September 22, 2020 | International, Aerospace, Naval, Land, C4ISR, Security, Other Defence
Pentagon acquisition boss talks industry, mergers and coronavirus
Aaron Mehta WASHINGTON — A longtime industry executive, Ellen Lord was confirmed as the Pentagon's undersecretary of defense for acquisition and sustainment in August 2017. In that role, Lord — who is now the longest serving political appointee at the department from the Trump administration — oversees billions of dollars in weapons procurement and sustainment, while also overseeing the health of the defense industrial base, a particularly important role in the wake of the coronavirus pandemic. Lord was a keynote speaker at this year's Defense News Conference, where she touched on a number of issues affecting the Department of Defense. This interview has been edited for length and clarity. We're about six months after COVID-19 first hit the defense industry. How do you judge the health of the defense industrial base? We use the Defense Contract Management Agency and the Defense Logistics Agency to track about 22,000 key companies that the department works with. And going back over the last six months, we did have hundreds of companies shut down, but now we're down to only about 30. So that's very, very good news. We monitor them on a daily basis; we look at on-time deliveries, deliveries missed and, most importantly, we listen to what the issues are, really leveraging the industry associations to do a lot of listening. What we are looking for is whether or not we're maintaining war-fighter readiness for our production programs, and then relative to modernization, whether we are hitting key milestones relative to development programs. We have seen some slowdowns. We are carefully monitoring, using monthly metrics, where we are. That's something that I'm actually extremely proud of the team over the last few years — we have developed a very data-driven way of doing business. The Pentagon is seeking billions of dollars from Congress to help fund reimbursements for the defense industry's pandemic-related costs. But we've heard criticism of this from a number of sectors, with some saying financial reports last quarter were not so bad. Why is that funding needed, and why now? All the [quarterly] reports that have come out in large part don't reflect the hits that were taken by business. I would contend that most of the effects of COVID-19 haven't yet been seen because most companies gave their employees time off, they stretched out production, paid a lot of people for working 100 percent when perhaps they were only getting 50 percent of the hours in and so forth. So I think the system has absorbed it up to this point in time. Now when we get to the point where we're having payments and incentive fees and award fees earned, and if we haven't done the deliveries, that's where you're going to see the hit. So I believe there's a bit of a delayed response. We want to make sure that we have a one-time accounting for these major COVID hits — very, very well defined in terms of a period of time, March 15-Sept. 15, that we take a very, very data driven approach [saying]: “Send us a proposal showing what the impact was; we will assess them all at once and get back.” However, we can't do that at this point in time because we have an authorization through Section 3610 [of the Coronavirus Aid, Relief and Economic Security Act] and so forth, but we don't have an appropriation. We believe we need that appropriation to maintain readiness because if we do not get that, what we are going to find is we are not going to get the number of units delivered, we are not going to maintain war-fighter readiness, we're not going to move forward in modernization. We would like to take the one-time hit and then see where we go from there. Assuming you get the appropriation, much money is needed? When will industry see it? We think it's somewhere between $10 billion and $20 billion. We think it would take five to six months because once we got an appropriation, we would go out for a request for proposals, and the larger companies are going to have to flow down those RFPs through their supply chain, gather the data — because again, this has to be a very data-driven drill. So we would get all of that back; we think that would take two to three months. Then we want to look at all of the proposals at once. It isn't going to be a first-in, first-out [situation], and we have to rationalize using the rules we've put in place, what would be reimbursable and what's not. So overall we think five to six months, in terms of a process. We're at about the two-year mark from the executive order 13806 study, which assessed the health of the defense industrial base and included some dire warnings about the supply chain. How has work on fixing those issues gone? We had several areas that we pointed out were problematic, that we were concerned that the U.S. had too great of a dependency on non-friendly nations and that we just didn't have the security and resiliency that we were looking for. In fiscal 2019, we actually had 14 presidential determinations, which is the process you go through to actually say: “Yes, these are areas that are worthy of looking at.” Then we go to get the appropriation to be able to use [the Defense Production Act's Title III authorities]. A number of the areas we looked at were small unmanned aerial systems, rare earth [minerals], that type of thing. When COVID-19 hit, it shone a spotlight on the concern we had with this fragility and helped us tell the story. Because of another executive order coming in declaring a federal emergency, we no longer had to go through the presidential determination route, which is a bit time consuming, to identify areas where we needed to invest. Then [with the pandemic] we had new areas bubble up, probably the most significant of which was aviation propulsion, where we have a number of our key suppliers who are extremely dependent on commercial aviation that was grinding almost to a halt for a while — huge impacts there. So what we did was we were now able to move a little bit more quickly, which is always helpful. And we made a number of awards to aviation companies that literally kept those companies in business, which allowed us to continue to support the war fighter. COVID-19 has helped us accelerate some of those areas. Others are perhaps not getting as much attention as they were pre-COVID-19, looking at our defense industrial base for nuclear modernization for instance, also for hypersonics. But overall, the team is working very hard, and we have put out almost a billion dollars in DPA Title III over the last six months. It sounds like the pandemic may have been beneficial in addressing these long-term issues. What it did was allow us to really put speed in the system, peel away all of what I would call the non-value-added bureaucracy. COVID-19 gave us a burning platform to really demonstrate we could be very responsible in terms of taxpayer dollars, very responsible in terms of security of the war fighter, but move at the speed of relevance to get things done. So I don't want to backslide there. And I want to make sure we really take advantage of all of that. Companies are concerned about being in compliance with the Section 889 rules, which prohibit the government from buying a system that might have Chinese equipment in it from the telecommunications supply chain. Are more waivers for companies possible? We are incredibly supportive of making sure that we don't have Chinese technology in a lot of our telecom systems, which has proven to be a problem in terms of exfiltration of data. So what we did is we got a waiver from [the Office of the Director of National Intelligence] for noncritical weapon systems. We continue to discuss an extension beyond September of that with them. We are getting waivers on a case-by-case basis, we will look at those. However, we are encouraging industry and we are very, very pleased at how we see industry still stepping up to really get these systems out of their supply chains. So it will be by exception that we will do waivers, and we are looking to really have a clean path through everything. There have been significant mergers and acquisitions during your tenure at the Pentagon. Are you seeing a downside for the department, given the desire for more competition on programs? I actually put a process in place early on, when we are notified of M&A deals, that we go out very formally to all the services and agencies and ask for objective evidence as to whether or not these mergers or acquisitions will constrain competition in any way. We then work very, very closely with either [the Federal Trade Commission or the Justice Department] on those deals to make sure there are divestitures if needed. Where I'm really focused, and the team is focused, is really getting the small companies going. That's where the predominance of our innovation comes from. That's what bubbles up to these larger companies. So we are holding all kinds of webinars and meetings connecting not only our traditional defense industrial base, small company partners, but nontraditional [firms] with our DoD efforts. We're partnering with the services to get more of that activity. So we want that diverse group coming in, and I'm really excited about what I see coming up through. That doesn't sound like you have many concerns about what you've seen. We watch very carefully. And at this point, we think we've made some smart divestitures on some of those. And we like competition. It's our friend. https://www.defensenews.com/interviews/2020/09/21/pentagon-acquisition-boss-talks-industry-mergers-and-coronavirus/