DOD bets on small businesses to improve industry competition

A new Pentagon report says there's not enough competition among defense industry companies and to fix it, it wants to push for more small business partnerships while keeping an eye on mergers and acquisitions. 

The Office of the Under Secretary of Defense for Acquisition and Sustainment released a report Feb. 15 on the state of competition in the defense industry base, noting that the number of companies has shrunk from 51 to five prime contractors in the past 30 years. For example, satellite suppliers have been halved to just four in that timespan. 

The report was required under a Biden administration executive order on Promoting Competition in the American Economy.

To increase competition and prevent further shrinkage, the Pentagon wants to team with more small businesses by using more flexible buying authorities and preventing consolidation through mergers and what it sees as anti-competitive data rights practices. 

The report states that DOD wants more oversight of mergers and acquisitions by supporting the Federal Trade Commission and Justice Department antitrust investigations "when a merger threatens DOD interests." 

The report landed the same week as defense giant Lockheed scuttled a planned $4.4 billion acquisition of component manufacturer Aerojet. The deal was the target of a FTC lawsuit which argued that the acquisition would have hurt competition in the defense aerospace sector by cutting off Lockheed's rivals from a key supplier.

Additionally, the Defense Department also wants to address issues with "vendor lock" and intellectual property and data rights that may hinder competition. 

"Certain practices surrounding intellectual property and data rights have been used to limit competition in DOD purchasing and to induce 'vendor-lock' and other undesirable results," the Pentagon report states. 

"DOD will implement best practices for identifying its long-term IP needs early in the competitive phases of acquisition programs, ensuring IP is an evaluation factor in competitive awards and a negotiation objective in sole- source awards, and contracting with vendors who are willing to provide the government the IP deliverables and rights it needs."

But to attract more companies, the Pentagon said it wants to boost outreach to small businesses through flexible buying authorities, such as other transaction agreements and commercial solutions opening.

The Defense Department's use of OTAs has increased in recent years, doubling from 2019 to 2020 with some of that lift attributed to use for research and development needs for vaccines and therapeutics brought on by the COVID-19 pandemic.

DOD likes those authorities because they can help "foster new relationships and practices" with nontraditional defense companies and for multi-use projects. They also  "encourage flexible, quicker, and cheaper project design and execution," the report states. 

But there's concern about the shrinking small business base, despite increased investment. 

A Government Accountability Office report from October 2021 found that while DOD's contract obligations to small businesses rose from 2011 to 2020 – reaching more than $80 billion – fewer businesses participated. Of that increased spending with small companies, DOD found that 83% was for research and development projects and 28% for manufacturing.

"Yet, over the past decade, small businesses in the [defense industry base] shrunk by over 40%," the department's report states, and if the trend continues another 15,000 suppliers could vanish in the next decade. 

The Pentagon is working on a department-wide small business strategy to boost the small business defense industry base. But the success of it will likely hinge on implementation. 

The department has a small business strategy from 2019 – which the GAO determined needed a clear implementation and policy plan as well as a formal way to monitor progress.