Black defense firms battle for more contracts.

The truth is that the relationship between America's defense establishment and African-American businesses has never been comfortable. From the very beginning, even simple deals had a way of going sour.

Take Joshua Bowen Smith's Civil War contract, for instance. This prosperous black caterer and abolitionist parlayed a friendship with Massachusetts Gov. John Albion Andrew into a $40,000 contract to provision the Bay State's 12th Regiment.

Unfortunately, Smith, a mutoon-chopped Republican who went on to serve two terms in the postwar state legislature, only collected $23,000 owed on the contract and had to sue for the rest. But the Cambridge businessman, who employed scores of fugitive slaves and newly freed men, died before the issue was resolved, leaving his widow deep in debt.

One century after the caterer's death, another black Republican entrepreneur named Joshua Smith continues to wage battles for defense contracts. Although today's Smith has fared much better with the mammoth defense establishment than his 19th century namesake, the founder of Maxima Corp., a $49.82 million systems engineering firm in Bethesda, Md., is concerned that massive cutbacks in military spending will further dampen opportunities for black businesses.

With several lucrative 8(a) noncompetitive small disadvantaged business (SDB) and U.S. Navy contracts under its belt before branching out into civilian government work, Maxima has undergone phenomenal growth over the past decade. Small wonder, then, that Smith is one of the leading proponents of reauthorization of the Department of Defenses's (DoD) 5% set-aside program for SDBs.

"I anticipate new battlefronts in view of the diminishing dollars for the major contractors," says Smith, who as chairman of the presidentially appointed and congressionally mandated U.S Commission on Minority Business Development, has George Bush's ear on black business affairs. "Many defense contractors are dropping major lines, and they'll see less of an advantage in continuing to do business with blacks."

With more than $50 billion in proposed defense cuts over the nest five years, members of America's military-industrial complex have good reason to worry. The drastic reduction in the Pentagon's annual expenditures of $136.7 billion (on prime contracts larger than $25,000) is forcing defense industry giants to rethink their growth strategies for the next decade. Last year, the top five contractors alon--McDonnell Douglas, General Dynamics, General Electric, General Motors and Raytheon--pulled in a staggering $29.3 billion in Pentagon contracts.

But even as the defense industry's worst doom-and-gloom mongers continue to fret about lost revenues, savvy contractors are already negotiating how to make "beating swords into plowshares," another profit center. This may be a good move based on recent findings. According to one report, even dismantling arms facilities and cleaning up defense plants here and abroad could be very lucrative--to the tune of over $400 million under the socalled Congressional Nuclear Threat Reduction Act.

The fact is that no matter how much the Pentagon and its major contractors stand to lose or gain over the next decade, Washington will continues to authorize military spending. And no matter what the final dollar amount, by law SDBs are due their 5%.

With this in mid, former Maryland Rep. Parren Mitchell, founder and now chairman of the Washington, D.C.-based Minority Business Enterprise Legal Defense and Education Fund Inc. (MBELDEF), is adamant that the minority business community must not bact off a single inch from demands for the Pentagon to meet that 5% goal. To use a military analogy, allies are tested in times of war, not in times of peace. Make no mistake, says Mitchell, the fight over a fair share of military contracts for minority firms is political warfare. "If there is a real commitment to minority economic development, you continue to keep to it in the worst of times," he says. "Contractors and public officials should not relinquish their commitment in these tougher times. That's the acid test of their beliefs."

The 5% Acid Test

When U.S. Reps. John Conyers Jr. (D-Mich.) and Gus Savage (D-III.) sponsored the DoD set-aside law, Section 1207 of the Defense Authorization Act that was passed by Congress in 1986, there seemed to be no way of stopping America's huge defense machine. Five years and one spectacular Persian Gulf War victory later, downsizing is the name of the game at the Pentagon. Nevertheless, over 2 million defense-related jobs are destined to disappea nationwide. And in the aftermath of the breakup of the Soviet Union, industry observers and black contractors are concerned that the 5% federally mandated set-aside will never be met.

The law, which was extended in 1990 and is scheduled to expire at the end of 1993, is designed to cover only small disadvantaged businesses (roughly defined as minority businesses with annual revenues of $2 million to $16 million). Not included are prime and subcontract awards to minority firms that do not compete as economically disadvantaged businesses, like Smith's Maxima Corp., a perennial on the BE INDUSTRIAL/SERVICE 100.

Last year, SDBs accounted for 3.5% of all prime contracts worth $4.4 billion with the Defense Department, up nearly $300 million from fiscal year (FY) 1990. Despite the shortfall, DoD is proud of its $1.3 billion growth in SDB contracts since the law went into effect five years ago, says Horace J. Crouch, director of the DoD's Office of Small and Disadvantaged Business Utilization. Although Pentagon spending is facing drastic cuts, Horace insists that DoD is still committed to complying with the law: "Our goal is 5%, and we will continue to work diligently toward that objective," he says. Crouch, who works under Secretary of Defense Richard Cheney, says the DoD "will support legislation to extend the set-aside program."

"We haven't come up with our own initiative to extendt it," Crouch admits, "but we'll support it when it comes up for a vote in Congress."

Nevertheless, industry observers believe that the $5.9 billion in SDB prime awards and subcontracts to the Defense Department in FY'91 could prove to be the highest minority procurement level for years to come. They also warn that the set-aside could go the way of the Cold War and virtually disappear.

Last year's $25 million drop (from 2.9% to 2.7%) in SDB subcontract awards from the major corporate contractors clearly provides fuel for this concern. The lingering bitterness at the defense establishment's failure to reach the 5% goal gets even worse when the subject of the DoD's other set-aside initiatives come up. In fact, the Pentagon exceeded its small business contracting goal of 18.5% in 1991 with $26 billion, or 20.6% going to small businesses (defined as non-minority firms with annual revenues of $2 million to $16 million, depending on the industry). The 2-year women-owned business program resulted in $806 million--1.4% of all subcontracts--being spent in 1991 with women-owned firms, exceeding its 1.2% goal.

Like most SDB contractors, North Charleston, S.C.-based American Development Corp.'s (ADCOR) CEO W. Melvin Brown Jr., believes that there is little or no enforcement of the minority-procurement goals by the DoD. According to the Defense Department Logistics Agency, which monitors contract performance, the most severe penalty for major contractors available--termination of a contract due to default--has never been imposed. "There are no teeth in the regulation," says Brown, whose BE INDUSTRIAL/SERVICE 100 sheet metal fabricating firm pulled in $25 million in 1991. "IT's hardly worth the paper it's written on if every big contractor can get away with a mediocre best-faith effort."

"Out concern is to buid accountability into the law," says MBELDEF"s Mitchell. "The Defense Department says it takes several years to put the program fully in place, but it didn't take a year to plan Desert Storm. As long as you have the current arrangement, the big primes [prime contractors] can get off the hook."

Angered by DoD's inability to enforce its SDB set-aside requirements, Rep. Conyers, the senior member of the Congressional Black Caucus, has vowed to make the federally mandated 5% goal a permanent feature of the defense contracting structure. "Minority businesses are becoming the first casualty of reduced military spendin," says the Detroit Democrat.

According to Conyes, proposals to make the military procurement system more responsive to black economic needs will encounter stiff resistance from the same forces that fought the 1991 Civil Rights Act, which restored certain legal remedies to victims of discrimination chipped away by Supreme Court decisions. "There is a misguided theory that is attempting to pit small businesses against minority businesses," adds Conyers. "Some people mistakenly believe that if you create a goal of 5% for minority businesses, somehow you reduce the amount of contracts for non-minority firms."

A look at Pentagon figures clearly explains why the non-minority business community is worried about the set-aside program. From 1986 to 1991, total defense contract spending dropped nearly $11 billion, while small business prime contracts decreased $1 billion over the same period (despite the uptick last year). On the other hand, SDB dollars increased $3.1 billion in that five-year span.

A Slowdown In The Arms Race

Advocates for set-asides expect the stiffest resistance to increased SDB involvement to come from the major prime contractors that build the ships, tanks, missiles, rockets, jet fighters, radar systems--the hardware that makes up our complex network of national defense. As the nation prepares to be taken off permanent wartime readiness, the top suppliers will most likely struggle to keep their work in-house, limiting subcontracts with small and minority-owned businesses.

Consider the efect on General Dynamics (GD) of losing the Seawolf nuclear submarine project, a $17.5 billion defense behemoth that's gone the way of the Soviet Union, taking with it a good chunk of the 21,500 jobs in GD's Electric Boat Division in Connecticut and Rhode Island. The massive cuts in the attack sub program will leave GD, which received $7.8 billion in Pentagon contracts in 1991, lukewarm to improve on its 4.2% SDB vending record lasy year--nearly twice its 1989 level of 2.2%. GD's $88.7 million of subcontracts to minority firms in 1991 ranked first among all prime contractors producing military hardware.

Regardless of cuts and threats to the DoD set-aside program, GD officials express a firm commitment to their minority vending goals. "We expect to keep on the same course we're on," says Monty W. Dickinson, GD's staff vice president for material. "We have no plans to deemphasize the importance we're placing on this effort. The economic realities of the business climate are obvious in terms of the absolute dollars going to minority businesses. Those dollars will decrease, but that is not to suggest the percentage will decrease."

GD, with a centralized tracking system for minority vending contracts and a 15-point, companywide strategic plan for SDB opportunities, is the exception among the big contractors. Of the top 25 defense primes, only TRW, which received $1.1 billion last year to produce satellite and battlefield communication systems, exceeed the 5% goal-chalking up $27.4 million in SDB awards, or 6.6% of its subcontract total.

TRW,s SDB advocate, Ray Rice, credits his former boss Daniel Goldin, then vice president of TRW's Space Technology Group, for supporting the development of a strong program with clear cut-goals, objectives and incentives for SDB awards. (Goldin has been confirmed to head up the National Aeronautics and Space Administration [NASA]). "To make certain TRW maintain its goals," says Rice, "I review all contract proposals and help department heads match SDBs with potential contractual needs. "Rice is particularly proud of his work with companies such as Input Output Computer Services (IOCS), a $30 million BE INDUSTRIAL/SERVICE 100 firm based in Waltham, Mass. As part of a subcontract agreement, Grumman Corp. will use IOCS to handle its Digital computer system needs.

More typical in its SDB efforts is Litton Industries, a far-lung empire of 12 separate divisions that report independently to the DoD. Litton, headquartered in Beverly Hills, Calif., received $1.6 billion in defense contracts in 1991 for various naval shipbuilding and military electronics programs. Its largest division, Ingalls Shipbuilding in Pascagoula, Miss., spent $3.5 million with SDBs in 1991, less than 1% of its $474 million subcontracting total. Litton officials say its corporate headquarters does not complie companywide SDB vending figures. Set-aside advocates complain that this system reduces accountability and gives company executives "plausible deniability" when reports surface about the firm's low SDB contracting level.

Similar policies prevail a America's largest defense contractor, McDonnell Douglas, which reaped $8.1 billion in Pentagon awards in 1991. Based in St. Louis, the electonics space systems, aircraft and missile manufacturer spen $48 million with SDBs in 1991--only 1.6% of its subcontracting total. That anemic performance, howerver, represents a fourfold increase over its .4% effort in 1987.

Retired Lt. Gem. Arthur Gregg, the former Army deputy chief of staff for logistics and currently executive vice president and chief operating officer with Coastal Industries in Arlington, Va., sees efficient tracking as an essential component of reaching the 5% goal. "I would not say there's a lack of firm direction for the task, but rather there appears to be a lack of firm accountability in achieving the objective," says Gregg.

Nonetheless, there's still plenty of reason for black contractors to worry. One of the defense systems that has surviced recent downsizing is the $9.5 billion F-22 program, an advanced tactical fighter--considered the last major weapons system of the century--being developed by Lockheed. To develop the F-22 prototype, Lockheed has subcontracted $6 billion worth of work over the next six years to Boeing and GD. The contract launguage contains provisions for a minuscule $11 million in subcontracts with minority-owned firms--less than .5%. "This is a graphic example of what's wrong with the set-aside program," says Hank Wilfong, president of the Los Angeles-based National Association of Small Disadvantaged Businesses. "They've just totally obliterated the %5 goal."

The DoD's Crouch, acknowledging the complaints over the F-22's low SDB plan, says the Pentagon intends to as Lockheed to beef up its numbers. "We're going back to Lockheed and telling them they have to do better," he says. "Lockheed has got to do better because they're goin to get a lot of money over the next few years."

But how effective can the 5% program be when the DoD signs off on a SDB utilization plan that falls more than 90% below its legislatively mandated contract goal? And if the Pentagon can demand changes after the contract is signed, why can't it apply the necessary pressure earlier on in the process? DoD experts repeatedly emphasize that in the development of new systems, few minority-owned companies can be found to meet the exacting specifications of complex weapons systems and their supporting electronics.

"Defense contractors give us all kinds of reasons why it hasn't complied with the law," Wilfong asserts. "They say they can't find us. When we find them, they wonder if we're qualified. When we're qualified, they lament the fact that we didn't get in a at the start of the job. Then they sincerely promise to include us, 'next time,' or in the next proposal.'"

Defense Contractors Take A Hard Look Inside

Finally, complaints like Wilfong's may no longer be falling on deaf ears. Last December, 60 aerospace industry executives held a best practices forum in Washington, D.C., to discuss ways to increase subcontract awards to SDBs. Sponsored by the Aerospace Industries Association (AIA), successfu SDB program administrators stressed that CEO support was critical to a proram's success. (AIA member companies report an increase in SDB aerospace subcontracting awards from 1.9% in FY'88 to 3.2% in the first three quarters of 1991.)

Other recommendations included: giving minority program managers access to top management; getting more departments involved in the SDB contracting process; tying SDB goals to performance reviews; and improving communication and techniques to measure progress. One particularly controversial problem centered on the fact that very few SDB contractors are employed in exremely lucrative, high-tech developmental work. In fact, according to Pentagon officials, the awarding of the F-22 contract in the last quarter of FY'91 was responsible for the $25 billion drop in SDB subcontract awards last year. That's because SDB participation generally increases after a weapons system goes from the development stage into full production, say DoD procurement specialists.

Carl E. James, president of Cal-Tron Systems Inc., in Carson, Calif., finds that argument frustrating. Pentagon-approved contract language that largely excludes outside firms from playing a critical role in the developmental stage of a major defense system means SDBs are limited to support work, such as providing fuel oil or repairs, says the 55-year-old engineer.

"The high-tech work in the early phase is where the big money is," says James, whose company has manufactured electronics equipment for the TOW and Hawk missiles and test equipment for the Navy's on-board electronics repair systems. "Our company has the technical expertise to develop and build parts of radar systems, but we are generally limited to the more mundane area of backup and support equipment. If the major primes did a better job of allocating the work, giving SDBs a better shot at the developmental stages of production, they could reach their goals."

"He's absolutely right," says one industry insider who asked not to be named. "SDBs will never get a larger share of the fighter contracts until their works gets in the cockpit."

Cal-Tron, launched in 1982, earned $2.9 million last year on contracts with some of the biggest names in the defense industry--Hughes, Lockheed and TRW--and employed about 30 workers in its engineering and production departments. Certified as a Small Business Administration 8(a) firm, Cal-Tron does about 20% of its work through the program, which allows James to receive non-competitive awards from military and civilian agencies. Cal-Tron has another five years of eligibility in the program, but is already looking to reduce its 8(a) contracts.

Of the $4.4 billion in prime defense contracts that went to SDBs in 1991, nearly half--$2.1 billion--were in the 8(a) column. Firms that fail to prepare for graduation from the 8(a) program by expanding their competitive contract base are quickly headed for extinction.

In response to complaints from the SDB community, the Defense Department introduced Section 831 of the National Defense Authorization Act, an initiative (the legislation for which became effective last year) designed to create a nurturing relationship between major prime contractors and minority suppliers. The four-year pilot Mentor-Protege Program, established by Congress last October under prodding from U.S. Senate Armed Services Committee Chairman Sam Nunn (D-Ga.), reimburses major contractors for providing technical assistance to SDBs in such areas as business management and engineering. The Mentor-Protege Program should enable SDBs to devlop and manufacture first-use hardware found in a variety of defense equipment and aircraft. Otherwise, says one procurement specialist, SDBs will remain stuck on the ground, relegated to providing supply and support work. So far, six mentor-protege agreements have received Pentagon approval, with eight others pending. One of the protege hopefuls is Cal-Tron, which is currently being courted by Lockheed, Rockwell and TRW.

Contracting In A Peace Time Economy

As one of the DoD's leading SDB prime contractors, James I. Chatman, CEO, founder and president of Technology Applications Inc. (TAI), located in Alexandria, Va., isn't looking at the Mentor-Protege Program as a way to grow his company. His complaint is that military agencies routinely shortchange minority businesses by refusing to transfer contracts from the 8(a) arena to the competitive bidding process in order to give graduating firms a shot at the contracts they held while in the program.

TAI, a BE INDUSTRIAL/SERVICE 100 firm that rang up $64.64 million in sales in 1991, developed several large 8(a) computer integration projects with the Navy, but found itself locked out after graduation. "That's Navy policy," says Chatman. "Once [a project] is in the 8(a) program it stays in." In one instance, TAI got a crack at one of its old 8(a) contracts--a $28 million contract to modernize the Army's strategic command and control computer system--but did not win the award in the competitive bidding arena.

Despite massive defense cuts coming down the road, Chatman considers his firm well-positioned to maintain its high level among SDB prime contractors. Ranked No. 9 by the Pentagon among SDB firms, with $34.9 million in DoD prime awards, TAI's expertise in high-performance computer operations will be in constant demand. "The big cuts are in the hardware area--weapons systems, ships, tanks and airplanes," says Chatman. "We don't anticipate huge cuts in our area, but we do anticipate some disruptions. We're also trying to increase our share of contracts with the civilian agencies."

ADCOR's Melvin Brown is also heeding the call to divert national resources from guns to butter. "Wen the defense budget started to get cut back, I decided to branch out into other areas," says Brown. At one time ADCOR amployed 380 workers to build water and gas tankers for the Army. Now slimmed down to 180 employees, ADCOR currently has a $25 million contract to build carts for the U.S. Postal Service.

"I used to be 100% DoD-related. Now I'm down to 60%. You've got to change with the times."