Do you sell butts in seats, and have no research and development? Then say adios to your company!

BLUF: If you are exclusively a SETA (Systems Engineering and Technical Assistance) contractor, with no work as a provider (builder of things) you are in a race to the bottom in today's US DoD environment, at least in the Army and Navy procurement ecosystems.

We are seeing multiple clients lose major competitions and re-competitions because they are being underbid by a few percentage points. And they are losing these jobs to firms or teams with decades less experience in critical areas.

What the F%#&?

Our research shows this is happening to multiple clients of ours, large and small and across all services but mainly US Army and Navy. The reason seems to be that DoD procurement specialists and contracting officers in those services seem to believe that SETA contractors are interchangeable.  Off the record, I have had USG contracting officers tell me these things:

• Contractor teams and firms are usually interchangeable. It doesn't matter which one you pick on a recompete, since they just hire the incumbents anyway. It is just a badge-flip and the US government saves dollars every time by awarding to the lowest bidder.
• Contractors have profit hidden throughout their jobs. And it is my job to find it and reduce it as much as possible.
• I am financially incentivized by bringing contracts in below the US government's estimated cost. And I'm going to do that every time.
• My colleagues and I have been humiliated by contractors’ fancy lawyers, repeatedly, and we never forget it. I get even with contractors in general, every chance I get.

The result is a fractured procurement system: 

1. Pricing wise, it is a death spiral for contractors.  To price jobs low enough to win, you must bid lower labor prices or fewer hours. If you bid fewer hours without strong justification, the USG is likely to determine that you do not understand the difficulty of the problem and bounce you from the competition. Alternatively, if you bid lower labor prices, you must either hire less qualified people (lower salaries) or if a recompete, you must offer incumbent staff lower salaries and then hope they will badge-flip.
   If you have already hired technically savvy people, at competitive salaries so you could recruit those people, you will have a hard time bidding them when the US government specifies low wage rates.
2. SETA contractors are now completely at the mercy of price-focused contracting officers, many of whom do not understand their program’s real engineering needs nor the warfighter’s real operational needs. Many of them have been in procurement their entire careers.

When the USG procurement staff selects a low priced and substandard contractor to do SETA work, several things happen and all of them are bad:

• The war fighters are the ultimate losers when the winning contractor is second rate, with low quality (read inexpensive) talent. Where excellent engineering or technical expertise is required, only average contractor support will be provided.
• Many times, the winning contractor will be unable to staff the jobs at the rate they bid in their proposal, causing a late transition to a fully staffed job.
• Throughout the program, as routine staff turnover occurs due to better offers elsewhere, etc., the contractor will find it difficult to hire replacement staff because, again, they are offering substandard wages to prospective hires.
• The USG contracting officer will be unable to assist the USG program teams in fixing these problems because usually, contracting officers immediately move to other procurement efforts once a contract is signed. As one USG PM told me “the KOs leave us to clean up their messes.”
• The PMO and the government project manager will be forced to make some draconian decisions when milestones are slipping and costs are climbing. Best case, they cut corners to save money, and worst case, their project gets cancelled.  And again, the Warfighters are the losers. 

Are there honorable, principled contracting officers out there?  Yes, there are contracting officers who worry about how well the warfighter is being supported by their contractors. I know a few contracting officers like that. And for a long time that was the norm. Is that common now?  Apparently not.  I am hearing too many stories to the contrary, especially from US Army and US Navy contractors. 

But we are extremely fortunate as a nation that some contractors still choose to do SETA work since many USG technical teams would grind to a halt without their SETA contractor team working alongside them every day. 

But few of those firms are likely to last as pure SETA contractors without Herculean efforts to deeply and irretrievably embed themselves in their USG customer’s operations (see #2 below).  As a SETA contractor, what can you do about these inequities?  You have four basic options:

1. Cherry Pick: You can try to work only with reputable, principled contracting officers for your contracts. Good luck trying to do that. You don't get to pick them.
2. Lock-In: Embed yourself so deeply into your customer’s daily operations that it is almost impossible for the procurement staff to extricate you by awarding a routine re-competition of your contract (aka a recompete) to your competition. Everyone tries to do this.  Most firms believe they are embedded with their SETA customers, only to find out they were just attached, and loosely at that.  And it will seem to work, right up until it doesn’t.  Then you can try action #3 below.
3. Protest: You can protest every job you lose, where your proposal is both a) evaluated as being equal to or superior to the competition’s and b) you were underbid by some common-sense standard such as 5%. I am aware of several such protests over the past three years and, to my knowledge, none of them were successful.  When DoD procurement officers even just barely follow their own rules, the GAO supports them and contractors’ protests are rejected.  So that leaves you with one option, if you want to survive . . .
4. Diversify! If you have technically savvy people who can solve tough problems, you can begin weaning your company off the butts-in-seats bandwagon.  But into what new work, you may be asking?

Become a provider, a DARPA distinction to set systems suppliers apart from SETA contractors.  Here is a plan that has worked for other purely-SETA contractors making the transition: 

1. Nicherate - Determine what your organization is good at. You need to know what exemplary products it could offer, given the right resources and a year or two. Then you need to figure out what the DOD customers will need/want in the future. Build that Venn diagram (VP Harris would be so proud) and find the essential overlap.  No overlap?  Stop and rethink this approach! 
   With an overlap, you must take a risk and try to produce what DOD needs, when they need it.  You must do what fighter controllers do daily - - - run the intercept.  And as hockey star Wayne Gretzky said famously, “I skate to where the puck is going, not where it has been.”
   Begin this intercept by talking to three groups of people and getting their thoughts:
   1. Technologists - find the best and brightest nerds in not only your company but in your customer communities and in trade organizations to which you might belong. Ask them what new technologies are being developed in the US, and indeed worldwide, that could impact defense market trends. As an example of low-hanging fruit, ML/AI (machine language and artificial intelligence) immediately come to mind and you’ll need to consider what they will do in the years to come, and how it might affect your offerings now and in 3, 5 and 7 years.   And it will affect your offerings. 
      Also plan to increase your capabilities in Digital and Mission Engineering since they are essential aspects of anything the US DOD is considering adopting/buying these days.
   2. Intelligence specialists: These people worry about what potential enemies could develop in the way of enhanced capabilities and emerging technologies. Attend every classified threat briefing, by any U.S. military service or agency, wherever and whenever you possibly can. You want to find out about any new technologies in the developmental pipelines of hostile nations, that could emerge as military capabilities within the next 3-5 years.
      
      
      
      
   3. Combat Operations Specialists: Ask these military end-users and requirements writers what new capabilities and systems need to be developed in order to meet emerging and future threats. Unless you are willing and able to “chum” the conversation with your own emerging capabilities and new technologies in research and development, the USG military operations people are unlikely to be very forthcoming about how they see future requirements and needs shaping up. You must give something to get something. So be prepared to launch the discussion by opening your own kimono.
      
      Remember that not everyone in the US DoD holds contractor’s information as close to the vest as they should, so tell these military end users what you plan to be able to do for them in the next three, five and seven years, but not how you will make that happen.  You will meet great people in the ops community, with real needs for better gear.  But do not give up the family jewels in those conversations with potential DOD customers, no matter how much you like them and appreciate the sacrifices they make.  You cannot help them if you are out of business.
      
      
   4. Repeat these discussions at least annually, so your plans roll forward with friendly and hostile technologies and developments, and you don’t get surprised.
2. Build a Plan - an integrated product- and technology-development road map. Develop realistic dates for the technologies and systems that will comprise your new offerings.  These will become your IRAD (Independent Research and Development) and/or CRADA (Cooperative Research and Development Agreement) efforts.  And finding contracts, even small ones such as SBIRs, that fill in gaps in your internal plans, is a bonus!
3. Pick Your Contract Type - Look for the contracting vehicles you’ll want to pursue, listed here in order of my preferences, for illustrative purposes:
   1. Any existing “provider” contracts you already have, where the SOW will allow you to develop something, not just put butts-in-seats, if you have such a thing. Be sure the contract ceiling will accept the additional work and confirm the USG contracting officer and PM are willing to put your upcoming work on the contract via a modification.
   2. OTAs – these Other Transaction Authorities can be any number of innovative contracting vehicles not subject to the FAR (Federal Acquisition Regulations). Dozens of OTAs are scattered across DOD and they usually are focused on the contractor delivering a prototype. 
   3. CRADAs – These require a sharing of effort (and expenses) between a USG office and the contractor. But the real benefit here goes far beyond the dollar value:  The USG office can sponsor contractors to attend invitation-only threat discussions and operations demonstrations, observe exercises, etc.  And they can help find transition partners who can contract to take your prototypes into production and help develop (or support) programs of record (POR).
      
      
4. For each technology development effort you intend to launch, carve out the people, tools, funds and materials from your current organizational chart. Set aside the money up-front and assign the core people to a couple of PMs who report to an R&D director at the VP level, who reports directly to the CEO. Also find separate physical space(s) for these teams, away from the mainstream locations.  Trust me - - - this segregation action will triple your chances of successfully developing those new technologies and systems.  Yep, you are building a Skunk Works.  I first learned this from Emmitt Wheeler, who was a remarkably successful senior VP at Westinghouse Defense, God rest his soul.  And then again from Ben Rich of Lockheed Martin fame, whose book “Skunk Works” with Leo Janos, is a must read/listen for all defense PMs and engineers today.    

Danger, Will Robinson, Danger!

Do not starve this new R&D initiative by trying to ease the company into the transition or trickle fund the efforts, “to see if they will work”.  Don't put your best and brightest people into a bind like that.

I am not in the habit of quoting Chinese scholars but this one sums it up nicely:

 “You cannot leap a chasm in two hops.” 

Over the past four decades, I have watched countless efforts like this fail when they are insufficiently resourced. So, take on business partners, sell off a non-productive division, take out a bank loan, etc.  Just find the money to properly launch diversification efforts.

Do Not Put This Off

Delaying a difficult task usually makes it more difficult to accomplish later.  And, yes, doing this correctly can be fiendishly difficult.  Moving away from a stagnant, dying or even toxic business niche can be difficult since you sometimes must exit from something you know, to try something you don’t. 

But exit you must.  As a defense contractor, remaining exclusively in the SETA business these days is likely to bring a slow, agonizingly painful death to most companies.  The profit margins have always been less than half what you can earn with well-managed, fixed-price product development contracts. And now the contracting pendulum has swung so far into the LPTA (Lowest Price, Technically Acceptable) category, whether it is officially called that in the RFPs or not, the juice is no longer worth the squeeze. 

So as the paratroopers say, hit the silk!  Or as we said in the US Air Force, “visor down, sit straight and narrow, yank those handles, BAIL-OUT!” 

If you need help thinking through the options for your company or team, I am here to help.  Just pick a free, 30 minute slot and we can discuss how I can help you build an actionable, workable strategy: https://calendly.com/smoothprojects/ss