Outsourcing is not a new idea. Over the years, the nation has swung regularly between faith in in-house defense research and development and contracting out. R&D for Sidewinder was largely an in- house effort, but most systems today are so large they have to be built by an inside-outside team—probably the only way to go.
One of the hottest topics in the Department of Defense today is how to streamline an infrastructure some consider too large and too costly. Many believe we can best accomplish this by turning over to the private sector many functions the government now performs—in other words, by outsourcing. Outsourcing, its proponents assert, will produce savings that then can be plowed back into high-priority modernization.
Numerous studies have waxed sanguine about the benefits to be reaped from outsourcing. Advocates promise savings of 20-40% when functions currently done in-house are contracted to the private sector. Consider these examples: A 1995 report of the Commission on Roles and Missions of the Armed Forces notes that "more than a quarter of a million DoD employees engage in commercial-type activities that could be performed by competitively selected private contractors. Experience suggests achievable cost reductions of about 20 percent." Two influential Defense Science Board reports claim that DoD can save from $10 billion to $30 billion annually, in large part by contracting out a range of functions government employees now perform.
These views stem from the perception that the private defense sector is more efficient than the public sector because it responds to the competitive forces in the free market. Those who champion outsourcing also point to what they claim is a vigorous restructuring within industry that has left private-sector defense companies with a leaner, less costly, more agile infrastructure.
Despite all the assertions, there is growing doubt that outsourcing and privatization will produce savings at all, much less those of the magnitude DoD needs to fund modernization. At a conference on the Quadrennial Defense Review, for example, senior members of DoD, the Rand Corporation, and the Center for Naval Analyses recognized the difficulties with funding modernization from infrastructure savings. Any cost benefits that might occur, they concluded, would accrue slowly, and no single approach could produce the needed savings.
There also is an increasing awareness about outsourcing's potential pitfalls. Consolidation of the defense industry, particularly at the prime contractor level, challenges the very assumption underlying the rush to outsource—that competition in the private sector drives efficiency. In fact, today, fewer and fewer mega-defense companies control larger and larger shares of defense contracts. Consolidation at the subtier/supplier level, or so-called vertical integration, also threatens competition in the private defense sector. The Defense Science Board has cautioned that this vertical integration can cause problems, and senior DoD officials fear that as defense spending—and thus the contractors' business base—declines, contractor overhead rates will rise, driving up costs.
Nevertheless, outsourcing is a growing rage in the private sector, and the lore that has grown up around it makes it difficult to separate myth from reality. One thing is clear, however: many private-sector companies have been disappointed over the lack of cost savings generated through outsourcing.
For example, Ed Dean, a cost analysis expert for NASA, recently commented that outsourcing to a low-quality supplier actually can increase costs and reduce revenue, and that outsourcing a customer interface can cause disaster. A 1996 Deloitte & Touche survey of some 1,500 chief information officers of a variety of U.S. and Canadian companies documented that 69% of those officers were disappointed with the savings gained through outsourcing, and Coopers and Lybrand has reported that only half of the chief executive officers who turned to outsourcing for cost savings achieved any, while 29% broke even and 4% lost money. Fred Joy, a senior research analyst at the Meta Group, Inc., of Stamford, Connecticut, says customers should count on spending 5-7% of the value of an outsourcing contract just to manage it. The Economist found that savings have been particularly elusive in manufacturing. And in information technology, an area in which there is extensive experience with outsourcing, companies across the business spectrum have been disappointed in their return from this business strategy.
Despite these cautions, contracting out remains the game plan for reducing DoD's support infrastructure and, in the process, creating the savings to fund modernization and other needs. This strategy should produce a sense of deja vu. As Congressman Herb Bateman (R-VA), chairman of a congressional hearing on DoD use of outsourcing and privatization, notes, "The DoD is now, once again, telling us that the savings they have taken out of future defense budgets will materialize through the use of outsourcing and privatization. I would really like to believe them this time but it will take some convincing."
Indeed, DoD has in the past used outsourcing as a sort of silver bullet for saving money, but the big pushes to contract out defense research and development (R&D) have never produced the unqualified successes their staunchest advocates contended they would. In fact, comprehensive efforts to increase contracting have created problems and, many would argue, damaged the country's overall R&D effort in the process. Today's raving about outsourcing is simply the latest phase in a recurring, pendulum-like process that has been occurring for 50 years.
Been There, Done That
World War II provided the impetus for a strong in-house defense R&D program. Determined not to let the country's technological capability lag as it had following World War I, a number of government study groups committed to a strong R&D effort. They also were disturbed, as are many DoD officials today, by the concentration of R&D among a few industries and universities, who consequently gained unfair competitive advantages. For these reasons most studies advocated strong in-house capabilities.
By the 1950s, however, the pendulum was swinging back, and study groups were championing savings and efficiency through contracting. After the end of the Korean War and during a pro-business decade, Charles Wilson, President Dwight D. Eisenhower's Secretary of Defense, reduced the DoD civilian workforce by 40,000 people and transferred a great deal of military production to industry contractors. The second Hoover Commission—appointed in 1953 to find ways to reduce the number of federal government departments and increase their efficiency—advocated that government turn over to private industry those activities in which there was competition with businesses. The commission did not direct that R&D be done in the private sector but instead recommended that it be placed wherever it could be done most effectively and efficiently. Reflecting his lifelong suspicion of active government, former president Herbert Hoover, who headed the commission, assumed that the private sector generally did more expeditious work, and therefore that the number of contracts awarded would increase steadily.
The attempt to put belief into practice did not go well. Increased contracting not only reduced the amount of work government labs performed but also hindered their ability to perform their core missions. And it quickly became apparent that contracts came with their own disadvantages.
First, dependence on contracts jeopardized the work that remained in house. "Strengthening American Science," a study of the prestigious President's Science Advisory Committee, lamented that government workers had lost heart and that extreme reliance on contracts could "greatly impair the morale and vitality of needed government laboratories." Second, as contracts increased, new problems arose—their short-term nature, cumbersome reporting requirements, the inability to pursue unexpected discoveries not specified in the contract, termination dates that disrupted planning, late renewals, labyrinthine salary structures, scientists' inability to direct their work, and the high number of selecting and reviewing boards. As these realities took hold, the romance with contracting began to fade.
This disillusionment coincided with the Soviets' launching of Sputnik (1957) and the escalation of the Cold War, and as a result the pendulum began to swing back toward in-house performance of research and development. In 1958 the House of Representatives R&D Committee on Government Operations noted that "contracting methods ... have been carried over by brute force and sheer awkwardness into the area of scientific research contracting, in which they protect adequately the interests neither of the government or the contractor." Other study groups reached similar conclusions. By October 1961, Secretary of Defense Robert McNamara had decided that "in-house laboratories shall be used as a primary means of carrying out Defense Department [R&D] programs."
By 1962 the situation had returned pretty much to where it had been at the end of the World War II, as evidenced in a major study known as the Bell Report. David Bell, director of the Bureau of Budget's report, noted that contracts could be a good way of doing business, but that, nonetheless, the government had to maintain strong in-house capabilities and pay for the expert personnel to perform them. "No matter how heavily the Government relies on private contracting, it should never lose a strong internal competence in R&D."
As the Cold War peaked and the country's involvement in Vietnam grew, the effort to concentrate research and development in house continued. Secretaries of Defense and the Navy, research institutions, and government studies bemoaned overdependence on contracts, argued for more involvement of in-house personnel in high-level research, development, test, and evaluation activities, and staunchly supported technical competence in government laboratories.
Reaction, Reexamination, and the Peace Dividend
By the early 1970s, faith in in-house research and development again was waning. A Blue Ribbon Defense Panel, chaired by Gilbert Fitzhugh, chairman of the board of Metropolitan Life Insurance Company, criticized the fragmentation and lack of accountability among R&D organizations. The panel concluded that considering the investment, lab productivity was low. Remarkably, none of the committee members ever visited the laboratories, and when pressed for evidence offered no justification for their conclusions. DoD therefore appointed a number of committees to examine the panel's allegations.
During this reexamination several groups, at first, sought a balance between in-house and out-of-house work. The Naval Weapons Center noted, "A certain amount of contracting seems to be healthy for all laboratories, and either over or under dependence upon contracts tends to be counter-productive." The Naval Research Advisory Committee concluded that doing business through Federally Contracted Research Centers, with industrial laboratories, or in house all cost about the same. And John Allen of the office of the director of Defense Research and Engineering said that, although a lot of innovation in the technology base came from contractors, "no way has been found to preserve the combination of current technical expertise and long-term corporate memory other than setting up an organization wherein individuals can maintain a lasting and close association with their Service while staying involved in technology; in short, an in-house laboratory."
But the events of the latter 1970s again strengthened the push toward contracting. The return of military personnel from Southeast Asia led to drawdowns and efforts to develop jobs in the civilian workforce. Federal budget monies shifted from the military to the Departments of Energy, Housing and Urban Development, and Health, Education, and Welfare. Industries lobbied forcefully for defense work. Inflation dominated national concerns. And the old saws about bloated government and its underproductive workers found new voice in the reinvigorated chorus of antigovernment sentiment.
And so the pendulum began to swing again. The Defense Science Board suggested an "increased contract to in-house ratio for technology base activities"; the Chief of Naval Material's report on functional realignment, the Gavazzi study, recommended that "to the extent possible, all work that can be done as well by industry would be contracted out"; OMB Circular A-109 and DoD Directives 5000.1 and 5000.2 urged DoD to rely on private industry in major systems acquisition and essentially to end in-house efforts in system development. Indeed, Defense Research and Engineering recommended reverting "to the ... better balanced ratios which existed in the early 1960s"—the years just before the Bell Report had noted, with alarm, the erosion in laboratory capabilities.
Back to Business
Although a number of analysts advocated strong in-house research and development capabilities, and others discerned an injurious dependence on contracts, the trend toward contracting continued in the 1980s. The generally pro-business sentiment of the Reagan era and dissatisfaction over burdensome regulations on the labs led to support out-of-house R&D efforts.
Some groups did recognize the importance of in-house R&D. The Government Accounting Office argued that R&D was central to national security and labs were central to R&D. A study commissioned by the Naval Material Command noted that the labs maintain technical expertise, which in turn requires a clear, supported technology base program. A Navy secretariat-sponsored report claimed that research, development, test, and evaluation centers needed the capability to perform "hands-on full-scale engineering development work."
The overall trend, however, was toward contracting out. The President's Private Sector Survey on Cost Control, for example, advocated privatization in general. The Packard Commission's "A Quest for Excellence" also recommended going commercial: "major savings are possible . . . if DoD broadly emulates the acquisition procedures used in outstanding commercial programs."
Just Another Swing
Today, many enthusiastically champion outsourcing, acting as though it were a newfound principle. In a recent Issues in Science and Technology, for example, retired Air Force Lieutenant General Thomas G. McInerney and Erik R. Pages propose "a truly revolutionary restructuring" in DoD, by which they mean "increasing its reliance on the private sector and emulating best business practices."
Revolutionary indeed. We have been there before—twice.
Today's faith in privatization is just another swing in a recurring historical cycle. In fact, some recent publications suggest that sentiment may be shifting yet again, back in favor of government performance of defense research and development. Alarmed about the difficulties DoD is having with hiring and retaining high-quality personnel, defense planners and pundits are lamenting the lack of defense workforce planning over the past dozen years.19 Observers in both the private sector and DoD are now noting the negative effects of more than a decade of personnel downsizing.
The eminent jurist Oliver Wendell Holmes Jr. once said, "Upon this point a page of history is worth a volume of logic." Perhaps history in this instance can teach us a little caution in our untested tenets, a little skepticism for sweeping panaceas, and a little perspective.
Mr. Marshall is executive secretary of the Navy Laboratory/Center Coordinating Group, a group set up by the Secretary of the Navy to provide coordination for the Naval Research Laboratory and warfare centers. He previously served as a staff specialist on laboratory management to the Director of Navy Laboratories. Dr. Hazell works for the Navy Laboratory/Center Coordinating Group and the Naval Historical Center as an archivist/historian and teaches at the University of Maryland.