The Risks of a Monopoly Managing the DOD Personal Property Program
This is the first in a series of op-eds that IAM is running to shed additional light on problems associated with privatizing the household goods program to a single source contractor.
The current DoD moving program is supported by over 900 TSPs (Transportation Service Providers) that provide varying levels of capacity to the DoD. Some companies own more than one TSP as a way to ensure they can have some work year-round and not just during the peak season. TSPs often partner together, under a management company, to create networks that provide additional capacity to the DoD. In some way they operate similarly to van lines, but specifically handle military business. These networks, both formal and informal, are greater than the sum of their parts because they allow for efficiencies to exist which can move traffic. For example, a single TSP might be offered a shipment from San Diego to Norfolk, but by being a partner with other movers, they can tap in to that network to ensure they can get their truck back from Norfolk.
Even outside of the formal managed networks, nearly every TSP has a hauling agreement with every other TSP to provide hauling capacity in the event that either TSP has an open spot on a truck or a shipment that needs picked up. Those hauling agreements extend to companies that aren’t approved TSPs and that allows the DoD to have access to essentially every bit of capacity in the industry.
Industry has responded to the current business rules by building out these networks. The result has been an arrangement of capacity providers, some big and some small, that provide all of the lift to the DoD. While DoD has indicated that they want more capacity and the ability to provide a higher level of quality during periods of peak capacity, it’s apparent that DoD doesn’t understand how the current structure is set up; therefore, it doesn’t understand how the proposed change to a single source contractor creates risks that the DoD doesn’t need to create in order to get what it needs out of the program and retain the ability to tap into the combined capacity of the entire moving world.
In addition to breaking up some of these networks that are already providing very high levels of customer satisfaction, there are other risks created by a privatized contract to a single source.
There isn’t any back up.
In the current program, if any single TSP or management company were to cease operations, for any reason, the remaining hundreds of TSPs are better suited to absorb the loss of that capacity with very little effort or strain to the system. There is an incredible resiliency built into the current program.
In a single-source privatized program, if anything happens to the primary contractor, there will not be any network left to coordinate the capacity. Some of the largest companies in the world have gone bankrupt or got into legal trouble. With no back up or other TSPs to carry the load, customers would suffer significantly and all moves would have to be secured via the PPM process.
Additionally, since the prime contractor owns the custom software, no other company will have the necessary IT systems to manage the shipments or interact with government IT and financial systems.
A single company with all of the moving data presents unique security risks that may not have been considered.
Allowing all personally identifiable information to be housed by one contractor, potentially a foreign owned company, allows for a complete picture of where all of our troops are and what their rotation schedule is. Further, it seems obvious that the most vulnerable time for the U.S. to suffer an attack would be when the maximum number of military members and civilians are in transit. Additionally, specific intentional disruptions to the network based on data being compromised could create new areas of vulnerability.
Awarding all of the DoD shipments to a single-source contractor can provide the opportunity to the entity to exert monopoly power in at least three different ways.
First, since the IT system and all of the unique professional functions (counseling, entitlements, network relationships, etc.) will be handled by the contractor, during subsequent contract transition periods, any potential new bidder will have to build the cost of developing those functions, which are specific and unique to the DoD, into their bid. As a result, the incumbent will have an insurmountable advantage against any new bidder’s price. That will put the DoD at a significant disadvantage.
Second, the winner will be able to exert monopoly power over the small businesses in the rural parts of the country where much of the military moving occurs. The moving companies in those markets don’t have a lot of opportunities to diversify their businesses. Since the prime contractor will have all of the business, they will be in a position to push that agent down into a subservient role.
Even if the performance incentives offered by USTC are effective, there is a point where satisfaction will level out. A business with 100% of the market will look to reduce costs on the backs of the service providers at the curbside. There is a belief in USTC that the prime contractor will be able to grow capacity by creating incentives. That begs the question, can you provide any example of a profit-seeking enterprise with 100% market share, that elects to give up some profit for the good of its vendors? That doesn’t sound like a formula to grow capacity.
Third, if the contractor is part of a joint venture that has ties to a large entity already in the moving business, there will certainly be opportunities for the abuse of monopoly power in the market place. An already large provider that is given 20% of the domestic market will be able to provide predatory pricing to other accounts, thereby pushing out competitors and increasing its market dominance.
Allowing 900 TSPs to compete as prime contractors, and awarding good service with more business opportunities, sounds like a solution which champions competition.
The DoD, while it may want more capacity, does have a known quantity of capacity in the current program. The idea of outsourcing to a single contractor will remove connections in place between the TSPs and the managed TSPs, which creates risk—especially in the first year of the program and in the years leading up to the complete takeover of the program by the single-source contractor.
The new contractor, especially in year one, won’t know which providers in which markets provide quality work. It won’t know which providers prefer to haul shipments, and in which channels. As a result, the existing capacity infrastructure is at risk while the new contractor tries to build out the capacity.
USTC doesn’t understand how its capacity works; it is recommending a program that doesn’t take into account how the industry functions and it creates significant risks. These risks can be avoided, and the desired increases to capacity and quality can best be obtained, by providing targeted changes to the current program.