This is the first of a two-part series examining the role of the nonprofit corporation in an aerospace-defense context.
In 1830, when a musket still was a handy weapon capable of stopping a horse at a dozen yards, the Franklin Institute of Philadelphia was granted a research contract by the US government. The mission was to study the cause of boiler explosions, a project in applied research.
It is not recorded that the results were fully successful, but certainly they contributed to later weapon systems when steam boilers became part of the propulsive component of the battleship. What is more important as a precedent is the fact that the Franklin Institute was a nonprofit organization.
In 1830, the technology involved in development of the steam engine was new, complex, and crude. The application of steam power to rail and water transportation was being pushed to the limit of the state of the art. The government had an interest in the subject, but there was neither talent on the federal payroll nor federal facilities for researching the strength of materials under high temperature and pressure.
The Franklin Institute is still a nonprofit organization and today appears high on the Defense Department's list of contractors in that category, collecting more than $2 million a year for its services. From steam engines its laboratories have graduated to more profound areas, such as a current USAF study for the Office of Scientific Research entitled: "Properties of Medium Weight Nuclei."
One of the earliest applications of a contract with a nonprofit organization to a weapon system is recorded in connection with the first military step toward airpower. It was the War Department grant to Samuel P. Langley and the Smithsonian Institution for development work on a flying machine. The date was 1898, and the result came to disaster in the Potomac River nine days before the Wright brothers staggered into the air at Kitty Hawk in 1903. It is interesting, but not germane, to point out that nonprofit organizations were in the airpower picture before private enterprise. The first Wright brothers military aircraft, built on contract was delivered in 1909.
What has happened to aerospace systems since the start of military aviation is an often-told story. The growth of technology in the years since World War II alone is the most staggering part of this saga and the progress of the last ten years the most astounding of all. The demand has resulted in the organization of more than 350 nonprofit organizations in the postwar years, most of them concerned with some aspect of the missile, electronic, and atomic technologies. The Air Force is not the only customer, but it is a substantial one. The Atomic Energy Commission and other government departments use them in addition to the military services. In early September, the Research Analysis Corporation, located just outside Washington, was organized on a nonprofit basis to help bolster, the announcement said, "the strategic, tactical, and management capabilities of the US Army through scientific research and analysis." It already has 450 persons on the staff.
More recently it was announced that the Defense Department is sponsoring the creation of a new "Logistic Management Institute." It will be a nonprofit organization with a full-time staff of highly trained business management specialists. The mission will be to seek breakthroughs in logistics management.
And industry itself shows signs of leaning toward the nonprofit unit in areas where public service is paramount and there is evident determination to keep it so. The communications industry is about to propose a nonprofit organization to own and operate a communications satellite system. Government participation is considered possible and likely, but the initiative appears to have come from industry itself, which is willing to finance the project and share in its utilization.
The Air Force is commonly known as a prime customer and creator of nonprofit organizations. One of first and best-known examples is the RAND Corporation, described by Harper's as an "arsenal for ideas" that "is in the business of finding ways to apply scientific skills to the problems of national security." Its defense contracts run in the neighborhood of $15 million a year. Another is MITRE Corporation, substantially larger than RAND, which has broad systems engineering and technical direction responsibilities in the development of USAF command and control systems. A third major USAF nonprofit contractor is Systems Development Corporation, which was listed as second only to MIT as a nonprofit contractor, with a total of $35 million in Defense Department business. Others range from the Cornell Aeronautical Laboratories to the Institute for Defense Analysis, which has offices in the Pentagon, and a list of research institutes, most of them affiliated with universities.
In fiscal 1960, the latest year for which complete figures are available, the Defense Department had contracts with nonprofit organizations totaling $370 million. Of this, thirty-five percent was paid to academic institutions, colleges, and universities. About twenty-seven percent represents contracts with research centers associated with academic campuses, such as MIT's Lincoln Laboratories and the Stanford Research Institute. A quarter of the total, twenty-five percent, was paid to nonacademic organizations with the capability to make hardware but only six percent to nonacademic groups without this capability. Finally, seven percent of the total was in the form of contracts with nonacademic corporations primarily concerned with technical review and guidance operations.
This seven percent, a proportion that is increasing rapidly on the threshold of the space age, may represent the most critical part of America's effort to meet the technological challenge dropped on our doorstep by Soviet Russia. Asked to name the priceless ingredient of the complex systems that will operate in space, for military or peaceful missions, the men in charge will agree it is the engineering architecture and management of these systems. The task of providing this architecture and management is one that cannot be entrusted to less than the most competent and objective experts.
In the jargon of the scientist and engineer, this architecture and management is called "systems engineering" and "technical management."
Systems engineering is described as the integration of a number of complex subsystems, each of them usually involving a different branch of technology. Just as an architect has to have familiarity with plumbing, types and materials for construction, heating systems, landscaping, building codes, and insulation, the modern aerospace system demands an even wider and more integrated talent. No single "architect" can possibly have complete competence in all of the technological areas, particularly when the job is complicated by design compromises. Engines must be bigger because payloads cannot be smaller or payloads must be smaller because engines can't be bigger. The components must fit together and work together. They must be ready when they are needed on the assembly line. The systems engineer must have some degree of competence in all fields to ensure that the right compromises are made and that maximum results are ensured.
Technical management is the activity that demands the ultimate in objectivity. It is the job of getting the word to the subsystem contractors, both on the standards of performance required and—even more critical in many instances—on the modifications that are accepted. These may result from some of the compromises mentioned above, from unexpected problems in design and construction or from advances in the state of the art. An adjustment in one subsystem may complicate one contractor's job and ease the problem for another. Requirements must be changed all along the line to accommodate these changes. At the same time, the technical manager must make sure that the whole pattern is proceeding according to the established concept and objectives. All decisions must be impartial.
Both Congress and the Executive Department, urging all possible speed and effort for the now-acknowledged space race, still have the system under constant critical scrutiny. A few weeks ago President Kennedy, taking note of a rising crest of congressional interest, ordered the Bureau of the Budget to "review the effectiveness of this means of accomplishing the government's purposes."
The White House pointed out that the trend is toward wider use of contracts "for the operation and management of research and development facilities and programs, for analytical studies and advisory systems. ..." The President acknowledged that the contracts have made it possible to "accomplish scientific and technical work essential to urgent public purposes."
While Mr. Kennedy did not single out nonprofit organizations for particular attention it was clear from the atmosphere on Capitol Hill that most of his interest centers on this type of operation.
There is a strange contradiction in the fact that the perpetual monitors of the defense effort in Congress have widely divergent views on the subject. Aerospace Corporation, newest nonprofit creation of the Air Force, was formed with the blessing and at the instigation of the Military Operations Subcommittee of the House Committee on Government Operations. Yet its operation is under examination by the Subcommittee on Manpower Utilization of the Committee on Post Office and Civil Service. Both the Armed Services Committee and the Committee on Science and Astronautics have displayed interest. And the Defense Subcommittee of the Committee on Appropriations has threatened to demand "severe restrictions" on the utilization of nonprofit organizations. Specifically for Aerospace, it recommended a slash in its budget for fiscal 1962 from $35.2 million to $30.2 million.
The Appropriations Committee report viewed with alarm the growing practice of contracting for technical management, scientific evaluations, and administrative and management services. It said USAF uses these services to a greater extent than other branches of the government, particularly from nonprofit organizations. Then it stated, clearly, the issue that has aroused congressional interest:
"The employees of such (nonprofit) organizations are paid indirectly by the taxpayers to the same extent as employees under civil service are paid directly by taxpayers. The pertinent major difference is that their pay is higher. . . . To a considerable extent the use of contracts with nonprofit organizations is merely a subterfuge to avoid the restrictions of civil service salary scales. …
". . . It is noted that the buildup of these organizations has not been accomplished by corresponding reductions in the number of military and civilian personnel on the government payrolls. . . ."
This is the aspect of nonprofit operations that stirs most interest on Capitol Hill, where both the taxpayer's dollar and the welfare of the federal employee get a full share of attention. But it is not the only one that contributes to the atmosphere as new nonprofit organizations are formed to accept government contracts. Their increased utilization, says a writer in the Harvard Business Review, "reflects a conclusion by government officials that they cannot entrust projects vital to the national defense (such as missile program management) to profit-making enterprises."
There may be truth in this statement but the Harvard Business Review failed to show that it is the honest hunt for objectivity that favors the nonprofit corporation. This can be documented from the 1959 and 1960 hearings of the Military Operations Subcommittee of the House Committee on Government operations. Nor did the Review examine the impact of technology on management.
The transcripts are a running account of the USAF struggle to achieve objectivity and to convince both industry and Congress that this was a fact. If we take the ballistic missile area, one in which urgency existed just as it does today for the space programs, the first USAF reaction was to get speed—this was in 1954—and give the responsibility for architecture and technical management to a private contractor.
At the outset, the contractor was a firm set up by Drs. Simon Ramo and Dean Wooldridge. It was selected after a committee of experts, called the Strategic Missiles Evaluation Committee and headed by Dr. John von Neumann, had decided that the conventional prime and subcontractor pattern would not be able to meet the demand for fast action. The Air Force then commissioned Ramo-Wooldridge to set the basic system concepts and specifications, and coordinate and direct the work of its industrial associate contractors. This was the method used on both the Thor IRBM and Atlas ICBM missiles. Both systems exceeded their performance specifications and were operational in record time.
One congressional committee said:
"From the performance standpoint, Ramo-Wooldridge (STL) along with BMD, can point to the fact that they 'beat the clock' and surprised many experts in getting operable Atlases and Thors from factory to field in so short a period of time. There will be many—in industry among participating contractors, in government among rival services—who discount the contribution of Ramo-Wooldridge (and STL) but this organization can take pride in its own right for what it has done for the United States."
But there was a rub. The largest single stockholder of Ramo-Wooldridge was Thompson Products, Inc. This company is in business to make money. It found that its investment in Ramo-Wooldridge cast doubts on the objectivity of Ramo-Wooldridge decisions. The House committee, in its 1961 report, made the situation clear. It pointed out that USAF had placed a "hardware ban" on Ramo-Wooldridge, making it ineligible for development and production contracts.
"Thompson Products looked to Ramo-Wooldridge as its vehicle for entry into new fields of production. And Ramo-Wooldridge itself had ambitious plans. Although it received sizable and certainly ample fees … the company's top executives were keenly alive to the fact that the real money-making potential was in hardware production.
"Industry too," the report says, "was becoming restive." The Ramo-Wooldridge division associated with the USAF Ballistic Missile Division was called Space Technology Laboratories and the contractors working under its direction "did not relish (STL's) access to their technical data. . . . Nor were the contractors impressed by the temporary hardware ban imposed on Ramo-Wooldridge. They looked forward apprehensively to the day when, heavily armed with technical knowledge and equipment, Ramo-Wooldridge would offer formidable competition in the industrial area."
In late 1958 STL became a separate corporation and the rest of Ramo-Wooldridge was merged with Thompson Products to become Thompson Ramo Wooldridge Inc. STL, however, remained a wholly-owned subsidiary of the new corporation and, as Dr. Ramo told the House committee in 1959, had to have a "reasonable return" on the investment. He argued that STL differed from other profit-making corporations in that it stopped at systems engineering, technical direction, and laboratory work. It did not have a production factory.
The House committee was not impressed. It acknowledged that STL was doing an important job, one that USAF could not perform itself because of the impossibility of mobilizing the technical talent in a military organization. But it reiterated that complete objectivity was essential and charged USAF with responsibility to ensure that objectivity. It said STL "is frank about its interest in expanding operations."
"In acquiring the services of STL," the 1959 report continued, "the Air Force was not seeking low-echelon technical competence, for salaries at this level admittedly are no higher than salaries paid for comparable work in the government. What the Air Force got was the combination of scientific talent and business-managerial ability possessed by the small group of company executives. In view of this fact it is not surprising that the top executives have an interest in building up the company and increasing its profit."
The report said STL was complaining about a low rate of profit and said that the statistics substantiated the complaint.
The solution? The committee said that if STL were to have any future with USAF "it must be converted to a nonprofit institution. . . . The aggressive profit-making drive, better suited to a production company, would be replaced by a quieter sense of dedication to scientific pursuits and government service."
USAF's answer was the creation of Aerospace Corporation and the concept itself clearly was recommended by the House report. The Secretary of the Air Force asked a committee headed by Dr. Clark B. Millikan of CalTech, to review the management of the Air Force ballistic missile and space systems programs. This group favored formation of a new noncompetitive organization to replace STL.
Max Golden, general counsel for the Department of the Air Force, has emphasized that Aerospace Corporation has deep roots in the history of Air Force weapon system development. He views the traditional prime contractor, the independent systems contractor, and the nonprofit corporation as "progressive attempts to keep forms of management abreast with technology."
"Each of them," he says, "was created within the framework of private industry to perform a common function. The first step was to concentrate this function in a single manufacturer, the second to sever it from hardware production, the third to sever it from the profit motive."
Mr. Golden also has addressed himself to the charge, repeated in many congressional hearings, that the Air Force is abandoning its management responsibilities to the nonprofit organizations. He replies that USAF still "remains firmly in the driver's seat . . . it does not follow that Air Force supervision stops if a matter falls within Aerospace's province."
"Aerospace does not detract from Air Force program control. It enhances it. Think back for a moment to the single prime contractor approach. In contrast, Aerospace provides the Air Force with an impartial and disinterested check on the work of other contractors. With Aerospace, moreover, the Air Force is able to contract directly with these contractors."
On the subject of salaries paid by nonprofit corporations, and again the spotlight has been fixed on Aerospace Corporation, there is a consistent effort by congressional critics to compare them with civil service standards. There has been no emphasis on the fact that the government pays lower salaries than private industry. And the nonprofit corporation, in the market for top talent, competes with industry, not the government, for that talent. Hence, salaries are comparable with those paid in industry. Unless, as Mr. Golden has pointed out, all private contractors are required to conform to government pay scales, it will be difficult to single out nonprofit organizations as the ones which must conform.
In view of the sometimes stormy past that has led to increasing utilization of the nonprofit corporation, outlined in this article, it may be time for a new look at the trend. It is a look that should be shared by Congress, industry, all government departments, and the executive. The Budget Bureau study ordered by Mr. Kennedy, due at the White House in early December, is a first step.
Without conjecturing what the findings will be, it can be suggested that there be another examination that considers both the urgency of the national effort and the alternatives if the nonprofit device were not available.
Both Congress and profit-making industry can afford to do this and have an obligation to do so. It is possible that the observation of the Harvard Business Review is wrong. It is possible that nonprofit organizations, providing top talent for engineering architectural services, with the only true objectivity that can be obtained, will protect the role of American industry in the space age. Next month AIR FORCE Magazine will examine these possibilities.—END
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