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Special Briefing on the Latest Reforms in Defense Acquisition

Presenters: Mr. Stan Soloway, Deputy Under Secretary of Defense for Acquisition Reform
December 15, 2000 9:00 AM EDT

(Special briefing on the latest reforms in defense acquisition. Also participating: Rear Adm. Daniel Stone, director of Logistics, Defense Logistics Agency; Tom Culligan, vice president, Defense and Space, Honeywell; Bill Sylvestri, general manager, Hamilton Sunstrand; Air Force Brig. Gen. Darryl Scott, deputy assistant secretary of the Air Force for Contracting; Bob Bartolini, vice president, Sarnoff Corporation; and DoD Spokesperson Cheryl Irwin)

Irwin: Good morning, ladies and gentlemen. Welcome to the briefing room at DoD. And also for the audience at Fort Belvoir, I'd like to welcome you to this news conference this morning. And I believe we'll also have a training session as well for a few moments afterwards.

We will have up here today, for your information, Deputy Under Secretary of Defense for Acquisition Reform and also Director of the Defense Reform Initiative Mr. Stan Soloway. And we will also have Admiral Daniel Stone, who is the director of Logistics for the Defense Logistics Agency.

Ladies and gentlemen, Mr. Stan Soloway and Admiral Stone, I believe.

Soloway: Thank you, Cheryl.

Before we get started, I'd like to invite the rest of our party to come up here with me, and we'll explain all this to you as we go along.

On behalf of the under secretary of Defense for Acquisition Technology and Logistics, Jacques Gansler, I want to welcome you and thank you for attending what is really kind of a "threefer." It's part news briefing, part kickoff for a major summit on change management, and also an opportunity for us to talk about some specific outcomes that we've experienced through the Change Management Center since we launched it just a year ago.

Joining me on the podium today, as Cheryl said, is Rear Admiral Dan Stone from DLA; Bob Bartolini, the vice president of the Sarnoff Corporation; Tom Culligan, vice president of Honeywell; Karen Wilson, also a vice president of Honeywell; Bill Sylvestri, the general manager of Hamilton Sunstrand; and -- where's Darryl -- and Brigadier General Darryl Scott of the United States Air Force, Acquisition Contracting.

We are also broadcasting this conference, this briefing, down to Fort Belvoir, to over 150 people who are attending the first change management summit and training session. They've assembled down there to learn more about industry-proven tools and methods that we are pleased to feature at this press conference and we'll talk more about.

In addition to training, our change agents will receive a valuable opportunity to brainstorm with their peers from across the department, to find new ways to accelerate change in their own organizations.

We'll be taking questions from all of you and those folks down at Fort Belvoir in just a few minutes.

And in addition to our folks down at Belvoir, we're also delighted to have however many of our thousands of acquisition professionals out across the country today, who are joining us via the Internet and a satellite feed.

As many of you know, in 1998, the Department of Defense published a major report on change management and the necessary transition to what we now call the commercial business environment. That 1998 report, which was part of our Section 912 studies, a series of studies, found that commercial enterprises proactively use targeted education training to develop, refine, deploy, and maintain key characteristics of world-class organizations.

Those key characteristics include things like empowering cross-functional virtual teams across the enterprise to achieve goals, adopting and adapting industry-proven practices to accelerate change within the enterprise, and creating and maintaining a true learning organization and knowledge-management system to share best practices.

Shortly after the report was released we established within DoD the Change Management Center. And I have to tell you that this is something that I believe is one of the most important steps we've taken in acquisition reform, and reform in general, across the Department in the last number of years.

The Change Management Center, or CMC, integrates commercial change management methods and tools to bring the benefits of accelerated change management to DoD and across government. The center itself is an example of proven best practices. Indeed, virtually every company study that -- when we were doing the report, every company we studied that had successfully transformed itself, had also created within the company an infrastructure or organization to assist with the very difficult and daunting challenges associated with the change process itself.

The CMC is already helping the Department fashion new roles and responsibilities for the workforce while promoting meaningful action and results. This change is being driven by a very successful technique known as Rapid Improvement Teams.

Rapid Improvement Teams, or RITs, are intended to be short-lived working groups empowered by senior sponsors to deliver important, measurable results quickly. The Change Management Center helps a potential sponsor design and charter a Rapid Improvement Campaign to meet his or her most pressing reinvention problems.

Typically, a Rapid Improvement campaign will begin with a senior- level jumpstart meeting that develops a problem framework and solution outline in just three or four days. This framework is then passed to additional Rapid Improvement teams to develop specific solutions and implementation plans, as well as the metrics to measure success. While campaigns can vary significantly in complexity, even the toughest problems can often be solved or at least the road to solutions can be identified and begun to be pursued in as little as 60 or 90 days.

The RIT process has already shown tremendous promise. Through more than 100 RIT engagements over the past 11 months, we've developed strategies and roadmaps for change in dozens of areas. These areas include commercial research and development; business process and organizational reengineering; knowledge management and electronic business; and in concert with our civilian agency counterparts, redesign of the federal procurement data system; reengineering of the 8-A process and more.

One of the most significant accomplishments of the RIT process has been the development of innovative strategic supplier alliances with several of our key industry partners.

This progress was -- and I will talk about it more in a minute -- recently acknowledged in a recent report by the inspector general.

For instance, the strategic supplier alliance between the Honeywell Corporation and DLA was created through the RIT process. In building the alliance, DoD was able to move from its traditional transaction-based acquisition approach to true strategic portfolio management, such as we see in the best of the commercial world today. In this case, previously DoD had contracted for tens of thousands of parts on numerous contracting vehicles from Honeywell and annually executed thousands of contract and thus pricing actions and more.

Through the supplier alliance, we are able now to significantly streamline the process, reduce the number of actual contract and pricing actions from thousands to literally a handful a year, rely on agreed-upon cost and price baselines, performance commitments, information sharing, long-term price commitments and reductions and much more. Among other things, the results will include decreased response times, lower administrative costs and much better service for DLA's customers.

It has been estimated that this strategic alliance will save DLA's customers nearly half of what they would have paid over the next 12 years. In fact, based on the price reduction curve agreed to by Honeywell and DLA, DLA will actually be paying, in real dollars, less for parts in 10 years than it paid for some of those parts last year. As the inspector general put it in a recent report praising the strategic supplier alliance strategy, this partnership will achieve better, faster, cheaper results for DoD.

Although it was the first, Honeywell's is not the only strategic supplier alliance we have built through the CMC. Our strategic supplier alliance with Sarnoff Corporation will help enhance and increase the department's ability to advance commercial technologies and research capabilities in the commercial sector, while our strategic alliance with Hamilton Sunstrand, as does our Honeywell initiative, brings commercial innovations to our supply and contracting systems.

As I noted before, I'm joined here on the podium by senior representatives from DLA, Honeywell, Hamilton Sunstrand and Sarnoff. All of us will be more than willing to answer whatever questions you might have in just a few minutes. But I want to make a few other comments.

Strategic supplier alliances are not the answer to all of DoD's support needs. There are many innovative business collaborations that can help the department meet its mission requirements. But strategic alliances are proving themselves to be extremely beneficial, real innovations, and most importantly, that they help further illustrate the art of the possible, particularly when the many varied stakeholders, customers, buyers, our oversight community and others, work together. As such, we think they are excellent examples of the kind of change that is possible through an initiative like the Change Management Center.

Before I conclude, I should also note one other feature of the CMC. In addition to the rapid improvement process, the Change Management Center has created a state-of-the-art learning and knowledge management website as a foundation for the DoD commercial business environment. Through this portal, the DoD workforce can now access undergraduate and graduate level online courses from some of the nation's premier business schools, pursue professional certification and training, and take more than 825 on-demand courses.

The same website also serves as the home for public group discussions within knowledge communities and provides a private online forum for the sharing of best practices and collaboration by team members involved in the Rapid Improvement Team process. It will also be closely and directly linked to an overall DoD knowledge management system that we are now in the process of building.

I'd like to close by repeating something that Dr. Gansler and others have said many times. As our military continues to re-think and change to meet the new strategic challenges we face, as the commercial world continues to adapt to the challenges and enormous opportunities presented by the technological change and new global marketplace, so too must we, the DoD, continue to change the way we think about the business of defense, and that's really why we're here today.

Now, it's my pleasure to introduce Rear Admiral Dan Stone, the director of Logistics Operations for DLA. Admiral Stone is going to talk for a moment about some of the strategic alliances DLA is involved in and how they're benefiting DLA and its customers.

Dan?

Stone: Well, good morning. I want to start out by saying how pleased and proud DLA is to be part of the strategic supplier alliances. Each day I think we all agree that we get much closer to achieving the benefits that we all know are possible through a strong partnership with our strategic suppliers.

The credit for the success of this effort probably could go to many parties that are in the room today, but I think we all agree the first thank-you should go to Mr. Stan Soloway. It was Stan's vision and belief that improving the process was really achievable, that has been our motivation. I think we also should thank Bill Mounts, who has guided Stan's vision through what has been at times a very complex road as we've gone through this effort.

I believe also we all agree that the industry partners are a very key part of this alliance and this relationship, and supporting the vision with a strong commitment from their senior executive level, I believe that has been one of the key factors in the success that we're experiencing right now.

There are many, many players that are on this all-star team for this alliance, and probably one that has -- that no one has been more key to it than Henry Kleinknecht from the IG. His useful insight has been there just about every step of the way in helping us to improve the process.

At DLA, we're very proud of our team and of our players that have been working very hard to make these alliances, I believe, strong and very productive. The DLA is very committed to this effort. I believe that the success of the this effort is of mutual benefit to the government and is also of mutual benefit to our industry partners.

We are committed to leveraging commercial practices where they best fit. And this is really a complex process. And I think one of the real strengths of the alliance is the recognition that no one solution really hits every need. The needs of a major industrial activity is definitely different from the needs that we see on our aircraft carriers. And I think the contracting vehicles that we're putting in place with these alliances really do hit all these different needs. There is, I think, a mutually beneficial solution for every need. And these alliances, I think, show a commitment to finding these solutions.

I believe probably what should always bear a last thought is that if we continue to get this right, and I firmly believe we can, then the warfighter will thank us for it. Thank you.

Soloway: Thank you, Dan.

Before we go to your questions, let me just reiterate one point. As I've said, this is really kind of a three-fer because we have this whole group of folks down at Belvoir today who are participating in this first Change Management Summit and training session.

For those of you in the press and others who are interested in specifics, we're more than happy to answer specifics about the individual alliances that are represented up here on the podium. But again, I want to reiterate the point that what we're most proud of in this process is that we've actually put in place a structure and a resource for folks across the Department of Defense who are interested and excited about pursuing change but face those typical barriers you face in any organization to enable them to do that and to help them through the process. And these are just a few examples of what the art of the possible is.

With that, I'd be more than happy to take any questions the folks here might have, or anybody down at Fort Belvoir.

So, why don't we start here. Yes.

Q: Is a strategic supplier the same as an industrial prime vendor, and does the strategic supplier have a guaranteed business on a particular market and nobody else can compete anymore?

Soloway: Dan, go ahead.

Stone: In some cases, our strategic alliance could be with one of our industrial prime vendors. The criteria we're using initially, because this concept can go across many, many of our suppliers, but initially we're looking for the major suppliers that have business with us which is $100 million or more.

In some cases, some of our industrial prime vendors probably do not meet that threshold.

We're also looking for those items that really have a critical mission capability, the items that probably mean the most from a readiness point of view. And so in coming from those two criteria, some of the industrial prime vendors will be in and probably some will not. Not initially. I think there's a potential for just about everybody to use the concept of what we're trying to do with the strategic alliance.

Soloway: Let me add something to that, if I could, also. That one of the key points -- and I'll use the Honeywell example -- is what we're able to do in this alliance is, instead of having multiple different contracting vehicles for different kinds of parts coming through different supply systems and so forth, we're able to consolidate them, take advantage of Honeywell's commercial distribution capabilities, whether it be a military-unique part or a commercial part, and build all of that into a consolidated alliance built on agreed-upon cost baselines, long-term price commitments and so forth, and performance commitments. So we're able to do things and take advantage of capabilities that are out in the commercial sector that we might not be able to take advantage of through other vehicles. So it can be a very unique mixture of capabilities that you can involve in something like this.

Q: Now, the industrial prime vendor has to get a contract to continue as a prime vendor. Does the strategic supplier have to get a contract also?

Soloway: Well, these are suppliers that have contracts. They have multiple contracts, in many cases. For instance, I don't know how many Honeywell had, but it's dozens, I would guess, in terms of vehicles that we were buying off them. So we're already buying the stuff, if you will, from the company. The question is, through what vehicle do you buy it, how do you ensure good pricing, high performance, access to the best supply chain capabilities that exist out there? And in our sort of traditional transaction-based system, we really can't do that because we segregate things out in such a way. This enables us, really, to coalesce them together in an innovative, as we call, alliance, which is a term of art now even in the commercial world. And that's what you see, long-term strategic alliances with suppliers with guaranteed performance, price and so forth over a period of time. And this is a way that we've gotten at that in a, for the Department of Defense, anyway, nontraditional, innovative manner that enables us to take advantage of the benefits of such a relationship.

Q: I'm sorry if you've already covered this, because I came in late, but what do you estimate the potential savings; what's the percentage of savings you expect to realize through these arrangements?

Soloway: Well, I'll use the Honeywell one as an example for you. The best estimate we have -- and I'll ask our folks from Honeywell if they want to speak to it also, or DLA -- but on an over-arching basis, our best estimate is that over the next 10 or 12 years, we expect to save something close to 50 percent over what we would have paid in a more traditional bifurcated, or multi-furcated, if you will, buying process.

And I think I made the comment earlier on -- I don't know if you were in here -- in some areas, you look at some of the parts, we'll actually be paying in real dollars less 10 years from now than we paid last year for the part, because of the innovations that are taking place -- in Honeywell's case in their commercial supply distribution capability -- that we can now access for our needs as well, offers tremendous benefits in all kinds of ways, not the least of which is delivery times and performance and, of course, price as well.

Q: And is that --

Soloway: Let me -- before you go on -- is that a -- would --

Q: That's -- it's fair. Yeah.

Soloway: Okay.

Q: Is that a typical estimated serving -- savings through other such strategic supplier arrangements?

Soloway: I don't think you can generalize this across -- because each alliance, depending on the business line, the product involved, the technology capabilities, and so forth, is going to be different. So I wouldn't say that that's what we shoot for in every case or not.

What we're looking for in these alliances is the ability to access high-quality, state-of-the-art performance distribution capabilities which, if you look at our structure today, we have trouble getting parts in a reasonable amount of time. We are doing still an awful lot of build-to-order stuff. We still take on ourselves a whole series of responsibilities and burdens for our own parts supply, which we don't need to take on. We can access and take advantage of what's going on in the commercial sector.

So I wouldn't take the 50 percent and generalize it across all strategic alliances. What I would say is that the commercial world has found -- is that these long-term alliances, if they're built right -- and this one was really built very carefully; it was the first one, Honeywell was the first one -- the inspector general was part of the team. DCA was part of the team. If you build it right, you do get significant cost savings and price reductions and what have you over a long period of time, which is a fairly standard commercial practice today, if you look at the long-term relationships companies have with their suppliers. But it's built on a collaborative relationship, not an over-the-transom relationship. It's built on a degree of information-sharing and so forth that has not typically marked our business processes, and a reliance on technology that we don't often have available to us.

Q: And can I just ask the people from Honeywell what impact that will have on their bottom line in these same programs?

Culligan: Well, first of all, I want to make -- if I may, make a comment that we at Honeywell deeply appreciate the spirit of cooperation from this Rapid Improvement Team. We think it's a win-win for both sides, quite honestly.

As we look forward, our advantage -- and it comes from many years now of working the Six Sigma activities that were brought to us by former Chairman Larry Bossidy -- we get inside improvement, and by streamlining what we do with our supplier base and our customers, we're allowed, you know -- that allows us to also improve on both sides. And so by streamlining all of this, by cutting through some of the difficult parts of doing business traditionally with the government, it allows us to benefit ourselves and the suppliers.

So we have an advantage to improve our processes. We have an advantage to integrate that into all the activities we do. So we think, across the board, it's a win-win.

Soloway: You know --

Q: (Off mike.)

Soloway: I'm sorry.

Culligan: I'm Tom Culligan, spelled C-u-l-l-i-g-a-n.

Soloway: He's the Culligan man.

Culligan: The Culligan man. (Laughter.)

Q: And your title, just for --

Culligan: I'm vice president of Defense and Space for Honeywell.

Soloway: You know, the other point that needs to be made here is when we look at -- when we talk about costs and so forth, we tend to talk about the costs of the part or, in this case, the cost of an overall supply chain service. Think about what I said earlier on; we have literally bunches of different contracting vehicles; thousands of actions on those vehicles a year, each of which has its own pricing action, requires all kinds of stuff to go into the order.

The degree to which you can consolidate that into a much more simplified stream saves you less visible but no less real costs in the system, because your workload associated with it goes down significantly. And you're building it in such a way that you can fully protect the government's equities, because you've got agreed- upon cost baselines and you've built it on a model that everybody agrees to. You can greatly simplify it. So it's not just that as we take advantage of Honeywell's or Sunstrand's or Sarnoff's capabilities and their access to new technologies and constant improvement that we save money; we also save money internally in a sometimes less visible but very real way, just in sheer workload. It makes it a much smoother, much more realistic -- much better process.

And that's something, as a department and as a government we typically don't look. When we talk about total cost of ownership, we don't look sort of across -- as the commercial folks would say -- across the enterprise, what's the impact? because that's not the way our budgets are built, and so forth. But all you've got to do is look at it, and logically you know you are having a real impact.

Scott: Stan, could I --

Soloway: Yeah, Darryl?

Scott: Another point I would bring out is that not all the savings that we get are savings in price or in administrative cost. One of the real savings that we expect out of the alliance is savings in inventory holding costs, for example. The Air Force has participated with DLA and with Honeywell in strategic alliances in the RIT, and what we expect to see is the lead time on parts drop from around 90 days on average right now to 25 days or less, and even improve beyond that as we go forward into the contract.

What that means is we have to hold much less inventory than we would under the traditional arrangements. And, I would add, that the information sharing back and forth between the department and Honeywell allows Honeywell in many cases to anticipate our needs and they build the right stuff and they have the right stuff on the shelves when we place an order so it speeds up the support to the warriors, as well.

So we see -- the price advantages are marvelous. We always like to save money. But there are other advantages and other benefits that go beyond just the price savings that we expect. So then many of those will show up in cost savings elsewhere in the logistics system.

Q: And your name and title is?

Scott: I'm Darryl Scott, D-a-r-r-y-l -- and I'm the deputy assistant secretary of the Air Force for contracting.

Soloway: You know, we -- as Darryl was talking, I'm reminded, back in the acquisition reform hearings in 1993, when a small businessman was testifying before a joint hearing in the Senate, the Armed Services and Governmental Affairs Committee, and he said, "You know, when you do business in the commercial sector, the key to excellence is the degree to which you communicate and collaborate with your customers. When you do business with the government, that's what gets you thrown in jail." And what we've really been about in acquisition reform for the last seven years is trying to break down those walls and enhance those levels of communication and enable collaborations that actually make a difference for everybody's benefit. And I think, if you listen to what Darryl said and if you think about the essence of this kind of an alliance, that's what it's all about.

Before we go on, I think we had a question coming in from Fort Belvoir, so if I could interrupt and go ahead and take that question, we'll go ahead.

Q: Yes, hi. Thank you. What is the plan to apply the Strategic Supply Alliance model elsewhere in the Department?

Soloway: Dan, do you want to try?

Stone: Yeah, as I had said previously, we have initial criteria; we're looking to look across our whole supplier base and see where the best opportunities are. I believe that once we gain a lot of knowledge and lessons learned through the initial three, we are already looking at where we can expand this to our other suppliers. So I think the potential is there just to go through our -- start at the top and go down through our major suppliers.

Of course, another piece of this is the willingness -- and this has not been a problem -- but a willingness of the suppliers also to join into this relationship. I think this is going to get contagious, and I have no doubt that we'll have a lot of cooperation coming out of our industry partners.

Soloway: We've talked pretty much all about the supplier alliances with DLA and, without ignoring Ham-Sunstrand, what I do want to do is introduce Bob Bartolini from Sarnoff, because our supplier alliance with Sarnoff is a little bit different. They're not supplying us spare parts and so forth. What we're really trying to do is access world-class research and development capabilities in the commercial sector.

Bob, if you could just take a second and talk, maybe, just about what the meaning of the alliance is to a company like Sarnoff that does some business with the Department but is also primarily a commercial R&D technology company, I think that would be helpful because it's a different aspect.

Bartolini: Sure, Stan, thank you very much for the opportunity.

Sarnoff is a corporation in Princeton, New Jersey that creates new technology. You probably -- some of you remember us as the former RCA laboratories. And so we've brought you television in the past. Most recently we've taken -- which is what we're demonstration right here as a matter of fact -- and what we've done recently as a private for-profit corporation is we develop new technologies in the areas of information, biotech, and semiconductors. And I want to give you a couple of examples and then relate it to what Stan wants me to get to, just so you have the background.

Sarnoff recently, in cooperation with Hughes and Thompson, developed the DIRECTV system. So there's an example of where we've taken digital television-type information and we've put it out into the commercial arena.

Biotech is another area where we've developed, strongly, new technology. One of our companies -- and we take this new technology and we either do a partnership with a commercial company like I just described with Hughes, or we take that technology and we do spinouts. Sarnoff has started 20 new corporations in the last five years. And several of these companies have just gone public; one in the biotech area. It's called Orchid BioSciences, and it went public this year, in 2000. It trades on the NASDAQ.

And the last area's in semiconductor technology. And in semiconductor technology we've been involved with the Defense Logistics Agency, actually, for over 13 years in taking new technology and providing a new family of integrated circuits -- computer-type chips that are used to support military platforms that have had obsolete parts on them for many, many years. This program is called the GEM program. And we've actually been looking at the innovative ways of doing these things over a number of years. So when we got the opportunity to work with Stan, we jumped right at that because we -- the bottom line is we develop creative new technology, and how does the Department of Defense get access to that new, creative technology in this day when time-to-market is the critical element in the commercial arena? And there's a difficulty of saying time-to-market and the way that government contracting is administrated.

And so that's where we've been trying to work through the RIT process, to break down the barriers there. I think that's really what you wanted me to get to, Stan. How do we break down those barriers so that new technology gets into the marketplace through government needs and in a more timely fashion? And I believe that's what part of what the arrangement with Honeywell and Hamilton Sunstrand is about also here.

So we're at the end of the food chain, sort of. We create new technology. And we want to look for ways of getting that new technology out into the marketplace and also to assist it in the DoD area. Half of our business is in U.S. government.

Q: Can you give us an example of something that you will be doing and how that would benefit DoD under this program?

Bartolini: One of the first programs that we will actually put a RIT together -- and we're looking to develop a new contract vehicle, and we've got a test case that we're dealing with DARPA right now to try that out -- how do you develop commercial-type contracts for government research? That's different than how do you do supply of parts, because that you can "definify" pretty easy. You know, you can delineate all of the elements of that, the costs, et cetera and all. How do you do it with research?

Soloway: Easy is relative.

Bartolini: So the research game has changed a lot since I began as a double-E [electrical engineer], and it was easy to deal with the technology piece, but now how do you implement it in this changing global economy that's faster, faster, faster every day. And that's really, I think, what this is about.

Soloway: Let me --

Bartolini: I may --

Soloway: No, no, Bob. That was great. That was great. And stay up here, if you would.

Let me back up a whole step and answer a question that we always get asked in this: Well, why are you doing this? I mean, we have a vibrant government R&D, we've been doing R&D with industry for years, and what's changed? And I think the thing that people miss is that the R&D, technology development world probably is the biggest challenge DoD faces and the government at large faces for the next 25 years, and it's driven by the changing dynamics of that marketplace, which too many people don't, I think, understand enough about.

First of all, it's only been about 20 years since the government -- since private industry has actually spent more money on R&D than the government. I mean, up until about, roughly, 18, 20 years ago, if you measured R&D dollars across the country, government was the biggest spender. That changed about 18 or 20 years ago, and today, the last number I saw -- and I don't what to use this as an absolute, but it will give you a rough order of magnitude -- for the year 2000, private industry will spend something like $185 billion in research and development. The government will spend $50 billion, give or take.

Much of the new technology that we buy for our weapon systems or for our existing platforms as we try to modernize, upgrade, reduce the cost of ownership and operations, are information and other related technologies that are widely commercial or being developed in that commercial R&D world as opposed to in the government R&D world.

And the problem we face again is a communications and collaborative one. Typically, we're not at the table with companies that are doing cutting-edge R&D, helping them understand our needs, our obsolescence concerns, our long-term sort of military outlook and so forth. And that means as technology develops, we're kind of just jumping over trying to figure out if we can use it rather than being, like other customers in the marketplace, a partner at the table, figuring out and having some input into where that technology development goes.

So the relationship with Sarnoff is one of several examples, but it's one that we're working through the Change Management Center to demonstrate how you can integrate where that commercial R&D marketplace is going with what we are doing and what our long-term needs are.

So I think this is a very critical and exciting effort we have with Sarnoff because it really speaks to one of the biggest challenges we have in the technology community.

Q: Mr. Soloway, can you talk a little bit about how the strategic supplier alliance with Honeywell is an example of the DoD trying to ensure price reasonableness in spare parts. The IG, as you know, back in March of '98, starting in March of '98, came up with audits involving Boeing, Sunstrand, Allied Signal, Hamilton Standard, too, alleging unreasonable prices in commercial sole-source contract -- parts. You're well aware of that. How will an arrangement like this ensure price reasonableness?

Soloway: Okay. Well, I don't want to leave the premise of the question alone, but let's just -- because I don't want to get into a debate about it -- let's just point out that the IG reports of '98 talked about some spare parts issues, but one of the things that the IG, as I recall, was very careful about saying was that this was more a matter of how we were doing business rather than the prices we were being charged. In other words -- I'll use Boeing since they're not up here -- in that particular report, they talked about how we were using a very good contract vehicle wrong.

Q: Right.

Soloway: So let's be careful that we don't sort of lean this into, you know, bad children being sort of herded into -- you know, that was not the point of the IG report. It was more a business --

Q: (Off mike) -- was, though. But anyway --

Soloway: No, actually it wasn't. We have to be -- I don't want to leave that premise as it is.

But let's take how we built this and explain what we've done. By having all of the players at the table, all the stakeholders -- the company, the customers, the IG, DCAA [Defense Contract Audit Agency] and so forth -- by building agreed-upon cost baselines -- where are we starting from -- we were able to establish sort of a long-term vision of where prices should go. And if I remember correctly the details -- I'm not an expert on the details of any of the three contracts per se, the language, but I think we have a long-term fixed-price relationship, with price reduction curves over time, increased performance requirements, but also incentives to the company for even higher levels of performance that will be rewarded.

And so we start from a premise of understanding the baseline.

We are mixing here commercial and military parts. These are not all military-unique parts. But we are able to do this with a robust exchange of information, without getting down to the kind of onerous burdens that are sometimes imposed through traditional processes. So it's really a matter of customer and supplier getting together, understanding what the key cost drivers are, where the market is, how our buying patterns will affect that market. If you're dealing with military-unique items and your buying of them goes down, down, down, down, down, you can't expect the price to go down, down, down as you would in other areas where you're buying in a more vibrant kind of commercial market where there's a lot of buying going on. We see that -- I mean, that's just a typical Econ 101.

So -- but that was what the collaboration really started with, was we wanted to build this alliance, we wanted to simplify and streamline the process, and we wanted to build it on a basis of agreed upon and well understood major factors, and that's really what we did.

Yeah, a question in the back.

Q: Sir, do you see any key areas of breakthrough on a strategic supplier alliance with Honeywell and DLA that enabled those to be put in place, any key areas, both from the government perspective and from industry's perspective --

Soloway: You mean in terms of drivers that got them started --

Q: Enabling the strategic supplier alliance.

Soloway: Well, I'd leave it up to the companies or Admiral Stone, if they want to make a comment on this. My only take was that we have not had in government -- change is not a government core competency, I think is a safe assumption. And we have not had in government over the years really the kind of resources that are needed to facilitate process changes. We've made tremendous amounts of progress in policy, we're changing how we do education and training, and so forth. We've made a lot of progress. But sometimes it gets down to really a process issues and how do you make all of that come together at the end with all the players, and that's really the role of the Change Center.

So I think, first of all, it was creating a resource that could help the process forward, and the second was really a very clear interest on the part of DLA, the companies, our oversight community, and everybody to try to figure out there has got to be a better way of doing business. This is crazy. It's crazy from the standpoint that I'm ordering thousands of things from you a year, and every time I have to go through this whole series of steps. It's crazy that we don't get the delivery times we need, partially because we don't give you the information you need or we're not accessing your sort of cutting edge supply system, and so forth. So everybody sort of realized, you know, we had a problem here, and we had a resource we could use to get at it.

It's just, I think, kind of a collective look back and saying, "This isn't the way it's supposed to work." And everybody really had the interest -- I don't know if anybody else wants to add to that, but --

Stone: I do. I think to expand on one of the points that Mr. Soloway made earlier is really the key, and that is that exchange of information. In the past, with those many contracts, the -- probably the biggest part of the information was how many and how much.

What we've done now is, we've sat down at the table, and we've discussed how do our customers -- DLA's customers, the services -- really operate, and how does that change the need, and how do we best match a vehicle to that need, as opposed to, again, just quantity and price.

The first three contracts that are coming out of the Honeywell alliance really puts those items and those needs into three categories. The first is the catalogue items, where you have a very stable demand base. And there's an assurance to Honeywell that there is going to be a market out there, and they can rely on that and be able to cut their cost. That's one of the bases for the price reductions that we're seeing. We're seeing also in that category this demand is coming from a large number of our customers out there, from the military services.

The second category of contract is the one we call replenishment, and that's where we have one dominant customer that has over 50 percent of the demand. I used the example earlier of a major industrial activity. There we have the opportunity -- we can predict what that demand's going to look like, and we're putting in place into that contract more of a push concept, so that Honeywell can anticipate what those quantities are going to be and be making those in advance of when the need hits and be able to move those items out. That -- I assume that makes Honeywell more efficient, and that's going to, again, help to drive the cost down.

The third category is one that has always been the challenge in a lot of the issues you get in the pricing -- is where there is not a stable demand. And these are items that could be in the "obsolete" category -- a number of different reasons, where they just kind of pop up on you coming out of weapons systems.

What we're doing is sitting down and talking about those items and trying to get them into -- at least into a grouping, so that Honeywell can be aware that there's a chance that we will have a build-to-order requirement that could come up in the next couple years, and they can do some preparation for that.

I go back to my original point. All this is the exchange of more information than we have probably ever done in the past, and different types of information.

Q: In a non-adversarial setting?

Soloway: Exactly.

Stone: Very --

Soloway: Exactly.

Stone: Stan.

Soloway: You know, one of the things that I was thinking about as Dan was talking is that I go out and I've done lots and lots of town hall meetings with our workforce over the last couple of years -- dozens of them -- and spent a lot of time talking to industry and so forth. And one of the things that always comes back at me from folks, both at our workforce and in industry, is how difficult it is to be innovative in government. It's just the nature of the beast. It's nothing -- it's not a criticism of people, it's just sort of the nature of the government beast.

And I want to say two things. First, I don't want to build up Bill Mounts's ego any more than it already is, but -- (laughter) -- as my time gets short here -- and just another week to go -- I look back at a number of things that we've done that I think are really exciting, and this is right there on the hit list of things that we've done at the Change Center in offering an opportunity and a resource to folks to really do things that are different and innovative.

But one of the people who's beaten me up a little bit about innovation in government over the last couple of years is Bill Sylvestri from Hamilton Sunstrand. And so, to go to the question of what were the drivers that actually enabled this to happen, maybe Bill, who has been very constructively -- I don't mean this in a negative way -- very constructively outspoken on how difficult it is to be innovative, often, when you're dealing with such a wide range of interests, people, parties, organizations, and stovepipes. Maybe, Bill, if you could just talk to that question for a second.

Sylvestri: Thanks, Stan.

Well, first of all, I want to say that Hamilton Sunstrand is very honored to be a part of the strategic supplier lines process. We're still in the early stages of the SSA with DoD, but clearly we support acquisition reform initiatives and look forward to supporting the government.

And what we're talking about here is the integration of civil and military. We're taking experience that we've gained over the years dealing with commercial customers and integrating that with the military business. And we're very -- I would say we're experts in that are. And what we're trying to do is take those initiatives and marry them with the government transactions and business that we do.

The drivers for us primarily are -- you know, it's a business for us and we're very interested in staying in government business. We think, as Tom said, it's a win-win for us and for DoD. And as Darryl said, you can't just look at the price of the part, you really have to step back and look at what your total acquisition and operational costs, because that's really where the rubber meets the road.

So we are very excited about this. I think that information -- we talk about information -- it's very crucial that we have good information. With the right information we can establish long-term agreements with our suppliers to lock-in prices, to put incentives in with our suppliers to get lower prices as we go down the road.

So I'm real excited about this and looking forward to getting deeply entrenched in SSA.

Q: Can I ask, what's the revenue potential for Hamilton Sunstrand -- excuse me, Hamilton Standard --

Sylvestri: Hamilton Sunstrand.

Q: What's the revenue potential, revenue stream you see down the line here over the next four or five years?

Sylvestri: In terms of millions of dollars?

Q: Yeah. Is this --

Sylvestri: Yeah, it's hard to say. It depends on how many products we put into the strategic alliance. For example, right now we have a virtual prime vendor program, that's been going for five years now, in support of the propeller on the C-130 aircraft, and that's about a $20 million-a-year business for us.

Q: Can you project -- are we talking hundreds of millions or in the range tens of millions?

Sylvestri: We're talking probably -- I'd like to see this grow into at least a $100 million-a-year business, with all the products that Hamilton Sunstrand brings to the table.

Q: You were talking a moment ago about applying this to the R&D that the government purchases. And I wondered whether DoD had considered anything like the thing that the Central Intelligence Agency announced earlier this year, setting up a kind of a venture capital arm.

Soloway: In-Q-Tel?

Q: In-Q-Tel, yeah. Does that fit with the kinds of rationalizations, streamlining and cost savings you're looking at?

Soloway: Were DoD to decide to go down that road as an option, clearly, this would be a process -- I mean this kind of a process could help build something like an In-Q-Tel -- I think it's called In-Q-Tel. I can't say at this point that DoD is going to or not going to do that. It's something that's certainly been thought about. As we look at the R&D challenges we face, as we look at the long-term technology base, if you will, beyond just the defense base, but across kind of the industrial -- the commercial industrial base, there is a whole wide range of ideas and concepts being developed because we know we have a real challenge to get at that.

It is not inconceivable that DoD would think about doing something like In-Q-Tel, but at this point, there's been no policy-level discussions of it. I think people are looking at what's happening with the CIA and trying to figure out if it makes sense; if it's something that can work for DoD or not. So no one is prepared to say, "Yeah, we're going to go down that road." But certainly that kind of a concept is one thing you would look at as you kind of think about kind of your whole R&D position in the marketplace, how you do R&D.

We have a lot of sort of basic contracting and acquisition issues with R&D, that run up against kind of the traditions of the commercial R&D marketplace, that we have to get at and start dealing with and will be doing over the next several months.

I mean, there's clearly a requirement, as many of you know, that came out of the Defense Science Board last year and so -- earlier this year -- and so forth, to really think about our R&D policy and how we do it and how we access the broadest possible base. So In-Q-Tel could well be something, that kind of a concept, could well be something that's looked at, but certainly at this point there's been no serious high-level policy discussion of yes/no/maybe. It's really very embryonic in terms of our thinking.

Q: Okay, and one last thing. What would be a good figure to use for the size of the entire pie that we're talking about that could be changed, in large part, by the kinds of reforms that you're talking about today?

Soloway: I don't think we could give you a number on that. I mean, I think as Bill said, their -- the Ham Sunstrand, as I say, is still being built. The Honeywell relationship is expanding. There are a number of other suppliers that would -- and customers that would like to get together and try to do this kind of thing. I don't know if DLA has a figure in mind, but I think it would be hard to put your finger on it. I would suggest it potentially could be quite large; very significant, in fact.

Stone: If you look at the population of items just for Honeywell that I mentioned, those three categories, there was about 13,000 items that we saw as candidates, and I use that word "candidate" --

Q: For just the Honeywell?

Stone: Just for Honeywell, and I --

Q: Across all three categories?

Stone: Right. And so, I mean, that's a very large population. Now, we are working our way through to come up with the agreements on those individual items and whether we will achieve on 10 percent of those items, 50 percent, or all 100 percent, it goes back to the process, and I think that's the key point. And as we have this information exchange, we can make a very good decision on whether the items should be in or should not be in and what the benefit is, both to Honeywell and to the government.

Soloway: But the other thing to keep in mind is that we're not -- I don't want to leave the impression that we're, as I said in my opening comments, that we're here to say that the strategic alliances are the answer to all that ails us. There are many different kinds of solutions that can work, that can achieve the same end result in terms of long-term relationships and so forth. This is one that we have worked through the Change Center, which is why we want to highlight it for the purposes of today's event, these three different alliances. But there is a number of the types of innovations that are being pursued also. So to say that strategic supplier alliances could touch on X millions of dollars' worth of business would be very difficult right now, because there's a lot of different things that are going on. This just happens to be one that we've work through this process.

Q: I understand that you can't define exactly what that X millions is, but I wonder if you can put it in any kind of a range as to the potential of how much business could be affected?

Stone: I think we'd be hard-pressed at this point --

Soloway: I think at this point that would be difficult. Keep in mind, Honeywell is the first one out of the box, and it's still being built. I mean, the arrangement is there, but it's still evolving in terms of size and so forth.

Ham Sunstrand is still being worked. We have others that we're going to be looking at, DLA and others will be looking at. At this point, to try to define the dollar value, even a range of what they might include, it's just impossible. It's too early in the game. And this is something that we've just launched and is already showing real benefit, which is why we thought now is a good time to talk about it rather than waiting five years from now to say, "Hey, we did something really smart five years ago." We'd like to do something smart now, get people to know about it and start emulating it quickly rather than waiting forever for the system to catch up.

Q: Admiral Stone, the lay person would be interested, just because they would remember the hammer, the $400 hammers -- somewhat apocryphal -- but using those examples, the horror stories of the mid-'80s, as an example, give us a sense of how this is an example of progress in preventing that type of example and restoring integrity to a system that's seen as a problem, creating a problem here.

Stone: I mean, I think that is an example, that or the ashtray, and we all lived through those different items. And in just about all cases, what finally came down was that we were looking at a very unique item and that would go into that third category that I was talking about, that build to order. And it's that information exchange and also giving the supplier some preparation time and be able to maybe anticipate that that need could be coming, as opposed to try to start from a standing start and produce it to a very short time frame. That's where the costs -- it doesn't matter whether you're talking inside the government or outside the government; if you want something yesterday, the cost is going to go up. And anything we can do to provide information to our supplier to make them -- to put them in a better position to provide that in a more routine basis as opposed to an emergency basis is definitely to both sides' advantage.

Q: In this case, the hammer that cost x in the mid-'80s, was a built-to-order kind of situation. One of these companies would have a predictable order pattern for the hammer in the future.

Stone: And again, what we're doing is we're sitting down and we're discussing these different items and trying to come up with a mutual strategy; what is the best way, if we anticipate that this item could be used once a year, once every 10 years, how do we best approach that from their experience, especially working in the commercial world, there is some commonality there and also what we can tell them about what we think the situation may be.

Soloway: Let's not look at things in a vacuum. I mean, take the ashtray. If I remember my facts correctly, I mean, it wasn't a spare parts issue, it was a mil specs and standards issue more than anything else, and that we were defining everything that had to go into building an ashtray. We used to tell how many chocolate chips you could put in a cookie and that kind of stuff, and then all the way up through fairly sophisticated technologies and weapons systems.

We all know that that drove costs, and that was why the first acquisition reform out of the box was when Secretary Perry signed the mil specs and standards reform, to start to get into performance-centered.

Now you're taking all of that, and you're starting to take that concept and apply it to how we do support and supply business, that whole idea of performance-based partnerships, if you will, as opposed to that -- as I said earlier, that over-the-transom world. And so it is that you can't look at any of this in a vacuum. And there are a lot of reasons we had some of those interesting issues in the '80s and early '90s.

I think we have time for one more question, if there was another one. We have -- do we have somebody calling in from Fort Belvoir, did I hear?

Q: (From Fort Belvoir.) Yes. How are we going to keep the Change Management Center alive after the change in administration?

Soloway: Bill Mounts is going to pay for it out of his retirement.

No, we actually -- that's a very fair question. It's not just the Change Management Center; it's the whole momentum that we've been trying to build towards more and more reform, not only in acquisition, but across the department.

And I think the answer is that it's already established itself as such an important force that it's going to survive. We've budgeted it. It's got tremendous support up across the department. We're doing things, as I acknowledged in the opening, through the Change Management Center that go well beyond just the acquisition and logistics businesses. And I think it's part of an increasing institutionalization of a spirit and a commitment to reform that you see. And I have no doubt that that's going to continue, regardless of who the next secretary and deputy or undersecretary might be, or who my successor might be.

So I actually have a lot of confidence that it will be around for a long time. It's already demonstrating its value, and that's -- the key to good business is demonstrate value, and that's where you survive.

We've pretty much run out of time. I want to thank everybody up here, from our folks, our friends and partners from Hamilton Sunstrand, Honeywell, and Admiral Stone from DLA. Thank all of you.

Folks down at Fort Belvoir, have a great day of learning. And we thank you for all your commitment to change and the time you're putting in to really try to make this a better institution and to really work on the business of defense.

Thank you all very much.

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