Frank Kendall, under secretary for acquisition, technology and logistics (Staff file photo)
Frank Kendall loves data. A quote from the statistician W. Edwards Deming, which reads: ďIn God we trust; all others must bring data,Ē is splashed across the door of Kendallís Pentagon office.
Kendall recently published a 126-page report, ďPerformance of the Defense Acquisition System,Ē a data-intensive look at the reasons for cost growth and schedule slips within the DoDís massive acquisition portfolio. He recently discussed the report and major issues facing the Pentagon procurement community on This Week in Defense News.
Q. What are some of the lessons you learned from this recent report on the acquisition system?
A. Thereís a lot of conventional wisdom that we tend to use in the acquisition business in defense, and I wanted to see data that would tell us whatís actually going on. So the first thing is just to understand whatís going on. I wanted to also see what kind of correlations there were between our policies and our results. And what we found was there werenít that many correlations. A lot of the things we looked at didnít seem to be making a difference.
This is really the beginning of the journey. This report takes the data that was relatively easily available, kind of lays it out in a way which is understandable, and starts the process of asking a lot of good questions about whatís really going on. Why are these things happening? And one of the first questions I would ask is, given all the years of acquisition reform, why donít we see more improvement? And part of the reason is, I think, that our policies have been cyclical and itís hard to pull out of them ó out of the data which actually happened. Weíre learning a lot from this, but thereís a lot more to be done. And in many cases, the report just tells us what question to ask next so we can peel back the onion another layer.
Q. Why did bad programs go over budget, and why were successful ones successes?
A. Thereís a piece of data in the report that comes from our program assessment group analysis organization which I think is very instructive. It takes those programs, which have had Nunn-McCurdy breaches ó large cost increases ó and it analyzes them pretty carefully for what group causes were involved. Some of those programs are because of quantity changes alone, so you kind of dismiss those. If you look at the rest, the majority of them were because of some kind of management problem. There was poor system engineering; the contractor type wouldnít set up well. The incentives werenít enforced. There were bad assumptions made at the beginning of the program. So management comes back as the thing that runs through our biggest problems more than anything else.
Q. You said that conventional wisdoms have been built up over time, and the report tries to tackle some of those conventional wisdoms and show which are true and which arenít. What are the urban myths and what are the truths youíve found?
A. I think itís a little early on some of those. There are a few that I think confirmed our judgment, [such as] undefinitized contract actions. Not a good idea for development programs; thereís a high correlation there. Production was a different story. Production, we didnít see that high correlation. There, if you know what the product is, and you can put it on contract and then definitize the contract later, it didnít seem to have as much impact. We did not see a correlation between fixed-price and cost-plus in terms of a differential in performance. That surprised me. And thatís one where weíre going to have to go look a lot more deeply.
Q. Did year-to-year monetary changes have a big impact on programs?
A. We did not see either funding stability or requirement stability popping up as big issues. Now one of the things we have to do is to go through program by program and try to understand exactly what decisions were made and why they were made.
Q. Youíre working on the Better Buying Power 2.0 acquisition improvement effort. What types of culture changes in workforce and leadership would you like to see? What are the skill sets you have to improve?
A. There are two culture changes. One is to get beyond the checklist mentality, to actually really understand the job that has to be done and how to do it. So that when people are managing these programs, they donít just look for the school solution and check off the things that are on that list. They really dig in and understand what it takes to get the job done, work with industry to get it done. Thatís on the government side.
The other one is a stronger culture of cost consciousness. All of us should be trying to drive cost out all the time. Industry does that routinely. In the government, we tend to have a spending culture, where your job is to spend the money thatís been appropriated for you. I want to turn that around. The use of should cost, for example, is pointed right at that. Our managers need to define the cost that they can attack, and then attack them and dry them out.
Q. Will acquisition and research-and-development [R&D] programs bear the brunt of sequestration budget cuts?
A. I hope youíre wrong about sequestration being here to stay. I donít see any momentum right now to remove it. Hopefully, as we get into í14 and the damage accumulates, that political imperative will become stronger. People thought that sequestration will arrive like a hurricane. It did not. It arrived like the rain just started to fall. Waterís rising and things are getting worse and worse over time. But itís damage thatís spread out across the department. It affects readiness, certainly. It affects all of our programs. Itís disrupting our plans across the board.
Going to í14 is going to be much more difficult. Weíre probably going to go into í14, as a guess, under sequestration and not knowing how long it will last, which is going to put us in the same position weíre in now, except additional cuts are going to have to be made. We hopefully will have more flexibility, but there are no easy choices out there. It looks like a lot of the burden is going to fall onto the investment accounts, research and development and production. I donít see any way around that. I canít give you a number. But that looks like the way weíre headed. The damages, I think, frankly are going to be devastating.
Q. Due to sequestration, are you going to end up incurring termination and other charges and costs on changing and altering these contracts that are going to have to be revisited in other savings elsewhere? Do you have to cut in order to be able to underwrite your cut?
A. Itís a misperception that sequestration has that kind of an impact. Our contracts are generally funded at the time that we write them. So, if we cancel programs, we will [incur] maybe some termination liability, such as with some of our R&D programs, for example. Production programs will probably stop ones that havenít been ordered yet, so thereís no direct impact there. There may be some close-out costs associated with that. But we have to make some very, very tough choices. Iím hopeful that once people understand the magnitude of the choices we have to make, that will be a strong impetus to remove sequestration.
Q. Are you concerned about the health of the defense industrial base? For example, our Top 100 study of defense companies this year indicates that this is the first year where the hits are really going to be felt by US contractors.
A. Iím very concerned about it. The largest companies will weather this. They have access to capital. They have big backlogs. This is cyclical. This isnít going to last forever. But the smaller companies are going to have much bigger problems. Iím very worried about our small businesses. What weíre doing about it is weíre working with industry. Weíre trying to monitor for places where we might want to intervene. Our potential to intervene, our capacity to intervene is very limited. We just donít have the resources to save every company thatís going to be in trouble.
Q. Traditionally, the government has sought to cap defense profits as a general rule at, say, 15 percent is what the limit is. You know, 5 to 8 percent is sort of more of what the average is. Do we need to have a shift, a change in thinking that will reward a company?
A. Nothing weíre doing is an attempt to cut costs by cutting profit. Profit is a tool to get better results from industry, as far as weíre concerned. And profitís also a necessity for business. And you canít be a business if youíre not making a profit. Basically, we set profit through competition, or we set it through negotiation with a starting point thatís based generally on something called the weighted guidelines. I am very happy to give industry larger profits if theyíre giving me something in return. Each case is individual. But if a company is performing extraordinarily and gets larger margins because of that and weíre getting lower cost, thatís terrific. What we care about at the end of the day on a government side is what we pay in price. And profitís just one part of that.
Q. Do you think that weíre spending enough on R&D? And is it a mistake to be cutting back as we are right now?
A. I think in a downturn like this, itís even more important to spend on R&D. Weíre in this game for the long haul. We need industry to be in it for the long haul with us. And when I was running an R&D program for industry, we understood that. We continued to make investments in the early í90s despite the downturn in defense. Companies that want to be in this business for the long term, and want to provide us with the products that we need, need to be invested in R&D. ■
By Vago Muradian in Washington.