Making the case for irrational behavior.

• Author: Thompson, Jim
• Position: INDUSTRY PERSPECTIVE

As U.S. defense spending decreases from a gush to a trickle, contractors are desperately competing for market share. Programs are being canceled, curtailed and restructured.

Many companies coming off all-time highs over the last decade now find themselves in a declining market. Some are fighting for shareholder confidence, while others are just fighting for survival.

Meanwhile, customers facing an unchanging list of requirements are under pressure to fulfill them with fewer resources. The result is aggressive action on the part of some contractors, which unsuccessful bidders sometimes deem "irrational" behavior.

But is it irrational?

History is riddled with examples in which uninformed and aggressive bid decisions have led contractors down a risky path that ultimately resulted in failure. However, capture managers and executive leadership are now recognizing that aggressive strategies can be very effective, and therefore appropriate and rational, when driven by the right intelligence. An asymmetric strategy requires a detailed understanding of competitors and customers in order to manage risk. In an environment where everyone is trying to gain an edge, there are some contractors who have successfully played to win.

Sometimes, companies will choose to bid a price that is so much lower than the competition that the customer can't help but award the contract to them. This often results in the company executing the program at a loss for a period of time, but it is typically "made well" at a later date via engineering change orders or operations and sustainment work.

The perception within the capture community is that companies tend to buy in only when there is extreme incentive to win, or no other options for survival. This overlooks recent history, which indicates that the rationale for buying in can be quite compelling from an overall business case perspective.

Take the Air Force's aerial refueling tanker competition. While the Northrop Grumman-EADS team offered a technically superior aircraft at a reasonable price, The Boeing Co. recognized that the production contract was an entry point to a larger and more lucrative role as the sole provider for all services associated with the platform. Boeing used this rationale to bid well below EADS. In this case, Boeing took a calculated risk, which it likely justified with a strong business case based on historical customer behavior. This is a decision that is quite rational.

[ILLUSTRATION OMITTED]

A...