Boeing Seeks Opportunities in Performance-Based Logistics (UPDATED)
Unlike traditional transactional contracts, vendors in a performance-based logistics contract are not paid for repairing a platform. Instead, they are paid for a pre-agreed outcome to ensure a required level of performance — in readiness and cost — for defense systems. Because these agreements typically come in the form of a firm fixed-price contract, vendors are incentivized to increase the time between failures and repairs to reduce costs and boost profits.
Boeing wants to invest in areas where there is real market potential and performance-based logistics represents one of those opportunities, said Stephen King, senior manager of product support for global services and support at Boeing. He noted that sustainment of an aircraft comprises about 70 percent of total lifecycle costs, resulting in a significant incentive for companies to pursue PBL contracts. “Against all of Boeing’s platforms, PBL is being assessed as a standard offer so every potential aircraft sale and/or sustainment business that we do, the question of, ‘Why not a PBL?’ is being asked internally and … most of the time externally with our customers.”
The company has 13 such contracts in place with U.S. defense agencies and international customers. Some of the platforms that are currently under contract are the Marine Corps’ MV-22 Osprey, the Army’s AH-64 Apache and the Air Force’s C-17 Globemaster III.
King said positive signs from top-ranking defense officials have bolstered the company’s confidence to pursue a more aggressive performance-based logistics strategy.
The office of the secretary of defense “has doubled down on PBLs,” he said. If the agreements are constructed properly from both a contract standpoint and incentive model standpoint, OSD officials have said they are beneficial, he noted.
In April, Undersecretary of Defense for Acquisition, Technology and Logistics Frank Kendall ordered the implementation of Better Buying Power 3.0, an acquisition reform initiative. Within the guidelines for BBP 3.0, Kendall stressed the importance of “incentivizing productivity in industry and government.” One of the ways in which the document said this could be achieved was by “ensuring effective use of performance-based logistics.”
“When properly established and executed, performance-based logistics is an effective way to balance cost and performance regardless of whether industry or the government is providing the logistics service,” BBP 3.0 said. “PBL also provides explicit productivity incentives and ensures the best value for the DoD.”
Terry Emmert, from the office of the assistant secretary of defense for logistics and materiel readiness, said, “absolutely we should be seeing more of these” performance-based contracts in the near future.
The Defense Department is “very committed to using the arrangements and using them more effectively,” he added.
A lot of effort and resources have been placed into educating defense officials on the benefits of PBL, debunking myths and hyperbole that have surrounded these contracts and expanding training programs to grow the skill set for crafting complex performance-based arrangements, he said.
Emmert noted that the nature of such contracts is changing as the department faces downward budgetary pressure. “We’re seeing a lot of dynamics that could both expand the utility of performance-based arrangements in ways we haven’t used them before and maybe constrain the ways we have used them before because we’re having more need to make better use of our organic depots and our supply systems.”
Additionally, a core law requirement for the use of government depots, Title 10 United States Code 2466, stipulates that no more than 50 percent of the funds made available in a fiscal year to a military department or a defense agency for depot-level maintenance and repair work may be contracted to third parties to carry out those tasks.
Due to these budgetary pressures and statutory requirements, many PBL contracts require that a portion of maintenance work be done in government depots.
“We don’t see that as a constraint — working with our government depots. We see that as an opportunity,” King said. Such an outlook could differentiate the company from its competitors, he added. By partnering with the government “we’re enabling them, helping them to improve their processes, and … they’re sharing with us some of their techniques and practices from their perspective.”
Al Banghart, a senior adviser at Deloitte Consulting LLP, who has been working with the Pentagon’s procurement office for years and led a study that quantified the savings that could be wrung from PBL deals, said a public/private partnership where the vendor moves work into a government depot via a direct sales agreement can often be beneficial for the company.
Before entering into a performance-based contract, a company will ask itself where it can obtain the best quality repair service at the lowest price to improve its return on invested capital, Banghart said. “The answer to that question is very often inside of a government facility.”
King said there are qualities that differentiate Boeing from its competitors when it comes to PBL arrangements. He pointed to the company’s experience with such deals, both at home and overseas.
The company boasts the C-17 Globemaster III integrated sustainment program (GISP) as a model PBL arrangement. The program began in 1998 and will continue through 2021. Currently, 269 C-17s operate around the world, according to Boeing’s website, and King said to his knowledge every aircraft has come under the sustainment program.
In addition to the U.S. Air Force, GISP includes international customers from the U.K. Royal Air Force, Royal Australian Air Force, Royal Canadian Air Force, Qatar Emiri Air Force and United Arab Emirates Air Force and Air Defence.
Such a global program is beneficial to both U.S. and international customers due to economies of scale, King said. “You don’t have to build unique infrastructure for each country. You can connect to … a global support network and be able to move product or technical data and/or execution across a larger scale of customers.”
GISP has reduced sustainment cost per plane by about 40 percent in fiscal year 2014 dollars. That has resulted in more than $3 billion in savings for the Defense Department from fiscal year 2004 through fiscal year 2014, according to Boeing.
The company is seeking additional global growth opportunities and observed that more international customers are interested in pursuing PBL arrangements, King said.
Banghart said there are differences in business culture that companies have to be aware of when engaging in performance-based agreements overseas.
“The divide between the government and industry in the U.S. is pretty clear,” he said. “That is not true around the world.”
In many European countries the government will have stock in defense companies, which is something that does not happen in the United States, he said. “You have to factor that in to find an intersection of interest” and structure a PBL arrangement around that.
One advantage Boeing can provide to its Defense Department customer is the ability to leverage its existing commercial global supply chain and maintenance operations for military aircraft with commercial derivatives, King said.
“When you aggregate the experience of the company on the commercial side, a lot of that is directly applicable to … [military] support arrangements,” he said.
The Navy’s P-8 Poseidon and the Air Force’s KC-46 air-refueling tanker are derived from Boeing’s 737 and 767 commercial aircraft, respectively. There are more than 5,500 737s and 800 767s currently in service, Boeing documents said. By leveraging the existing commercial infrastructure, supply chain pools, warehousing and distribution, the military could reduce costs significantly, King said.
The company is currently pursuing several PBL programs with the Navy, he added. One platform the service is debating placing under a performance-based arrangement is the P-8, he noted. Additionally, he said expanding the Marine Corps’ MV-22 Osprey — which is under the Navy’s acquisition command — is being considered.
Between 2001 and 2010, Boeing’s F/A-18 Super Hornet was under a PBL arrangement with the service. The F/A-18 Integrated Readiness Support Teaming, or FIRST, program received the system-level award for excellence in the field at the 2007 Secretary of Defense Performance-Based Logistics Awards in Washington, D.C. The arrangement increased the platform’s mission capable rate from 57 percent in 2000 to 73 percent in 2007, a Boeing press release said. However, the contract with the Navy was not renewed in 2010.
Banghart said the contract was not extended because of problems in execution unrelated to the way the PBL itself was arranged.
There was one high-cost component that turned out to have a lower mean time between failure, and therefore a much higher maintenance demand than either the Navy or Boeing had anticipated, he said. The company had to pour significant funds into traditional repairs and replacements as a result.
“At a point in time you saw the aircraft availability ... [and] mission readiness drop a little bit,” Banghart said. “The government was unhappy about that; industry was unhappy about the forecast they were provided.”
However, had there not been a PBL arrangement, the same mechanical problem would have occurred, he said. In that instance, “100 percent of the financial risk would have belonged to the Navy and 100 percent of the performance risk would have belonged to the Navy,” he noted. “Under the PBL arrangement, the sustainment provider … assumed a ton of that risk.”
Despite issues with the FIRST program, Vice Adm. Mike Shoemaker, the commander of naval air forces for the U.S. Pacific Fleet, said he is optimistic about the future of performance-based logistics.
The service currently has several successful programs in place, he said following an August panel discussion at the Center for Strategic and International Studies, a Washington, D.C. think tank.
Before the CSIS event the Navy had just finished a summit in Philadelphia with its entire supply, defense, logistics and acquisition community where the value of performance-based logistics contracts was discussed, he said.
The PBL on the service’s helicopters is “working very well,” he noted, referring to a current arrangement with Maritime Helicopter Support Co. — a partnership between Lockheed Martin and Sikorsky — to sustain its H-60 fleet.
Other attack model aircraft are being considered for future PBL arrangements, including the electronic attack variant of Boeing’s Super Hornet, the EA-18G Growler, Shoemaker said.
Correction: A previous version of this story misstated Terry Emmert's title.