The Defense Department wants a much better understanding of the industrial base that supplies it with goods and services. To accomplish that, they’ve started an ambitious effort to build a comprehensive and continually-updated map of the companies in every tier and every sector of the defense contracting industry.

DoD said it needs the data so it can make better decisions to keep the industries it depends on healthy: as defense budgets come down, the department is worried about losing the industrial capabilities it needs.

Brett Lambert, the deputy assistant secretary of Defense for manufacturing and industrial base policy, said the Pentagon has good insight into the health of the top-tier prime defense contractors. But those contractors are far from being the entire defense industrial base, and DoD wants to be able to act proactively to make sure companies that make critical products can survive, he said.

“When I came into office, I was charged, in essence, with getting the department out of the role of firefighter, waiting for a building to be on fire before we responded.” Lambert said during a hearing Tuesday before the House Armed Services Committee. “There are a number of mechanisms we can use. Program managers have good visibility, but it’s a soda-straw visibility. We need greater insight, and I think what this administration has been pursuing is to gain insight before we dictate oversight. We need better data at that second- and third-tier level before we can make these decisions.”

The project, known as S2T2, will become DoD’s sector-by-sector, tier-by-tier repository of data on the health of the defense industry. To build it, they’re gathering data from the “soda straws” of all their program managers, surveying individual companies and bringing in contracting experts from each of the military services.

“We’re putting all of that information together into a data set that will become the basis for not just individual assessments of the health of the industrial base, but also help us as we go through this next chapter of mergers and acquisitions and consolidation, so that we understand what it is that we’re actually approving or having problems with in very specific elements of the lower tiers,” Lambert said.

Starting small

For the survey effort, DoD picked five programs in each industrial sector and tried to determine how many total firms were working on them. Among those programs, they found 25,000 companies. Lambert said getting insight into the subcontractors that DoD doesn’t do business with directly will allow it to do a better job of making sure the entire industrial base is stable.

“For example, in the solid rocket motor industry, there are two prime providers,” he said. “But both of those primes rely on a single sub-supplier at a much lower level. Propping up the two primes — while it might be easier because we have more visibility — it would do little to alleviate the real concerns. When we need to intervene in those areas, we try to adjust programs so that we can create sustainable rates of production that are in the best interest of the primes, but also in the best interest of the taxpayer over time.”

As it tries to boost its understanding of the Defense industrial base, Lambert said DoD also is trying to shift the way its prime contractors get compensated. He said that over the past 10 years, many vendors became comfortable with the notion that defense budgets would keep growing, and that profit margins of defense contractors were healthy, regardless of whether they were performing well for the government.

That reality, Lambert said, is about to end.

“When we had programs in trouble or were bleeding, we tended to cauterize that wound with money,” he said. “We needed to field that program because it was important to the warfighter. But in that process, some discipline went out of the system. When we look at the financial ratios of the leading primes over this period, they grew quite substantially, understandably. And there wasn’t much differentiation. What we’re trying to restore now is a balance of rewarding with better profitability those companies which perform well, while making it clear to those that don’t that the expected profitability they may have had in past years will not continue.”

Acquisition not a tool of punishment

Nonetheless, Lambert says, DoD wants to be careful not to use the acquisition system as a tool of punishment. He said the department worries that hurting the profit margins of its large contractors will filter down into lower tiers and threaten the viability of critical subcontractors.

Lambert testified at a hearing before a special panel of the House Armed Services Committee that was set up in September to study the defense industrial base. Its members have been conducting field hearings outside Washington to hear from businesses, particularly small and medium-sized ones, about working with the Defense Department.

“We get a sense out there that there’s a sense of hostility between DoD and contractors,” said Rep. Bill Schuster (R-Pa.), the panel’s chairman. “The media does some of that, but I think the Department of Defense has some culpability in creating this tension. We’ve got to figure out a way to work together. I think it’s a huge hurdle we have to overcome.”

Lambert said DoD is cognizant of that sense of hostility, and he said Pentagon leaders are working to calm tensions.

“It’s very much a cultural issue, and I was surprised by it when I came into DoD,” he said. “What we’re trying to do is within the leadership, explain that despite spending a billion-and-a-half dollars a day, we can’t make anything. Without our industry partners, we can’t field an army. We need to better communicate and be transparent. We send memos out to that effect, but pushing that down is a real challenge. It doesn’t get any press, but [Deputy Defense Secretary) Carter and [Undersecretary for Acquisition, Technology and Logistics] Frank Kendall spend as much time going internally to the buying commands, preaching that message of cooperation and working with industry for best value, as they do going to the companies themselves. I’ve seen that change in just the last 18 months, but it’s very much an internal process we’re working through.”

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