The Pros and Cons of Competition

Feb. 1, 1986

For some time now, Congress has been fairly erupting with legislation designed to increase competi­tion in defense procurements. There is general agreement that goods and services tend to cost less when competing contractors bid against each other to supply them. Indeed, the statistics do indicate that costs go down as competition goes up.

But there is also broad concern that Congress, in its enthusiasm for competition, may not have left enough room for the services to ap­ply common sense in procurement and that the lock-step competition drill may lead to new problems. (See editorial, “Legislating Competi­tion, ” August 1985 issue.)

Amid these concerns, the armed forces are busily implementing the competition initiatives imposed by Congress, plus others they thought up themselves. The Air Force, for example, began appointing com­petition advocates three years ago. It now has about 1,500 of them working full time, mostly in Sys­tems Command, which spends sixty percent of USAF’s procurement dollars, and in Logistics Command, which spends thirty percent.

Panelists at an Aerospace Education Foundation Roundtable held in Washington on November 21 exam­ined the consequences, good and bad, of this heavy emphasis on com­petition.

Gen. Robert T. Marsh, USAF (Ret.), former AFSC Commander and Roundtable moderator, said that in the vigorous movement for procurement reform, “no one sub­ject has received so much of the reformists’ attention as competi­tion.” The belief is widely held, he said, that the military can achieve significant cost reductions while in­creasing quality and performance if it will take advantage of the oppor­tunities for more competition. He and his fellow panelists then set about exploring the validity of that assumption.

“My own studies of defense pro­grams have shown that when used properly, competition produces on the average a twenty-eight percent reduction in gross price,” said Nor­man R. Augustine, Senior Vice President, Martin Marietta Corp.. and author of the incisive book Au­gustine ‘s Laws. The circumstances, however, are not always appropriate for competition. Mr. Augustine Cit­ed one such example that he had witnessed: a decision that two con­ tractors were needed for competi­tion’s sake when there wasn’t enough production to keep a single factory employed efficiently. That, he said, is “akin to trying to leap deep chasms in two bounds.”

“Competition is just one strategy that we use to achieve both quality and affordability within our defense programs.” said Dr. James P. Wade, Jr., Assistant Secretary of Defense for Acquisition and Logistics. “There are others—for example, multiyear procurement, preplanned product improvement, cooperation in an arms sense with our allies, and the important aspect of having joint service programs development.” He said that it is Pentagon policy to use competition “to the maximum extent practical” and to encourage prime contractors to generate com­petition among subcontractors. At the same time, he acknowledged that defense acquisition is an exer­cise in balancing cost, schedule, and performance and that too much emphasis on any one of these can play hob with the other two.

“Our acquisition strategies might be good, they might be fast, and they might be cheap. but I think we can say that they can’t be all three at the same time.” Dr. Wade said.

Mr. Augustine observed that “technical leveling” often occurs as the government interchanges tech­nical ideas among contending con­tractors, leaving the low bid as the sole means of deciding who gets the job. As a result, he said, some com­panies are cutting back on innova­tion in favor of strategies to become the low-cost producer.

“We recognize that competition doesn’t solve all problems. but gen­erally we believe that there has been too little of it, and we want more of it,” said Rep. Jim Courier (R-N. J.). Congressman Courier rejected the idea that cost alone must be the ob­jective of competition. “1 think you can compete other things besides cost,” he said. “I think you can com­pete reliability and survivability and maintainability and quality and speed,” adding that “no one should suggest that competition means you forget those other necessary quali­ties in that which you’re trying to get.”

Brig. Gen. Gerald C. Schwankl, USAF’s Competition Advocate General, said that the Air Force ob­ligates more than $45 billion in some 4,000.000 contract actions a year. In FY ’85, eighty-two percent of the contract actions (representing 39.2 percent of the money) were the re­sult of competition. This was a twenty-five percent improvement over the previous year, and the Air Force expects to do even better in FY ’86. About half the total pro­curement dollars are spent in the “follow-on to competition” catego­ry. The portion awarded on a non­competitive basis was sixteen per­cent in FY ’84 and 12.8 percent in FY ’85.

Fielding a question from the audi­ence—How much money has been saved, really, compared to what it takes to maintain 1,500 bureaucrats in the competition advocate pro­gramGeneral Schwankl said that competition and spare parts pro­curement reform had saved $525 million in FY ’84 in Logistics Com­mand alone. “In the first nine months of FY ’85, we saved $518 million,” he said. “These are audit-able, documented figures. So yes. they [the competition advocates] are paying their way.”

Panelist Tim T. Carrington, Pen­tagon correspondent for the Wall Street Journal, recalled how the securities business struggled with the question of competition in the 1970s. “Wall Street, although it’s at the core of the United States cap­italist system, was quite a protected industry and resisted competition until ten years ago, when it was forced on them by Congress, which decided that the fixed commission rate—sort of a cartel system that had been maintained over the years—should be dismantled and that the forces of competition should be brought to the securities business,” he said. “It was some­thing that was generally resisted by the industry. It was highly disrup­tive after rates were unfixed, and a lot of companies went out of busi­ness. But I think it has been con­cluded that, in the end, the surviv­ing companies were considerably stronger than any of the companies were five years before.”

He recognized the enormous dif­ferences between defense and the securities industry, but said. “I think that what they have in com­mon is that disruptions are to be expected.” Mr. Carrington added. “Probably, in the end, if it is handled wisely, it’s going to yield a stronger industry with stronger components after it shakes down.”

One of the potentially most harmful side effects of excessive competition is that it discourages in­dustry from making capital invest­ments because it cannot depend on sufficiently long production runs over which to amortize expenses. “If one wins a contract for a new airplane and the contractor knows it’s only going to build 100 of those airplanes before a competition takes place, one can afford to tool in a very different fashion than if you think you’re going to get to build the whole 1,000 of them,” Mr. Au­gustine said. “If you know you’re going to build the 1,000, you can spend the money to build a more efficient factory.”

There is also an effect on general research activity, because under the complex acquisition rules, the amount that industry can bill for in­dependent research and develop­ment (IR&D) and bid-and-proposal preparation is limited by a common ceiling, expressed as a percentage of current contracts. Emphasis on competition naturally stimulates bids and proposals.

“An increasing share of indus­try’s discretionary money that used to go to advancing the state of the art, to doing research, today is going to proposal writing—a very significant increase,” Mr. Augustine said.

Expanding on that in response to a question from General Marsh, he added, “Day-to-day pressures of staying in business are such that if you have a choice between writing a proposal to bring in business tomor­row and doing research on some­thing that will pay off ten years from now, it’s very difficult to look your shareholders in the eye and not re­spond to a request for proposals.”

Congressman Courier said that he has begun to worry about a “military-congressional complex” that works at cross-purposes with the objective. “Congress is becom­ing much too involved in the pro­curement process,” he said. “We have to allow it to breathe.

“Congress, of course, wants small business set-asides: we want minority set-asides; we want to make sure that New Jersey, a state like mine, receives its ‘fair share’ of contracts. We’re interested in a jobs program. Basically. the Department of Defense is a jobs program for various members of Congress. We’re interested in social engineer­ing as well. I’m a little concerned that Congress has taken its job and its responsibilities so seriously that we are getting in the way of true competition.”

As uncertainty, pressure, and bu­reaucratic requirements grow in de­fense contracting, many small ven­dors are dealing themselves out. Mr. Augustine said that he had recently heard from a small firm that had long supplied about ten very special washers a year for a low-production defense program:

“We received a box of washers from the president of this company, and it was accompanied by a letter that said, ‘Our firm is made up of good Americans. We want to do our share for the defense effort. There­fore, we’re providing you with a ten-year supply of washers, courtesy of ourselves. Now please go find somebody else, and leave us alone.’

“Competition in the broad sense is a superb mechanism, but as with many other things, one can have too much of a good thing.”