The Slight Nod to Small Business in Better Buying Power 2.0

Having just taken the opportunity to comment on the draft of Frank Kendall's Better Buying Power (BBP) 2.0 memorandum, through the e-mail address conveniently provided at the website, I thought that I might recycle the lines here for general consumption. Actually, I have lots of thoughts on BBP 2.0, and may continue commenting, but I'll start with one area, expressed in two items therein, with which I have some expertise: small business. BBP 2.0 contains two line items on the subject:

"Increase small business roles and opportunities: Small businesses, as both prime contractors to the Department and sub-contractors within the supply chain, are effective sources of innovation and reduced cost. The Department will continue its emphasis on improving small business opportunities...

Increase small business participation [in services contracting]: A number of steps in this area have been implemented; however, we believe that the increased use of small businesses in service contracting can be a source of additional cost saving and we will continue to emphasize the participation of small businesses in this area."

Honestly, as I told Frank Kendall (or, well, the guy reading his flood of e-mail), this seems to be quite generic. It's really just an exhortation to do more, without any guidance about where seeking out small businesses as suppliers is most appropriate.

If you look to the right in this column, you will find the reference by which I can offer one theoretical framework on how best to enlist small business in the service of security. I am, after all, the author of Arms and Innovation: Entrepreneurship and Alliances in the Twenty-First-Century Defense Industry (University of Chicago Press, 2008), a book wherein I propose and defend a three-part theory of where small businesses are effective prime contractors for defense ministries. Small firms are often relatively advantaged in industries that

1. are highly innovative, but that are low in R&D intensity, and in which uncertainty about markets or future technological trajectories is high.

2. require a high proportion of skilled labor, and in which production is more skill-intensive than capital-intensive.

3. are composed of a relatively high proportion of large firms, but that also have room for smaller competitors. Industries often feature this relatively heterogeneous structure when their products are subject to medium-speed learning curves—that is, learning-by-doing of production is neither particularly rapid nor slow.

The other half of what the book covers is when those small businesses should find alliance partners that are a lot bigger than them. For that, there's a whole separate theory. To illustrate both issues, the book uses six case studies, including the procurement of the now iconic MRAPs, Predator drones, and catamaran transports (HSVs), at least initially from relatively small firms.

When thinking about this, it's important to remember that defense is not an industry, but a set of customers. Defense ministries (the US DoD no exception) draw from a host of different discrete sectors, all with different industrial economics. So what's appropriate for small business participation with the Navy Department will differ from what's appropriate for the Army and Air Force Departments.

Let me be clear that I am not talking simply about the SBIR program. That's a valuable concept, but by its name, it focuses on research. BBP covers the entirety of acquisition, and that's what I address. 

Who should be interested in this? Well, the DoD of course, but any defense ministry, really. Add to that any small business interested in the market, naturally. But even large military suppliers ought to think about their small business sourcing and alliance strategies, because not all good ideas are hatched within big organizations, but some of those good ideas require big organizations for commercialization. That's obvious, I suppose, but commercialization does not always require buying the little company. Sometimes an alliance or joint venture is a more statically and even dynamically efficient structure.

Let me also make clear that, regarding large contractors, I am not talking about a strategy for utilizing specially designated groups for political purposes. Pursuing that objective may also be important for large firms, but the reasons are political, and not founded in the economics of innovation. Of course, it's entirely possible that presumably disadvantaged firms have overlooked good ideas, but I've not seen systematic evidence on that. If that's the case—and I ask anyone with that finding to send it along—then two birds can be sighted at once.

For the background on whence I drew this theory, I recommend checking endnotes 18 through 23 on page 154. I do recommend my book, and not just because I get a tiny royalty on sales, but as well because this is an important topic. Heck, the Pentagon's procurement czar thinks it's important. The theory I offer is well-developed, even if not everyone need agree with the three points. My point here is simply that the DoD should have a set of points—a small business contracting strategy other than "do more". If there is such a strategy, and mention is to be made in BBP 2.0, then the memorandum might include a few lines about what that strategy is, in place of the boilerplate they have now.

Jim +1-512-299-1269 www.jameshasik.com

Comments

[Dave Foster]

Jim,

BBP is merely more happy talk proceduralism, another dusting of supposed business process improvement atop the mountain range of fossilized and active DoD policy and process. Per this and your previous post, I am unconvinced that any type of modifications to doing business in DoD will lead anywhere other than toward further sclerosis and acquisitions ineffectiveness, as has been the trend - there's always some kind of 'New Coke' initiative every several years, at least since the early 60s. I don't know what either BBP 1.0 or 2.0 meant or means; I'm standing by for the new DoD 5000 and maybe we'll hear something about the ultimate fate of JCIDS sometime soon. In any case, it means nothing at the working level where we have no discretion to avoid the policy and process clutter with the exception of some relative simplicity in rapid acquisitions that apply to few active programs.

Policy, process, and organizational structure dies hard in DoD. Aside from the usual, useless form of DoD BPI - the episodic deck chair rearranging and policy new boss replacing the policy old boss - only a substantial restructuring of DoD roles, missions, business areas, and management & worker bee incentives & punishments (i.e. tangible consequences for performance), in other words, a fairly substantial cultural replacement, could possibly make any difference in US military procurement.

As for this idea of tangible consequences, note two of the major impediments to cultural change:

(1) The juicy contractor & consultant gigs for the GOFO and civilian leadership ranks are the goto sanctuary for all but the most Druyunesque acquisition malfeasance so any possible consequences are easily sidestepped. It is impossible to discount the conflicts of interest and while private sector upper management may be sacked from time to time, there's no comparable this side/that side dynamic. Indeed, there really isn't one for the upper orders in DoD.

(2) As for the worker bees, recall the hullabaloo surrounding NSPS not that long ago, the uproar about being measured for performance to some theoretically greater and richer degree than previous measurement systems. At the worker bee level, NSPS was no more that just a more complicated way of doing the same old nominal performance measurement. The personally observed whining from colleagues and the outcry, writ large, says everything about the philosophical pestilence that a great chunk of noisy DoD employees and their agitators find the idea of improved scrutiny of job performance.

Thus, the system of incentives and disincentives for all levels of acquisition employees is rather different from the private sector and this cultural, organizational, and legal body of differences is the root of why repeated attempts to unscrew the development and procurement of warfare systems continually fails.

Notably, Fox, et al. make the basic point in their conclusion of 'DEFENSE ACQUISITION REFORM An Elusive Goal – 1960 to 2010':

"There is little doubt that acquisition reforms produce limited
positive effects because they have not changed the basic incentives or pressures that drive the behavior of the participants in the acquisition process."

Indeed.

BBP x.0 is ambiguous happy talk that will add nothing tangible to the acquisitions business.

It would be a great thing if Kendall and that crowd picked up your book and had a deep think - 'Arms & Innovation' is valuable study.