The Defense Department has moved to bolster contractors in the wake of a report finding major weaknesses in the Pentagon's industrial base. A November review, "Preserving a Healthy and Competitive U.S. Defense Industry to Ensure our Future National Security," by a Defense Science Board task force, found that lean Pentagon procurement budgets and outdated acquisition policies have contributed to a decline in the health and competitiveness of the post-Cold War defense industry. The task force was led by Phil Odeen, an executive at Cleveland-based TRW Inc. and included representatives from defense companies, academia and government. Flat spending on research and development, export controls and contracting practices are partly to blame for an exodus of companies from the defense marketplace, according to the report. Now, the Pentagon has taken steps to implement the task force's ideas for reversing this trend. "[The review] was a very useful exercise," said Carol Covey, deputy director of defense procurement for cost pricing and finance and an advisor to the task force. "Several actions have been taken to implement the findings, although it's fair to say that some actions [recommended by the report] were not feasible at this point." The Pentagon has moved to reimburse large contractors for a greater share of the costs they incur while completing projects. Defense has also upped spending on research and development to 3 percent of the fiscal 2002 Pentagon budget, a 20 percent increase from current levels. Defense has formed a working group to examine how research and development programs could be separated from weapons and systems production, a major recommendation of the review. Traditionally, contractors covered a portion of research and development costs themselves, with the expectation that such investments would be rewarded with new production contracts. But with little money for new production on the horizon, the review recommended that the Pentagon explore new ways to support research and development. To that end, the review suggested the Pentagon fund a not-for-profit pilot venture capital fund to support firms focused on technology projects. Defense has no plans to create such a fund, according to a Pentagon acquisition official. The Defense Science Board review, which was based on interviews with top executives of many defense companies as well as with Wall Street analysts and investors, was unequivocal in its conclusions about the financial health of the defense industry. "Aggressive, near-term actions are required to reduce the risk that the Defense Department's industrial base will be technologically weakened, less competitive and unresponsive to our defense needs," the review concluded. The review found that defense companies have suffered from a brain-drain as technical workers leave for high-tech companies. The defense industry is also due for a retirement wave, as 54 percent of the science and technology workforce is over 45 years old. Many contractors also feel that they received few benefits from the restructuring of their operations in the mid-1990s, according to the review. "The government took all the savings from any operational improvements so that many capital investments would have had a negative return to the company had we employed the capital to achieve them," said the senior executive of a company that exited the defense market. The review called for the Pentagon to pass along half of all savings achieved through company restructuring back to contractors. The Defense Department has taken action to make the procurement process more competitive, another suggestion of the review. Last July, for example, the Pentagon issued new policy guidance ordering the military services to ensure that no new weapons programs worth more than $50 million unduly favor a single contractor. For a copy of the Defense Science Board's final report,call 703- 695-4157.
Want to contribute to this story? Share your addition in comments.