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Navigating OCI

Lockheed Martin announced plans last week to sell most of its Enterprise Integration Group (EIG) and Pacific Architects and Engineers, Inc. (PAE) in order to stay ahead of government concerns about organizational conflicts of interest (OCI).

“Through EIG, Lockheed Martin provides both systems and services to a broad range of government customers, and this has led to concerns about the potential for conflicting interests,” Lockheed President and COO Christopher E. Kubasik commented in the announcement.

While Kubasik characterized Lockheed’s acquisition of PAE as a way to reach a new customer base in need of additional IT and systems integration services, he said that “in the current market, customers are seeking a different mix of services that do not fit with our strategy.”

Robert Stevens
Robert Stevens

The announcement comes at the conclusion of an internal review of Lockheed’s services portfolio, and Robert J. Stevens, Lockheed Martin CEO, said that the divestments “factor in the major changes we’ve seen in the global security environment, world economic conditions and the new priorities of the Administration.”

The move follows Northrop Grumman’s divestiture of TASC in November of last year, a $1.65 billion-dollar sale to private equity firms General Atlantic and KKR.  Ron Sugar, then Northrop Grumman’s CEO at the time, said that the move “reflects Northrop Grumman’s desire to align quickly with the government’s new organizational conflict of interest standards, while preserving TASC’s unique organizational culture and its status as the advisory services employer of choice.”

This sale also makes Lockheed Martin the first in the government contracting community to respond to the proposed changes to DFARS, which reflect GAO’s ruling “that there is no basis to distinguish between a firm and its affiliates, at least where concerns about potentially biased ground rules and impaired objectivity are at issue.”

New DFARS wording would enable companies to either “firewall” off conflicted business units by restricting the flow of information within an organization (a business process nightmare) or to “resolve” the conflict by spinning off the business units, the route both Lockheed Martin and Northrop Grumman have taken.

The proposed rule change also singles out “support services” as an area where OCI issues are more likely to arise, which makes Lockheed’s renaming of its Information Systems & Global Services division to Information Systems & Global Solutions seem like a direct response to the proposed rule change.

So far, it looks like the proposed changes to DFARS have already forced some major changes in government contracting, and it’s not just SETA business units that are going to require strategic evaluation.

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