Defense Department To Review Conflict Of Interest Rules Too Late For Northrop

(MoneyWatch)  Earlier this month Northrop Grumman (NG) announced that they were selling their Science, Technical, Engineering and Analysis (SETA) arm to a private equity group. TASC was a company that Northrop acquired back in the Nineties when defense consolidation was all the rage. The company decided to divest this portion of their corporation due to new rules on conflict of interest that were put in place this year. This placed limits on how a company could bid on a hardware contract if other parts of the company were involved in helping the Government with the source selection.

In Northrop Grumman's case they had to sign complex legal agreements with the U.S. Air Force due to TASC's work supporting that service. SETA contractors work within the Government's acquisition and support offices performing a variety of programmatic, technical and logistical work. They can do most any work not considered inherently government and as long as they do not speak or make decisions for the government. Due to limits on the size of the civil service and military work force SETA contractors provide experienced and capable personnel who fill out the offices.

Now Brett Lambert, the director of industrial policy for the Defense Department, has announced that in early December a forum will be conducted between the Department, NASA and contractors to try to figure out the right balance for this rule. Lambert said that the goal of the policy was not to force companies to do what Northrop did either through divesting parts of the company or doing things that were not good business. In Northrop's case they obviously decided the potential cost of not bidding on procurement programs offset the money they were making through SETA.

The SETA business is also being buffeted by the Obama Administration's plan to eliminate contractor positions and replace them with more Government workers. This in-sourcing has picked up over the last few months and since contractors with those jobs get revenue from people eliminating the positions has cut into their bottom line. The companies are also concerned that the Government will take their best people reducing opportunities for them to win other work or perform.

Northrop basically gave up over a billion dollars in revenue each year due to their and the Air Force's interpretation of the new rules. If Mr. Lambert's forum and efforts lead to a less broad interpretation or one that favors companies more this may have been a hasty decision. The result of this may be a few more months or years away but it is clear that a profitable, effective part of the defense contracting industry will see significant change.