DoD’s Contracting Initiative—How Much Trust is Too Much?
This is the sevenh 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.
In light of United States Transportation Command (USTC) and the Department of Defense (DoD) moving to outsource DoD’s household goods (HHG) moving process to a single contractor, it’s interesting that just last month, the Department of Justice (DoJ) and the Federal Trade Commission (FTC) released a joint statement on their standard of review under the antitrust statutes of proposed transactions within the defense industry (see, https://www.justice.gov/opa/pr/justice-department-federal-trade-commission-issue-joint-statement-preserving-competition).
In their joint release, DoJ and FTC stated “…the overriding goal of the Agencies in enforcing antitrust laws is to maintain competition going forward for the products and services purchased by DoD. Competition ensures that DoD has a variety of sourcing alternatives and the most innovative technology to protect American soldiers, sailors, marines, and air crews, all at the lowest cost for the American taxpayer.”
One might ask how outsourcing DoD HHGs to a single prime contractor ensures that “…DoD has a variety of sourcing alternatives…?” In fact, it does just the opposite. Awarding all DoD HHG requirements and responsibilities to a single contractor over multiple years—potentially up to 7 years—destroys the opportunity for other companies to compete for this business in the future. That single company would manage the movement of over 400,000 shipments per year, dwarfing what any company is currently doing in any other market segment. Coincidentally, one of the largest corporate accounts for the commercial moving market relocates approximately 8,000 employees a year. This customer, like many others with similar volume, utilizes many different van lines and moving companies in an effort to create competition for price and quality. This account is nothing in comparison to the massive DoD volume, but corporate America doesn’t want all its moving eggs in one basket.
Once the prime contractor is in place, with an eventual transportation information technology (IT) solution, it suddenly becomes too big to fail. And with the considerable pain DoD’s Service Members WILL FACE in the first few seasons of this new contract, the DoD will be very hesitant to re-live this pain by awarding a new contract to a different contractor, who will have to develop its own IT solution, forge new relationships worldwide, hire significant new staff, and get spun up to service 400,000 shipments per year. The bottom line is that there is NO safety net if a single contractor fails the relocating service member.
The release further states that, “The unifying theme of the Guidelines is that mergers should not be permitted to create, enhance, or entrench market power or to facilitate its exercise.” And, that a merger can “…produce these harmful outcomes if it is likely to enhance the ability of one or more firms to raise price, lower output, reduce innovation, or otherwise harm customers as a result of diminished competitive constraints or incentives.”
Certainly, once the DoD HHG solution is privatized under a single prime contractor for up to 7 years, that company, who will control 400,000+ shipments under a multi-billion-dollar contract, will certainly be “entrenched” in the market and be able to exercise its market power. The market power of such a company will be more significant than any other single entity involved in HHGs in any market in the moving industry worldwide. At that point, what’s to keep such a goliath from influencing corporate or residential markets? And simply by the nature of its size and control over a significant portion of HHG moves worldwide, even if this contractor does not delve into other markets, they will definitely influence those other markets by the sheer size and volume of HHG moves they control.
The joint DoJ and FTC release summarized their mission as ensuring that “…our military continues to receive the most effective and innovative products at competitive prices over both the short- and long-term, thereby protecting both our troops and our nation’s taxpayers.”
What happens if USTC’s Global Household Goods Contract initiative leads to a contractor who, a few years down the road, discovers that it can no longer provide HHG moving services at the price it bid? Does DoD come to the rescue and provide more money to keep the company afloat? Does it let the contractor fail, stranding a good portion of 400,000 shipments wherever they might be in the world, and let someone else try to clean up the mess? In reality, there simply may not be “someone else” to clean up that size of a mess. Many in the moving and storage industry fear this initiative may force them out of the DoD business, or worse, force them to close their doors altogether.
In meetings with HHG industry leaders, the USTC Commander, GEN Lyons, stated that the ability he has with other major transportation contracts, that he doesn’t have with HHGs, is to sit across the table at the CEO level and have face to face talks with industry leaders to resolve issues in a meaningful way that works for both the DoD and the transportation company. He lamented that in the HHG arena, there are 900 transportation service providers (TSPs), and he can’t have a senior leader to senior leader discussion with 900 companies. This is a reasonable claim on the face of it. But looking at just a few of USTC’s largest transportation contracts, the story isn’t quite so tidy.
The Defense Freight Transportation Service (DFTS) contract is a scaled down model of its predecessor, the Defense Transportation Coordination Initiative (DTCI) contract. DTCI was envisioned to provide multiple efficiencies and cost savings under a single prime contractor that were never realized to the extent expected by the Services, and had to be scaled back as the Services pulled out of the contract. DFTS was awarded to a single contractor. That contractor acts as a third-party logistics company moving domestic surface freight on behalf of USTC, supporting the Defense Logistics Agency (DLA) and the Defense Contract Management Agency (DCMA). At this moment, the Services (Army, Navy, Air Force, and Marines) are not a part of this contract. So, while USTC can sit across the table from the DFTS contractor’s senior leaders and have a face to face conversation, for now that conversation is only about DLA and DCMA cargo…not the Services’ cargo. Additionally, while DLA and DCMA can use the DFTS contract, the contract is not what is called a “requirements contract,” meaning DLA and DCMA are not required to use it, and the contractor isn’t required to service their shipment requirements when it doesn’t make sense for them.
What DLA and DCMA have as a fallback outside the contract, is the Surface Deployment and Distribution Command’s (SDDC) voluntary freight tender program. This program uses approximately 900 TSPs who file voluntary tenders to move domestic surface freight via motor, rail, pipeline, and barge carriers. These TSPs have over 50,000 active voluntary tenders on file. As a result, all of the DoD’s domestic freight requirements are not in the same basket. It actually provides a great deal of flexibility for USTC to be able to offer multiple options to move DoD’s domestic freight. This freight tender program is what moves the majority of the Service’s domestic freight. MG Farmen, SDDC’s commander, commented on this flexibility during the 7 May, 2019 Surface Committee Meeting when the point was made that DFTS moves some freight, but freight is also moved via tenders. MG Farmen stated that it was good to have options when moving DoD’s freight.
When GEN Lyons wants to talk about domestic freight movement requirements to the 900 TSPs in the voluntary tender program, he relies on a Surface Executive Working Group, through which TSPs rotate so they can have a voice; he relies on the National Defense Transportation Association’s (NDTA) Surface Committee and its SDDC and Industry co-chairs; and he or his senior staff have interactions during other industry type interactions like the NDTA Annual Meeting or Transportation Advisory Board (even though all TSPs, even NDTA members, don’t have access to senior leaders via the Transportation Advisory Board).
NDTA doesn’t represent all 900 TSPs in the voluntary freight program, but it provides a fairly representative voice on issues and concerns for those in industry who are active in NDTA. Likewise, the International Association of Movers and the American Moving & Storage Association don’t represent every TSP in the Defense Personal Property Program (although a majority), but they provide a voice to USTC on major issues and concerns in the moving industry, and help get USTC’s message out to their members via various forms of correspondence, and major industry meetings and conferences.
A second large surface freight contract under USTC is the Universal Services Contract (USC). This contract provides for DoD surface movement of international freight via major vessel liner service. While this contract has fewer participants than the 900 or so TSPs who make up SDDC’s voluntary tender program, nearly every major and minor player who can move international freight via a vessel is involved. Additionally, if USTC can’t get a vessel company to move international freight via the standard USC process, it can solicit rates from an even broader list of vessel and barge companies via a “one-time-only” or OTO process. This ability brings additional capacity into the mix to service shipments that the USC cannot get TSPs to bid on.
Furthermore, USTC can use the Military Sealift Command (MSC) to charter commercial vessels as needed, and MSC can activate organic capability from its government owned surge fleet. Again, this isn’t a one-on-one relationship between USTC and a single CEO sitting across the table making things work via a close relationship. It takes nearly 30 companies to make the Universal Services Contract work, along with an MSC partnership with commercial vessels and an organic surge fleet that USTC can fall back on to meet additional demand.
Conversely, if HHG is turned over to a single prime contractor, there is no fall back when the contract doesn’t work, or doesn’t work as intended. There are no voluntary tenders to help supplement what a single contractor is providing; there are no additional TSPs to bring into the process via an OTO process that opens the aperture to additional TSP capacity; and there is no organic lift capability. It all rests with a single contractor.
Is USTC creating a monopoly, or is it relevant here to introduce the term, “monopsony?” In economics, a monopsony is a market structure in which a single buyer substantially controls the market as the major purchaser of goods and services. In such a scenario, where there is one dominant power in the buying relationship, monopsony power is created where one buyer faces little competition and so can set wages and prices for labor or goods it is buying at a lower level than would be the case in a competitive market. This kind of power puts the vendors who tangentially support DoD’s household goods movement at risk, just as the current group of DoD approved TSPs are at risk.
Service Members, TSPs, and the entire DoD household goods moving enterprise are being asked to trust that USTC gets their contract for a single prime contractor structured exactly as needed to improve quality and capacity beyond its current levels. And to trust that the winning bidder can develop the systems, processes, relationships and procedures required to bring additional quality and capacity to properly manage all Service Member household goods moves. This kind of single, outsourced, privatized solution is risky at best, and a potential disaster for the DoD and moving industry alike.