Gates: Pentagon to Implement Tougher Business Rules

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    Ashton B. Carter
    U.S. undersecretary of defense for acquisition, technology and logistics, Ashton B. Carter. Photo: DOD

    U.S. Secretary of Defense Robert Gates and undersecretary of defense for acquisition, technology and logistics Ashton B. Carter announced yesterday new rules guiding the Pentagon’s $400 billion-a-year procurement process. These guidelines are expected to save $100 billion over the next five years without impairing warfighting capabilities and readiness. By implementing this strategic reform, the Pentagon expects future systems will become more affordable, reliable and supportable.

    “Consumers are accustomed to getting more for their money — a more powerful computer, wider functionality in mobile phones — every year,” said Gates “when it comes to the defense sector, however, the taxpayers had to spend significantly more in order to get more. We need to reverse this trend”. One of the key elements in Gates’ new rules is for program managers set a new affordability target. “This target can’t be altered without authority from Carter. Managers must ensure the initial design is constrained by its ultimate schedule and cost.” Gates explained, adding that this guidance will make programs more affordable without sacrificing capabilities and prevent us from embarking on programs that will need to be cancelled when they prove unaffordable.

    Gates and Carter outlined the 23 areas expected to be improved by the plan. Specifically, new contracts will address and mandate affordability to control cost escalation. By implementing these procedures the Pentagon plans to reduce 27 percent in a program where costs are projected to be more than $100 billion.

    Some of the new programs to be started in the near future will put the new rules to the test. These include the next-generation ballistic missile submarine (SSBNX), long-range strike systems for the Air Force and Navy, and the Marine Corps presidential helicopter and the ground combat vehicle. The later was cancelled recently and the current pause will enable the PM and industry to ‘start on the right foot’, along with the new procedures.

    Under the new policy companies will be required to provide more predictable cost estimations and meet those costs down the road. They will be rewarded for efficiency, consistently delivering affordable systems on time, and below budget. When costs increase happen, contractors will be required to share the burden. Prime contractors are likely to be most exposed to this new risk, but subcontractors could also find themselves vulnerable when required to take responsibility on delays they cause, far exceeding their share of a program. Therefore, the new regulation, although positive in theory, is likely to cause significant concern among second and third tier suppliers.

    On its part, the government will examine processes to streamline the process, for example, by committing multi-year contracts over year-by-year acquisition. More competition and the encouragement of small business enterprises are also considered vital for cost reduction. As an example, the littoral combat ship program shifting from directed to competitive buys, is expected to save over $1 billion.

    To increase affordability and reduce life cycle cost, the Pentagon will require the use of open-system architecture.

    Another area where the defense sector fails to achieve the results of the open market is in outsourcing contracts, considered a significant money saver in the commercial market. Outsourcing services in general have grown dramatically in the past decade. “This area that has grown to become a $200 billion annual cost to the department,” Carter said. “Half of our costs are for services, and we’re performing worse there,” he said. Indicated this inflated outsourcing should be better managed. To improve control, the Pentagon is shifting back to in house contract management. In the past year the Pentagon has been hiring procurement officers in the thousands to handle the acquisition process outsourcing to industry in the past decade. Aware of the potential of bureaucracy they may add, Carter promised to weed out those ‘ unproductive bureaucratic processes’.

    Carter added that he will oversee progress daily and will provide progress reports to Gates monthly. “To those who hesitate, to those who fear to go down this path, they need to consider the alternative: broken promises, cancelled programs, unpredictability and uncertainty that is bad for industry, erodes taxpayer confidence, and worst of all, results in lost warfighter capabilities,” he said.