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 18 years ago. Today I would like to share with you some of my developing views on advanced technology and where I think we're headed in the world of defense procurement.
The defense acquisition challenge facing us is driven by dramatic changes under way 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 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 [force equals mass times acceleration] 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 trade-offs that were made in those times performance was the sine qua non [essential element] of every major defense acquisition program. Cost was a fallout -- a dependent variable.
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 partners.
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 [research, development, test and evaluation], procurement, operations and maintenance -- must cope with this dual transition and lead us to a new, stable condition. For this transient phase, Secretary [of Defense William J.] 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. 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 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 2-to-1. In the current downturn TOA is down about a third and procurement is down about 65 percent 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:
- Right-size our infrastructure.
- Reduce the cost of weapon system ownership.
- Implement acquisition reform.
- Leverage the national industrial base.
- Leverage our allies' industrial base.
As I said earlier, our force structure and budgets are down about one-third from 1985 levels. Procurement is down about 65 percent 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 FY [fiscal year] 93 and will need to deal with a further contraction on the order of 20 percent over the next two years.
The department's infrastructure accounts are down only 18 percent. Our tooth-to-tail balance is in need of adjustment. We are planning to reduce our infrastructure by an additional 11 percent over the Future Years Defense Program. This is the reason why the base realignment and closure process is necessary. We need BRAC 95 to finish our right-sizing of the department's infrastructure.
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.
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 fallout 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 limited options.
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 [percent to] 70 percent 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 systems.
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. 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.
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 stages:
Stage 1: Groundwork. This stage, now behind us, was the groundwork laid by Bill Perry, [Deputy Under Secretary of Defense for Acquisition Reform] Colleen Preston and many others. It was completed with passage of the Federal Acquisition Streamlining Act 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 a moment.
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 implementation.
Our acquisition reform implementation efforts will be focused upon modifying traditional 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 unlearn 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 and Lybrand [an accounting firm] assessment indicates the DoD regulatory cost premium is about 18 percent of the contractor's value-added costs. Nearly half of all these regulatory and oversight costs are concentrated in 10 key cost drivers. MIL-Q-9858A [military standard for soldered joints in manufacturing of electronic components], an inspect-in quality assurance specification, and the Truth in Negotiations Act lead the list. Eight of the 10 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.
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 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 nondevelopmental items, commercial off-the-shelf 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 M-1 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 incremental cost.
The benefits of a better leveraged industrial base are not only reduced cost, but reduced acquisition cycle times as well. In DoD we cannot afford a 15-year cycle time when the commercial turnover is every three to four 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.
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 cannot afford individually may be affordable with a common effort.
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 cooperative interests.
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 alone approach.
To summarize briefly, I've discussed a five-pillared investment strategy for the Department of Defense that emphasizes the need to right-size our infrastructure; reduce the cost of weapon system ownership; implement acquisition reform; leverage our national industrial base; [and] 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 multifaceted 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?"
Published for internal information use by the American Forces Information Service, a field activity of the Office of the Assistant to the Secretary of Defense (Public Affairs), Washington, D.C. Parenthetical entries are speaker/author notes; bracketed entries are editorial notes. This material is in the public domain and may be reprinted without permission.