This speech was given by Dan Goure at the Lexington Institute’s Capitol Hill Defense Acquisition Reform event on June 24, 2015.
Why is acquisition reform still so difficult? The answer is we are trying to impose the existing 20th Century, government-centric, platform-focused acquisition system, which was created at the start of World War Two and refined over forty years of the Cold War, onto the economic and technological realities of the 21st Century. The Cold War is a fading memory. Virtually no one in political office today was present when the Cold War acquisition system was created. The industrial base that existed at the time is diminishing and a new one is flourishing. The new one is not nearly as dependent on government for revenues or R&D support.
The Department of Defense is dependent on private companies for virtually all its weapons systems, platforms and supplies. The Pentagon also relies on the private sector for much of its maintenance, sustainment and logistics. While there is a requirement in federal law that half of all depot maintenance dollars be spent in public sector facilities, such as Air Logistics Centers, a significant portion of those funds are spent on spare parts provided by private companies.
Yes, part of the private sector is dependent on DoD for contracts. But only a handful rely on defense spending for more than half their revenues, and these typically are the large prime contractors. For the vast majority of the companies involved in defense production or support, this constitutes a relatively modest portion of their overall business. When it comes to companies leading the way in areas of advanced technology, such as computing, telecommunications, or software, the government is a small customer.
In order to reform the acquisition system, it is necessary to change DoD’s acquisition culture first to incentivize both government and the private sector. The major stumbling block facing DoD in pursuing its acquisition reform agenda is not the attitudes or behavior of the private sector, but those historically exhibited by the government. DoD has an unrelenting need for control, not only over the inputs to the acquisition process requirements generation, budgeting, testing and evaluation, but many of the internal processes by which companies produce and deliver goods and services.
DoD still is resistant to the widespread use of commercial best practices in logistics and sustainment because it means giving up some control over resources, people and even equipment. What Pentagon officials, particularly program managers, have to realize is that the key to successful cost reduction is giving up control over much of the process, relying instead on the incentives of a free market-oriented approach with properly written contracts to drive the desired behavior by the private sector.
The most recent example of the problem of “over controlling” the process can be found in AT&L’s new policy on IR&D. AT&L is trying to establish greater insight and even influence the topics on which companies spend IR&D dollars. This is a reflection of the concern that the U.S. military is losing its technological edge and that it takes too long and costs too much to bring new capabilities into being.
The IR&D policy reforms carry with them a major risk of provoking negative unintended consequences. Companies must now find a sponsoring organization for their IR&D efforts and justify their ideas before initiating work. This is wrong for many reasons. What about the absolutely brilliant, transformative idea that no DoD entity wants to sponsor? Conversely, the new requirement is likely to encourage “sponsor shopping” by companies. Because most potential sponsors are focused on acquiring current systems or supporting current operations, this will inevitably drag IR&D even more into the near-term, exactly the opposite result from what AT&L wants. Requiring “pre-reviews” of proposed projects will act like a tax on scarce IR&D resources. Finally, traditionally risk-averse acquisition officials could turn the endorsement process into a full-blown proposal review, undermining the “I” in IR&D.
Unfortunately, there is no evidence from the Pentagon’s efficiency initiatives or statements by senior officials that DoD is willing to reduce its desire for absolute control. It still seems to want the degree of freedom it has always had to add requirements, move money around, change production rates, etc. But, at the same time, it now wants increases in efficiency, reduced costs, high productivity and adherence to schedules. The DoD acquisition system will not be more efficient until the chief culprit, the government bureaucracy, is reined in. What is needed here is reform of the acquisition culture in DoD.
The U.S. government faces a dangerous future if it does not provide greater incentives for private companies, particularly commercial enterprises, to do business with DoD. The Pentagon is in danger of being labeled a bad customer, one whose business companies with choices may decide they don’t want.
The one thing that those in both the Executive and Legislative branches could do to support and incentivize industry is provide planning predictability and budget stability. Even if actual quantities of new items procured are limited, industry can adjust and scale both their workforce and facilities to meet expected demand. What industry cannot do is hold onto capabilities and people when there is no prospect for revenues. In addition, the Pentagon now buys so little that companies are finding it increasingly difficult to see how spending scarce resources on innovation will help their bottom line. In fact, to the extent that introducing innovations adds to cost, schedule and risk, even if only at the beginning of a program, there is a positive disincentive to invest.
Many companies have found success in innovating to support their products in the aftermarket. Manufacturers can both increase their profit and provide customers a better bargain by improving the quality and reliability of their products while holding prices relatively steady. Car manufacturers learned this lesson decades ago and now commonly offer ten year/100,000 mile warranties on power trains. Commercial aircraft engine manufacturers are moving in this direction as well. It is worth investing in innovations that improve reliability or on-wing time because it reduces the costs to the company of repairs, resulting in increased profit. But the acquisition system risks upending this model and thereby losing out on the next generation of products and innovations when it shrinks the horizon for these companies by shortening contract periods and increasing the frequency of competition.
Most private contractors work hard to be a good partner to DoD. Despite the attitude of many in the acquisition bureaucracy, they are motivated by more than money. The Pentagon needs to reciprocate this commitment by becoming a good partner to industry. The Under Secretary of Defense for Acquisition, Technology & Logistics, Frank Kendall, spoke recently about the importance of better training for acquisition professionals. A significant part of that training should be in microeconomics — that portion of the dismal science that deals with how companies operate.
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