President Barack Obama swept into office issuing executive orders promising to reform government contracting. Congress also jumped into action. But two years later how likely are the reforms to stick? And what does government success mean for industry?

In the spring of 2009, the Government Accountability Office issued its annual report on the Defense Department’s 100 major defense programs, and coming amid the worst financial downturn since the Great Depression, the 190-page document presented grim findings. Sixty percent of the programs had increased in cost over the previous year, and the number of programs expected to close on time had declined to about 30 percent.

“Every dollar of cost growth on a DoD weapon system represents a lost opportunity to pay for another national priority,” the report said.

GAO’s doorstopper of a report coincided with a push by the White House to cut back on contract spending and efforts in both houses of Congress to reform the acquisition system. It was clear — the $400 billion of defense contracting were going to feel the squeeze.

Now, two years later, as efficiency initiatives roil through the Pentagon and as budgets decline across the federal sector, the pace and scope of reform have only quickened.

A Brief History of Reform
A little more than 40 days after taking office, Obama issued an executive memo to federal agency heads, promising to change how Washington — and Northern Virginia — does business. The memo called for a 7 percent reduction in baseline contract spending across 2010 and 2011, adding up to $40 billion in savings. Agencies should also cut back on their “excessive reliance” on sole-source and cost-reimbursement contracts in favor of fixed-price contracts and begin in-sourcing, bringing “inherently governmental” positions back in-house, the memo said.

But before the ink had even been spilled on Obama’s memo, Congress, which has had a long — sometimes cordial, sometimes contentious — relationship with Pentagon spending habits, had already stepped into action.

In 2009, as in previous years, Congress acted the part of “catalyst,” said Frank Anderson, former president of DoD’s Defense Acquisition University, the training academy for the department’s acquisition workforce.

The modern era of procurement reform can be traced to The Weapons Acquisition Process: An Economic Analysis, written in 1962 by Harvard Business School graduates Merton Peck and Frederic Scherer. Their work, still cited in acquisition journals, took a business oriented look at why major defense programs run over budget and behind schedule.

More than 25 years later, a 1988 House Armed Services Committee report lamented that 40 years after the first presidential commission studied federal
procurement, there had been few permanent fixes.

“The acquisition process may be vast, but it is not uncharted,” the report stated. And commenting on the unfinished business of six previous blue-ribbon panels, the report said, “Perhaps the next executive commission on acquisition should be created not to propose the reforms, but to implement them.”

By spring of 2009, government contracting had witnessed nearly a decade of unprecedented growth, spurred by the wars in Iraq and Afghanistan. The industry landscape had been significantly reordered before that by the market maneuvers and M&A boom of the 1990s. It was in this climate two Senate stalwarts rolled up their sleeves.

Sens. Carl Levin (D-Mich.) and John McCain (R-Ariz.), two political bookends atop the Senate Armed Services Committee, by then had begun work on the Weapons Systems Acquisition Reform Act of 2009, or Levin-McCain as it’s known.

Along with a call for life-cycle competition through competitive prototyping, dual sourcing and open architectures, the bill also contained brass-tacks measures that told the Pentagon and contractors what they could and couldn’t do.

For example, DoD was directed to terminate programs that went 50 percent beyond original estimates and half that for contracts that had been previously adjusted, giving “teeth” to a statute from the 1980s to cut back on over-budget programs, Levin said.

The bill originally barred contractors with systems engineering and technical assistance contracts, known as SETA, from also holding research and development contracts for similar projects — a perceived loophole critics said amounted to giving companies oversight of programs they were developing. But after industry complaints, the provision was amended, giving the OK for companies to have both SETA and R&D contracts as long as the company spun off a “geographically separated” business entity.

As Levin-McCain made clear, Congress’ voice would be heard. And, significantly in an era defined by political gridlock, Congress spoke with one voice
— both the House and the Senate passed the bill unanimously.

The Big Impacts
After years of contention, observers wondered if these efforts not only would work, but stick. Data released earlier this year suggest just that. In February, the Office of Management and Budget announced that for the first time since 1997, federal spending on contracting had dropped — from $550 billion the year before to $535 billion.

Whether there is long-term success for the government’s initiatives, industry has already felt the impact of reform — both in their individual companies and
as part of the larger defense marketplace. But despite good-faith attempts, the flurry of reform — more fixed-price development contracts, heightened oversight, rules and requirements — could “just make things worse in the end,” said Barry Watts, a senior fellow with the Center for Strategic and Budgetary Assessments, an independent think tank with close ties to the Pentagon.

Watts, former director of DoD’s cost assessment division and a former analyst for Northrop Grumman, said the 1986 Packard Commission offered insight into the reason why.

“There’s all kinds of oversight and rules and regulations and reporting requirements — hoops that you have to go through — and at the end of the
day, it tends to severely restrict the freedom or the latitude of program managers to make the commonsense trades between cost, schedule and performance,” he said.

For example, between internal regulations and provisions tacked onto the latest appropriations bill, a single major program can require up to 60 documents
“to get from birth to producing weapon systems that are going into the inventory,” Watts said.

Meanwhile, Richard K. Sylvester, vice president of acquisition policy at the Aerospace Industries Association, a trade association that represents many defense contractors, said industry has also seen an impact on its lifeblood: cash flow.

And while it’s important for all companies, he said, for small business, “it’s a life-and-death matter.”

But Anderson, who used to head up DoD’s training for federal acquisition professionals, said Pentagon leaders are not necessarily “anti-profit,” although, contractors will likely have to examine how they do business.

“I think for industry … a part of their cost-reduction initiatives will have to translate into a better business deal for the government and not just a healthier
bottom line for the contractors,” he said.

The Defense Marketplace Other regulations have hit the marketplace as a gestalt. In provisions governing organizational conflicts of interest, the pendulum has swung toward tougher restrictions, experts said, meaning companies are faced with spinning off practice areas, leaving a lasting mark on the marketplace.

Roger Duke, senior vice president for contracts and procurement at QinetiQ North America, a subsidiary of a British defense-technology firm, said the discretion of individual program managers has always played a key role in regulating often thorny OCI cases.

But now, “We’re seeing a number of contracting officers going one step further, and demanding that those conflicts be eliminated altogether,” he said, “which in some cases has resulted in the requirement to divest of certain businesses for companies.”

QinetiQ NA has had to divest itself of a contract because of what Duke called an “unmitigatable” OCI. His company is not alone: Northrop Grumman and Lockheed Martin have also spun off entities because of OCI regulations, Duke said.

As companies divest and spin off practice areas, it could create opportunities for other companies to expand and reshape their portfolios. But the new rules
could also affect government. “By essentially forcing companies into one area or another, they may be leaving some competitive capability on the table,” he added.

Similarly, in-sourcing, which has been hotly contested in the government and the private sector, will also refashion the marketplace in the long run, Duke
said. Over time and through attrition, the government’s gains from in-sourcing could be stalled or reversed. And even if government does see success, it could come at industry’s expense, Duke suggested. “Industry is forced to either change their approach to that business area or to that type of work and has to seek alternative revenue,” he said.

Despite all the optimism expressed by the administration, troubling numbers still surround large-scale defense programs. Earlier this year, GAO’s annual
report found at least half of DoD’s portfolio of 98 major programs exceeds original costs.

Watts, who has focused on the defense-industrial base at CSBA, said he is “very skeptical that much real acquisition reform is likely to occur,” because defense acquisition doesn’t function like a normal free market — an observance made in Peck and Scherer’s groundbreaking 1962 work.

But Sylvester, the Aerospace Industries Association’s acquisition specialist, said he remains optimistic about the reforms because the defense marketplace can be a competitive place, although not in a traditional way.

Competition can be achieved by using different programs rather than the traditional head-to-head variety, he said. “You can use missiles for some things as well as you can use aircraft,” he explained. “You can use the next generation of something in competition with the current production process.”

Policy vs. Leadership
Not all reforms are getting sour looks from the private sector. In industry’s estimation, the Pentagon’s acquisition chief, Ashton Carter, who has championed “better buying power” for the department, gets high marks.

And for good reason: Driven by Defense Secretary Robert M. Gates’ cost-saving efficiency initiatives, Carter, who studied both physics and medieval history
at Yale, might be well suited to the arcana of defense procurement.

The initiatives prescribed by Dr. Carter (as he’s known in some industry circles) can be summed up in his idealistic catchphrase “doing more without
more”: Reducing bureaucracy, promoting competition, controlling costs by mandating affordability as a key parameter and incentivizing contracts.

If Carter’s plans succeed in less combative fixes than previous reforms foisted by Congress onto an unwilling department, it’s likely because a mix of policy and personality.

“There are some policy things that you can do, but the leadership component is critical,” said former DoD insider Anderson. “And that’s what’s different this time.”

Both critics and proponents of the plan recognize change won’t be easy, especially for a system as big as that of defense acquisition and when the fixes are as sweeping as those proposed by the Obama administration, Congress and, even, DoD.

The key ingredient in determining if efforts will be successful and what that means for industry is simply time. There is a lag between the development of a strategy and implementing it in the field, Anderson said, and the current cycle of reform is still young. In terms of defense acquisition, two years is akin to a few first baby steps down the road to reform.

“You’re talking about things that are not going to happen overnight,” he said.