Achieving DoD Acquisition Goals by Being a Better Buyer and a Better Customer

Achieving DoD Acquisition Goals by Being a Better Buyer and a Better Customer
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This speech was given by Scott Chandler at Lexington’s Defense Acquisition Forum on June 3, 2016.  Chandler is an Aviation and Acquisition Consultant.

After 35 years in aerospace, I find myself passionate about defense acquisition reform because the stakes are high, the challenges are deep, and the opportunities are great.  Today we face both resurgent threats and a budget crisis: Russia, China, North Korea, Iran, the Islamic State, Al Qaida, and the U.S. is $19 trillion in national debt.  Former Deputy Secretary of Defense John Hamre and others have estimated that a full third of procurement dollars goes to overhead.[1]   We have a widely recognized loss of technological superiority, and an acquisition system that too often delivers needs late, and costs more than necessary.

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The technological superiority of the United States is now being challenged by potential adversaries in ways not seen since the Cold War.  Efficiency and productivity are always important, but the military capability that we provide to our Warfighters is paramount.”

Implementation Directive for Better Buying Power 3.0

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We have tackled such shortcomings over time with new policies aimed at being a better steward of citizens’ money, and advocate for the warfighter and buyer of the things he needs. To this day, the government has neglected the importance of how it can become a better customer for the defense industry.

This forum is a small part of the surging conversation on acquisition reform in recent years.  Congress, Department of Defense (DoD), think tanks, industry and the media have dedicated remarkable resources to this topic.  Senator John McCain and Congressman Mac Thornberry have been great advocates about how the government can become a better customer.  Thornberry was particularly optimistic in a speech at the Center for Strategic and International Studies last year stating that, “never before have all of the stars been so favorably aligned with the necessity of reform, the people in key positions, and the commitment to make it happen.”

On the other hand, acquisition reform has been more or less a continuous conversation over decades, and MIT Professor Harvey Sapolsky famously summarized the lack of progress in his well-known 2009 article “Let’s Skip Acquisition Reform This Time:”

The limited number of available reforms have all been recycles.  You can centralize or decentralize.  You can create a specialist acquisition corps or you can outsource their tasks.  You can fly before you buy or buy before you fly.  Another blue-ribbon study, more legislation, and a new slogan will not make it happen.[2]

I corresponded with Professor Sapolsky in recent weeks and discovered that he is even more pessimistic.  His remarks in that article seem particularly relevant today given current and proposed legislation which is now, once again, decentralizing DoD acquisition and walking back many Packard Commission and Goldwater-Nichols reforms.  The claim is that today is different.  In the 1980s, we were just recovering from the Cold War, but today we face a different environment.  That may be true for arguments about strategy and tactics, and perhaps the kind of equipment we are buying, but those considerations have little to do with how we buy.

Secretary Ashton B. Carter in an April House Armed Services Committee (HASC) testimony reported that DoD’s Better Buying Power (BBP) program has slowed annual growth metrics for contracted costs on major programs, dropping from nine percent to three and a half percent. A much higher percentage of major programs are also projecting cost reductions relative to initial baselines.  Better Buying Power has also improved the professionalism of the acquisition workforce, but restoring our diminishing technical dominance, increasing competition, and timeliness of acquisition have proven elusive.

It is challenging for the private sector to justify investing in an unfriendly defense acquisition environment when compared to the more attractive commercial markets available.  While BBP focuses on technical dominance and acquisition tradecraft, DoD struggles with access to technology and low rates of competition. One hundred thousand companies have stopped doing business with the Department of Defense.  The 2012 HASC report Challenges to Doing Business with the Department of Defense describes many issues driving companies to make that choice.

The Department of Defense has taken steps to reach out to the private sector and the non-traditional defense industrial base in particular.  Over the last several years, DoD has established the Defense Innovation Initiative, the Third Offset Strategy, the Defense Innovation Unit Experimental and new Manufacturing Innovation Institutes such as those in Silicon Valley and atMIT.  These measures point to a flawed strategy and assume the solution is related to education, outreach or proximity while missing the essential truth:  non-defense companies already know who DoD is and what it means to work for a difficult defense acquisition customer, and these companies choose to do business somewhere else.

The Defense Acquisition System

The defense acquisition system is a construct of government, erected over decades and codified in statute that now exceeds 180,000 pages.  It is so complex that the Air Force commissioned a supercomputer to make sense of it.

Suppliers contemplating business with the DoD must consider the burden of an acquisition system that imposes strict limits on return on investment, controls on the internal supply chain, risks intellectual property rights, and imposes social and political policy objectives unrelated to business or national defense.

Being a Better Customer

The importance of being a better customer arises not in the interest of suppliers, but from the government’s duty to responsibly handle taxpayer dollars when awarding contracts.  DoD needs the best technology available, the top minds and companies working on its problems, and the lowest cost-effective solutions for acquisition, operations, and services.  The most important principle of being a better customer is recognizing that suppliers have a choice as to which markets to serve –acquisition policy should create an environment which motivates suppliers to do business with the government.

Being a better buyer and customer are not mutually exclusive.  Being a better buyer and customer is a philosophy based on self-interest. This is because better customers increase the pool of potential suppliers eager to work and the effectiveness of market forces when the customer makes a purchase.  Better buying becomes important when awarding a contract because buyers have no access to innovation, energy, expertise, or products and services outside the supplier pool.  The buying process is where a relationship with the right incentives and checks and balances can be created to demonstrate to potential suppliers the benefits associated with being a better customer.  Ultimately, being a better buyer and customer complement one another.

Achieving Department of Defense Acquisition Goals

In the first BBP memo, Carter recognized that DoD cannot succeed alone, that many weapons and services essential to deterrence and warfighting are provided by private industry, and that “industry partners are patriots as well as businessmen.”

The Department of Defense and the private sector can work together to develop a more comprehensive DoD strategy to achieve acquisition goals by being both a better buyer andcustomer.  Many issues confront such a strategy which embraces Carter’s sentiment, but we can begin by tackling these five difficult aspects of current acquisition strategy: lack of trust, unproductive process, intellectual property policy, acquisition of commercial items, and profit policy.

Trust.  The indispensable ingredient. The 2005 Defense Performance Assessment admits the current acquisition system is based on lack of trust.  This drives predictable behavior and erection of protection on both sides of a contract, and it’s a barrier to partnership.  Lack of trust is expensive, consuming tremendous resources in unproductive process better directed to delivery of actual equipment and service to the warfighter.  Despite headlines about imagined fraud, waste and abuse, these things are as a practical matter extremely rare.  The 1986 Packard Commission understood “The nation’s defense programs lose far more too inefficient procedures than to fraud and dishonesty.  The truly costly problems are those of overcomplicated organization and rigid procedure, not avarice or connivance.”  If we are to achieve the revolutionary improvement in acquisition reform so elusive these past decades, we must establish an environment of trust both in the indispensable, patriotic private sector and the professionalism and judgment of DoD’s acquisition workforce.

Unproductive Process.  More than just consuming limited resources, the acquisition system drives so much time and cost into defense systems that product technology can become obsolete before being fielded, or makes them cost more than they need to, or pushes so much cost into the programs that they ultimately fall into irrelevance and cancellation.

For 40 years, Pratt & Whitney has been manufacturing F100 engines and components and each year it must renegotiate prices for each one.  After building 180 C-17 aircraft, the bulk of the Air Force fleet, Boeing was obliged to submit sixty-three thousand pages of data in a subsequent buy.  Are these role model examples for the protection of the taxpayer’s interests?  I suggest instead they are great opportunities for common sense and tremendous savings in time and treasure.  Suppose for example that for mature products and services, we simply allow alternate buys at base price plus agreeable government economic indices.  How many of the 150,000 acquisition professionals in AT&L, and how many in industry can be freed up with such a simple change and their resources applied to other critical tasks or to the straining budget?

Rep. Thornberry is tackling this problem.  “One of the reasons things have gotten so bogged down in bureaucracy is that we’ve tried to paperwork away all risk … Over and over again, I heard that program managers and industry are forced to manage the process rather than manage the programs.”

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“Our ability to compile vast amounts of information gives us a false sense of oversight because we now “know more” and that information is more broadly available to more checkers.”

Gary Roughhead, Compendium of Annual Program Manager Assessments for 2015 (Page 148)

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We cannot afford to fritter away precious time and treasure on unproductive process.  Moreover, the complexity and rigidity of the acquisition process, and the supplier infrastructure required to comply with it, is a tremendous barrier not just to entry for government acquisition, but tointerest in being a government supplier, and they are big factors decreasing the pool of potential innovators and competitors in the private sector willing and able to put up with it.

Intellectual Property Policy.  Article 1 of the Constitution protects intellectual property not for the benefit of innovators, but to ensure that discovery and innovation and technological breakthrough thrive.  In his visit to Silicon Valley last year, Ashton Carter assured his audience that government and DoD are “strong proponents of protecting intellectual property rights” and that “IP is often the most important and valuable asset a company holds.”  However, DoD policy in practice is to require innovators to provide the “full spectrum” of intellectual property which it uses internally and for competitive purposes. The Air Force’s “Own the Technical Baseline” program is another example of DoD intention to obtain the entirety of IP from innovators.  Recent legislation goes even further by giving government rights to compel from innovators all data used or generated in the performance of a contract if government funds were used in any part of the design.  This right can be used to allow government access to design systems and models, historical data, and research as well.


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Technology poses a particular challenge, because the DoD’s structure does not make it attractive to many American technology companies.  For Silicon Valley giants with global reach, working with the DoD may not be worth the trouble. We don’t have enough business to make them excited.  Smaller start-ups, where lots of innovation happens, are often put off by the red tape that comes with working with the Pentagon. At the end of the day, we have to provide them with an incentive to do business with us.

Frank Kendall Kendall. “DoD Tech Needs Private Sector,” Defense News, April 13, 2015.

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One of the troubling aspects of DoD IP policy is the disconnect between what DoD innovation proponents say it is, and what DoD’s intellectual property policy actually is.  While Secretary Carter reassures Silicon Valley, senior acquisition staff believes that “industry uses IP as a weapon to gain competitive advantage”, crusades against what they see as “vendor lock”, and constructs policy that embodies these two unfriendly philosophies.  All of the private sector understands actual DoD policy on intellectual property, and this is perhaps the single greatest barrier to DoD access to and inspiration of immense technological achievement.  Clearly, current intellectual property policy is working against DoD innovation goals.

Acquisition of Commercial Items.  A near universal recommendation of previous studies of defense acquisition is greater use of commercial products.  Development funded by the innovator, competition and greater volume all combine to make innovative products available to DoD in far greater variety and affordability than otherwise possible from the defense acquisition system.  Congress has been consistently supportive of acquisition of commercial items. DoD consistently less so.

In the 2013 National Defense Authorization Act (NDAA), Congress explicitly rejected[3] DoD legislative recommendations to narrow the definition of commercial items and services “of a type” that are “offered for sale”, and in 2016 required that commerciality determinations once made be valid for subsequent procurement.  However, the Director of Defense Pricing last year issued a memo dismissing the importance of the commerciality determination itself and instead stressed determination of price reasonableness regardless of commerciality and instructed contracting officers that “In certain instances, the only difference between ‘certified cost and pricing data’ and ‘other than certified cost and pricing data’ can be the fact that the data is certified.”  Then DoD issued a proposed rule on data required for commercial items which referred in several places to Federal Acquisition Register 15 requirements but finally withdrew the proposed rule after significant public pressure[4] and a letter signed by 55 Congressman. [5]

The Department of Defense has been updating its own Commercial Item Handbook, and the current version is a pretty good document.  It has some great advice too:

The more attractive the Government can make itself as a buyer, the more likely it is that world-class sellers will enter into contracts with the Government, that favorable terms and conditions will be negotiated, and that lower prices will be paid.

In other words, be a better buyer and a better customer.

Profit Policy.  The defense industrial base earns margins averaging half that for all S&P 500 companies.[6]  Whether that is a good thing or not for taxpayers depends on whether DoD profit policy delivers what the taxpayer needs in acquisition and defense.  Does it attract competition and new innovators to do business with DoD?  Does it inspire private sector investment in solving DoD problems?  Does it sustain the industrial base, ready to provide DoD whatever capability it may ask of it?  And does it actually maximize affordability?  Our recognized innovation deficit, low rates of competition, and the shrinking industrial base suggest that it does not.

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Culturally we have evolved to a point where the system would rather pay $1 billion and 5% profit for a defense good, than $500 million and 20% profit.

Pierre Chao, Twenty-five Years of Acquisition Reform: Where Do We Go From Here, Testimony before the HASC, October 29, 2013.

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Acquisition policy must understand businesses will act as businesses.  As long as businesses have a choice on what markets to pursue and whose problems to solve, financial performance will play a dominant role in the decision.  Private investment and rock-star talent, like other resources, will flow to where it receives the best return.  Leading edge technology and the venture capitalists that fund it expect margins consistent with risk – significantly greater than DoD is typically prepared to offer.   It is the nature of markets.

DoD profit policy must evolve away from viewing profit as a needless expense to be minimized, but instead as a powerful tool for achieving acquisition goals.  For as long as defense margins lag commercial alternatives so completely, many innovators will be solving commercial problems, and DoD will be frustrated in achieving its goals for acquisition and defense.

Summary

The defense acquisition system has for decades struggled with reform and elusive goals.  It is a problem that cannot be solved by education or outreach or proximity to the private sector. The private sector knows what it means to work for the difficult and unfriendly defense acquisition system.

The 2016 NDAA (Section 808) directed the Secretary of Defense to establish an Advisory Panel on Streamlining and Codifying Acquisition Regulations.   Success of this panel will depend on many things including deep understanding of the connection between policy and choices policy drives in stakeholders, including the choice of current and potential suppliers to perhaps do something else. It is right that DoD seeks the technical advantage, capable equipment, and the cost-effective service wherever it can be found, but it should not be surprised to find that freed from an acquisition system that today requires a supercomputer to make sense of, that many of the best, most innovative companies and minds already work for it.

We cannot paper over all the risk.  It’s too expensive and it’s unfriendly to the partners we need. We must have a balanced approach to acquisition, and in the end, the best approach is what we already know.  Better Buying Power 2.0 told us “the first responsibility of the acquisition officer is to think”, and when we do, we discover that we know already that to achieve DoD acquisition goals, being a better buyer and being a better customer are one and the same thing.

End Notes:

[1] John Hamre, An Honest Look at the “Military-Industrial” Complex, May 10, 2013.

[2] Harvey Sapolsky, Let’s Skip Acquisition Reform This Time, Defense News, February 8, 2009.

[3] Title VIII – Acquisition Policy, Acquisition Management and related Matters, Subtitle C,Committee Reports – 112th Congress (2011-2012) Senate Report 112-173 – National Defense Authorization Act for Fiscal Year 2013.

“The Administration requested legislation that would amend the definition of commercial items in section 103 of title 41, United States Code, to exclude items that are merely `offered for sale’ or `of a type’ offered for sale in the commercial marketplace. The committee declines to make this change.  The Federal Acquisition Streamlining Act of 1994 (FASA) (Public Law 103-355) adopted a broad definition of commercial items to ensure that federal agencies would have ready access to products that are available in the commercial marketplace – including new products and modified products that are just becoming available.  Such access remains particularly critical in fast moving commercial markets, including the markets for information technology and other advance products.”

[4] DFARS Case 2013-D034, Evaluating Price Reasonableness for Commercial Items, Council of Defense and Space Industry Associations (CODSIA), September 3, 2015.

[5] Congress sent a letter with the signature of 55 legislatures asking DoD to withdraw the proposed rule.

[6] Many references document this fact but here are two recent authoritative sources.

Aerospace & Defense – 2011 year in review and 2012 forecast, Pricewaterhouse Coopers, May 2012.

The Aerospace and Defense Industry in the U.S. – A financial and economic impact study, Deloitte Development, March 7, 2012.



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