Will We See the Gradual Nationalization of Government Contractors?

I recommend a terrific article about the Department of Defense budget being proposed by Secretary Robert Gates with the strong support and influence of the White House. It is entitled “Gates’ Plan for Acquisitions Is Seen as a Start,” written by Kevin Baron, a reporter for Stars & Stripes, which describes itself as “the independent news source for the U.S. military community.”

This is the lead of the story, dated April 10, 2009:

The foundations of the defense industry rumbled on Monday when Secretary of Defense Robert Gates proposed expanding the department’s own acquisition workforce by 39,000 jobs through a combination of hiring 9,000 new workers and converting 30,000 more from private defense contractor employees into civil servants.

The Gates proposal envisions some 11,000 of the converted positions mostly in the areas of program management, engineering, logistics and business management, and, according to a DoD spokesperson will include, for example, “2,500 contract overseers at the Defense Contract Management Agency, 800 pricing and cost estimating specialists, 250 attorneys.”

It raises the questions: Are all those DoD projects that are contracted-out worth the overhead costs both in dollars and time to go through the procurement process and then oversee and audit the contractors versus just employ the people who can do the work directly as DoD employees? Can it be done? How difficult would it be to transfer jobs from the private sector to the government? I know that answer: Real Easy.

In 1985, I went to work at Planning Research Corporation, also known as PRC. At the time, it was a NYSE company that traded under the symbol PLN. It bannered itself at the time as “The world’s largest professional services firm.” It was based in McLean, VA, and was organized into four operating groups, two of which were virtually entirely government contractors: PRC Systems Services (which did things like engineer and maintain launch pads for the Space Shuttle as a contractor to NASA), and PRC Government Information Services (GIS) (which was best known for having won the $100 million+ contract to computerize the Patent and Trademark Office, although most of its contracts were for the DoD).

I was hired to re-craft the company’s corporate communications program, and reposition it into one of the first precursors of what is now called an IT (information technology) company. One of my first priorities upon joining was going out to the various operations, meeting with employees at various levels to understand the business. The company’s share price had been stuck at about $11.00 for a long time. We had to do something to invigorate the stock and that couldn’t be done by smoke and mirrors. We actually had to do something to the company, and as a professional services company that in the final analysis was just people working on contracts, that meant we needed to something to/with the people of the company. I wanted to see if there was anyway we could make the company more entrepreneurial and, if so, how? So I hit the road.

I learned enough at the very first meeting to end the trip – I didn’t need to incur the time and expense to learn more.

The meeting was at Ft. Ord near San Francisco. A few months before my trip, PRC beat out the incumbent BDM for a fairly big contract. BDM was just about our most important competitor when it came to winning business and the interest of investors. So, it was perfect for me to go ask the people working on that contract what they thought of PRC, and ask them to compare their BDM experience to their PRC experience.

When I arrived, the head of our operation there was ready for me, and had some of the people who worked on the contract also at the meeting.

My first real question after introductions: “Can you tell me what you think are the biggest differences between working for PRC and BDM?”

“There’s only one real difference,” he said.

“What’s that?”

“They were yellow and you are blue.”

“What ???”

“Their checks were yellow and your checks are blue. That’s the only difference. We used to be employees of BDM. When you won the contract you needed people to work on the contract so you hired all the people who used to work on the BDM contract. Truth is we don’t work for either BDM or PRC, but we work for the client. They need what we do and they will continue to need what we do. Every once in a while they re-compete the contract and sometimes the incumbent loses. Then we’ll become employees of the company that won. It might be BDM and we’ll get yellow checks again.”

I forget the man’s name, but he taught me a major lesson. I left PRC in mid-1986 by which time we did have the company repositioned and sold it for $33.00 or so a share. But I and my communications firm have been retained by and worked with the Chairmen and others in the most senior management positions of numerous other government contractors for many years since then, and that lesson is always proven true.

Many employees of government contractors identify more with their client than their employer. That’s the reason why if I were answering the question: How difficult would it be to convert these private sector employees to civil servants working for the Pentagon? I’d say “Real Easy.” All that would have to be done is for the DoD not to re-compete some contracts as they come up for renewal, and instead offer to hire the employees of the private sector as civil servants at comparable pay and benefits. I'm not suggesting that this would necessarily be a good or bad thing; nor am I predicting this job trasfer will happen, but to me it sure is conceivable that little-by-little work could be transferred from private sector companies to the government, and in effect it will be a nationalization of those businesses. We have seen no signs that the Obama Administration would not at least quasi-nationalize other businesses, why not government contractors?

Thus, what happens with this budget could impact government contractors fundamentally, especially if, as Gates has positioned this budget, it is only a first step. It will be a while before the consequences become obvious, I think, but you’ll start getting early clues if you hear this when listening to a quarterly conference call: “Results for the quarter were also affected when our customer at the Department of Defense decided not to put up for re-competition a contract that we have worked on for xx years.”

Who might be affected? Lots of companies, but here are some that were cited and characterized in the article linked above:

• CACI (CAI): A military and intelligence services firm, 95 percent of its revenue comes from federal contracts supporting approximately 6,000 local employees.
• Northrop-Grumman (NOC): A recent promo video brags the company’s Technical Services division is so ubiquitous that it is involved in 65 cents of every defense dollar spent.
• Lockheed Martin (LMT): Almost exclusively a government contractor.
• SAIC (SAI): A defense contracting giant.

There are others I am certain, but these are among the leading pure play DoD contractors.

Disclosure: I have no equity positions in any of the companies mentioned. I was a retained conslutant to the Chairman/CEO of CACI for several years beginning 1991 and ending about 1996.

Comments

[Leftfield]

I just listened to Federal radio this morning. Kind of creepy; it's well-enough produced and had information for seekers of government contracts. Public, private, what's the difference? That's where we're going.

In eastern Connecticut, the largest private employer was Electric Boat until the last 15 years or so. Government contracts for submarines. Now it's the casinos. Who prove the economics at least of low government interference and taxes. But offer lousy jobs for low pay mostly.

Government is certainly making itself the most influential if not the largest player in everything. I'm not sure our people have the insight or the balls to realize what's happening and vote for a return Constitutional law before we are total serfs.

2009 Apr 12 08:55 AM

[Joseph Sherman]

Tribe Mentality - "Truth is we don’t work for either BDM or PRC, but we work for the client. They need what we do and they will continue to need what we do...Many employees of government contractors identify more with their client than their employer."

2009 Apr 12 08:56 AM

[john s. gordon]

it is true, these support contracts are recompeted at regular intervals & if the competition is the low bidder then you have to change hats & do the same work at lower pay for the new contractor (or else move out of town), it's called wage busting, it's been going on for a long time and among the government agencies NASA has probably been the worst offender.
> jack

2009 Apr 12 09:12 AM

[Edward Ulysses Cate]

Look up the TOP 10 Major Holders of these companies. You'll see that a handful control them.
CAI: 4.95% control over 50%.
NOC: 1.85% control over 50%.
LMT: 1.45% control over 50%.
SAI: 3.37% control over 40%.
Barclays is London and AXA is Paris. Drill down into the major holders, and you'll see the same names. Then see that the same holders control AIG, C, BAC, WFC and so on, including GS, MS and JPM. Same with IBM and GE.

Ever wonder why our destiny seems out of our control? Even in our little mid-western town, SI International was taken over by SERCO, an immense British government contract firm. SI International processed immigrant files for Department of Homeland Security. ATK manages the local ammunition plant, the largest supplier of small rounds to our military. Same names pop up. Gives one a real sense of security in the homeland.

2009 Apr 12 10:35 AM

[Howard_T]

How easy is it to convert private employees to civil service? Not as easy as some might think. Several years ago, the company from which I am now retired had a contract with the US Navy to provide equipment and technical services for a shore-based radar program. (I was not involved in the program, but a number of friends were.) The Navy put it out for competitive bid, but for quite a while, no one was able to bid low enough and provide the technical competence to take the contract away. Finally, one firm underbid us. This firm had counted on being able to hire the employees who were currently on the program, and thus spare themselves the expense of recruiting and training new employees. Their offer was generous enough, but of the several dozen people on the contract,only one, a local hire, was willing to switch. The rest packed up, came home, and were given other job assignments. The company that won the contract from us took a loss on it.

My point is that not all employees identify so closely with the customer that it makes no difference who signs the paychecks. there are other things to consider. Also, is it not more expensive to hire a full-time civil servant than it is to employ a contractor? You are stuck with the civil servant, his retirement pay, his normal salary step increases, his benefits, and the rest for at least a twenty-year or more career. If the demand for his services goes away, the termination process is costly. A contractor can be let go on the spot, and his employer is then responsible for him. I could go on and on about how much expense is added to the cost of goods and services to the government because of the layer on layer of bureaucracy that is overseeing contracts. For the most part, these overseers are not familiar enough with the technical aspects of the job to intelligently evaluate what they are seeing, and require companies to perform extensive and unnecessary testing, verification, and paperwork before they can be satisfied. This adds enormous costs to a program. If the government wants effective program management, they need to be able to attract people who are as talented as those in industry. This will never happen until civil service is reformed to the point where it is a true meritocracy, and not a repository for those who value security over performance.

What scares me is that the government might make up some sort of "emergency" and nationalize the defense industry. Should this happen, I would strongly suggest investing in a reinforced concrete bunker, canned goods, weapons, and ammunition. Our defense will soon become a hollow shell.

2009 Apr 12 01:19 PM

[realold]

I worked for five years for aerospace, twenty-two years as an owner of a small software company and fourteen years directly for government. With that in mind, I can say that you could expect some success in converting contractors to government in hard times. Then, they would generally stagnate under the less competitive, less rewarding government work. Down the road, you would end up going back out to contractors, but there would be none left, and you would end up overseas to get fresh contractors with new ideas and work ethic. Government is a stifling, process (rather than end-product) oriented environment where everyone is afraid to make a decision and take responsibilty for something new - why should they?

It is all an Obamanation that will end very badly.

2009 Apr 12 05:34 PM

[mahony]

What makes anyone think that large defense contarctor employees aren't already controlled by the government? The processes, rules and utterly useless programs are dictated by the government customer. If you think that a civil servant is more expensive than a contractor, you must have missed the part about cost plus contracts and how they cover the contractor "overhead". The cost plus programs (especially the ones people don't know about) dictate every part of the contract including bonuses and awards. Calling it government ownership would be semantics and like the article says, largely invisible.

2009 Apr 12 10:17 PM

[Rob Viglione]

Obama's solution to the economic crisis, in all sectors, is to nationalize. Albeit not overtly, the silent employer of last resort is increasingly the federal government.

All new government jobs come at the expense of private ones that are taxes or inflated away.

2009 Apr 13 12:52 AM

[TinCanMan]

As a retired Navy Senior Chief, and now a contractor, I have worked with Civil Servants for years. When it came time to retire from the Navy and get more employment, the Gov't was not on the list. I have met too many that could't hold a job in the real world. We call them "Legal Welfare".

2009 Apr 13 01:10 PM

[baloney]

How many DoD procurement staff does it take to screw in a light bulb? Don't know - they have never succeeded in that task. Secretary Gates' plan to hire 39,000 more procurement staff - I know he has come up with a range of other labels for them like program management, engineering, logistics and business management - will simply add more civil servants "supervising" the contractors who get all the work done. This is nothing more than a major jobs program for returning military personnel, so why not just say so.

2009 Apr 14 01:51 PM

[bcinu42]

hey, this sounds great. if the government keeps taking over one industry after another -- defense, auto, healthcare, etc. -- pretty soon we'll be under complete control of the government. we'll no longer have to work so hard to produce quaility products or provide quality services because the government will take care of all us no matter what. and there won't be such high expectations of our country having to police and care for the rest of hte world. we can become one of the ones that need to be taken care of for awhile. i wonder if that was the vision of the founding fathers of our country? probably not, but they're dead now, so it's time for a change.

2009 Apr 14 07:20 PM

[axelrod608]

Look at the big picture. I used to rant that the feds spent 4 dollars for every 3 they took in. We got change alright - this fiscal year they are on track to spend 2 dollars for every 1 dollar they take in. This year's deficit will be bigger than a decade-ago total spending. Can they create 40,000 more gummint jobs ? Hell yes. Can they pay for them ? Hell no.

The fed now spends 1/3 or more of the GDP. Add in the bloated state and local bureaucracies and you have half of the GDP. We are drowning in government. That, not the credit markets, is the problem.

2009 Apr 16 11:43 AM

[Respirate]

With due respect to Jack Gordon's experience, I submit that's not always the case.

He said, "... support contracts are recompeted at regular intervals ... you have to change hats & do the same work at lower pay for the new contractor (or else move out of town), it's called wage busting..."

There are long term DoD operations in which the winning contract bidder hires essentially all of the existing employees, including management, at the same or better compensation. The name on the prime contractor's letterhead changes from Lockheed to Johnson Controls to Raytheon to Boeing back to Raytheon, but the change is mostly immaterial to the employees. They're still performing the same operations on government-owned (GO-CO) equipment.

It depends on the functional level of the work, but often the new prime contractor can't afford to lose the expertise already in place.

--R

2009 Apr 17 08:49 AM

[Neomorph]

I think this is a step long overdue. I'm personally involved with dealing with DoD types, in a technical role. A major problem they have is that they don't have the technical talent to even effectively contract tasks out. It has gotten so bad that they essentially had to outsource the entire oversight process on two large programs, Future Combat System (FCS) and DDG-1000 (the new destroyer). That's the very definition of the fox guarding the hen house. Neither program is doing well.

2009 Apr 20 08:40 PM