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Outsourcing

Gloria Christie (US) - US Contracts: Issues and Opportunities

Beginning in the 1990’s the US started trending toward shutting down internal government maintenance operations and shifting that work to subcontractors. When President Obama took office in 2008, he found that over the previous eight-year-period beginning in 2000, the government doubled the amount it spent on contracts of $500+ billion. With contracted projects delivering two years late on average, he set about revamping the contracting structure. Also at issue was maintaining nonfunctioning projects.

Obama’s plan for procurement reformation examined returning contracted tasks and projects to the government and eliminating no-bid, cost-plus contracts such as huge contracts granted in Iraq and Afghanistan wars and lesser ones granted in the aftermath of the New Orleans, LA, Katrina hurricane and subsequent Lake Charles embankment ruptures.

President Obama originally estimated that these changes along with increased oversight should save the country, “up to $40 billion annually”.

Northrup Grumman Corp. aligned with Airbus parent European Aeronautic Defense and Space Co. won the original US government contract in a bid for 179 aerial refueling tankers to replace the Air Force’s post World War II fleet. After finding the Air Force gave more credit to Northrop for a larger plane, but had not clarified that size and fuel capacity meant a greater advantage, Boeing Defense protested that the Air Force’s decision was based upon unfair favoritism.

Upon further investigation, Capitol Hill hearings uncovered that those in charge of awarding the contract had not taken into consideration the issue of national security and awarding a contract heavy in proprietary information to a foreign country. Furthermore, the larger refueling tanker was too large to land at many landing strips. 

Senator Patty Murray, from the state of Washington where Boeing Defense is headquartered, was naturally pleased with the decision to reopen the bid. The $35 billion deal was awarded to Boeing Defense.

Boeing Defense has also had a long presence in Wichita Kansas, and promised to bring 7500 new jobs to Wichita as a result of the refueling tanker contract. The Kansas Legislative Research Department indicated that the state enacted tax incentives, subsidized training programs and other investments as measures to ensure Boeing Defense’s continued process in the state.

Although Kansas Governor Brownback received reassurances to the contrary, Boeing Defense elected to phase out its presence in Wichita by 2013. Instead those jobs will go to Texas, Oklahoma and Washington. After divestiture Boeing Defense will have dramatically slashed 15,000 Kansas jobs.

Many countries including the US rarely purchase full technical rights on defense systems. The underlying reason may be an attempt to spread the costs over a number of years rather than request the full amount up front. For example Lockheed Martin Corp., the world’s largest defense contractor, was awarded an addition to an existing contract, raising its total to $7.4 billion.

However relying on original equipment manufacturers (OEM) for modifications, upgrades and support can hardly be less costly than an upfront bid.

US Defense Secretary Leon Panetta has been accused of rushing a Marine Corps next-generation strike fighter jet, F-35B, into development. The jet’s two-year probation recently ended.  It was due to what former Defense Secretary Robert Gates indicated was, “significant testing problems”.  Those problems include difficulty with the F-35B’s propulsion system and basic assemblage.

Even so, Panetta indicated that the F-35B’s unique ability to, “take off from shorter runways and land vertically,” make it a worthwhile investment.  The jet is 20% through its test plan.

After 10 years, several US senators formally expressed frustration with the contract’s troubled progress of delays and overruns. Lack of communication between the department and involved committees may underlie such frustration. Lockheed Martin Co. has been tasked with building three prototypes of the F-35: Navy (1), Air Force (1) and Marine Corps (1).

Like the Lockheed F-35 series, its F-22 Raptors have had some issues. These include difficulty with its oxygen-generating system.

After recent hacking events at Lockheed Martin, Visa, multiple banking institutions and even the US Government, 2012 is the year for top US officials to get tough on cyber-security. In order to bring home the possibility of infrastructure attacks, White House National Security Advisor, John Brennan, and FBI Director, Robert Mueller, put senators through their paces in a simulated cyber-attack. The simulated attack focused on New York City’s electrical grid during a heat wave.

The US administration is making an attempt to work in tandem with Congress and corporations on an issue of such importance. However, that relationship is a bit like a three-wheel cart with wheels of varying sizes. The result is a rather rocky ride. A bill backed by Senator John McCain would require federal contractors and corporations to notify the government about any threats. However companies resist this as a form of regulation. A bill is in progress that expands the Pentagon’s pilot program. It addresses sharing threat information with defense contractors and their internet service providers.

Even with all the US frustrations with delays and overruns, bidding and rebidding problems and national security issues; there are ample opportunities for government contractors. Clearly cyber-security is an issue. And with the recent healthcare mandate, all 50 states are required to implement computerized healthcare systems. That makes fertile ground for high-tech contractors.

By Gloria Christie, Partner at The Christie Group

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