Information Systems (IS) Offshoring in the United States Department of Defense Service Contracting Industry

Information Systems (IS) Offshoring in the United States
      Department of Defense Service Contracting Industry:
            Obstacles to Successful Implementation
In the greatest Country with the greatest military there is little reason for a population to
feel threatened, that is, until you enable that military with technology and network
connectivity. These new capabilities which are designed to enable the military, are now
subjecting it to new threats that are not easily destroyed, targeted, or even found at times.
If our military remains strictly “volunteer” and continues to administer a multiple choice
test (not even on a computer at times) to determine the best job for the new recruit, how
can we expect them to defend a whole new generation of cyber-attacks and network
threats? The answer is simple. You hire a Defense contractor to teach them how to do
their job better, faster, and with more computing horsepower than a machine gun has
bullets. So who are these contractors that serve the military as a de facto arm of the
Department of Defense (DOD)? Some are former military members who, having served
their country and acquired certain military colloquialisms and well deserved respect,
return to the DOD to make a new living wearing slacks and a collar shirt. Others are
patriotic young men and women who have not served in the military but bring critical
skills like engineering, computer programming, and in some cases significant experience
from the corporate world. And who blames them, the United States (U.S.) Defense sector
of business has fared well in the age of the Information Technology (IT) business roller
coaster. In 1991, following the Gulf War, the ratio of defense contractors to military was
1:50. By 1999, when American military forces were supporting the liberation of Bosnia-
Hezegovina, the ratio was 1:10. 1 Today with the United States military serving in
numerous locations around the world the sight of contractors close to the conflict is not
unusual. With a stretched Defense budget and less inherent technical expertise in the
existing military the need for the defense contractor is greater than ever.
These technical lags have provided the Defense industry significant growth opportunities.
The field has seen a range of entities from corporate giants to entry level small
businesses. Most in the business refer to the top Defense contracting corporations as the
big six (Lockheed Martin, Boeing, Northrup Grumman, Raytheon, General Dynamics,
and SAIC). These firms have reached levels of development that require significant
support from outside vendors to keep their production costs down and the revenues up.
But what additional concerns come with the United States Department of Defense as your
customer. Sure there are people trying to profit from phishing scams, and others who
want to make an ideological statement, but what happens when someone is trying to
infiltrate and attain sensitive classified military reports and vulnerabilities. We are not
dealing with stolen credit card numbers. The U.S. Government places requirements on
Defense contractors to validate their internal workforce and prevent them from holding
authority over Government civilians and military members. But if a contractor has access
to classified information and his social security number is compromised, the United
States as a whole is at greater risk if the offender wants to leverage information from the
individual. Ruining a person’s life in cyberspace is possible, but it could be considered
trivial when compared to a much more devastating loss of life in the physical world, or

on the battlefield. This paper will investigate the barriers to the defense contracting
industry in context of Information Systems (IS) offshoring.

The Defense Contracting Industry

History has shown a number of times that information capital can be measurably
successful in both tangible and intangible benefits. One of the most obvious examples is
the development of the Atomic bomb during World War II. This effort that was referred
to as the “Manhattan Project” was an effort that used both U.S. Government scientists
and experts from academics and the energy industry to create a weapon for the DOD who
would employ it on behalf of the United States. Knowing the toll that the War had
already taken on Europe and the eventual impact it would have on the U.S. the policy of
keeping all the development inside the Government was found to be flawed. The time
commitments and expertise could not be brought together within an accepted timeframe.
The outsourcing of nuclear physicists from industry and academia was required. History
shows that with the right motivation and a unified goal the “Manhattan Project” was
successful. This marked one of the first ventures of the DOD into the outsourcing arena.
The trend would continue as evidence from the U.S. Government’s A-76 circular that
was released as policy in 1955. President Eisenhower’s approach to outsourcing was a
glaring change to what had previously always been inherently Government work.
Essentially it stated that where the private sector could do a Government job, it should do
the job. The policy was based on the market competition theory and specifically stated
that “the Federal government will not start or carry on any commercial activity to provide
a service or product for its own use if such a product or service can be procured from
private enterprise through ordinary business channels.” The government would only
make an exception when the public interest as a whole was at stake such as in national
security matters. 2 The last part of this statement gave weight to one of the first barriers to
offshoring Government work from the DOD to Defense contractors and beyond, which
still has application today.
Since the DOD has requirements to develop applications and systems to support specific
instances of classified projects it requires a team of developers and managers that all
possess Government clearances. This restricts the ability of corporations to offshore their
development. Additionally the corporations that do use outside support for certain
services must have firewalls in place to ensure that employees are not unnecessarily
exposed to public scrutiny or exploitation which may compromise the program that the
employee is working on. Additionally networks must be segregated so that there is not
cross-over. Often times the contractor will come to the Government facility (on a
military base or other secured location) to access the classified networks behind approved
levels of security. This required institutional security is still in place today and new
businesses to the defense industry are required to apply for the applicable Federal
clearances. This usually requires the sponsorship of an existing company that holds the
required clearance levels. In this case the barrier is built by the corporations that desire to
remain the sole source of the Government’s Defense work. If the company does not have
the required expertise to provide what the DOD requests it will internally build the
capability rather than open the door to new enterprises that will increase the market
competition. In order for this same paradigm to be placed on military units working

overseas, the defense contractor is required to be transported from the United States to
the distant location rather than using the local population. The military rarely procures
technical expertise from local sources in order to preserve the integrity of the operations.
Defense contractors are therefore restricted in cases of offshoring (although this may be
defined as outsourcing in the foreign country).
Outsourcing in the defense industry is not unheard of. Electronic Data Systems (EDS),
purchased by Hewlett-Packard (HP), is probably one of the biggest defense contractors
that do the least amount of hands on work. They are extremely adept at representing the
U.S. Government to small and disadvantaged businesses that are trying to break into the
industry. Therefore EDS provides a sponsorship into the industry and then sub-contracts
the work to the business. As the small business grows it is required to pay a percentage
of all of its profits to EDS, who is in turn making money by acting as a middleman. This
makes EDS an outsourcing leader, but also exposes it to more risk since it requires the
sub-contractors to comply with the Government regulations. EDS insulates itself by
scrutinizing the contracts and building strong legal grounds if a sub-contractor fails to
uphold the DOD security requirements. Can a Defense contractor adequately provide the
DOD with the right service in a sub-contract? Does sub-contracting create the same
concern that Offshoring would? Understanding the nuances in these external solicitations
provides the answers. The concept of outsourcing is defined by Jane Linder of Accenture
as follows: Outsourcing means purchasing ongoing services from an outside company
that a company currently provides, or most organizations normally provide, for
themselves. 3 In the EDS case, there is specific knowledge that is held by the company in
order to lead a team of sub-contractors; however EDS has done little innovation and
measures their success in the services industry. For a standard blue-chip defense
contractor that produces military products and also sells services, there are a lot of
reasons not to outsource. When considering that most defense contractors cannot
outsource fabrication and production one of the few areas left to improve is Information
Systems (IS). The range of services in the IS sector are vast and choosing the right ones
to retain in-house may make a difference in the bottom line. Consequences of IS
outsourcing include the threat of losing technical expertise in the IS realm as all in-house
functions will be moved out, as well as any leverage related to specific project or systems
information when the IS outsourcing contract is due for renewal. Additionally the threat
of losing confidentiality is a significant concern for most senior executives who oversee
IS outsourcing solutions. Finally the fear of being held under the financial obligations of
hidden costs for licenses, maintenance, equipment, software and other fees make
outsourcing perilous for some decision makers. 4 These threats are equally consequential
for the offshoring paradigm. For the production of military wares there is typically only
one customer and he will pay top dollar for an on-time delivery of a new capability that
will provide an advantage over the adversary. The defense contractor thereby gains
specific experience that cannot be matched by other firms. The areas of the business’s
operation that provide its unique competitive differentiation – the areas where none of its
competitors nor the external marketplace of providers can deliver superior results – are its
core competencies. 5 These core competencies lead to innovative technologies providing
a decisive advantage to the military. This in turn allows the U.S. Government to
maneuver on the International stage with much more flexibility. So the threat of
jeopardizing security on a military technology project due to a leak in the IS realm is

significant enough to lead these defense contractors to retain most of the services in-
house. This barrier probably remains one of the most significant to outsourcing in the
industry.

Barriers to Effective Offshoring

Security is not a living entity. It leads to one of the primary concerns in offshoring IS in
the defense industry; the people who are supposed to uphold that security. As was
previously mentioned the companies that exist within the circle of cleared vendors make
it difficult for new businesses to enter at the same level with the same product. Specific
knowledge or background in the U.S. Defense industry is largely based on a small pool of
prior military servicemembers. The processes that might be outsourced are not
necessarily military in nature, but the development of commercial off the shelf (COTS)
applications for military use are typically required to undergo a transformation in order to
be useful in a military context. This means that in the systems engineering process there
must be a military member that can lend value to the end product. Therefore the ability
to efficiently outsource must be either military independent and still useful or include a
former or current military oversight aspect. However the military mindset has typically
been to retain the interest of the U.S. Government by providing goods and services that
cannot be procured in the open market. At times this has led the government to contract
with a vendor and require new levels of efficiency and lower costs. The defense industry
has begun to investigate (as the commercial sector has already been transforming) new
outsourcing initiatives. In a 2003 Accenture survey of senior U.S. executives, 54 percent
of respondents agree or strongly agree that outsourcing is one way the organization can
implement dramatic changes effectively. 6 There are not always the same constraints
placed on the small contractor companies that are privately owned, but the “big six”
corporations are all owned publicly and therefore have to show investors that the proper
attention to lowering costs and increasing profits is being given. In a 2002 survey
conducted by the Economist Intelligence Unit, 225 executives around the world said their
companies will need a radical change to remain competitive in their industries. 7 In the
defense industry when a corporation suffers a failure large enough to be reported outside
of a Senate oversight hearing, there has been an egregious error, meaning that the risk of
failure in the industry is somewhat graver than in the commercial business industry. To
say that the defense industry puts significant weight into reputations is an understatement.
When the defense corporations expose themselves to risk their customer is not as
forgiving when a failure occurs. IS outsourcing failures have been documented in
numerous reports including:
      A 2003 report published by IT research and consulting company Gartner reported
         that one-half of all outsourcing deals are labeled “failures” by decision-making
         executives because the results do not meet expectations. 8
      A 2003 survey by UK-based PA Consulting Group found that 66 percent of the
         benefits anticipated from outsourcing were only partially realized. 9
      A 2000 study by Dunn & Bradstreet found that 25 percent of the functional areas
         within the 2,200 companies surveyed had prematurely terminated at least one
         outsourcing contract during the preceding two years. 10

This naturally leads to less dynamic executive management and less flexibility in the
middle-manager ranks of the Defense corporation. This leads to the next barrier to
offshoring which is the U.S. Government’s risk tolerance level. The barrier doesn’t
immediately open new avenues to market competition, but the Government has in the
past kept a smaller less well managed firm in business just to retain market competition.
As the United States diplomatically uses engagement is there a possibility that foreign
allies may be able to start providing services to U.S. defense firms? Business Process
Offshoring (BPO) is already occurring in India as a significant number of U.S. firms
export their low-end back office IT requirements. For a defense contractor if he
adequately separates the cost-savings from the security minded processes then there may
be a good reason to offshore. The Government then is forced to make the decision of
paying less to the contractor as he passes savings on or deny the contractor from
offshoring and increasing the cost to the Government and ultimately the taxpayer. The
only insulation that the Government has from cost fluctuations is a contract. This is
another barrier to effective IS offshoring. Since all the work that is completed for the
U.S. Government is always in a contract form, there is little negotiating of the rates,
deliverables and teaming arrangements. The companies that contract with the
Government are forced to make concessions that may affect their ability to generate
profit. Contracts that the Defense industry award are usually for long periods of time
(three to five years) which tends to work against the corporation that is awarded the work.
One of the reasons that longer awards are tougher to profit from is because there is little
that management can do once the pay, profit, and allowed expenses are written.
Although most would assume this is a situation where outsourcing work would fall in
favor of the company, it actually would tend to work against the Defense industry
contractors. Some Defense contractors have been awarded contracts that call for a
specific deliverable when they are unable to provide it, they have to arrange with another
contractor who can. Limitations on who is able to do the work fall back into the category
of security. The barrier can be overcome, by arranging contractual teams, but the
Government has the ability to award the contract to more than one provider. This means
that two companies may be awarded the opportunity to complete the work, but if
Company 1 can do the job better than Company 2 the individual delivery orders may be
paid only to Company 1. This would have the same implications with respect to security
concerns. The Government may find that a particular company is not adhering to the
security concerns required, even though an offshoring decision may save money. Since
IS has become one of the most popular areas to outsource, many companies in an array of
businesses have investigated the option. For the Defense industry, offshoring represents
a significant break from the norm. The post September 11, world is much more sensitive
to a loosening of military advantage. In the coming years there may be even more
warfare waged in the networked world. Therefore Defense corporations that have
significant IS contracts will tend to keep their outsourcing decisions close to their chest,
even as the Government is holding the contractors at arms length.

Conclusions

In their article “A Two-Level Investigation of Information Systems”, Nam, Rajagopalan,
Rao, and Chaudhury print in large typeface, “Firms in which the IS Department has a

high degree of power tend to use outside vendors for limited purposes”. This is a
statement that speaks volumes about the Defense industry. Every one of the big six
Defense corporations have some sort of outsourcing, but the extent is very limited and
definitely firewalled from their “core” business areas. What can a corporation with such
stringent management do except pass direct costs on to the customer because the
customer has placed limitations and thresholds on the way the company can do business?
The types of barriers include personal or physical security, a limited set of developers
that can adequately integrate the technology with military members and lastly the
difficulty of winning and succeeding within a written contract. One of two things will
have to take place in order to alleviate the difficulties. Either the military will need to
reduce the number of personnel that are currently serving and being paid and take the
surplus of funds for application to another lengthy contract for guaranteed work. Or the
military will need to start recruiting better candidates that can learn faster and accomplish
more with fewer resources. Either way the American public will be secured. The
consensus is usually that as long as no one comes into our area and starts threatening, or
worse, killing us, we can leave the military alone and they will find a way to make us feel
safe. Once the world has become a fully networked and connected global society, the
question may be whether the military will still be able to protect us. The answer, though
not certain may be even more cloudy if half of the tactical operations that can be
completed are outsourced to companies that specialize in things not really relevant or
worse who require support from foreign entities.
1
 www.AmericanVoice2004.org, “The American Voice 2004: A Pocket Guide to Issues
and Allegations (Issues and Allegations: Military Privitization)”, November 07, 2006.
2
 Kettl, Donald F., Sharing Power: Public Governance and Private Markets, The
Brookings Institution, 1993.
3
 Linder, Jane C., Outsourcing for Radical Change: A Bold Approach to Enterprise
Transformation, Accenture LLP, 2004.
4
 Lacity, Mary C., Hirschheim, Rudy, Information Systems Outsourcing: Myths
Metaphors and Realities, John Wiley & Sons Ltd., 1993.
5
  Corbett, Michael F., The Outsourcing Revolution: Why it Makes Sense and How to do
it Right, Dearborn Trade Publishing, 2004.
6
 Linder, Jane C., Outsourcing for Radical Change: A Bold Approach to Enterprise
Transformation, Accenture LLP, 2004.
7
    Ibid
8
 Keiser, Gregg, “Gartner Says Half of Outsourcing Projects Fail,” http://www.crn.com,
March 3, 2003.
9
 “IT Outsourcing: Mindset Switch Needed to Improve Satisfaction with Supplier
Relationships,” PA Consulting Group, http://www.paconsulting.com, March 3, 2003.

10
  Ozanne, Mark R., “The Barometer of Global Outsourcing,” The Outsourcing Research
Council, New York, NY, September 14, 2000.