Keep Providers that are Cheap, or Providers that are Good—You Choose.

Politico Pro ran an article earlier this week on Engility (NYSE:EGL), in which CEO Anthony Smeraglinolo argues that its “low cost contracting model works,” but that two years in, “the company is now under pressure to prove that it can boost its sales and profit.” Politico goes on to note that in its spin-off from L-3 Communications, largely to avoid organizational conflicts of interest with its customers, Engility was engineered for a market in which contracts were awarded to companies with “lowest-priced, technically acceptable” (formally called LPTA) bids. But big trouble lurks with that industrial policy: consistent application of lowest-price contracting gradually produces a supplier base in which even the best firms can’t make money, no one bothers to invest, and eventually the supply of quality providers shrinks.

Back in February, I commented (“Best Value Is a No-Brainer”) on an editorial on this topic in the New York Times by Jacques Gansler, a former Pentagon under secretary for procurement. Gansler called out for particular scorn for two recent procurement fiascos that employed the LPTA approach. In the USAF search-and-rescue (CRH) and Marine One (VXX) helicopter “competitions” no credit was given to potential suppliers for exceeding merely acceptable requirements. So, in bringing the cheapest helicopter, Sikorsky (with partner Lockheed) wound up winning both contracts as the only bidder. From the government’s standpoint, it’s hard to know whether you’re getting the best value for your money wen you don’t know how much lower the price would have gone with a little competition.

Decades ago, the British Defense Ministry moved decisively towards best-value contracting, and hasn’t looked back. So why is the US Defense Department allowing this? From the bureaucrat’s standpoint, the LPTA approach is attractive:

• Supplier selection process is easy. There’s no need to convert qualitative assessments of bidders’ offerings to somewhat forced numerical rankings. It’s a simpler process of determining whether they purport to meet minimum standards. After that, the remaining candidates are stacked by price, and the lowest is chosen.
• Supplier selection is largely protest-proof. In reviewing any complaints that might emerge, the GAO never tells you whether the selection was a good idea—it’s just a question of whether the rules were followed. And LPTA rules are easy to follow.
• Supplier relationship management is an afterthought. SRM has never been the federal government’s long suit anyway, but this makes it even easier. Service level agreements (called “SLAs” in the business) are written from the boilerplate of the original request for proposals, and needn’t be adjusted for whichever company wins.

Indeed, learning not to rely solely on price is supply chain management 101, but either the Defense Acquisition University is not teaching SCM 101, or program managers are badly over-applying the cost-saving guidance of the initial version of the Better Buying Power initiative. Fortunately, in his last revision of BBP (version 2.0), current Under Secretary Frank Kendall notes how

     Industry has expressed concerns about the use of Lowest Price, Technically Acceptable (LPTA) selection criteria that essentially default to the lowest price bidder, independent of quality. Where LPTA is used, the Department needs to define TA appropriately to ensure adequate quality.

That’s better, but still insufficient. LPTA competitions may be attractive bureaucratically, but they should be used rarely for procuring services. If you wonder why, consider picking your daycare provider with that process—“technically acceptable” is probably not a way to buy maintenance, logistics, or intelligence inputs for the troops either. And as Politico notes, it’s already a tough market all around; low-cost Engility’s “2013 sales fell nearly 10 percent from its 2012 revenue.” The emerging danger is that quality providers in the industry will continue to lose money, and after enough time, either downgrade their offerings to compete, or just exit the business. And as Defense One observed yesterday, the Defense Department can hardly stand more difficulty competing its contracts.

So, as spending contracts, the Pentagon has a choice: keep those providers that are cheap, or keep those that are good. Cheap is easy. It’s just not all that good.

James Hasík is a non-resident senior fellow at the Brent Scowcroft Center on International Security.