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5

Barriers to Increased Integration

The desire to use more commercial products and processes in defense systems has been a significant goal of DOD for many years. Many earlier studies underscored this need, which is motivated by concerns about system acquisition and affordability, the dynamics of a rapidly consolidating or shrinking defense industrial base, and real worries over diminishing sources of defense-unique processes and products. It was not until 1994, however, that Secretary of Defense William Perry launched initiatives to reform the acquisition process.

In these new acquisition reforms, actions needed to simultaneously enable abolition of military-unique specifications and standards, encourage far greater use of COTS items, and support the evolution of a common civil-military industrial base became viewed almost interchangeably, without recognition of the different steps needed to implement these reforms. Much confusion was generated at the many policy implementation levels of DOD and the military services, especially because the reform efforts coincided with the beginning of post-Cold War workforce downsizing. In addition, reforms involving the rewriting of Federal Acquisition Regulations (FARs), legislative reform to relieve burdensome oversight, new contracting practices, and identification of pilot programs to test reforms were all proceeding simultaneously. Despite the progress in issuing policies in these areas, the goal of an integrated civil-military industrial base that would routinely yield defense systems with measurably greater (and more cost-effective) commercial content has remained elusive.

Sufficient time has now passed to permit planning and action to implement new ICMM policies. Industry consolidation is largely complete, at least among prime contractors, and workforce downsizing, while possibly incomplete, has



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Page 30 5 Barriers to Increased Integration The desire to use more commercial products and processes in defense systems has been a significant goal of DOD for many years. Many earlier studies underscored this need, which is motivated by concerns about system acquisition and affordability, the dynamics of a rapidly consolidating or shrinking defense industrial base, and real worries over diminishing sources of defense-unique processes and products. It was not until 1994, however, that Secretary of Defense William Perry launched initiatives to reform the acquisition process. In these new acquisition reforms, actions needed to simultaneously enable abolition of military-unique specifications and standards, encourage far greater use of COTS items, and support the evolution of a common civil-military industrial base became viewed almost interchangeably, without recognition of the different steps needed to implement these reforms. Much confusion was generated at the many policy implementation levels of DOD and the military services, especially because the reform efforts coincided with the beginning of post-Cold War workforce downsizing. In addition, reforms involving the rewriting of Federal Acquisition Regulations (FARs), legislative reform to relieve burdensome oversight, new contracting practices, and identification of pilot programs to test reforms were all proceeding simultaneously. Despite the progress in issuing policies in these areas, the goal of an integrated civil-military industrial base that would routinely yield defense systems with measurably greater (and more cost-effective) commercial content has remained elusive. Sufficient time has now passed to permit planning and action to implement new ICMM policies. Industry consolidation is largely complete, at least among prime contractors, and workforce downsizing, while possibly incomplete, has

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Page 31reached a modicum of stability. Many individual examples of ICMM potential have been demonstrated, but they remain the exception rather than the rule (usually requiring acquisition professionals to take unprecedented actions, with some career risk). The revisions to the FAR provide potentially enabling guidance and authorizations, although mixed interpretations are still likely across different procurement activities. Today, increased ICMM seems much more achievable than in the early days of acquisition reform, but there are still longstanding barriers that must be dealt with. Significant among these barriers are the following: Requirements process. Acquisition reform has made substantial advances in emphasizing performance-based requirements—expressing the warfighter' s need in terms of function and military utility instead of specifying how to manufacture the product. However, the cycle time for validating needs and contracting for defense product development, production, and sustainment remains excessive. Opportunities for more aggressive product/process ICMM are lost because this cycle is grossly out of sync with the commercial life cycle of development, production, and system support. Further, while “cost as an independent variable” (CAIV) requirements have been embraced as an acquisition reform philosophy, cost targets have not been sufficiently aggressive or enforceable to motivate serious pursuit of ICMM trade-off alternatives. Definition of commercial products and services. Acquisition reform also made significant strides in developing a new definition of a commercial product or service in FAR 2.101. However, that redefinition is quite narrow, particularly with respect to enabling the procurement of R&D as a commercial activity. This is true even when the actual work closely parallels or seeks to tap into existing commercial R&D as a forerunner to what could become an ICMM-based acquisition. The definition problem is fundamental. The present situation results from a definition philosophy that seeks primarily to limit, rather than optimize, the ability to leverage the commercial marketplace where such leverage is greatest—in the R&D phase. Notably, in the R&D stage commercial industry (not yet having captured the market) is usually still willing to consider defense needs. This will be so only if the defense customer does not compromise rapid product deployment to the commercial marketplace, jeopardize intellectual property rights, or impede efficiency by using parallel, defense-unique production lines. Incomplete use of FAR Part 12. The Federal Acquisition Streamlining Act (1994) called for the executive branch to place heavy emphasis on the acquisition of commercial products and services to the maximum practical extent, so a new section was added to the FAR. FAR Part 12, Acquisition of Commercial Items, gives wide latitude to contracting officers to

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Page 32buy commercially. Despite some successes, DOD has yet to realize the full potential of buying under FAR Part 12. Part of the reason is cultural and part is a lack of tools (e.g., market research and pricing tools) that the contracting workforce could use to buy commercially. These issues are addressed in Chapter 6. An aggressive and expanded implementation of FAR Part 12 is essential to the success of ICMM. In an ideal acquisition system, there would be sufficient flexibility and transparency to the type of technology used that it would be unnecessary to designate a product or service as commercial to reduce regulatory oversight. However, in the absence of such a system, more frequent designation of products or services as commercial offers significant benefit. Profit policy. This is a longstanding barrier in doing business with the DOD. It has been the subject of numerous studies in recent years, including a recent Defense Science Board Study (DOD, 2000b). The Under Secretary of Defense (Acquisition, Technology and Logistics) has as one of his five goals an initiative to improve the health of the defense industrial base. Profits on DOD contracts are largely governed by the provisions of the weighted guidelines in Department of Defense FAR Supplement (DFARS) Section 215–404–4. 1 These are detailed procedures that consider three factors in coming up with an overall profit objective: (1) performance risk, (2) contract type risk, and (3) level of capital investment in facilities. DOD contracting officers are well trained in calculat-ing and applying the weighted guidelines in a way that limits the profits on DOD contracts. This practice of negotiating profit has no counterpart in the commercial sector. The committee examined the DOD profit policy provisions of the DFARS and considers that they are a significant barrier to achieving an aggressive implementation of ICMM. The primary reason is the emphasis the weighted guidelines put on facilities capital. Specifi-cally, the provisions state that contractors are “encouraged and rewarded for aggressive capital investment in facilities” (DFARS 215–404–71–4). This incentive has long-term consequences because it encourages contractors to bring work in-house. It also frustrates an initiative like ICMM, the success of which depends on creative and innovative outsourcing, primarily to commercial suppliers. DOD acquisition executives should reexamine profit policy with an eye to dramatically stimulating outsourcing, particularly to commercial suppliers, by removing disparities in al-lowable profit rates on contracts for in-house vs. subcontracted work. This would lead to less costly systems. In the long run, it would cause prime contractors to reduce excess capacity and overhead (the extensive facilities and manpower to perpetuate military-specific custom design and 1The DFARS is available online at < http://web2.deskbook.osd.mil/htmlfiles/DBY_dfars.asp >.

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Page 33production of many items). In December 2000, DOD added a technology incentive to its weighted guidelines (DFARS 215.404–71–2). This incentive adds as much as 4 percent profit for technology innovation. This could be a fruitful area, particularly in the commercial sector. This new incentive has not received widespread implementation in DOD buying commands or in the defense industry, reinforcing the committee's impression that cultural barriers remain a major impediment to ICMM. Absence of certain other incentives. Other incentives should be considered by DOD to enhance ICMM. Longer-term contracts would motivate industry to make investments that yield savings over the product life cycle. Award term contracts could be used for this purpose. DOD could institute programs that give industry a share of the savings that accrue to DOD as a result of investments and other actions by industry. Value engineering is another tool that could be adapted to enhance ICMM and satisfy the needs of both government and industry. Acquisition oversight. It is noteworthy that most motivations for relief emanate from a desire to simplify the acquisition process, with the overseers dedicated to preventing abuse. The statutory warrants of both contracting and financial/audit management officials are brought to bear to prevent even the perception of wrongdoing, resulting in an acquisition environment between military customer and supplier that is largely adversarial. This is a totally different set of dynamics from that in the commercial customer-supplier world. It calls for a totally new basis for determining appropriate oversight—namely, oversight that does not unintentionally prevent the adoption of commercial products, processes, and practices, oversight that enables rather than impedes ICMM. Cycle times. Major defense weapon system research, development, testing, and evaluation (RDT&E) plus acquisition cycle times average 7 to 15 years, depending on the type of system, and have lifetimes of 20 to 50 years. By contrast, commercial product development cycles and product lifetimes are both shorter. The military system must be supported in the field with technology upgrades and maintenance/overhaul actions over an extended period that has few commercial counterparts. Yet the same product-life-cycle actions are accomplished in the commercial arena, including technology refreshment, only faster. This cycle time mismatch is a barrier that will probably never be completely resolved, but it certainly could be significantly improved. The new DOD 5000.1 policy of evolutionary acquisition could have an important impact by enabling technology upgrading using rapidly evolving commercial technology. Evolutionary acquisition will necessitate the definition of requirements incrementally over time. Workforce knowledge and experience base in ICMM. Modern defense acquisition professionals are highly trained, motivated, and focused on

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Page 34meeting the needs of the warfighter. This workforce consists of functional specialists, including program managers, contracting officers, financial managers, engineers, logisticians, and other specialists. They recognize their role as statutory and regulatory stewards who protect the interests of the taxpayer. They have worked hard to become an integrated product team (IPT) that executes the acquisition function. However, the very depth of this specialized approach has inadvertently worked to frustrate the shift to robust ICMM. The culture, motivation, education, training, and reward system for this workforce has traditionally been driven by a defense-unique business and program world. It is not surprising that the few successful examples of ICMM, or even ICMM pilot demonstrations, have resulted from heroic efforts by some acquisition professionals. Rather than viewing ICMM as an extraordinary event, rarely to be duplicated, this workforce must become, over time, expert and steeped in commercial practice and in all aspects of commercial business. Such a transformation is fundamental to successful ICMM and will take a substantial investment of people and funding to be realized across the workforce. All aspects of acquisition professional development (from recruitment to experience patterns, education/training, motivation, promotion/assignment policy, and so on) will have to change. Once adopted, changes in contract incentives will tend to drive the commercial workforce in this direction. However, this experience base will have to be developed in both the contractor and the government workforces. Low-risk demonstration. The recognized successes of acquisition reform often stemmed from demonstration or pilot programs with special authorities to waive or modify current practices. In most cases, there was an experimental atmosphere, and program managers were not seen as risking their careers. In spite of this, real change (and there has been some) came slowly and was not easily transferred into general practice. DOD executives will need to execute a much more aggressive set of demonstration programs and authorities than prevailed in the initial reform movement, and they will need a higher level of education and training in commercial practices to make adoption of ICMM widespread. A much more robust level of experimentation is warranted, and significant additional tools and methods, such as modeling and simulation of technology and business practice variables in real and hypothetical acquisition scenarios, will have to be devised. Personnel will need to have broad expertise in industry business, design, and product support practices. Lack of institutionalized solutions. The program management teams of even the largest acquisition actions rarely have the autonomy to develop and implement ICMM solutions on a case-by-case basis in time to benefit their programs. Program managers and prime contractors need a climate of commercially oriented procedures that they can routinely draw upon

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Page 35and a workforce steeped in commercial practice that can work from the outset of a program to increase ICMM. Dealing with these longstanding barriers to the implementation of ICMM will be difficult, especially given their deep roots in the culture of defense acquisition. The progress to date in acquisition reform, a growing base of experience in ICMM, the trends in technology and commercial business practices cited in this report, and increased incentives for ICMM are all part of the solution.