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FCW : January and February 2017
A recent article in Fortune titled “The Great Rocket Race” details the fever- ish efforts underway by the United Space Alliance, a decade-old joint ven- ture between Boeing and Lockheed Martin that launches space satellites for NASA, to cut its price per launch by half to compete with the prices charged by SpaceX. NASA has made it clear that going with SpaceX — the rocket launch company founded by Elon Musk of Tesla fame — is a viable alternative and has already awarded the firm some contracts. SpaceX is also com- peting for Defense Department work launching military satellites. The United Space Alliance “cannot survive,” the article states, if it doesn’t find a way to compete in the new environment. I had, of course, heard of SpaceX before reading the article, and I was vaguely aware that the firm was launching satellites at much lower prices than what NASA has been pay- ing. But the article made a big impres- sion on me — albeit mostly related to my interest in federal IT rather than space. In terms of how we have typically contracted for IT development in the government, there are real similari- ties with the United Space Alliance. When developing a new system, we typically run a competition, and then the government and the contractor enter into a post-award sole-source arrangement. The systems themselves are generally developed in a cost-reim- bursement environment. For a long time, many observers have believed that the incentive struc- ture in this kind of arrangement is not designed to keep costs down or innovation up. After all, there is no post-award competition for the busi- ness, and payments to the contractor increase as the incurred costs climb. Yet although it is logical to assume that the direction of these effects is to raise costs and lower innovation, it is hard to estimate how large those effects are. A 5 percent penalty? Fif- teen percent? Higher? What struck me in reading the For- tune piece is that it pointed to a smok- ing gun for the magnitude of these negative effects, at least for satellite launches. That’s because we can actually compare the price for satellites under a traditional contracting arrangement versus one in which SpaceX provides competition and also charges the gov- ernment a fixed price. SpaceX costs half the price of the United Space Alliance. I suspect many readers will react as I do: That’s a big difference. The effects of such poor contracting arrangements are not trivial. Ashlee Vance’s biography of Musk provides tantalizing hints of how SpaceX has done this and gives read- ers a good sense of the cultural chasm between the United Space Alliance’s cost-reimbursement, low-compe- tition world and SpaceX’s hyper- active, relentlessly cost-conscious world. “I don’t know what these guys do with their money,” a senior SpaceX executive said of the United Space Alliance in Vance’s book. “They are smoking it. I just don’t know.” Vance also quotes an engineer who came to SpaceX from defense con- tractor TRW, “where he’d been used to various internal policies blocking him from doing work.” “I called it the country club,” the contractor told the author. “Nobody did anything.” Such employees, Vance writes, “were used to traditional aerospace companies that had huge, multiyear government contracts and no day-to- day survival pressure” the way Musk’s startup, which had a near-death expe- rience during the 2008 Great Reces- sion, did. At SpaceX, they built many items for the rockets from off-the- BY STEVE KELMAN The competition for cost-effective satellite launches holds a lesson — and a warning — for federal IT acquisition A smoking gun for government contracting TheLectern 32 January/February 2017 FCW.COM SPACEX.COM 0217fcw_032-033.indd 32 1/24/17 9:48 AM
November and December 2016