war on the rocks

Rethinking Defense Acquisition: Zero-Base the Regulations

January 6, 2017

The defense acquisition system is clearly broken. It equips the most powerful military in the world, but the process alone devours far too much time and one third of procurement dollars. Writing for War on the Rocks, Sen. John McCain (R-AZ), the chairman of the Senate Armed Services Committee, said  “our broken defense acquisition system is a clear and present danger to the national security of the United States.” The Defense Department’s own Defense Business Board made its number one recommendation to “zero-base the entire system, including all directives and regulations.” Or as Arnold Punaro suggested for the thousands of pages of acquisition regulations: just “[p]ut a match to it.”

The Broken Acquisition System

The defense acquisition system must deliver the most capable, innovative, cost-effective equipment to the warfighter. Too often, it fails: “The Department of Defense (DoD) acquisition process is too complicated, too slow, too expensive and includes too many competing objectives.” It does not account for how business works. It lacks agility, imposes tremendous burden on suppliers it does business with, disrespects intellectual property, and fails to inspire or harness the full innovative power of the national economy. These are the conclusions of Congress, Pentagon leadership, oversight organizations, think tanks, and the hundreds of panels, commissions, and studies spanning decades of largely ineffective acquisition reform.

More Than Just Time and Money

Dysfunction does more than squander time and money. Seemingly endless reporting, checking, approving, auditing, and program cancellations directly weakens America’s defense.

The defense acquisition system alone employs 207,000 federal workers, more than the entire active-duty Marine Corps. An equivalent army exists within industry with the sole function of complying with regulations now exceeding 180,000 pages. These are so complex the Air Force commissioned a supercomputer to make sense of them.

Ronald Fox, author of the definitive study on the history of acquisition reform, observed:

If someone were asked to devise a contracting system for the federal government, it is inconceivable that one reasonable person or a committee of reasonable people could come up with our current system.

It is troubling to consider that an adversary, determined to weaken the American defense, might devise a strategy to covertly entangle America with a defense acquisition system that looks like the one we struggle with today.

Rethinking the Acquisition Management Model

After decades of ineffective acquisition reform, continued reform employing the same logic will more likely add layers of oversight, complexity, cost, and time than achieve any progress. A 2005 Pentagon report defines the essential problem: “[the] DoD management model is based on a lack of trust — oversight is preferred to accountability.” Lack of trust is compounded by a lack of understanding of business models, especially the importance of intellectual property, and the role of profit. During a visit to Silicon Valley last year, Secretary of Defense Ashton Carter recognized that intellectual property “is often the most important and valuable asset a company holds.” Yet the Pentagon’s competition guidelines instruct acquisition officers to pry from suppliers the “full spectrum” of intellectual property for use internally and for competitive purposes.

Pentagon profit policy is another barrier to innovation, competition, and cost reduction goals. Average profit margin in defense is half that of S&P 500 companies and an even smaller fraction of margins expected by innovators and high tech companies. Congressional testimony by Pierre Chao suggests the Pentagon will even accept compromise of other acquisition goals to limit supplier margins. “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.” Since profit potential and intellectual property protection are basic components of any company decision about where to compete and whose problems to solve, commercial markets have a clear advantage over defense markets and severe implications for Pentagon access to technology, talent, and competition.

Zero-Base All Acquisition Regulations

Since lack of trust is the failed foundation of the current acquisition system, the new acquisition system must be founded on trust, accountability, and partnership between the Pentagon, the private sector, and the acquisition workforce. This means relying more on principles of the free market economy and less on unfriendly, autocratic, monopsony power, but it means abandoning no part of our duty to the American taxpayer or the warfighter.

A zero-based reframing of current acquisition law must be informed by an understanding of business principles:

  1. Trust in the private sector and the acquisition workforce
  2. Accountability versus oversight
  3. Be an attractive customer
  4. Outcome over process
  5. Performance based contracting whenever possible
  6. Commercial products and commercial-like acquisition whenever possible

Trust is central to all personal and organizational relationships. It “functions as a cultural resource, which makes economic exchange and transactions more productive … by reducing transaction costs and costly controls, as well as by enhancing the flow of information.” Research has shown trust also facilitates innovation, and allows an immediately productive response to unusual events and especially crisis.

Trust is a shared commitment, and it must exist between industry and government, but also between government leadership and acquisition officials. Much of the tortured acquisition process today exists internally and has meant a precious and expensive loss of creativity and discretion.

Despite public theatre, industry has earned a place of trust. While one third of procurement dollars go to overhead, semi-annual Inspector General reports show costs questioned or funds put to better use are 1 – 2 percent Pentagon contract dollars. Trust cannot be blind or naïve, and there will remain a role for the IG, but Congress should refrain from creating a process that spends billions to save only millions.

Accountability versus oversight. The Federal Aviation Administration and the Pentagon are studies in the difference between accountability and oversight. The FAA mandates standards and monitors commercial aviation safety for many millions of passengers every year by certifying and inspecting manufacturers, maintainers, airman, and operations. Conversely, the Pentagon directly micromanages each stage of design, development, manufacture, sustainment and financial management of military projects. At a recent conference, Boeing CEO Dennis Muilenburg contrasted the stark difference in production between the commercial Boeing 737 and 737-based Navy P-8 maritime patrol aircraft.  The P-8 is saddled with tremendously more time consuming and expensive processes. It is said that in government, a fundamental problem is that everyone is responsible for everything and no one is responsible for anything. Acquisition policy that does not advance the national defense and instead serves only to confuse accountability has to go.

Be an attractive customer is both the number one recommendation of a recent War on the Rocks article and another of my own. Yet Pentagon policy seems intentionally designed to be difficult, expensive, and unfriendly to do business with. The result is low and declining rates of competition, reluctance of innovators to work with the Pentagon, and erosion of technical dominance — still the pillar of national defense strategy.

Profit, innovation, and competition, are cornerstones of both defense acquisition policy and commercial markets. They function automatically in commercial markets but struggle to function effectively in defense markets where unfriendly acquisition policy is designed to control them. The Pentagon tries to limit profit, attract innovation but undermines it due to intellectual property and Independent Research And Development policy, and forgets that competition requires at least two bidders willing to do business with you.

Suppliers view the fundamental intent of Pentagon intellectual property policy is to do things without the innovator, without his permission, or without compensating him.  This approach only makes business with the Pentagon unattractive and risky. The Pentagon’s Defense Innovation Initiative assumes that attracting innovation is a matter of proximity and education, and ignores the fact that unfriendly acquisition policy is the reason many of the best minds and innovators choose to solve commercial problems rather than military ones. Because suppliers have a choice about who’s problems to solve and what markets to serve, the Pentagon needs to redraft unfriendly policy to be a more attractive customer. Competition, lower costs, and restored technical dominance will follow.

Outcome over process. Today’s acquisition system suffers from “30 plus layers of management in DOD, and the suffocating paperwork and processes surrounding every decision, big and small.” Today’s technology and business systems allow collection, analysis, and delivery of tremendously more data to checkers and approvers than ever before, but the Pentagon has failed to show how exhaustive analysis translates into performance. The Pentagon’s internal report on the acquisition system makes this point: “… many of the things that we have tried from the data, from the statistics last year and this year, don’t seem to be having much of a discernible effect.”

Better Buying Power 2.0 emphasized that “The first responsibility of the acquisition officer is to think.”  The Department of Defense favors annual contracts with detailed financial and operational analysis which leaves many acquisitions in perpetual negotiation. Rethinking such policy suggests that multi-year contracts and annual prices geared to mutually agreeable inflation indices make far more sense when production lead-time or sustainment intervals are longer than one year, or whenever inputs are stable.

Performance-based contracting whenever possible. Sustainment contracts based on outcome deliver exactly what the warfighter needs – equipment on the line. Traditional contracts are priced per transaction, which are revenue events for suppliers. A performance based logistics contract might guarantee a certain level of availability for tanks or aircraft at a fixed rate per hour of use. Maintenance, therefore, becomes a cost event for both supplier and the Pentagon. In this way, incentives for reliability and low cost align for both supplier and buyer.

Project Proof Point showed that performance based logistics contracts both improve military readiness and save 10 to 20 percent compared to transactional type contracts — more than $10 billion every year. PBLs are preferred by regulation and encouraged by the Defense Acquisition University, but they are not favored by contracting officers who do not understand how pricing is calculated, and because longer contracts are needed in order for incentives to operate.

Commercial products and commercial-like acquisition whenever possible. A near-universal recommendation of previous studies and Congress is greater use of commercial products. Development funded by the innovator, competition, and greater volume all combine to make innovative products available to the Pentagon in far greater variety and affordability than otherwise possible from the defense acquisition system.

But the Pentagon has consistently attempted to narrow the definition of commercial items and to treat them as much as possible like military items that require the delivery of cost and pricing data and surrender of intellectual property. Last year, the Pentagon issued a memo dismissing the importance of commerciality and instead stressed determination of price reasonableness regardless of commerciality.  Then the Pentagon issued a proposed rule defining data required for commercial items, which referred in many places to military requirements. It finally withdrew the proposed rule after significant public pressure and a letter signed by 55 members of Congress.

At one time, the Pentagon understood the importance of commercial acquisition. Its own Commercial Item Handbook states:

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 the parties will negotiate favorable terms and conditions, and agree to lower prices and payments.

The Responsibility of Congress

Acquisition law — in letter and in spirit — is the responsibility of Congress. Fortunately, both houses of Congress have recently been very active in acquisition reform. However, proposed changes follow a continued policy of incrementalism, and a philosophy of oversight over accountability. That suggests little reason for optimism that current efforts will succeed where decades of determined reform have not. MIT professor Harvey Sapolsky is more direct:

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.

However, House Armed Services Committee chairman Mac Thornberry (R-TX) remains optimistic that the current environment is ripe for serious change: “… 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.”  But if it is to happen and be successful, Congress must be willing to step further and make the needed commitment to start over and zero-base acquisition regulations.

Start Now

Of course, one cannot suspend acquisition until a new system is ready. Fortunately, the Secretary of Defense has authority to waive many acquisition requirements, Other Transaction Authority (OTA) is available in certain circumstances, and every service has already established offices to get critical acquisition done. Key operating principles for each of these offices are more efficient organizations and streamlined authority. For instance, the Air Force Rapid Capabilities Office explicitly states it employs “waivers to and deviations from any encumbering practices, procedures, policies, directives or regulations.”

Apart from these special offices, statute provides for various other waivers and methods for bypassing mainstream acquisition. In some cases, contracting officers need only apply appropriate discretion and logically tailor their acquisition in accordance with requirements.

Real Acquisition Reform

The 2016 Performance of the Defense Acquisition System report claims the current acquisition system is fine, its overhead is in line with expectations, and that claims of a broken acquisition system are a myth. But that flies in the face of evidence, decades of determined analysis, and passionate contemporary advocates for change, including both current Armed Services Committee chairmen.

The lesson of decades of ineffective reform is that the Pentagon cannot achieve its acquisition goals through incremental change over a flawed foundation. We must start over. When we do, we must guard against restoring those parts in statute that protect without examination any process, function, special interest, or constituency that does not contribute directly to the national defense. There is no place for legislation or policy that mandates non-economic preferences, removes options and incentives for cost reductions, interferes with full-cost analysis, or diminishes readiness or capability.

Part of the urgency for game changing acquisition reform is that both the Pentagon and the United States face other problems threatening our economic health and our defense. In addition to the troubled acquisition process, financial management and five other core management functions are itemized on the Government Accountability Office High-Risk List. The Pentagon is the only government agency that has never passed a financial audit. While warfighter strength has declined in response to budget pressure, compensation and healthcare costs are increasingly crowding out funding for procurement and operations. Our national debt is alarming — nearly $20 trillion already and growing quickly due to spiraling entitlements. The economic power of the United States can no longer paper over national systemic weaknesses.

Forests have been sacrificed on the altar of acquisition reform producing hundreds of studies” and they have told us what must be done. Congress and the Pentagon must abandon their failed incremental approach to acquisition reform, establish new principles, and perform a zero-based redraft of current acquisition law.

 

Scott Chandler is a former Marine Corps officer and 35-year veteran of aerospace and defense. Scott has authored previous articles and reports on acquisition reform and is a graduate of MIT, Carnegie Mellon, and RPI.

Image: U.S. Air Force photo by Tech. Sgt. James Hodgman