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Who Will Win This $35 Billion Deal?

Have you been following the U. S. Air Force’s evaluation of Boeing and Northrup/Grumman EADS for the $35 billion contract for the next generation tanker?  If not, you’re missing a rare opportunity to observe a big-ticket, complex sale in real time.

I’ve written a few posts on this subject before.  Here is a quote from a BusinessWeek article referenced in my original post back in July (highlights are mine):

In a significant boost to the prospects of Boeing (BA), a U.S. government arbiter has sustained the company’s formal complaint that the U.S. Air Force unfairly chose to order 179 aerial refueling tankers from prime contractor Northrop Grumman (NOC) and its European partner EADS (EAD.PA), rather than Boeing.

The Air Force errors, according to the GAO, included failing to stick to the evaluation criteria it had announced in the original solicitation to bidders, and giving Northrop extra points for exceeding base requirements in the solicitation. That appeared to endorse Boeing complaints that the Air Force switched the requirements it was considering without telling the company. The [U.S. Air Force] lawyers wrote that the Air Force had held a “transparent and unbiased” competition for the tanker contract, immune to the whims of politics or other outside considerations. “We have upheld the Jeffersonian ideal of silencing the complaints of our citizens, whether just or unjust, solely by the force of reason,” they said.

The central complaint behind Boeing’s appeal was the aircraft chosen by the Air Force is very different—most significantly, bigger—than what the Air Force initially said it wanted. Otherwise, say Boeing executives, they would have offered a modified 777 rather than a 767, which is smaller and can carry less cargo and fuel than the winning A330-based tanker. Boeing also complained about European subsidies that the company asserts gave Northrop/EADS a cost advantage.

At this point, Boeing is threatening to go no further in the evaluation—to pull out of the competition.  The Air Force changed key decision criteria.  There is little question in my mind that Northrup influenced them to do so.  From another article in BusinessWeek:

Politicians from Washington State fear that the reopened contest, which was detailed at the Pentagon on Aug. 6, is being rigged to give Northrop an edge. “While it will take time to analyze this document, there are several issues that already raise red flags,” argued Senator Patty Murray (D-Wash.). For one, the Pentagon plans to give extra credit to the amount of fuel that can be off-loaded from the tankers, she said, and that will favor the bigger Airbus A330 design that Northrop would base its planes on. 

Another BusinessWeek article talks about Boeing pulling out of the competition potentially being a winning strategy:

Although the threat of taking its chips off the table suggests that Boeing plans to simply quit, the move actually may improve the company’s chances of winning the new battle. Such a delay could move the decision into the hands of a new White House and Congress that might be more inclined to favor Boeing. Boeing would be taking a gamble that Democrats would control Washington, since they generally are believed to tilt in favor of the heavily unionized company, and even more so because Northrop is allied with EADS, or European Aeronautic Defence & Space (EAD.PA), maker of Airbus planes.

…While Northrop favors speed—figuring that the Pentagon is tilting its way—it, too, has proven a shrewd poker player at times. Last year it threatened to pull out of the competition unless the military altered its initial bid request, and the Air Force obliged it. That time the Air Force blinked. This time, however, the Pentagon may be hard-pressed to blink again.

This is high-stakes poker.  For those of us who are students of competitive strategy, the combination of this election season and the ability to observe this Air Force deal in progress is very unusual. 

Is there anyone that would be willing to predict the final outcome?

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4 Responses

  1. I predict Boeing will play out their “pull out” tactic, the Air Force will blink/acquiesce, and, regardless of a Democratic or Republican president, Boeing will resubmit a wining award, using the 777 model mentioned in your blog. This contract is too big and too visible for the Air Force to be perceived to be awarding a foreign competitor. The delay will allow Boeing to re-submit a bid that will give the Air force what they need, allow for the competitive process, and keep the contract, if not some of the fabrication and labor, in the US.

  2. This is getting very interesting!

    I last commented on the Boeing Delay Strategy by threatening to no bid. Now that the playing field is open again It does sound like the Air Force is attempting to change their formal decision criteria to include the informal criteria that Northrop successfully used to change the rules with their original Flanking Strategy. It also seems clear that absent other influences the Air Force prefers the Northrop solution. So, it appears that Northrop is going to stay with that strategy while Boeing adopts a new strategy. (Their original strategy was Frontal and they got hammered).

    Since we all know that deals can be won on strategy, UBV in line with the formal or informal decision criteria or any combination of those, I look for this one to now be won based purely on Politics (on a much grander scale than we experience in our client systems).

    Expect the language we hear going forward to be about formal decision criteria, strategy etc, but know this is now all about politics.

    Advantage Boeing, but don’t count Northrop out since they have shown the ability to change the rules.

  3. FYI – I read today on CNN that the competition has been cancelled until the new administration takes office in January.

    http://www.cnn.com/2008/US/09/10/pentagon.tankers/index.html

  4. It looks like the Delay Strategy worked.

    Advantage Boeing…

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