticipate further discussion" on the buyout, said the statement.

SAIC executives would also be able to point to another section of the report, which states, "FFRDCs have insufficient incentive to innovate ... [and] are not actually involved in the development of new technology."

According to Andrews, SAIC's buyout of Aerospace and its subsequent shift toward commercial space contracts would help Aerospace recruit more technical experts and draw technology from the fast-growing civilian space industry.

Aldridge said Aerospace now gets roughly $20 million in annual revenues from nondefense work, including commercial work. The Air Force has given Aerospace conditional approval to assign 50 people to commercial work.

Andrews, a former DoD official, also complained that "the Air Force, the Pentagon, and for that matter the Congress, did not seem to be interested in the cost savings that we were offering."

SAIC promised the Air Force savings worth $167 million during the first five years after SAIC bought Aerospace, $25 million in free research work, plus several million dollars to convert Aerospace's government-designed accounting system to a commercial system.

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