December 04, 2013

A Better Procurement Model

Ben, you're totally right about our government contracts system. It is fundamentally un-American. In fact, when I teach on procurement issues, I usually describe it as a Soviet-style system of centralized planning, pricing, and production, with many of the same imperfections and inefficiencies. Ironic, considering that our procurement system also produced a lot of the hardware that won the Cold War.

That said, we don't have a Soviet system so much as we have an American system that reflects uniquely American political preferences. Our crazy accounting rules reflect our desire to account for every last penny of taxpayer money, categorized in ways that make political sense but not necessarily business sense. Competition requirements reflect our political desire to get the most value for every taxpayer buck, as well as a history of procurement scandals. Contracting preferences exist for everything from domestic fabric producers to veteran-owned businesses to Alaska Native Corporations -- and these too, obviously, reflect political preferences.

Unfortunately this burden falls disproportionately on start-ups and commercial firms, because they don’t have the same in-house infrastructure or long-standing institutional structures of major government contractors like Lockheed or Northrop.  The results are unfortunate in both cases.  Defense start-ups, like the firms you and I managed, must invest too much in infrastructure, overhead, and compliance, taking scarce resources away frominnovation and product development.  Truly commercial firms like Google and Yahoo often choose to stay away from the government altogether. Or, if commercial firms do sell to the U.S.government, they stay as far away from government rules as possible, often selling just those items or services that can qualify as “commercial off-the-shelf” in order to be exempt from the system’s most onerous rules.

The result is a system that tends to procure goods andservices from a fairly narrow slice of industry: the traditional governmentcontracts sector.  The government’s rules support a certain business model that is heavy on compliance and infrastructure, and often too light on risk and innovation.  Government contractors excel at meeting government requirements – but too often fall short at designing holistic solutions that go beyond government-written requirements documents to address the true contours of national problems.  The current struggles of illustrate this problem, as do many other cases. 

We need a new business model for government contracting that embraces best practices from the civilian sector, delivers better outcomes, and creates the incentives for our best companies to get into the game.

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