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The Analytics of Tough Choices

Christine Fox, Director

12 April 2011

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Overview

• Historical view

• Future challenges– Acquisition professionals opportunities

– CAPE’s role and responsibilities

• Challenges for us all

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DoD Historical Data

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1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

0

100

200

300

400

500

600

700

800

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY11

$B

Endstrength (K)

-37%

-31%

-18%

-59%

-35%

-33%

-14%

-64%

• Recent drawdowns each saw topline reductions ~30%• Acquisition cut disproportionately in both

Topline O&M Procurement Endstrength

post-Vietnam1967-1975

post-Cold War1985-1998

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Post-Vietnam• “Hollow force”

– Readiness measures bottomed out in late 1970s

– Reduced public support, adjustment to all volunteer force, and resulting lower recruit quality were contributing factors

• Some attempt to modernize rather than fully fund training, maintenance, and spares to pace the Soviet threat

Post-Cold War

• Problems with readiness occurred in mid-90s

• Major capital equipment procured below steady state replacement rates– Took advantage of Reagan

build-up

• Significant consolidation in the industrial base

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Consequences of Previous Drawdowns

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Where we are today

• Systems need replacing

• Spectrum of threats– Large, conventional nation/state actors– Smaller but very dangerous terrorist cells.

• Historic deficits

• We’re still at war……….

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The Secretary is determined

• NOT to recreate the readiness problems that characterized previous downsizing

• To make sure the Department is healthy enough to protect against and deter the continuum of very real threats that we currently face

• To find efficiency savings to reduce Department overhead costs– Protect force structure and procurement

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Our challenges

• What’s good enough?

• What should we give up? When?

• How do we invest in S&T?

• How do we get better prices?

• How do we incentivize our workforce to participate in a Culture of Savings?

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What’s good enough?

• Risk– Requirements risk– Technology risk– Cost risk

• New initiatives to inform the risk debates– Front End Assessments

• Example: Long Range Strike Family of Systems– Considered the entire portfolio of conventional deep-strike capabilities

– Focused on proven technologies to ensure that we deliver on time and on budget

– WSARA• ICE/AOA at Milestone A

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What should we give up?

• Recent SECDEF decisions:– Truncate F-22 – Truncate C-17– Terminate Future Combat System– Terminate the Expeditionary Fighting Vehicle– JSF “extra engine” a veto issue– JSF STOVL on “probation”

• How do we incentivize the community to identify these opportunities? How do we learn to ignore sunk costs?

• CAPE’s role: – Provide an assessment of the complete range of options – Distinguish critically important capability from exquisite capability

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How do we invest in S&T?• Science and Technology investment is a SECDEF and

Administration priority

• Big payoffs—the “game changers”—come from these investments.

• We need “game changers” in– Technological advancement

• Cyber– Savings

• Energy

• How do we know where to invest? How do we protect our design workforce?– One of this year’s Front End Assessments

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PMs play a lead role in identifying S&T “game changers”

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How do we get better prices?

• Teamwork key to successful programs:– Program managers; Acquisition executives; Industry; CAPE– Enables understanding of challenges, incentives, constraints– Critical to successfully working through difficult periods– Understanding leads to win-win solutions and better value for the Govt

• Example: Successful Development Program– Realistic cost estimate baselined at MS B– Realistic development schedule baselined at MS B– Experienced management team, continuity in key positions– Limited SDD phase capabilities to proven technologies

• CAPE analysis can enable strong programs and procurement savings

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Growth in PAUC Over 7-Year SDD Phase

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$225.6

2.7 4.8

150

175

200

225

250

275

300

Original PAUC (MS B 2004) CAPE estimate (MS C 2010)

Unit

Cost

(FY

04 $

M)

MILCON (underestimatedhangar requirements)

SDD Cost Growth(late test A/C build)

Quantity change (7 additional A/C)

Critical Breach

Significant Breach

$233.1$230.4

Critical Breach

Significant Breach

$233.1$230.4

(4.8)

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Growth in PAUC for Critical N-M Breach

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50

60

70

80

90

100

110

120

Uni

t Cos

t (BY

$M

)

PAUC

Spares

Support, Non-recurring and MILCONAcquisition Strategy/Fee ArrangementWeight Growth

Contractor Labor Rates and OverheadQuantity Reduction and Profile ExtensionSDD Cost Growth

Original PAUC (MS B)

Critical Breach

Significant Breach

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Multi-year Procurement Certifications

• CAPE is required in statute to assess savings from use of multi-year contracting strategy.

– Two programs evaluated to date: F/A-18 E/F and H-60– CAPE compares multi-year vs. annual strategies to assess savings– Certifications sent to Congress

• Multi-year contracting strategies can reduce costs by enabling more efficient use of contractor resources including:

– improved economic order quantities;– potential buyouts of parts and materials;– concurrent Foreign Military Sales;– acceleration of production; and– enhanced manufacturing flow.

• Assessments of savings are difficult: program historical costs typically reflect a single contracting strategy

CAPE Identified Opportunities for Savings in Both Cases 14

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Changing the Culture

• Program manager incentives– How do we best incentivize program ownership?

• What are the current disincentives?– What are the disincentives to raising concerns about a program?

• What would it take to incentivize this behavior?

• What tools do you need for effective program management?– Better cost visibility?– Better understanding of how different people assess risk and rewards?– More ability to question assumptions? – Ability to protect against requirements growth?– Other??

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You have the critical role in achieving acquisition success.

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Summary

• We are entering a period of tough budget pressures

• At the same time– We are still at war– We face a complex spectrum of threats– We need to recapitalize our force

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You are on the front lines of the procurement challenges and opportunities.