Defense Industry Pessimistic About Procurement Reforms

"Eye rolling" is the reaction that Rep. Mac Thornberry says he most often gets when he talks about improving the defense acquisition system. But it does not appear that cynicism will daunt the chairman of the House Armed Services Committee. "Defense reform is going to be a significant part of our agenda," he said during a recent committee hearing.

It is unclear so far what Congress might do to shake up the military acquisition system. Thornberry has managed to at least broaden the conversation, and has invited Defense Department and industry groups to throw in ideas. The Pentagon's top weapons buyer Frank Kendall recently submitted a lengthy proposal that seeks congressional relief from bureaucratic burdens that Kendall believes overwhelm procurement managers and keep them from focusing on the performance of programs.

Kendall, too, will soon unveil the final version of the Defense Department’s "better buying power 3.0” acquisition guidelines, which aim to spur innovation and cutting-edge technology at a time when the Pentagon is under pressure to equip forces with more advanced weaponry as other countries rapidly modernize their militaries.

Kendall's legislative proposal is "pretty significant," said Will Goodman, assistant vice president for policy at the National Defense Industrial Association. "It's clear that Mr. Kendall is looking to streamline the acquisition process inside of the government to focus program officials away from compliance and toward program management," Goodman said. "If these changes succeed in refocusing program officials back on their programs, that will be a very positive development."

Lawmakers like Thornberry and HASC top Democrat Rep. Adam Smith have become alarmed by the performance of Pentagon weapons programs. “We have a history over the last decade that is not pretty when it comes to a lot of money being spent in ways that did not turn out well, wasted money on a variety of different programs,” said Smith.

Thornberry worries that the sluggish procurement system will erode the technological advantages the U.S. military has had for decades. “Technology is moving incredibly quickly,” he said. “Some potential adversaries or competitors are putting a lot of time, effort and money into creating vulnerabilities for us.”

HASC leaders also fret about financial projections that show rising price tags for U.S. weapon systems. “By some estimates, the weapons systems that we are planning on building right now we can't afford, barring for some unforeseen acquisition reform miracle,” Smith said during a committee hearing with budget experts.

Programs like the F-35 joint strike fighter are “eating the entire defense budget alive,” said Nora Bensahel, of the Center for a New American Security. “Its costs are so high that it's crowding out everything else in the procurement area.”

Missing in that discussion, however, was the responsibility that Congress itself bears for at least some of the rising costs, officials said. Congress contributes to making the defense sector a business unfriendly environment, said Gordon R. England, former deputy secretary of defense. And not much can be done about that, he added.

“It’s our form of government,” England said during a panel discussion last week at a Naval Institute conference. “How can we be innovative?” he asked, when it takes years to get budgets approved and move programs through the Pentagon bureaucracy. “That’s the reality. How do we deal with this? It is a real issue.”

When he was Donald Rumsfeld’s deputy secretary during the George W. Bush administration, England and his boss scratched their heads over this issue. “We’ve done 128 studies on acquisition.

The bottom line is that I don’t think it’s going to get better,” England said. “I don’t believe commercial companies are going to jump into this environment because it hurts their commercial business.”

The Pentagon’s $180 billion a year research, development and procurement budget is not enough to entice new suppliers because of the regulatory burdens, said Doug Berenson, managing director of Avascent, a defense and aerospace industry consulting firm. “The Defense Department will have to make it easier for nontraditional players to sell to the government,” he said. “From a commercial player standpoint, it's a very high cost proposition.”

Contractors for years have pushed for business reforms that, they argue, will save the Pentagon money and accelerate the development of new systems. The industry’s incessant drumbeat: Pentagon red tape thwarts innovation and there is little incentive for companies to invest private funding in defense technology.

In an industry where every project requires a “legendary number of signatures” to get approved, innovation and efficiency fall by the wayside, noted Jerry DeMuro, president and CEO of BAE Systems. “This is a very highly regulated industry by definition,” he said. The Pentagon is trying to attract industry investment while at the same time it is giving companies reasons to not invest, he said. A case in point is the military radio program known as the joint tactical radio system. BAE Systems was a competitor in JTRS. “One procurement after another was canceled. Then they asked for a 70 percent solution. We developed a solution over three years, spent tens of millions of dollars, and then it gets canceled,” DeMuro said. All that money was wasted, he noted, because the JTRS technology has no commercial application.

If the Defense Department expects the industry to put money on the table, it will need to do a better job communicating its technology needs, said Ellen Lord, president and CEO of Textron Systems Corp.

“That’s one of my biggest concerns,” she said. “We’re seeing a situation where we no longer have the level of dialogue that industry needs. We have PEOs [program executive officers] who are no longer comfortable having meetings with industry.”

The Pentagon insists it wants faster and leaner programs, but the rhetoric is divorced from reality, Lord said. “We have layer upon layer upon layer of oversight that is putting so much cost into the system,” she said. “Small companies cannot afford to play. Even big companies are opting out.”

Better buying power 3.0 encourages program managers to seek new products from commercial suppliers that fund their own research and development. But Pentagon requirements for internal company cost data deter commercial companies from doing business with the government, she added.

A constant gripe is that the Defense Department demands ownership of corporate trade secrets that companies fear will end up in competitors’ hands.

“The trend that is developing is that the government wants to claim all intellectual property,” said James Dorrell, director of advanced development programs at Lockheed Martin Aeronautics. “In many cases that IP is being used to level the playing field in some competitions,” he said at an Air Force Association conference. “If that trend continues, I think many of the truly innovative ideas and technologies may not be brought forward.”

Defense officials said they sometimes seek ownership of technical data rights so they are not legally bound to keep buying from the same vendor. “Sustaining competition, that is a good thing,” said James Kenyon, general manager of next-generation fighter programs at United Technologies Pratt & Whitney. But that also stifles innovation, he said. “Everybody starts to have the same IP.”

Kenyon noted the Defense Department is increasingly using contracting mechanisms like fixed price and cost sharing which require industry to “put skin in the game.” Companies understand that, he said, but the government has to realize that there are unintended consequences. Companies, for instance, will cut corporate R&D spending to make up for the greater risk they are asked to take.

Pentagon officials have heard the criticism and are looking to fix problems, said the Air Force’s top acquisition official William LaPlante. “There is a lot of frustration on both sides,” he said at the Air Force Association conference. The IP issue is a tough one, he added. “It is a constant tension we have.” There are times when the government asks for a company’s IP when it shouldn’t, but he said it is up to the contractors to more clearly communicate where they draw the line on IP.

The Defense Department needs its procurement machine to be “faster than the adversary,” he said, and it has to do better at motivating the private sector. Companies will not invest if they don’t see a return down the road, he said. “We need to not make programs a moving target, we need to stick to requirements and source selection criteria.”

Industry executives appreciate these declarations but continue to harbor doubts.

"Many in industry are a bit suspicious," said Tom Captain, vice chairman of Deloitte's aerospace and defense sector. Contractors get the feeling that current efforts to fix defense acquisitions are another "initiative du jour" that will generate lots of reports and media coverage but will not break through the institutional inertia, Captain said. "It doesn't mean that the Defense Department doesn't have good ideas," but there is little reason to believe that any new round of reforms will reverse trends that keep weapon systems over budget and behind schedule.

The tenets promoted by “better buying power,” or BBP, have been helpful, he said. They started in 2010 under then weapon acquisitions chief Ashton Carter who is now taking the helm at the Pentagon. But Captain said the numbers show that reforms have done little to curb spiraling costs. "Not much real progress has been made," he said. "We haven't gotten the results we were looking for. Programs are getting more expensive and more complicated."

There are “many good ideas in BBP 3.0,” said Captain, “but what we need to see is movement toward doing this. I don't see the incentives.” Private contractors are “more than willing to innovate, but if they spend their own money, why does the government continue to insist that they give up the IP that they didn't pay for?”

Based on data from the Government Accountability Office over the past 15 years, the Pentagon's top 100 programs soon will be $450 billion over budget, and will hit $600 billion by 2020, Captain estimated. The average schedule slip is 35 months. Rather than address the problem, "we just kick the can down the road."

Captain lays much of the blame on Congress for not allowing "meaningful" reforms. Lawmakers say they want to fix the system but continue to pile on oversight demands and seem unwilling to let the Defense Department "do what is necessary to bend the cost curve," he said. "Defense leaders are trying hard. They're making some progress but it's very episodic and not consistent or enough to move the needle."

The Defense Department’s better buying power efforts got a boost from GAO last week. In a new report, the agency said these initiatives are a “step in the right direction,” although investigators remain concerned that this “call for change” might not result in real change as the Defense Department has a long history of failing to convert policy into practice, said GAO. “Many DoD programs are still falling short of cost, schedule, and performance expectations.”

Carter takes the top job at the Pentagon amid high expectations. In written answers to questions from the Senate Armed Services Committee, Carter highlighted long-standing frustrations with the weapons acquisition process. “We need to push to field the initial system within five years and avoid delays,” he said. “Time is money.” Another goal is to better incentivize contractors and program managers to cut costs, Carter said. “Even before the passage of the Budget Control Act of 2011, I strongly believed that unacceptable cost growth in individual programs had to be reversed.”

Topics: Procurement, Acquisition Reform, Defense Department