Wednesday, June 18, 2008

Political Chaos Theory

There's this cliché from chaos theory that says, if a butterfly flaps its wings in Japan, a hurricane blows in Florida. Something like that. The point being, in chaotic systems like weather or human societies, small initiating events can have large consequences down the road. Another old lesson from history states that we must guard against our baser selves or bad things can happen to us. Call it karma, call it punishment for sin, call it what you will. Today we have a marvelous illustration of both of these effects, but one needs to go back to the butterfly before getting to the hurricane.

About five years ago, an Executive Vice President at Boeing hired a former civil servant to become a Boeing executive under unethical circumstances.

That same year, Senator John McCain spoke before the Senate on Boeing getting a sweetheart deal from the U.S. Air Force for leasing 100 Boeing KC-767s at inflated prices. These two events cemented--in the minds of Congress, anyway--that Boeing was not to be trusted, and that its business dealings were questionable, to say the least. McCain thus led the charge against giving Boeing a sole-source contract to supply USAF with tankers.

Flash forward four or five years. The U.S. Air Force is once again in need of tankers due to the wear and tear of war operations on much of its airborne tanker fleet, which consists of 40-year-old KC-135 aircraft (the tanker version of the Boeing 707). Because of the bad name Boeing gave itself in 2003, the sole-source option was not available. Instead, the USAF went with a competitive bid. The bidders were Boeing, of course, and a team made up of U.S. company Northrop Grumman and its partner EADS (parent of Airbus Industrie, Boeing's major European competitor in building commercial aircraft). The goal was to shoot for "best value," which in government parlance usually means the lowest bidder. The lowest bid would have addressed both aircraft development and long-term operational costs of the fleet.

Despite some rumblings early on that Northrop-EADS might have gotten short-changed by the process, the point became moot when it turned out that they had won, right? Hardly. The game wasn't over.

Boeing's lobbyists kicked into high gear, claiming that American jobs and security were at risk by going with a European aircraft maker; this, despite the fact that Northrop-EADS plans to build some parts of the aircraft in Alabama, among other places. But never mind that: Boeing decided to wave a disingenuous flag of xenophobia, filed a protest, and got the right people in Congress to start raising hell over jobs in Washington going to Alabama and France. This is nonsense, in my opinion. This is like JFK raising hell about the "missile gap" with the Soviets, only to become president and discover, oops, the gap was on the Russkis' side. If anything, the contest was slanted in Boeing's favor, and they still lost; they should just let it go. What's the French word for chutzpah?

But the butterfly's work is not done yet. Department of Defense procurements--especially large procurements like the tanker deal--are rigidly controlled and rule-bound. Contract bids are evaluated by separate teams of individuals based on technical merit, price, management, and (logistical) support. These folks are often put into locked and guarded rooms without cell phones to ensure honesty during the proceedings. Individuals on the boards must disclose all of their financial dealings prior to the review process, and individuals with connections to the bidding companies must recuse themselves and be removed. In the final analysis, even the end customer (say, the Air Force general commanding the tanker wings) does not have the final say in the matter. All of these processes, while laborious and bureaucratic, are established to prevent corruption and influence-peddling within the procurement system. That's why you don't see legislators on procurement review boards.

However, given the fuss Boeing is likely to kick up, that entire system is about to get chucked out the rear hatch to satisfy the chest pounding egos of some folks on Capitol Hill. "Buy American!" will be the new chant, and future procurement boards are now on notice if they attempt similar buys from EADS or other foreign providers.

Here are some other painful truths: the American aerospace and defense industries have become one and the same. The number of competitors has shrunk (leaving at the top of the heap Boeing, Lockheed Martin, Northrop Grumman, General Dynamics, and Raytheon), leaving only foreign competition. Lockheed is nearly out of the big-airplane business, leaving Boeing and Northrop. And if Northrop doesn't have the chops to make all of the hardware they need, they have to look overseas to find bidding partners. The government procurement system prefers competitive bidding. Depending on the item in question, there is usually a minimum threshold of three bidders required before the government will even allow the competition to go forward. If they can't get three bidders, they'll often scrap the procurement and try a new one with a different scope to ensure that they get three bids.

In the aforementioned large aerospace and defense contracting world, the government is going to be lucky if it gets two bids; and given the consolidated American market and the more competitive global market, the odds are pretty good that at least one of the two bids is going to include a company based overseas.

Now I have no doubt that American equipment is still the finest in the world. If it weren't for Boeing, the U.S. trade deficit would be even further in the red. However, as the Big Three auto makers proved in the 1970s, if they're left without competition for too long, their prices go up and their quality goes down simply because they're the only game in town and they get lax. Do we want that, or do we want some competition to keep our folks sharp? And if the competition can't be found here, then we'll have to compete with France, Britain, Germany, or Japan (on matters of defense and national security, Russia and China wouldn't even be in the running because they're on the naughty list; India is still a "maybe" ally). The other alternative is to sole-source everything to one of the Big Three and hope for the best. You might recall all the great press Halliburton has gotten for its sole-source work during the Iraq War.

So we've got a potential long-term procurement crisis on our hands, started off by a lot of butterflies:

  • Boeing's bad hiring practices
  • John McCain's railing against sole-source contracts for Boeing
  • Members of Congress and Senators willing to raise a little nationalistic Cain to score political points
  • The Air Force's allegedly botched procurement process
  • A potentially deadlocked DoD procurement problem in the future, as review board members start making decisions based on politics rather than cost or technical merit

So what lessons have we learned today, class?

  • Behavior matters.
  • You can never fully predict the future impacts of your actions.
  • Bad situations can be made much, much worse depending on how people react to them.
  • What goes around comes around. If Boeing had just behaved themselves, they wouldn't have hired Ms. Druyun improperly, they would still have a tanker leasing deal with the Air Force at reasonable prices, and we wouldn't have a major defense deal going badly in the public media now.

We now return you to your regularly scheduled foolishness.

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