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Commentary: Acquisition Reform Vital

Competition, Accountability Can Refocus System

Jul. 14, 2014 - 03:45AM   |  
By John Lehman and Everett Pyatt   |   Comments
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The current US acquisition system includes programs valued at roughly $1.6 trillion. According to the Government Accountability Office (GAO), more than $400 billion is cost growth and program delays. Programs have been initiated, then canceled because they proved unaffordable, wasting billions in development.

Programs do not have affordability as a key performance parameter, thus allowing costs to grow while chasing the more-performance-is-better mantra. The result is a process of disarmament unconcerned about the need for quantity to make force presence real.

This process must be changed to realize the most from increasingly limited defense funds.

When tasked with executing President Ronald Reaganís vision to have a 600-ship Navy, we knew that affordability was the major challenge. Others believed that the task was impossible within the time frame. Yet the 600-ship Navy was nearly complete when the Soviet Union collapsed.

Key to achieving this goal was clear focus on ship affordability, recognizing that budgets were limited and a high/low mix of ships was necessary to satisfy military needs and desired force levels.

Program execution depended upon maximum use of design stability, firm control of design changes and planned upgrades over system life. These were implemented in a competitive procurement environment giving maximum incentive to contractors to lower costs rather than justify the highest costs possible in a negotiated procurement.

If competition had not been a tool, as it is not today, program completion would have been impossible. Use of competition also preserved the industrial base for when the Navy had to be recapitalized.

Management reforms were implemented. An excessive layer of bureaucracy, the Navy Materiel Command, was eliminated, clarifying lines of authority and responsibility.

Realizing that top quality people were needed to manage acquisition programs, the Navy Materiel Professional program was initiated. Separate selection boards identified candidates for this role and billets through the four star-level were identified and limited to materiel professionals.

I made these decisions because they were necessary to implement the presidentís plan and prepare the Navy for future acquisition challenges, but times have changed. Affordability has not been a consideration until programs are terminated, competition in production has ceased to exist and the acquisition workforce, decimated in the 1990s, has not regained the skills it once had.

The following conclusions are derived from program results shown in a recent analysis of acquisition performance by the undersecretary of defense for acquisition, technology and logistics (AT&L), GAO reviews of system performance and AT&L annual summaries of selected acquisition reports (SARs), which are the only database to define cost performance.

The GAO annual analysis shows that cost growth/overruns total over $400 billion. Part of this is a sunk cost but roughly half remains a future cost subject to change by dedicated management. This is not happening. In fact, the last SAR summary showed continued cost growth in the F-35 program despite claims by the contractor and program office that costs were declining.

The last SAR summary lists net cost growth of more than $10 billion in 2013 when quantity reductions and economic (inflation) corrections are removed. (This amount would be higher, but has been reduced by some programs being under budget). These are not under the control of acquisition managers. Management does not seem to attach a high priority to cost control.

But all is not bad. About half of the major acquisitions are very close to cost plan. The other half is the problem programs. Too little acknowledgement is given to the successful program managers. Affordability is ignored and major programs do not include cost as a key performance parameter. Yet there is plenty of evidence that program plans and budgets do not coincide.

Long-term projections of ship and aircraft programs made over the past decades and presented to the Congress have clearly shown that plans far exceed resources. Changes have not been made to bring unit cost in line with expected resources. The result has been disarmament by the acquisition system.

Competition has been relegated to near nonexistence. Recent decisions have eliminated competition for future fighters, the F-35 engine, ground vehicles and much of shipbuilding.

The source selection process is not a good predictor of future program success. Every troubled program (except carriers) won a source selection. The joint requirements process seems to have increased requirements frequently but changes needed for cost control are virtually impossible to obtain.

Finally, program turbulence caused by the congressional budget and appropriations process makes program planning and execution difficult and costly as production rates change.

Changes Needed

A fundamental responsibility of the Congress is to provide for national defense. This requires money, but the willingness to spend for defense varies widely, leaving defense managers uncertain about future plans. The first necessary reform step is for Congress to inform the executive of possible defense toplines, expressed as a range of percentages of gross domestic product. This would allow the executive to plan programs and present alternatives within that range.

Once a topline range is determined, program affordability ceilings can be set. A major current challenge is the recapitalization of strategic forces. Current plans include rebuilding of the triad. Cost estimates vary, but the range seems to be $30 billion to $50 billion a year for 10-15 years. This requires an increased topline or reduction in other forces investment.

Long-term program plans can then be developed and designed for efficient implementation using all the tools now available.

Current system performance with the $400 billion-plus cost growth makes it clear that cost focus is inadequate. There are many reasons for cost growth ranging from excessive technical risk to poor management performance by the contractor or government. While all programs suffer from vast bureaucratic layers of decision-making, each program has its own unique problems and cannot be generalized to a simple formula.

Part of the reason for this poor performance is lack of competition in major acquisitions other than the initial source selection to award the decadeís long monopoly of the winner. The current system rewards the winner with all of the production while prices are determined by a negotiation process that leaves the supplier firmly in control of cost. Even though there are extensive regulations governing cost and price, the supplier is in the position of justifying the highest price both for projects and overhead. Profits depend on it.

Government negotiators are at a great disadvantage, both in experience and system knowledge. Should-cost studies are a limited tool and have not shown much impact.

A competitive environment changes management motivation. Instead of an inexperienced negotiator having to figuring out reasonable prices, management will do it in an attempt to win business. Our experience in the 1980s confirmed this dynamic. It can be seen now in the Air Force launch vehicle program. The potential entry of a competitor has caused the entrenched sole source supplier to reduce prices to derail the competition. Hopefully, the Air Force does not surrender.

Many have argued that competition is wasteful duplication. This argument is applied only in the defense industry; the rest of the economy is based on maintenance of a competitive environment. Defense should be also. But competition is not just about cost, it is about performance, technological creativity and customer support. Defense should follow the national economy, not just rely on a poorly functioning regulated system.

Competition is also about maintenance of a long-term industrial base. Current acquisition policies have eliminated a competitive base for fighter aircraft since it is planned to terminate production of other fighter aircraft in favor of the poorly performing F-35 program. This is the right time to initiate a competitive program for Navy use, making it clear that the F-35 is not necessarily the only choice.

Similarly, all major system categories should not be allowed to atrophy to sole-source situations. A major tool for achieving long-term competition is dual-source production, even at low production rates.

Government management needs to be strengthened. Existence of more than $400 billion in cost growth makes it clear the current system has not produced the desired results. Falling budgets make it imperative that more attention be paid to cost control, not just relegated to some backroom staff.

The Navy had two acquisition executives, one for system development, the second for production and logistic support. This resulted in the ability to focus on cost control, both in production and operation. Since this organization was abolished, cost growth has accelerated and is reflected in the DDG 1000, Ford-class carrier, littoral combat ship and others.

It is time to restore this balance by reassigning one of the existing service assistant secretaries the role of acquisition executive for production and logistics. This person would also be the alternate acquisition executive, assuring that there is always an acquisition executive rather than a vacancy as has been the case far too often.

The acquisition process needs to be rationalized and decision flows simplified. Months are involved in getting requirements decisions, more in the procurement process and the milestone decision process. Flow charts of the process defy explanation. The Joint Requirements Board even has a routine and expedited path for approval. Bureaucracy excels.

Bureaucracy must be reduced. Navy performance improved by elimination of the Navy Materiel Command. Other services should take the same step.

Performance data shows the defense acquisition system does not work by any rational measure. But recent successes in streamlining the process for urgent war-fighting needs demonstrates that the larger problem can be fixed; it is not impossible to return common sense and line authority and accountability to achieve success.

The Polaris and Minuteman programs, each more challenging for their day than any current major program, took just over four years from concept to initial operational capability. That is the kind of accountable, streamlined system that we should have as our goal. It can be done. ■

John Lehman is founder of the J.F. Lehman & Co. investment firm, and was US Navy secretary in the Reagan administration and member of the 9/11 Commission.Everett Pyatt is the leader of the Project for Defense Management and Acquisition Leadership at the McCain Institute for International Leadership, a part of Arizona State University.

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