‘Nonprofits’—Who’s Got a Better Way?

Dec. 1, 1961

In the aerospace age, top managerial skill must be tempered with true objectivity. This careful balance is the government’s aim in the utilization of nonprofit organizations. It is a unique and justifiable solution for a time that demands high skill against a background of urgency.

Those of us who are managers have to be better managers than anybody has ever been before.

—Eugene M. Zuckert, Secretary of the Air Force

“We are by no means satisfied that the unique managerial talent with which this notion it endowed has yet made itself fully effective in defense production.”

—Roswell L. Gilpatric, Deputy Secretary of Defense

“The most critical resource we have is management talent.”

—Gen. Bernard A. Schriever, Commander, Air Force Systems Command

“The traditional prime contractor, the in­dependent systems contractor, and the non­profit corporation are but progressive attempts to keep forms of management abreast with technology. Each of them we created within the framework of private industry to perform a common function. The first step was to concentrate this function in o single manufacturer; the second to seven it from hardware production; the third to separate it from the profit motive.

—Max Golden, General Counsel, Department of the Air Force

Clearly, the spotlight is on technical manage­ment. This is true not only in the defense indus­try and the Pentagon, which share the staggering responsibility for America’s security in the years ahead, but in Congress, where the effort is monitored.

The issue now appears joined at the point where the Defense Department, and most specifically the Air Force, believes that in special cases top technical man­agement must be teamed with true objectivity. And that the nonprofit corporation, created specifically to provide talent and objectivity, is the best way to form this team. But some members of Congress are challenging the concept as a tool to achieve good management. And there are men among them who are the first to find fault with bad management when it appears.

At the same time it must be pointed out that no committee, congressional or otherwise, has argued that there is a better way of garnering the talent and objectivity needed or that a change would improve our management of defense projects.

It must be understood at the outset that the spot­light is on a single category of nonprofit organizations. At the moment these include the Institute for Defense Analysis, RAND Corporation, Aerospace Corporation, MITRE Corporation, System Development Corpora­tion, Analytic Services, Inc., and the Army’s new Re­search Analysis Corporation. Most recently, the Defense Department has launched the Logistics Management Institute.

Outside the Defense Department, the National Aeronautics and Space Administration is reported considering a nonprofit organization to help mobi­lize scientific skills. And, as if to illustrate that even profit-makers see virtue in no profit, the communica­tions industry is considering such an organization to operate a satellite relay system in space.

Some of these organizations are concerned with matters of management, as distinguished from primary interest in research, development, test and evaluation, or the production of hardware, however small in quantity. In aerospace jargon, they are carrying out the primary mission of systems engineering and tech­nical direction, described on these pages last month in the more familiar terms of architecture and man­agement. Aerospace and MITRE are the most im­portant examples.

Their ancestry goes back, as Air Force General Counsel Max Golden suggests, to the time when USAF entrusted systems engineering and technical direction to a prime contractor, monitored by a Weapon System Project Office. The B-52 bomber was produced with the Boeing Airplane Co., as prime, and when the first airplane was delivered to Castle AFB in California, the entire system, both airborne and ground-support elements, was operational. Gen. Clarence Irvine, then Deputy Chief of Staff for Materiel, said it was the first time in his experience that this had been true.

With the advent of ballistic missiles, USAF turned to a special private organization for its systems engi­neering and technical direction. This was Ramo­-Wooldridge, later Space Technology Laboratories. Factors dictating the decision in 1954 were the status of the ICBM program, which had been allowed to lag for a few years, the size and complexity of the pro­gram, and its high priority. On top of this there was a recognized shortage of top talent capable of mastering all the new technologies that had to be coordinated to ensure success. From the beginning, Ramo-Wooldridge was a profit-seeking organization but labored under a USAF-imposed handicap: It was forbidden to turn to hardware production as a source of profit. Ramo-Wool­dridge was financed for the most part by Thompson Products Co., which does manufacture missile compo­nents. The parent company, it was recognized by the Military Operations Subcommittee of the House Com­mittee on Government Operations, “was clearly inter­ested in Ramo-Wooldridge’s commercial potential.” The company was looked upon by its severest critics as “another private contractor pursuing its stockholders’ interests first and the government’s interest second.”

Basically, it was this criticism that led to the estab­lishment of Aerospace Corporation after the same House committee, acknowledging that the early missile program had been a success, said in 1959 that “if STL is to have any future with the Air Force, it must be converted into a nonprofit institution. . . .” USAF chose to sponsor formation of a new company, after it was clear that STL was determined to continue—as always—as a profit-making organization.

What Aerospace is to USAF’s aerospace program, so is MITRE Corporation to the electronic systems in the relatively new area of command and control. As a technical adviser, it works on concepts and integration. It cannot design a product or carry on production. It provides top technical talent with objectivity. “The necessary objectivity might be attainable in industry,” says MITRE president C. W. Halligan, as a rule industry itself might question an evaluation made by the contractor or by his competitor.”

This has been confirmed by USAF’s experience with systems evaluation and technical direction. The Air Force also has found that it can achieve more flexibility—in technical areas, logistics, and organization by using an independent contractor. When several systems are being managed by one organization, the major subsystems back up each other. If one appears to be failing, it is relatively easy to select a subsystem from another project and substitute it. If one subsystem shows marked superiority over its parallel in another project, management is free to recommend substitution. This kind of flexibility is hardly possible if each aerospace system has its evaluation conducted by a different prime contractor. It also has been pointed out that the method gives USAF more flexibility in dealing with a large number of associate contractors.

There are sound indications that over-all costs are reduced. A single prime, as Congress has lamented from time to time, can collect overhead and profit on work done by subcontractors. At the same time, some studies indicate, the method generates greater competition among would-be associate contractors.

It has been pointed out that a profit-making company entrusted with responsibility for system evaluation and technical direction is bound to face situations where it can make an honest and objective decision and still be accused of serving its own, and profit-making, interests. If, under these circumstances, the prime contractor loses the confidence of some associates, his value to USAF is lessened and the projects he handles are jeopardized. This goes not only for current systems but also for the ones he may direct in the future.

As pointed out last month, more than 350 nonprofit organizations are serving the government. If any two of them are exactly alike in charter, corporate structure, environment, mission, capability, or future prospects and ambition, it is not evident in the record. What they do have in common is their utilization in what Deputy Defense Secretary Roswell L. Gilpatric has called “a variety of functions.”

“Most of us in the Department,” he said in a recent speech, “rarely have the time to sit back and examine objectively the operations of the military establishment. While individuals could be detached from their regular assignments for this purpose, such an arrangement would not solve the problem of reconciling entrenched organizational points of view.

“Furthermore, nonprofit organizations enable the Defense Department to bring to bear on problems which cannot appropriately be assigned to private enterprise, talents not readily available to the government.”

Then he added:

“There are obviously limits on the use to which such organizations can be put, and we certainly do not intend to let them become convenient catch-alls for projects within the competence of private industry.

“Government in-house activities, nonprofit organiza­tions, and private industry all have their roles to play in the defense program. The objective should be to achieve the best possible balance among all three types of competence.”

Mr. Gilpatric’s reference here was to the criticism voiced in January 1960, by a committee that studied USAF’s ballistic-missile management under the chairm­anship of Dr. Clark B. Millikan. This group found that STL had done a good job but accused USAF of giving it too many tasks “outside its primary area.” The report made it clear that systems engineering and technical direction were the essential functions.

USAF Secretary Eugene M. Zuckert has echoed Mr. Gilpatric. The nonprofit organizations, he said at a Los Angeles symposium, “are in a position to make unique and valuable contributions. It is because they are special that we turned to them in the first place. And so they must be kept, if their exceptional potential is to be fully realized. We must be particularly careful that they do not become convenient catch-alls for work which should be performed either by the Air Force or by private industry.”

Mr. Zuckert pointed to the House committee’s basic vote of confidence in the concept, which was aligned with a warning that a close rein must be retained. He said USAF must make it clear why the nonprofit corporation was selected to do a particular job.

“Our purpose,” he said, “will be to preserve the usefulness of these nonprofit organizations by ensuring their scrupulous attention to the proprieties of public service and the bona-fide interests of the people of the United States.”

This goal has been put into words as a statement of policy on USAF’s relations with the nonprofit firms it has sponsored. Specifically mentioned in this regard are Aerospace, MITRE, RAND Corporation, Analytic Services, Inc., and System Development Corporation. The text of the policy statement is on page 79. It was issued over Mr. Zuckert’s signature.

The policy is a new and more restrictive definition of the controls USAF intends to maintain over nonprofit corporations. Behind each of its clauses there is something in USAF’s experience, usually on Capitol Hill or in its relations with production contractors, that calls for correction or a clearly stated insurance that some abuse, actual or potential, is eliminated.

Unspoken in the policy statement is the evident conviction that the more esoteric systems which lie ahead in the aerospace age require a type of competence and objectivity, so far as evaluation and tech­nical direction are concerned, that can best be achieved through a nonprofit operation. The suggestion, made by the General Accounting Office and some members of Congress, that the government can get this kind of management with in-house capability, is rejected.

The Air Force statement on its policy toward non­profit contractors has not been greeted with unanimous approval by the five companies to which it specifically applies. Some felt that it is too severe, others that it approaches the problem negatively. At first blush one spokesman said the statement “gravely needs revi­sion to make its provisions positive and constructive.” A high Air Force official, on the other hand, com­mented that “these nonprofit corporations are not tra­ditional contractors. They have a special relationship with the Air Force that cannot be ignored. The policy statement does no more than reflect this, and, we feel, in the long run will eliminate any doubts as to the dedication of these nonprofit corporations to the public interest.”

At this writing, it appears that the policy, which imposes strict monitorship on nonprofit operations, will stick and be extended to new corporations that the Defense Department is finding necessary. The extent to which this is true may be defined more clearly after the Bureau of the Budget has completed its analysis, as ordered by President Kennedy. That report was scheduled for completion December 1.

So far as the aerospace industry is concerned—and the reference here is to the profit-making production operations on which we depend so heavily for national security—it has not been demonstrated that they have lost anything to which they have undisputed title.

“It doesn’t take a very good ear to pick up growls of industrial discontent about how deeply government is getting into business,” said Donald Douglas, Jr., in a recent speech. “But talk about socialism is cheap, while viable solutions of the problem come a little harder.”

In the seven short years since the missile program really got started there have been tremendous ad­vances that looked nearly impossible at the outset. There have been equally great changes in the aero­space industry, yet it was by its ability to adapt itself to new management ideas while the revolution was taking place, that the industry emerged into the space age with new strength.

One House committee report, in 1959, said bluntly that “government relationships with nonprofit organi­zations . . . pose problems, but they are less important than the benefits received.”

There are alternatives, of course. But these could include the development of a huge bureaucratic in-house talent, or a full-fledged return to the arsenal system. They could include stricter control of private business, right to the border or into a socialistic system. The route of the Air Force and other government agencies, utilizing the objective and competent archi­tect engineer with nonprofit status, could be a strong defense for private enterprise against these inroads.—END

Air Force Policy on ‘Nonprofits’

Following is the text of the Air Force’s policy statement, issued recently over the signature of Air Force Secretary Eugene M. Zuckert, on non­profit corporations, with specific reference to Aerospace, MITRE, RAND Corp., Analytic Services, Inc., and System Development Corp.

These Air Force-sponsored nonprofit corporations have a close and continuing relationship with the Air Force that sets them apart from other organizations, profit or nonprofit. It is to this special status that our policies on relations with them must be shaped.

We look to these nonprofit corporations to focus the nation’s finest scientific and technical talents on selected highly sophisticated tasks. They must not become convenient catchalls for projects which could be performed by private industry; the elite nature of their technical staffs must be preserved. Any dilution of the select quality of these organizations can only have an adverse effect on their ability to carry out their vital Air Force work. Procedures must be developed to require them to coordinate with the Air Force before undertaking assignments from other government agencies or commercial sources.

It follows, moreover, that the business aspects of their affairs must be open to Air Force scrutiny, much as an actual Air Force operation. Frills and other nonessentials cannot be tolerated, if public confidence is to be maintain­ed in their unique role. Such accountability is not incons­istent with the freedom of thought and independence on technical matters that we seek from these corporations.

Standards of conduct likewise merit particular empha­sis. There must be no conflict between the public interests, with which these nonprofit corporations are impressed, and the private interests of their trustees, officers, members of technical staffs, and other employees. Each corporation will be expected to prescribe and enforce suitable regulations to this end. These should take advantage of the progress that certain companies have already made—as for example, in the area of trustees. This indicates disclosure by a trustee of any private interests which may be in conflict with his responsibilities, his disqualification in particular matters, and restrictions on his use of inside information.

The special position of certain of these corporations exposes them to extensive technical information of other contractors. To prevent the possibility or appearance of private advantage to these corporations, our contracting officers should proceed in accordance with the recently revised policy in Paragraph 9-107.1 of the Armed Services Procurement Regulation. This policy provides guidance on the acquisition by the government of title to inventions, in lieu of a comprehensive license of free use, where the services of the contractor are largely those of coordinating and directing the work of others.

The fees allowed these corporations must also be tailored to their special status. While the amount of the fee in a particular case is necessarily a matter of judgment, it is clear that the traditional rules covering commercial companies do not fit these nonprofit corporations, particularly when the bulk of their contracts are assigned on a sole source basis. We recognize, however, that these organizations have legitimate needs that can be met only through fee. Above all, their stability must be assured, if they are to continue as effective instruments. For this purpose, fee is a proper source of assistance to these corpora­tions, to be applied, for example, toward the conduct of independent research programs. Such programs, which foster a healthy scientific climate, are to be encouraged, provided they are carefully planned and held within reasonable bounds. The fee may also be reserved for some working capital requirements, but should not be regarded as a substitute for advance payment arrange­ments, the preferable source.

Facilities, too, warrant different treatment. As a gen­eral rule the government should provide these corpora­tions with the buildings required for the performance of their contracts. There may, however, be circumstances which justify the acquisition of facilities by these corpora­tions with their own resources. Inordinate fees must, of course, not be allowed for this purpose; instead, con­sideration should be given to private financing under time-phased arrangements guaranteed, if necessary, by the Air Force. In the case of company-furnished facilities, the costs of maintenance and repair, but not depreciation, can properly be charged to Air Force contracts. Leasing of facilities by these corporations may, at times, prove to be a sound method of satisfying short-term or emergency working space needs. But these leases must have reason­able rental rates and avoid arrangements which permit the lessor to recover his investment on an accelerated basis.

As a corollary to the foregoing policies, the charter of at least one firm authorizes the Secretary of the Air Force to direct the disposal of its assets upon dissolution; and a provision to this effect is now under active consideration by the trustees of yet another corporation. The boards of the other nonprofit corporations should be asked to take similar action.

Salaries pose perhaps the most difficult problem of all. Charged with heavy and varied responsibilities, it is clear that these corporations must attract and retain talent of the highest order. Yet, their employment policies must be marked by good judgment and restraint. These companies have no license to outbid the market at every turn. If the compensation paid by these nonprofit corporations exceeds that paid by the government, it should be because private industry—with whom these companies must com­pete for scientific, technical, and other personnel—typically offers such higher compensation. The Air Force, on its part, must continue to review for reasonableness certain individual salaries as well as the over-all compensation structure of these corporations.

The policies outlined herein are designed to illustrate, not to exhaust, the guides that must be followed in Air Force relations with these nonprofit corporations. So far as possible; these policies should be applied uniformly to all of these corporations, for while they differ from other contractors, these -nonprofit corporations have much in common. Standardization should be the rule, down to such particulars as contract clauses; exceptions must be firmly founded in fact.—END