OCI Rules Lead Lockheed To Separate Engineering Services Unit

by: Matthew Potter
June 7, 2010

Category: Business Line, Companies, Congress, Department of Defense, Events, Federal Budget Process, IT, Lockheed Martin, logistics, northrop grumman, Northrop Grumman Corp., production program, Restructuring, Services, SETA, training, U.S. Air Force | RSS 2.0

Over the last twenty-five years the SETA support business has become a major component of defense contracting. Scientific, Engineering, Technical and Analytical services work inside military acquisition, testing and other support organizations to aid them in their missions. The decline in the size of the DoD civilian work force and the increasing complexity of weapon acquisition has led to increases in the demand for their services. Often they are former military or civil servants who provide knowledge and skills immediately for the government. Because of this growth area many larger defense contractors either established SETA divisions or acquired companies to get business.

The Obama Administration as part of its reforms led by Secretary of Defense Robert Gates is moving to reduce the SETA contribution to defense work. They are doing this through two ways. First they are increasing the number of government positions by “insourcing” contractor positions to government slots. They are also tightening the Organizational Conflict of Interest (OCI) rules to prevent a company’s SETA personnel having a role in the decision to award its hardware side a contract. While contractors are unable to make decisions for the government they often support contract awards by doing evaluations and analysis of competing bids. Normally a company will “firewall” the two different business units so that conflict cannot occur but the changes over the last two years have required more than just that.

Northrop Grumman (NOC) was the first major defense contractor to react to this situation by selling their SETA unit, TASC. They were concerned because TASC provided support to Air Force satellite procurement offices and those were requiring Northrop to sign documents to prevent OCI that were felt to limit Northrop’s opportunities to bid. TASC was sold to a private equity firm and became a stand alone company.

Now Lockheed Martin (LM) has decided to separate their engineering support division as well. The Enterprise Integration Group (EIG) will be divested as it primarily does system integration and engineering services to the Government. This is a small part of Lockheed’s total business but still it is revenue and the company felt with the new OCI rules that the unit’s growth potential was not there.

SETA contracts were attractive as they only required a company to provide personnel. Often the contractors worked in government offices so the company did not even need to supply facilities or support equipment and services as well. With the two decisions to tighten OCI and reduce the number of contractors overall the business will probably decline in the near future. This means that there will be contraction in the number of companies providing these services and a refocus by the big contractors on making and providing the government hardware.

Photo from moriza’s flickr photostream.

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