Skunk Works

To put the paperwork blitz in perspective: there are currently operative throughout the Defense Department, acquisition regulations that reportedly could fill an entire shelf of 300-page books, in addition to 50,000 individual specifications, 12,000 contract clauses for specific components, 1,200 department directives, and 500 separate procurement regulations.

Paperwork should be limited to what the government most needs to keep tabs on. And I cannot deny that over the years the defense industry has had more than its share of cost overruns, bribery scandals, and other serious transgressions, which proves the need for intense scrutiny. In many ways, though, our sullied reputation was somewhat unearned because cost overruns in our industry were seldom more than 20 percent, while in other industries operating entirely by private financing, big-project overruns of 30 percent or even higher are not uncommon.

Nevertheless, excessive government regulation is the penalty we now pay for years of overpromising and lax management in aerospace. At the heart of the defense industry problem was a recognition that if we bid unrealistically low to get a project, the government would willingly make up the difference down the line by supplying additional funding to meet increasing production costs. And it would do so without penalties.

Now if there are serious cost overruns, whether caused by unexpected inflationary spirals or even “no fault” acts of God, the company is liable to pay for it all or fix any mistakes from its own pocket. The era of the fixed-price contract rules supreme. As for major cost overruns, it is impossible to really surprise the government by suddenly revealing out-of-control expenses because every production line is swarming with government bean counters and inspectors keeping close tabs every step of the way.

Back in 1958, we in the Skunk Works built the first Jetstar, a two-engine corporate jet that flew at .7 Mach and forty thousand feet. We did the job in eight months using fifty-five engineers. In the late 1960s the Navy came to us to design and build a carrier-based sub-hunter, the S-3, which would fly also at .7 Mach and forty thousand feet. Same flight requirements as the Jetstar, but this project took us twenty-seven months to complete. One hint as to the reasons why: at the mock-up conference for the Jetstar—which is where the final full-scale model made of wood gets its last once-over before production—we had six people on hand. For the S-3 mock-up the Navy sent three hundred people. S-3 may have been a more complex airplane than Jetstar, but not thirty times so. But we were forced to do things the Navy Way.

In more recent years the government seemed determined to lower procurement costs through rigorous competition. One curious idea developed by Ronald Reagan’s secretary of the Navy, John Lehman, and adapted by the Air Force and other service branches as well, was something called leader-follower competition. The rule of this game was that the winner of a competitive bidding competition had to turn over his winning design to the loser. The loser would then learn how to build the winner’s product, and by the third year of production the loser would be allowed to bid on the project against the winner. For example, several years ago Hughes won the competition for an advanced medium-range attack missile against Raytheon, builder of the Patriot missile. The government bought four thousand of these missiles annually. The first year Hughes got the entire order. The second year, Raytheon, which had studied Hughes’s winning design, got an order to build one thousand while Hughes dropped to three thousand. By the third year, the government opened up the bidding to full competition and Raytheon won a majority of the buy. They were able to put in a lower bid because they had no initial research and development costs to factor into the price and they took over 60 percent of that missile’s production.

The leader-follower concept was an absolute outrage and a debacle. Fortunately, the Pentagon has since abandoned the idea, after admitting that there had to be fairer ways to lower costs, stimulate competition, and spread around new business among winners and losers.

In the so-called New World Order, defense-related procurements will undoubtedly continue to sharply decline into the foreseeable future, rendering the mountains of regulations and the battalions of inspectors and auditors irrelevant. Obviously, we will need continual defense spending and new technologies for as long as the world remains dangerously unstable. But now more than ever, I believe, the Pentagon and industry need to adapt the kinds of specialized management practices that have evolved out of the Skunk Works experience over the past half century.