Doug Poretz's  Instablog

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.