Rethinking Profit Policy In Defense Acquisition
“The first responsibility of the acquisition workforce is to think.”
Despite persistent myth, the average profit margin for defense companies is half the margin for S&P 500 companies. Whether that bargain is good for warfighters and citizens depends on DoD acquisition goals and what that policy actually achieves in security, cost effectiveness, and innovation. But defense acquisition has performed poorly for decades and has been under constant reform during all of that time. Lack of progress in acquisition reform suggests underlying assumptions in policy and reform to date are flawed, and that if any progress is expected in the future, then these assumptions and policies must be reexamined. Otherwise, future progress is equally unlikely however comprehensive and well intentioned.
DoD profit policy continues to operate under the assumption that profit is merely wasted expense, or worse.
According to a Defense Acquisition University training presentation, “Many in Government see profit as ‘evil’ and unfair to the government vs. a required component of the acquisition process”. DoD leadership consistently denies there is a “war on profit”, but in 2013 HASC testimony, Pierre Chao showed something is clearly wrong with DoD profit policy: “Culturally we have evolved to a point where the system would rather pay $1 billion and 5% profit for a defense good, than $500 million and 20% profit.” The Defense Business Board agrees: “Profit is misunderstood by the government, [It is] seen as something to be minimized” and more comprehensively that “DoD lacks sufficient understanding of business operating models and drivers of innovation.”
The Public View of Defense Industry Profit
Clearly, both the American public and media views of the defense industry and especially defense industry profit are aligned with DoD policy. Neither are generally friendly to the defense industry. A Brookings study noted, “We are accustomed in the American public debate to praising men and women in uniform, and yet we often ignore or even pillory those who equip and support them.”
Stories of $800 hammers and $1000 toilet seats are not lessons of industry greed. Such prices are instead monuments to a broken acquisition system mired in regulation, process, oversight, and unique and changing requirements – all of which add to the cost of delivering what DoD acquires. They have nothing to say about industry overcharging or profit.
Media and various watch organizations are especially responsible for feeding the public myth of a greedy defense industry. This 2015 Washington Post headline Defense contractors hunker down, then report blistering earnings is at best misleading. At the close of 2015, defense industry profits were again half of the S&P, and far less than profits for Dow 30 producers of hamburgers, diapers, and Coca-Cola, not to mention the truly prosperous producers of our iPhones and favorite apps. Such stories needlessly inflame the ire of the public and Congress and result in ever more expensive and time-consuming legislation, policy, bureaucracy, and process. Although responsible oversite is necessary for productive, accountable administration, in defense acquisition it has been driven to an extreme “accretion of laws, regulations, reporting requirements, and mandated procedures that are choking the system … Fully a third of our procurement dollars are going to ‘overhead’, much of it dictated by the choking layers of redundant and competitive overseers.” (John Hamre, “An Honest Look at the "Military-Industrial" Complex”)
Examining Defense Industry Profit
“We don’t see why more mature commercial technology firms would need to do business with DoD when margins they could earn might be half of what they see on commercial work”
-- Byron Callan, “Fair” Margins and Defense