Technological Supremacy at an Affordable Cost"
A Speech by
The Honorable Paul G. Kaminski
Under Secretary of Defense (Acquisition & Technology)
The Industrial College of the Armed Forces
January 27, 1995
Ladies and gentlemen, it's great to be back at ICAF--I had an enjoyable and
productive time during the wonderful year I spent as a student eighteen years
ago. Today, I would like to share with you some of my developing views on
advance technology and where I think we're headed in the world of defense
The defense acquisition challenge facing us is driven by dramatic changes
underway in the world today. I see us in a period of dual transition: one is a
needs transition due to the enormous changes in the national security
environment; and the second is what I would describe as a sources
transition where we, in the Department of Defense (DOD), are promulgating a
shift in the balance between the military and commercial elements of our
national industrial base. We are moving our system to place greater reliance
on commercial sources.
The needs transition is a change in the worldwide threats to American
interests. We are moving from the period of the Cold War in which the
galvanizing threat, the former Soviet Union, was so great, that we were
dependent on investment in weapon systems with strong performance advantages
for the survival of our nation.
In fact, we had a whole action-reaction F=MA paradigm operating where we could
rely on exquisite technical intelligence assets to determine the
characteristics of the threat systems as they were developed along with good
estimates of when they would be deployed. We then could determine precisely
what was needed to overcome those threats and what deployment schedule was
needed. We had plenty of lead time to begin a program in a way that was easy
to describe and to defend to the Congress and the American people. In the
tradeoffs that were made in those times, performance was the sine qua non of
every major defense acquisition program. Cost was a fall out--a dependent
In the post-Cold War world, it is a completely different ball game. The
United States, as the only remaining superpower, is faced with scenarios that
involve regional conflicts with diminished potential for direct military
threats to our territory. However, there is increased likelihood of our forces
being committed to limited military actions in which allies are important
I would sum this all up in statistical terms by saying the mean value
of our single greatest threat is considerably reduced. The irony of the
situation is that the variance of the collective threat that we are
dealing with, planning for, and must counter today is way up. This gives us
some pause in trying to plan intelligently. In response to reduced mean value,
we have cut our end strength by about a third. And at the same time, the
increase in variance has caused deployments to go up by a third.
The Department's financial investment strategy--what we spend on RDT&E,
procurement, operations and maintenance--must cope with this dual transition
and lead us to a new, stable condition. For this transient phase, Secretary
Perry made the conscious decision to bring our total budget and force structure
down while maintaining the high state of readiness needed to support increased
operational tempos. It is the right posture to be in for dealing with that
needs transition I spoke of earlier.
We have done this by bringing our procurement down at a pace that is twice the
rate of the overall downturn in total obligation authority (TOA). This
approach defers long term modernization or future readiness. I view this as a
temporary condition. This level of procurement is not intended to sustain the
Bottom Up Review (BUR) force over the long term.
If one goes back and looks at past periods of transition, procurement has
been the most volatile element of the budget. Over the past 50 years, the
change in procurement has tracked overall changes in the budget by a factor--an
influence coefficient--that is about two to one. In the current down turn, TOA
is down about a third and procurement is down about 65% since 1985. If the
budget is growing, we invest heavily in equipment; if it is declining, we do
not buy equipment.
The rationale here is really easy to understand. If the force size is reduced
dramatically, the equipment we have on hand is ordinarily sufficient. In fact,
you can keep the most modern equipment in the hands of the forces that remain.
There is virtually no need to procure new equipment. However, while this
strategy is executable in the short term, it is not a long term approach. It
does not address, for example, our longer term modernization needs and the
needs of our industrial base.
So what is our strategy for the longer term? One condition is a given: our
policy of fielding technologically superior weapon systems will not change.
Second best technology just does not cut it in modern warfare.
Our challenge will be to maintain technological supremacy--both in our
equipment and in the forces that will be using that equipment--within an
affordable budget. The key question is: How will we generate and sustain the
forces we need? I would like to describe to you a "five pillar" investment
strategy composed of the following elements:
(1) Right Size Our Infrastructure
(2) Reduce the Cost of Weapon System Ownership
(3) Implement Acquisition Reform
(4) Leverage the National Industrial Base
(5) Leverage Our Allies' Industrial Base
Pillar #1: Right Size Our Infrastructure
As I said earlier, our force structure and budgets are down about one-third
from 1985 levels. Procurement is down about 65% and has leveled off. However,
our full funding policy will cause the procurement outlay flow to not bottom
out for another two years. The implication is that industry is still living
off of dollars appropriated for FY93 and will need to deal with a further
contraction on the order of 20% over the next two years.
The Department's infrastructure accounts are down only 18%. Our
"tooth-to-tail" balance is in need of adjustment. We are planning to reduce
our infrastructure by an additional 11% over the Future Years Defense Program
(FYDP). This is the reason why the Base Realignment and Closure (BRAC) process
is necessary. We need BRAC '95 to finish our right sizing of the Department's
But there is a cash flow down side to base closures--it costs money in the
short term to realize a long term savings. The important point on right sizing
infrastructure is that it will generate savings on a recurring basis. This
will provide a key source of funds that can be
plowed back into the investment base for modernization.
Pillar #2: Reduce Cost of Weapon System Ownership
Future modernization will also be financed, in part, by reducing the cost of
weapon system ownership--this is the second pillar of an overall DOD investment
strategy. It means we need to adopt a more balanced "cost of performance" view
where weapon system life cycle cost is viewed as an independent
variable, not simply fall-out as a dependent variable.
This creates a strong imperative for the Department's acquisition and
requirements communities to do the up front trades and assess the incremental
cost of driving requirements. It is important to make the results of
cost-performance trades available to decision makers early in the acquisition
process. The alternative is to have an unwanted schedule-quantities outcome
thrust upon us at a downstream point--one where we have little flexibility and
As a consequence, I am emphasizing a shift away from a world where performance
is the only consideration. For example, I just recently reviewed the
acquisition strategy for a new class of high altitude, long endurance, unmanned
airborne vehicles--a system called Tier II Plus--in which the government has
only one driving requirement: a $10 million unit flyaway price. This
requirement stems from the need to have an economical, reconnaissance asset
that we can risk sending into enemy airspace. Our focus is to get as much
reconnaissance capability--military utility--as possible for $10 million.
TSSAM, the Tri-Service Standoff Attack Missile, was canceled largely because
it became too expensive. We simply could not afford the system. It is another
example of the Department's commitment to elevate the importance of reducing
weapon system ownership costs.
As we purchase new and modified systems, we will stress reduction of overall
life cycle cost--not just the initial acquisition cost. This emphasis
is driven by the fact that 60-70% of a system's costs are incurred subsequent
to initial deployment of the system. The message here is that "back end"
sustainment costs will receive more "up front" attention in the design of a new
system. To the extent DOD maintains systems longer, we must increase our focus
on reducing the cost of ownership for the remaining service life of our current
Cost of ownership is inextricably linked with how well our overall logistics
and support system operates. I have put defense logistics high on my list of
priorities. My sense is that part of the logistics and support control problem
is adequate cost visibility. As a rough working estimate, I find DOD wholesale
spare inventories are valued at $77 billion, with annual outflows approaching
$13 billion. About $18 billion is War Reserve Material (WRM). Even without
the war reserve stocks, the inventory turns ratio is unimpressive when compared
to certain commercial commodities. I would not say we can manage this
inventory in exactly the same way commercial inventory is managed--but I would
say there is probably room for improvement.
An additional cost of $13 billion is spent annually on depot maintenance.
Summing the depot maintenance and annual spares outflows together provides an
annual cost not far from what the DOD is spending on procurement. My point on
cost of ownership is that we must focus on reducing the life cycle costs of our
weapon systems, improving our operation in the back end, to provide another
source of funds for future modernization.
Pillar #3: Implement Acquisition Reform
Acquisition reform is the third part of the investment equation--it ought to
make us more efficient; improve our business practices; and allow us to buy
more with less. In general terms, I see acquisition reform proceeding in three
Stage 1: Ground Work. This stage, now behind us, was the groundwork laid by
Bill Perry, Colleen Preston and many others. It was completed with passage of
the Federal Acquisition Streamlining Act (FASTA) of 1994. This act provides an
excellent foundation and is especially helpful in two small-purchase
categories--under $25,000 and under $100,000.
Stage 2: Implementation. It is here and now--time for doing and not just
talking. This stage deals with improving the processes for procurement of
medium- to large-size systems as well as for small purchases. More on this in
Stage 3: Another Round of Legislation. This stage is directed toward
enactment of a legislative package--FASTA II--for relief from restrictive
statutes not dealt with earlier. It is intended to remove many of the
statutory impediments to efficient acquisition of large systems. I see us
moving to this third stage now--even as we make progress on stage 2
Our acquisition reform implementation efforts will be focused upon modifying
individual and organizational behaviors. We are shifting from an environment
of regulation and enforcement to one of incentivized performance. To make the
system truly responsive, we must "un-learn" some of the accumulated collective
behaviors we have "learned" over the years. My goal is to create a climate of
reasoned, well informed risk-taking by our program executive officers and
system program directors.
With successful implementation, acquisition reform should change the way we
conduct business within the Department. We are moving away from a pattern of
hierarchical decision making to a process where decisions are made across
organizational structures by integrated
product teams. It means we are breaking down institutional barriers. It also
means that our senior acquisition staffs are in a receive mode--not just
a transmit mode. The objective is to be receptive to ideas from the
field to obtain buy-in and lasting change. I expect to see more use of
"pilot-like" mechanisms as agents of change. There is lots of flexibility in
the 5000 series directives. The issue is to incentivize change away from a
"one-size-fits-all" classical mold.
One final note about acquisition reform: the payoff for relief from the
defense regulatory burden is big. A recent Coopers & Lybrand assessment
indicates the DoD regulatory cost premium is about 18% of the contractor's
value added costs. Nearly half of all these regulatory and oversight costs are
concentrated in ten key cost drivers. MIL-Q-9858A, an "inspect in" quality
assurance specification, and the Truth in Negotiations Act (TINA) lead the
list. Eight of the ten top drivers are not directly imposed by legislation.
We are moving out smartly on a plan to change the way we do business and attack
DOD-imposed regulatory cost premiums.
Pillar #4: Leverage the National Industrial Base
The fourth element of our strategy is to leverage both the technology and
production components of our commercial base. I believe that a dual-use
strategy is essential in today's world. The DOD no longer paces technological
change in many areas--electronics, telecommunications and advanced composite
materials are good examples.
We need to learn how to best capture what is going on in the commercial world.
The DOD can then influence the development of high-payoff commercial technology
through application-specific projects without having to make the root
investments by ourselves. The Advanced Research Projects Agency's investment
in monolithic microwave integrated circuit (MMIC) technology is an excellent
example of how the DOD should support dual use technologies.
I would like to stress that the DOD will only make these investments when
there is a projected value added return--in the form of lower prices and
increased military utility--to the Department. We are looking for increased
access to the kind of affordable, leading edge technology that is sustained and
continuously improved through the dynamics of the commercial marketplace.
We are seeking commercial processing and production efficiencies through
Non-Developmental Items (NDI), Commercial Off-the-Shelf (COTS) acquisitions and
use of common production facilities. I am not so naive to think we can build
full-up systems on a commercial or common production line. However, I do
believe we can use common production facilities to capture economies of scale
at the subsystem, component and piece part level.
For instance, we should look hard at commercial designs for a turbo-alternator
on the M1 tank or the propulsive unit for a new land vehicle. In general, we
need to evaluate those military requirements that are driving unique processes
or production facilities and assess whether these requirements are worth the
The benefits of a better leveraged industrial base are not only reduced cost,
but reduced acquisition cycle times as well. In DOD, we can not afford a
15-year cycle time when the commercial turnover is every 3-4 years. In a
global market, everyone--including our adversaries--has access to the same
commercial technology base. The military advantage will go to the nation who
has the best cycle time to capture what is available commercially, get it
incorporated in weapon systems, and get it fielded.
Pillar #5: Leverage the Allies' Industrial Base
The fifth and last pillar is to leverage our allies' industrial base. As I
see it, there are three primary reasons to pursue international cooperation in
armaments development. One is political: these programs help strengthen the
connective tissue between us and our allies. Another reason is military: an
increased likelihood of operating in a coalition environment means we need to
stress interoperable equipment and rationalized logistics. And the third
reason is economic: our defense budgets and those of our allies are
shrinking--what we can not afford individually may be affordable with a common
The history of international cooperation on armaments has not been good. As I
look at the record, I see that many programs were started; but few have been
completed or continued very long. In general, most of the problems revolved
around conflicts between narrow national interests being at odds with broader
We intend to pursue a strategy to mitigate these conflicts--one that provides
competition and more incentive for seeing a program through to completion. The
idea is to allow two international teams with equal national work shares to
compete. The team with best comparative advantage will deliver the highest
value product at a price that may not be affordable through a national "go it
To summarize briefly, I've discussed a five pillared investment strategy for
the Department of Defense that emphasizes the need to: (1) right size our
infrastructure; (2) reduce the cost of weapon system ownership; (3)
implement acquisition reform; (4) leverage our national industrial base; (5)
leverage our allies' industrial base. There is no single "silver bullet" that
the DOD can rely on to maintain the technological superiority of U.S. forces at
an affordable cost. Instead, we are going to pursue this deliberate,
carefully crafted and multi-faceted investment strategy.
In closing, let me leave you with a thought from Robert F. Kennedy--Some look
at things as they are and ask why. Others look at things as they could be and
ask why not. I invite you to join me in asking why not.