Defense News - December 17, 2012, By Zachary Fryer-Biggs
Not long ago, the industrial base policy office at the Pentagon was relegated to afterthought status during years of booming defense spending. Allocation of resources takes a back seat when the money is seemingly unlimited. But with budgets facing a serious squeeze, industrial base policy has come roaring back as a critical component of defense strategy. Every major acquisition decision is now being considered through the prism of base impact, and every potential merger or acquisition carefully reviewed for possible harm to competition.
The man leading that effort, and confronting the challenges of assuring the U.S. ability to produce what the war fighter needs on fewer dollars, is Brett Lambert, U.S. deputy assistant secretary of defense for manufacturing and industrial base policy. Lambert, who joined DoD in his current position in 2009, spent 20 years in industry and is tasked with orchestrating the actions of industry and DoD to ensure U.S. military competitiveness.
Q. What are you doing to prepare for sequestration?
A. Everyone is nervous about what’s going to happen or may not happen on Jan. 2. I think, uniformly, between the department and our industrial partners, it’s the uncertainty that is the most problematic.
We get glimpses of hope every so often, and then days and weeks of despair as they go through this process. And that’s no way to plan a defense budget, and it’s no way to do capital planning of a company.
We are convinced that there will not be a sequestration. The secretary [Leon Panetta], the deputy secretary [Ashton Carter] and Mr. [Frank] Kendall [undersecretary for acquisition, technology and logistics] have all spoken out on that. It’s not a good thing to the war fighter.
It’s a very bad thing to the taxpayer in the long run, as it relates to defense. So we’re working with our industrial partners to be as clear as possible, as guidance allows us, to make sure that we are prepared if something does happen. But again, we’re still convinced that we’re going to get through this.
Q. What are you telling companies when they call you for advice?
A. To the extent that we can, we’ve been very open with them. The problem is the law is very complex. This is not something the department does in a vacuum; this is a whole-of-government issue.
If it’s a straight cut, then it’s pretty easy to plan. If it goes line by line, it’s not planning, it’s math. If we have more flexibility, we want to be as flexible as possible with our industrial partners to ensure that we’re not breaking our production and having huge disruptions.
Q. The Pentagon has released the Better Buying Power 2.0 initiative, which has industrial policy components. What are some of the most important features?
A. The No. 1 thing to know about Better Buying Power 2.0 is that it is part of a continuous improvement process that both Dr. Carter and Mr. Kendall started, and now Mr. Kendall is carrying on. So you should expect to see in another few years, now that we have some stability in the leadership, you should expect to see Better Buying Power 3.0 and 4.0. It’s not about replacing things because we chose new ones. It’s about what have we gotten right, what have we gotten wrong, and doing this process of continu¬ous improvement, just like you would do in any industry.
Industry truly is, and we view them as such, our partner. I know there’s a lot of work still to do, but we’ve made a lot of progress in the last few years. So, everything from making sure that profits are not suffering as long as performance is good. In fact, we want to disaggregate the two. We want to reward companies more with profit, incentivize them, use profit as the incentive it should be used for, and so you’ll see that in profit policies.
I think one of the big differences in 2.0 vs. the first Better Buying Power is the perception that Better Buying Power 1 is all about what industry can be doing better, which was not the case. We knew we had things that we needed to correct after 10 years of double-digit, year-over-year growth within our department. Better Buying Power 2 is more focused on a partnership. Industry has a role, but we certainly have a role to do better ourselves within the department.
Q. You did the Sector by Sector, Tier by Tier (S2T2) review for the department. What parts of the industry are healthy, and what parts are you worried about? And how will this study and industrial base considerations in general shape future procurement decisions?
A. Well, the S2T2 analysis, it’s not really a study. It’s an ongoing effort, and it’s a continuous effort along the lines of continuous improvement. It was really borne out of a study, an analysis that was done of the previous four downturns.
One of the things that we took away from that analysis was that, in every case, we got the industrial base wrong, and that we needed to better understand the implications of that base. We either hollowed that base out or we supported the wrong things. So the initial part of this was to understand not just by the sectors — aircraft, missiles, ships — but down through the tiers. It used to be that we would give a dollar to a prime contractor and we’d get 70 cents on the dollar of product back from that prime.
Today it’s more on the average of 30 cents comes from the prime and 70 cents comes from the vast tier of subs, all the way down to the fourth and fifth tier.
Our base, the base upon which the Defense Department and the war fighters rely, the taxpayers pay for, it’s more global, it’s more commercial and it’s more financially complex. And that is going to be truer tomorrow than it is today. So we have to look at our industrial base within that context of a highly tiered, highly integrated industrial base. So part of the S2T2 process was being able to home in on single points of failure.
Q. Every time there’s a major downturn, we see a wave of mergers and acquisitions (M&A). DoD officials have said they don’t want any of the top companies to merge, but BAE and EADS were considering a merger that would have had implications in the U.S. market. Has your stance on M&A changed, and what are you looking for in deals?
A. We want real competition, and we’re not convinced that mergers in the very senior companies that we saw after the ’93 “last supper” gave us a greater deal of competition, lowering the overhead cost to the taxpayer. So we’re not sure we got greater benefits. We did in some cases, but generally speaking, the most benefit was at the second- and third-tier rationalization. We’ve never said that we’re opposed to every merger and acquisition, we’ve just said that we’re comfortable with the general number of prime contractors we have now, particularly since most of the primes are real systems integrators.
Q. What do you want to emerge from this process? What kind of industrial base do you want?
A. A more competitive, a leaner, more profitable industrial base. But competition doesn’t necessarily, in this day and age, mean head-to-head competition — one guy’s missile against another. It’s about a portfolio approach, which Better Buying Power is looking at. It’s about capability. So we may be looking at a range of capabilities and portfolios that may not sustain two companies that do the same thing.
Q. Soon after BAE and EADS announced their merger, which has now been called off, there were those who said the Pentagon was likely going to reject it, while others have suggested it would have been approved easily. How would you guys likely have ruled on that?
A. We weren’t looking specifically at that deal. We look at a multitude of deals and transactions, ones that we imagine could happen and ones that are being presented to us. We do that on a regular basis.
Again, the thing that would drive that decision would be, does it promote competition and does it increase the war fighters’ capability, and does it reduce the taxpayers’ burden? That is the first hoop that we have to jump through. We never really got to that in this particular case.
Q. Are you anticipating significant activity at the midtier level, as many analysts predict?
A. Sure, just as I’ve seen in the previous cycles that we’ve had, both up and down, a significant amount of activity — not just in mergers and acquisitions, but in spinouts, in new investments from the venture capital world. I think at every tier of the transaction process, domestic and international, you will see a significant uptick in 2013 that will dwarf what we’ve seen in ’11 and ’12.
Q. As you’ve taken on your role helping to increase the emphasis on industrial base policy at DoD, you’ve had to increase the staff in your office following a far quieter era during the defense boom. Do you feel you have the staff in place to handle the wave of M&A activity that many analysts are anticipating?
A. I don’t think anyone ever feels that they’re adequately staffed. The more important question for me to answer is, I have the support to maintain the necessary resources in my leadership, so that as we go through this period, the support will be there. I’m comfortable with the level of support I’m getting from above. They recognize the importance of industrial base policy and manufacturing, and they’re providing me the resources we need to accomplish the mission that is then given to us.
Q. A lot of CEOs are saying that they can’t sell the notion of increased research and development spending to shareholders, while at the same time the Pentagon is pushing for companies to invest in early-stage R&D, as well as seeking greater efficiency in R&D spending. How do you see those competing interests working out?
A. One of the problems with very large firms is that they rightly say that your investment in R&D carries with it a very large overhead.
One of the reasons that you have small entrepreneurial firms is that they have very small overhead; therefore, the cost structure is lower, which we want. What the larger firms are very good at is integrating very complex, highly sophisticated systems. So I can see a future where you start to disaggregate core technology development from integration and ultimately product production to the department.
By Zachary Fryer-Biggs
The Office of the Deputy Assistant Secretary of Defense for Manufacturing and Industrial Base Policy operates under the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics.
Major programs: ManTech (DoD Manufacturing and Technology Program); Sector-by-Sector, Tier-by-Tier Review; Independent Research and Development
Source: U.S. Defense Department
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