Mr. Kenneth H. Bacon, ASD/PA
-- Also participating in this press conference is Dr. Paul G. Kaminski, USD for Acquisition and Technology.
Mr. Bacon: Good morning to our press conference kicking off Acquisition Reform Week, which is next week, and a very important initiative here.
Secretary Cohen will start with a brief opening statement, and then take a few questions. Then we'll turn over the briefing to Under Secretary Paul Kaminski.
I want to remind you that at noon today Lieutenant General Peter Pace will give an operational briefing on SILVER WAKE -- the evacuation operation from Albania -- and he will have full charts and all of the facts and figures that you need.
I'll turn it over now to Secretary Cohen.
Secretary Cohen: Thank you, Ken. And welcome to the press conference.
I have a brief announcement to make. As you know, I have been on the job now for roughly seven weeks, and there has been a probationary period for members in the Department. I want you to know that Ken Bacon has decided that I can stay. But no, he has agreed to stay on as Assistant Secretary of Defense for Public Affairs. I'm pleased that I've asked him to do that, he has agreed to do that, and he's someone I have a great deal of confidence in, and I'm pleased that he's going to be with us -- and with me -- for the next four years.
I'm here today to help kick off Acquisition Reform Week, because I want to stress how important this subject matter is to me and what priority I place on it. It's important to the public, it's important to the Congress, suppliers, managers, work force, and most especially, the troops.
Walter Lipman wrote an essay how he described where dramatic change occurs in the following fashion. He said, "A regime and established order is rarely overthrown by a revolutionary movement. Usually a regime collapses of its own weakness, and then a revolutionary movement enters among the ruins and takes over the powers that have become vacant."
I think that statement accurately portrays the status of our defense acquisition system, at least in the past, because for years it has been sliding of its own weight and weakness into a state of collapse. Suppliers have been shackled by overly prescriptive specifications and purchasing rules. I recall being in the Senate holding up 14 pages of regulations describing a cookie -- what would qualify for an adequate cookie for the military. Buyers have been bound up by senseless red tape. And of course, when the taxpayers saw how much money was being wasted, they saw more than red tape, they saw red.
Today the revolutionary movement has entered among the ruins. The movement has been fomented by the imagination, the energy, and the perseverance of former Secretary of Defense Bill Perry. He is what I would call the Thomas Paine of Acquisition Reform. He's been supported, and I should say he's also been supported very strongly by maybe Sir Galahad in the form of Paul Kaminski. Dr. Kaminski has been just an outstanding advocate for acquisition reform along with Gil Decker, Art Money and John Douglass. These gentlemen have been in the forefront of acquisition reform in the Defense Department and have made an enormous contribution. It's been carried out by a very dedicated acquisition staff as well; much of it made possible by President Clinton and Vice President Gore, as far reinventing government initiatives, and also by legislation adopted by Congress.
I'm pleased to say that during my years on Capital Hill that I did play a role in the shaping of at least three pieces of legislation, three major pieces of legislation -- the Federal Acquisition Reform Act, the Competition in Contracting Act, and most recently, the Information Technology Management Act. Having helped spark that revolution, I now intend to see it through as Secretary of Defense. That's a pledge -- as being one of my top priorities.
I am firmly convinced this is absolutely critical to our maintaining a strong military into the 21st Century. We have an obligation to pursue it aggressively, because the public deserves it. When the public sees how much is being wasted in our acquisition system, they become justifiably outraged. So the public demands it, so we have an obligation to provide it.
We have an opportunity for reform because the marketplace is now providing it. The revolution in commercial technology and business practices has made us a global economic power. It also will help to sustain us as a global military power.
We have an urgency to reform it, because reality demands it. That reality is, that absent any kind of a major conflict in the world, our budgets are likely to remain flat. But the fact is that our troops need new equipment to sustain the technological edge that we have, and therefore, more modernization money has to go into product and not into process.
The reality is that we're living in an era of very fast- paced change in technology and also in world events, so we need fast-paced acquisition systems that can seize upon the new technologies that are being developed that will enable our forces to respond to the exigencies of the moment.
Having the greatest and the most powerful forces in the world, we can prevail on any battlefield. We cannot, however, see over the horizon with any degree of clarity and precision. So we need business practices that can respond quickly, flexibly, cost effectively, in whatever comes over the horizon. In other words, we need an acquisition system that can quickly tap into the commercial marketplace for new technology, that can apply that new technology to new systems, but also to existing systems, to upgrade that combat capability. We need to quickly put this technology into the warfighters' hands to meet their needs while this technology is still new and very competitive.
So if we're successful, we're going to be positioned to meet those challenges that come over the horizon in whatever form they come. Already I think we can see some rather significant progress in this fast-paced acquisition system. We've seen the results in Bosnia. We are now using commercial computer equipment to download intelligence from commercial satellites in encrypted form. We also saw it in Bosnia with the monitoring of the peace process there, using the Predator UAV. That is among our first advanced concept technology demonstrators, and this, of course, develops and fine tunes new systems and the training and the tactics for their use.
Monday I'm going to get another glimpse into this acquisition revolution at the National Training Center at Fort Irwin in California. There, the Army is field testing Force XXI, a digitized maneuver brigade that's been developed through an integrated team process. That team includes everyone who has a stake in the final product: the contractor, the doctrine developers, the testers, evaluators, as well as the end users -- ultimately the warfighters. And together, that team is developing the technology, but they're also going beyond simply developing the technology. They're also working the tactics and the training which used to be done after a system was fielded in the past. We're now doing it ahead of time.
So we're yielding a a better system. It's at a better price, at a faster pace with better performance for the troops.
So it's very nice for me to be able to step in as Secretary of Defense to acquisition reform that's so far along in the process, but I also know that the greatest amount of work lies ahead. It's much easier to start a revolution than to establish a new order -- not a new world order, but a new order as far as acquisition is concerned.
So the challenge really is to apply these new practices to all of our programs across the board -- large and small. And we have to make acquisition reform a part of our everyday life. And we have to continue to develop an acquisition work force, and that's also a challenge because they need to have the skills and the tools along with the motivation. Once we institutionalize this reform, we can truly say that the revolution has become successful and that we've turned the world upside down for the better.
Now I'd like to invite Paul Kaminski to talk about acquisition reform and Acquisition Reform Week. I will invite him in a moment, because I'll invite your questions first to talk about acquisition reform, if at all possible
Q: First, please, two American helicopters were fired on today in the evacuation operation in Albania. Your reaction to that, and what should the United States do militarily in response?
A: Well, according to the reports we've received from the pilots, they were fired upon. That fire was returned. They were not struck by any of the fire. Our military leaders at this point are taking that into account in determining whether or not we proceed with the evacuation at this moment. My understanding is that the evacuation process has been at least down for the moment -- terminated for the next several hours.
Q: Does the United States need to now reassess and go in with a stronger force protection element? Are you considering, for instance, taking over the airport in Tirana so that a more secure evacuation can be carried out?
A: I think you'll get a fuller briefing on this from General Pace at noon time. But obviously, force protection is something that is very much on the minds of the commanders in the field. Right now our principal goal is to get those who need to be evacuated out of Albania safely. That's our primary goal right now, and obviously, we'll be concerned about force protection.
Q: When you were a member of the Defense Reform Caucus , you supported something called the Director of Operation, Test, and Evaluation that reports directly to Congress and directly to the Secretary about safety effectiveness. Do these reform efforts maintain that critical function?
A: I am not familiar in terms of how they have worked in practice. Dr. Kaminski can direct his comments to that. But the objective was as you stated it. But how it's worked out in practice, I think you'll have to talk to Dr. Kaminski.
Q: Was that retained under your reform proposal?
A: Those will be maintained.
Q: The GAO recommends that you hold off on the F-18 LRIP decision until the QDR's been completed. They've written to you suggesting that. What's your response to their suggestion?
A: I think we should await the QDR, the process is only a few weeks away. I don't think any determination has been made about the F-18E/F in terms of proceeding and at what pace at this point. I think we can deal with those issues once the tactical air situation is reviewed by the QDR process.
Q: Mr. Secretary, how safe are the Americans who are currently in Albania?
A: My understanding is that they are safe. They are protected. We have Marines on the ground, and the area surrounding the embassy and the residential area is secure.
Q: Will the evacuation go ahead by helicopter?
A: That's a determination that will have to be made by those on the ground, as such, and those in command. It's been suspended temporarily to make an assessment as to whether or not the evacuation can be completed safely. That's something that you'll be briefed on again in some detail in roughly an hour.
Q: Mr. Secretary, the Government of Albania, such as it is, is calling for foreign military intervention to restore order to that country. Is there any chance that the U.S. might participate in some form of military intervention -- not to bring Americans out but to establish order in Albania?
A: There are representatives from the OSCE and I believe also the Italian government and perhaps others who are now trying to conduct negotiations with the rebels in terms of trying to arrive at some kind of a peaceful resolution of the situation.
What you have in Albania is a state of anarchy -- a complete breakdown of government. This is not principally a military issue right now; it's one of a violent, spasmodic reaction on the part of the people toward their government. So obviously, efforts will be underway to see if they can't establish some mode of order. But right now OSCE is involved in that.
Q: U.S. troops would not... Are you saying that U.S. troops would not in any conceivable way be involved in...
A: No, I'm not saying anything at this point. I think it's now under consideration in terms of what is taking place. The entire situation is being reviewed. We do know there are European diplomats, as such. Those from Europe who are actively engaged in trying to bring about a sense of order and a cease- fire, as such. What we have is basically citizens roaming the streets, some criminal activity as well. People firing randomly. This is not the kind of typical civil war kind of situation between ethnic groups. It really is a rebellion against a government on the part of the people.
Q: Mr. Secretary, a big part of the U.S. policy in the Balkans has been preventing spread of violence. Do you see this as a threat to that pillar of the policy, as an example of a potential spreading of the violence? Or is it isolated in...
A: This seems to be an isolated case as far as Albania is concerned, but obviously it could have spillover effects. If you have a mass flow of refugees trying to move into other countries, that could cause some instability. So all of the countries in that region are concerned about bringing order to what is clearly a state of anarchy right now in Albania.
Q: What would trigger a United States military intervention?
Q: If you could just clarify, you seem to be leaving the door open for some sort of perhaps NATO or other kind of stabilization force in the future. Are you leaving that door open?
A: I'm not opening any doors, I'm not closing any doors. What I'm saying is that we're watching it closely. Our sole motivation right now and goal and objective is to get the Americans out of there safely. Beyond that, there is no planning for U.S. intervention. We are watching it very closely. We are talking with our allies. We know that there are diplomats who are in the region trying to negotiate some sort of a peaceful state of being right now, and we'll have to wait to see how it unfolds. But we're watching it closely. Our objective is to get the Americans out. We will do that, and we'll do it in a way that preserves their lives and those of the people going in to rescue them.
(Filing break taken.)
Dr. Kaminski: I believe we've come a long way now in acquisition reform. As Secretary Cohen said, we not only want to sustain the momentum that we've built here over the past few years, but we want to move out full speed ahead to institutionalize this base throughout the whole department.
A good way to characterize the status of our acquisition reform efforts is to sort of compare ourselves with a runner today. That runner is just beginning the third lap of what I view to be at least a four-lap race. We're well into the race, but I think there's still much more to do.
Reforming DoD's acquisition system is really one of the principal reasons that I signed on to be the Department's Defense Acquisition Executive. Lasting acquisition reform means a commitment to a continuous process of improving a system which has been built now over the last 50 years. Our vision here is to be the smartest, most efficient, most responsive buyer and buyer of best value goods and services to meet our warfighters' needs.
Today our defense acquisition system is not undergoing just a reform, but I think Secretary Cohen used the right word -- this is a really wholesale revolution of how the Department is doing business.
We've set aside now next week as Acquisition Reform Week to pull together our government/industry teams throughout the defense acquisition system to look at the way we're continuing to do business now, and to explore how we might improve the way we do business in the future. The major focus here is on teamwork and a reinvention of the process that we have underway.
Our success in pulling together and operating as a team with open communications and no surprises will in large part be the overall key, I believe, to our success. I want to talk about that and illustrate what's been done here in just a minute.
I think together as a team we have to focus on getting and keeping our costs down. And we need to cut our acquisition cycle times -- the time that's required for us to conceive of, develop, and to field a system, and to field it ready for use. If we truly view cost as an independent variable, then our government contractor teams need to collectively agree on ways to incentivize cost reductions.
We in the government must be willing to trade off minor reductions and requirements for significant reductions in costs when those trades are available to us, and industry must work with us to identify such opportunities. I don't think this will happen unless we're all part of a team -- from the warfighting operators and users, to the trainers and doctrine developers, to the testers and simulation experts, and finally, to the acquirers and our industry partners.
I'd like to share with you now just a few charts illustrating where we've been and where we're going in acquisition reform. I think it will form the basis for much of the top-down message that I and our senior leadership team will be communicating top-down to our work force during the Acquisition Reform Week.
My I start with the first chart?
There are seven major focus areas which compose our work in acquisition reform. The first one, supporting the warfighter, is really building on this team concept that I was describing. It emphasizes that the warfighter is our customer in this system. We must work as a team with the warfighter involved to begin to visualize the requirements, the opportunities, and to field equipment that works in the field: field equipment that has the training built into it and anticipates the doctrine and the tactical application of the system. It doesn't wait for that to be developed after the system is fielded.
The issues here really involve getting together all the stakeholders as part of this team. I have two examples that I'd like to show in just a minute, in terms of specifics about how we've been going about that, and the huge difference that it's made.
The next area, improving our acquisition business processes. I've talked about a few of those with you in the past. This, again, involves the issue of teaming and looking to fundamentally attack our cycle times. I wanted to show you some examples of what has been done in implementing the single process initiative -- an initiative I had a press conference on in December of '95 when we launched it. I'd like to give you some status of where we are in improving that fundamental process.
I'd also like to give you some insight in fundamental reengineering of how we're buying things like cookies, food items, pharmaceutical products. Doing that a whole different way than we've done it in the past, really going to a commercial- virtual approach.
The issue of reducing weapons system life cycle costs. This has become a bigger and bigger issue since 60 to 70 percent of the life cycle costs of our weapon systems occur after fielding. It is something we need to be giving more and more attention to.
We have launched the COSSI initiative -- the dual use applications initiative that I briefed in a press conference in January. That program looks like it will be off to a very good start with very high bidder interest. Recall, that was a program in which we were looking to introduce commercially developed components into our fielded systems to reduce their life cycle costs.
Incentivizing program stability. This is still one of our biggest problems today. It's probably the number one item on my list that needs continuing work in acquisition reform. I will, with a chart, illustrate to you what the problem is. Improving this I think is the item that can make still the greatest potential improvement in how we spend our money to deliver product.
Implementing statutory and regulatory reforms. Here we have a wonderful base through the pieces of legislation that Secretary Cohen mentioned. Our issue here has been first to convert the legislation into regulation. That's all been done. Now our issues ahead are to make our work force aware of the opportunities and to push this down into the entire system to raise the awareness of the freedom that our workers now have available to them -- (it's) one of the major emphasis items in our Acquisition Reform Week, to push that down, to improve that awareness across the whole system.
The next item, conducting pilot demonstrations. We were given authority by the Congress for six pilot programs. I won't have an opportunity to describe all of them to you today. I will describe one. There's another in the briefing boards in the back. But these pilots give us an opportunity to pull together all the pieces of acquisition reform to illustrate what can really be done.
The last item I want to talk about is managing our acquisition work force. In the end, our people are our most important asset, giving attention to not only downsizing that work force, but making a better work force. Better does have to go with smaller. I want to talk a bit about a few of the initiatives that we're undertaking there. That, too, is a major initiative in our acquisition reform week.
Let me start with the first area, supporting the warfighter. If I might have the first chart.
This chart gives you a before and after comparison. I've picked a particular example. This is the one that Secretary Cohen was talking about going to visit at Fort Irwin, California, on Monday. This effort involves our Force XXI, bringing digital interconnection capability to our Army forces -- being able to share situation awareness and communications digitally. It involves a set of upgrades to this equipment. The term used is appliqués -- various applications of upgrade software and hardware to our various fielded systems.
When we did this kind of work in the past, we did this in the following kind of serial process. We developed a requirement. We threw that requirement over the wall to our acquisition system where, based on the requirement, we did some design work. The design eventually ended up into software requirements which were coded. We fielded those capabilities and we tested them. The cycle time was typically two to five years. Very often, when we got down to the test and evaluation phase, we got feedback from the operator saying boy, you know, that wasn't quite what we intended when we wrote the requirement. Now we're back up making some requirements modification, going through this loop again in a serial way. The cycle time that results, as I illustrate there, is two to five years.
We are not working that way in this Force XXI upgrade. This work is being done today at Fort Hood, Texas, by the 4th Infantry Division. It has operating as a team, members from our Training and Doctrine Command, looking at the training and the doctrinal developing aspects. It has a participating warfighter from the 4th Infantry Division. And it has our acquisition community -- both government and industry -- working together as a tightly knit team. It's kind of illustrated by this continuous circle there.
Here's what's really happening. I've been there and I was really quite impressed with what's happening. I think of this as sort of three nested loops. There's an inner loop that operates on a very fast cycle. I would illustrate this inner loop with a software release pattern where a piece of software meeting the overall requirements is developed and released.
As it's released to the field to be used by our trainers and testers, immediately, trouble reports come up. The software doesn't work as advertised, computers latch up. There's a process now in place to deal with all those trouble reports in a matter of days through this team approach. So in the matter of a few days or a week that software release is improved, and the trouble reports are down. That release now goes to the field, and our warfighters are using it now in combination with the trainers and doctrine developers in exercises. What they're finding is, given that they have this capability, they have some new insight on how better to use it. In fact, the requirement, in a sense, is changing when they realize that they have a new capability that they hadn't conceived of when they first wrote the requirement.
That goes up to the next loop, a higher level loop that works in a little slower cycle, so that we may have two or three iterations in the inner loop that I talked about while we go around this outer loop.
After we go through the outer loop a few times, we're really ready to field a unit-size activity with a whole unit working together.
What I've illustrated here now is a cycle time to field the kind of capability that Secretary Cohen is going to see on Monday. That is now a two to six month process by having these teams of people work together.
If you recall briefings that I've given to you earlier on the ACTD process, you probably notice some similarities here in building and fielding prototype equipment to be looked at and to be improved in the field. What I think is wonderful about this process is that this is something the Army developed and has worked on its own. It's picked up the good ideas from the ACTD process and done a fundamental reengineering of the acquisition process. This kind of cycle time improvement is a big deal. It really makes a great difference on what is fielded and how effective it will be in the field.
This work hasn't been limited to the Army. Let me give you an example undertaken by the Navy. Same kind of ideas. This is a program being worked at Carderock, Maryland, called the smart ship. Once again, a combination of the warfighter, the trainer, and the acquisition and industry community.
The warfighter involved here, Atlantic Surface Fleet Commander, has made available an Aegis class ship -- the USS Yorktown -- for this purpose. This program has had an inner loop cycle of about six months. In a six-month period, we will develop -- together with the crew -- a set of prototype systems to be fielded. Those systems then go out to sea trials with the crew, trouble reports, problems, opportunities for improvement come back, and we have a chance to make another iteration.
In a period of 18 months now, we have fielded on this ship 47 major new prototype systems. And part of the objective has been to reduce O&S costs -- I talked earlier about the importance of doing that. With the active participation of the crew, my estimate is that we will reduce the crew size on this ship by something in excess of 20 percent. They've been involved intimately in the process.
I've illustrated here for comparison just one of these 47 prototype systems that is fielded. It is a new system for bridge watch -- to do integrated bridge and voyage management. A system that provides situational awareness and control on the bridge. Doing it the old way, we had 12 people on the bridge watch. Doing it the new way, there are five people on the bridge watch. This has required intimate crew involvement in this program to work this out and to make the capability fieldable and workable.
Next chart, please.
These two charts really illustrate what I was describing to you in reengineering the process at the fundamental requirement warfighter level. I promised you a chart on how goes it with the single process initiative.
If you may recall, when I briefed this initiative when we launched it -- Secretary Perry and I launched this in December of '95 here -- what we were addressing was the problem related to the fact that all of our acquisition reform initiatives were straightforward to implement in our new contracts. The issue was how to get at all the old contracts to look at making process changes, moving away from MilSpecs where they were appropriate. And I shared with you an example on soldering, I think. I was describing soldering at the Raytheon Corporation in which we had eight different soldering processes in place -- three were commercial, five were imposed by the Department of Defense. My question here was, could we get down to a fewer number of soldering processes because we're spending our money to train people to document those various processes. Could we get down to a fewer number of processes, and if we could, could we use the commercial processes? If we had to go beyond that, could we at least reduce the number that we had in place?
We began to look into that -- following up on the single process initiative -- and ran into a number of obstacles. One of the first obstacles that you run into in that kind of activity is that you cannot change just one contract. If there are 50 different contracts using a variety of soldering processes, you have to be able to change all the contracts at once before you can change the soldering process. A number of people threw up their hands and said that's probably too hard to go change all of those contracts.
Once again, we put in place this team approach -- a management council who had all the stakeholders involved and all those contracts. The outcome of that was what I call the signing of “the mother of all block change contracts.” With one signing, we changed 884 contracts at 16 different facilities at Raytheon to get down to the simplest possible soldering process base. We changed several other things as well in that process. This effort has now started to bear some real fruit.
Since its initiation, you can see where we are today as of February 5th. Seven hundred different proposals -- actually 691 different processes -- now have been proposed for change with 579 concept papers. We worked to deal with those in a 120-day cycle time -- to be able to address and make decisions on those. We've been making that cycle time. We have approved modifications now on 290 of those processes.
This is working extremely well now. At the prime contractor level we've discovered now the next opportunity to push this down to the subcontractor level as well, especially since 50 percent of our value-added or more comes from our subcontractor base. I would now give us good marks on what we're doing at the prime contractor level, but I think we're really just beginning our work pushing this down to the supporting tiers.
This really is a good news story that has opened up fundamental looks at all of our business practices -- not just manufacturing processes, but financial processes, business control practices, moving to a commercial base where it's sensible to do so.
If I might have the next chart.
I promised a discussion of looking at fundamental reengineering of some of our business practices for commodity items like food and pharmaceuticals for example. On the lower right of this chart is a concept called prime vendor. It's really a very straightforward concept when you think about it, and you will see how much sense it makes with the following example.
In days past, with our previous acquisition system -- which was a slower system -- we had set up a system where when we bought food for our mess halls we would buy it in bulk quantity, buy it in some cases for a period of a few or several months, store it in our own warehouse, and then as the food was needed, delivered it from the warehouse to the mess hall. This prime vendor idea uses a completely differently concept. The idea is to use our total regional buying power as a Department of Defense for all of our food service entities in a region to negotiate the very best price list we can with a number of food suppliers, and then when the food is needed -- 24 to 48 hours in advance -- the cook at the mess hall can order the food from that price list. Food is shipped directly from the supplier to the mess hall. We've now gotten rid of our storage facility and our base transportation system, and you can imagine the difference in quality of food that has been shipped freshly in 24 hours in comparison to that which we had been storing in a warehouse for three or four months.
We not only improved the cycle time and the food quality, we've been saving money in this process. Our estimate is that we will save $1 billion in this program over a five-year period of time.
We've taken the same process and used it for pharmaceuticals and medical supplies. Our lead time now has gone from 27 days to 24 hours. We've taken 170,000 items out of our inventory in pharmaceuticals. We are in the process of expanding this across the board, being able to buy with a credit card off of a discounted -- now -- supplier's list.
Buying helicopter parts, for example, our lead time has gone from 270 days using our very specialized military system, to a commercial system in which the lead time is now eight days and the savings are 70 percent compared to what we did in the past. So it's been a wholesale reengineering created by a group of people who were thinking out of the box -- who had some incentives through our acquisition reform approach to not do it the old way, (but) to think about a sensible new way of doing business.
One of the key things we will be wanting to do in this Acquisition Reform Week is to share that message -- what I would describe -- horizontally: letting peers be exposed to the good ideas that their peers have developed and fielded, to give them some encouragement to think some out of the box and look at new ways of doing business.
If I might go to the next chart.
This chart illustrates, still, one of the problem children - - one of the areas to be worked on. It's the issue of acquisition program stability. As many of you have noticed, we have not been meeting our year-to-year predictions on procurement. That is, last fiscal year when we made a prediction on what our procurement budget would be this year, our prediction was about $3 billion high. That's been happening on a systematic basis year after year. You can imagine that it's very hard to run an investment program when the planning figures you are using for investment are changing year to year. In fact you really do pay a great penalty as a result of that. I've illustrated that penalty on this chart.
What you would hope to happen in the average program is as follows. You'd start on this black line. The cost of the program would grow as you entered development, got ready for testing, started low rate production. And as you completed production you would come down this black line.
Now in reality, we know we don't actually come down the black line. Our average program over its duration, if not interrupted, has about a four percent growth. That illustrates the blue line that in reality our experience shows we would come down.
Now what really happens is the following. Because of not having the investment dollars that we planned for, we have to make adjustments in the program. So to save money, rather than moving up the green line, we moved down to this red line. That stretches the program a little bit to begin with.
We then move up this red curve, but when we come down this other side we pick up all this gray. Our experience on this and work we've done in modeling it, shows that every dollar we take out here because of financial inability to execute our plans, we end up putting $3 in before the program is done. So this gray area is a lot broader than the little blue area. That's the price of the instability. Every dollar that we take out because of our inability to plan appropriately for the future, in the end we put in $3 to deal with it. And the average program stretches out about 11 percent because of that. That is the single place where we have the opportunity yet to improve our acquisition program -- to deal with that systematic stretch-out that has been occurring, to have our plans and reality come closer together. It's an effort we're taking on in a big way in QDR.
If I might move to the next chart. It's sort of a wrap-up on the programs. I indicated to you that we were granted the authority to conduct six pilot programs. I have one to describe here, there's another back on this side -- the AFSCATT program, the Army Fire Support Combined Arms Tactical Trainer.
I use this example often -- the JDAM that I'm going to describe to you -- for the following reason: in most of our programs in which we've implemented the full set of acquisition reforms, I don't have a base line to give you for comparison. What I mean by that is that I haven't actually conducted the whole program the old way so I can tell you what it cost, and then conducted the program the new way so I can take the difference and tell you what we saved. Because in most cases -- as we're proceeding to implement acquisition reform -- we're implementing all the reforms and there's no old way to give you for comparison.
This particular program we started the old way, so there is a reference for a comparison. When we started it the old way and issued our request for proposal, we sent out an RFP that had a Statement of Work that had 137 pages describing not only what we wanted in performance, but basically how to build the system; and we had 87 military specifications in that Request for Proposal.
What we were looking to build here is very accepting of commercial technology. We were looking to build basically a radio receiver, computer and guidance kit. We were looking to build a kit to turn dumb bombs into smart bombs. This s a global positioning satellite navigation receiver and computer. You can put in the coordinates of the target. It should turn this dumb bomb into a smart bomb with accuracy of about 10 meters or so.
When we went out and did the procurement the new way with all the acquisition reform principles, we sent out a performance specification -- what we wanted the system to do -- that was two pages long, not the 137 page Statement of Work. And there were zero MilSpecs in the design. The impact on the winning bid was that the old way was $42,000 which we were satisfied with. That looked to be very attractive for the improvement you got in performance. Doing it the new way, the winning bid was $14,000.
We now are having a substantial base of tests behind us on this program. It's meeting or exceeding its performance requirements. We have a bumper-to-bumper commercial warranty on the program. We're expecting to buy in excess of 40,000 units, and if you multiply the numbers together, the difference between the old way and the new is $2.9 billion.
I was asked earlier to make some kind of estimate of savings from acquisition reform. I gave a broad answer. It's the only answer I can truthfully give, and it's in the billions. But it is really hard for me to calibrate this.
I will tell you now that there are numerous examples, just like this one. There are six behind you in the room. There are actually a few tens of this sort in which the savings are billions of dollars. So this is really beginning to happen. It is happening well now on our large programs. We still have a lot of work to do to institutionalize this across the system.
That leads me to the work force, next chart. I plotted two things on this chart to give you some sense of how things might go together. The plot starts with 1980 and it goes to the turn of the century, and I've normalized this so that zero was the size of our investment budget in 1980, and then I'm showing changes from 1980; and zero also was the size of our work force in 1980, and the green line is then showing changes in the work force. What you see here, as everybody knows, our investment funding peaked in about 1985, going up to a little over 90 percent higher than it was in 1980. Now in '96, our funding has gone down to a little below what it was in 1980, about 15 percent or so lower.
Our work force, our acquisition work force. It didn't go up as much as the investment dollar. It actually doesn't track in proportion. It doesn't take twice as many people to procure something, say, twice as many fighter aircraft. It really takes only a modest increase. The work force went up just a little less than 20 percent -- about 16 or 17 if you read that curve. It lagged by about three years. This three-year lag is understandable when you think about regulations and the amount of time it takes to hire, bring people in the work force.
As the investment budget has gone down, so too, is our work force going down. Today our work force has been taken down by a little more than 30 percent over where it was at its peak. We expect to be taking it down to about 50 percent of where it was at its peak.
But there's an important issue here. The issue is, small only works if it's better. We need to be giving a lot of attention to the quality of our work force, to the education of people in the work force, the continuous training of people in the work force, and the exposure to the new ideas. It's easy to take out the old contract and to change the dates and change the numbers and buy the new thing exactly the way you bought the old thing. It takes some education and some training and some risk- taking to go out and invent an approach like Prime Vendor Direct -- to do it in a new way.
That leads me now to the final chart which is our work in Acquisition Reform Week. Last year my sense was that we were not propagating this full message to our entire work force. To really institutionalize the good things that had been done, we really had to bring the work force in with us -- gainful exposure throughout the work force -- and be able to propagate the ideas and the opportunities throughout that work force, so we stood down our acquisition work force for one day, on the 31st of May in '96. That day exceeded my expectations.
On that day we established three lines of communication. A top down, the sort of message I've been delivering to you today, but done by our whole leadership team in a much more thorough way. We allowed for a bottoms-up -- a 90-day period for everybody in the field to get back to us: what was working, what wasn't working, what could we do better together. But probably the most interesting thing we did was to allow for a horizontal communication path -- sharing of best practices with peers. I probably got more comments back on that issue than any other in terms of changing a culture: people being able to see how their better peers were performing and the results that came from that. So we're going to be wanting to do that in a big way.
We will be kicking this off next Monday, on March 17th. The kickoff will start with a very good tape that Vice President Gore has taken the time to make for our work force. This is a big deal to him. He's put a lot of time and energies into his whole reinvention program, and this is part of it. Secretary Cohen will be taking the time to participate in that, as well as General Ralston and myself. This team concept that I'm talking about will really be emphasized.
We will be recognizing excellence with the award of the Packard Award for Distinguished Performance in Acquisition. It's a key part of this horizontal communication that I was talking about to really change our culture, to recognize the opportunities. We will also be providing a set of awards for the best performance in the single process initiative that I was describing.
There will be a number of conferences through the week, a set of Internet opportunities, and a whole number of on-line forums which I would invite you to participate in. Many of those are open for your participation.
We look forward here, I think, to a really great week of getting this message top-down, bottom-up, and horizontally communicated through the whole process.
As I said, I think we have now really done substantial work to improve our acquisition process. I believe we are now really making fundamental changes to the environment and the culture. We still yet have a lot to do. As we get smaller, we need to become better. We need more emphasis on training, education, continuing education for our work force. We are now moving to electronic-based centers using our integrated product teams and focusing on our tactical business concerns, our strategic visions, bringing the warfighter's needs into this process with us. And also looking fundamentally at the affordability of the systems. Cost is a big factor in this process.
Next week I think should be a very significant milestone week. It's not a stand-down week; that is, we're not standing down our whole force for a week. What we've done, though, is given the work force freedom to pick days in this week to be able to concentrate and to be able to work around their own schedules with these forums and various activities going on through the whole week.
Let me stop and take your questions.
Q: One of the things the building's been working on is getting cost away from the economic order quantities of a buy. One of those things is the Lean Aircraft Initiative that's been going on. But on a grander scale, what are you doing towards getting there, and how effective can it actually ever be? I mean a munition you only buy two of can't be as cheap as one you buy 40,000 of.
A: Yes. We are doing some really fundamental things to look at that. Probably among the most fundamental things are moving to open systems kinds of environments where commercial elements can plug and play into our designs.
As we're looking at new systems, I couldn't think of a better way to do that than what we're doing with our Joint Strike Fighter -- basically building what is a modular aircraft, three completely different aircraft built on the same manufacturing line with something between 80 and 90 percent cost commonality of the major components. So the ability to produce those components at a rate of 3,000, even though some of the designs are only being produced in a few hundreds.
Q: You mentioned the example of the smart ship that they can reduce manning of the ship by 20 percent. There are other initiatives, I'm thinking of privatization, that would replace the amount of soldiers needed to do a given task, and certainly may be changes in tactics as well that reduces the number of troops needed.
Let me ask you, these acquisition reform initiatives or your infrastructure reform initiatives, will any of these be able to contribute to reducing the end strength of the armed forces as the QDR looks at that?
A: Yes, I believe so. And I think you have to allow for the fact that force structure and end strength are not the same thing. A large piece of our end strength is associated, in a tail sense, of supporting our active forces. Those are some of the things we're trying to attack as well.
Q: Can you give us a sense of how far reforms can get you in that arena?
A: I think they can be very substantial. I gave you this example of the prospect of 20 percent or perhaps more on this large ship. Those are not unreasonable numbers.
Q: A question on the work force. In 1993, Les Aspin fired a number of C-17 officials for bad performance on the program. That cast a pall over the entire acquisition community from what... I've followed the program. To what extent were you burdened by that action, in terms of a lot of your acquisition bureaucrats not wanting to be too creative for fear of...
A: Yes. I think there's an important element here of not just talking the talk, but walking the walk. That is, having our behavior be what it needs to be here. There are situations where people have taken prudent risk, done some good things in acquisition and it hasn't worked out for one reason or another. That's a category of people I've been looking for. Some of those people need to be rewarded. Circumstances turned badly, it was something out of their control. They thought out of the box and were trying to do the right things. So we do need to encourage and reward that kind of behavior.
The reason we got into the kind of conservative behavior that we have gotten into in the past is that there wasn't much benefit for thinking out of the box and doing really creative things. Not much recognition. But there were huge penalties if you did it and it didn't work out.
So if you think about those rewards and penalties, it drives people to very conservative behavior.
Q: What are some of the rewards then?
A: You've seen some of the recognition programs. These are going on at many different levels. Actually, one of the biggest elements of recognition for our people is to be able to tell their story to their peers.
Q: You talk a lot about cutting down the cycle time, getting systems out to the field. You talk a lot about this teaming arrangement, how that's been a big part of that. How large of a role has just the mere fact that the Pentagon is looking more at off-the-shelf systems cut down on cycle times? I would think that that plays a role as well, not just the new sort of restructured organizations.
A: It plays a role, but I actually see it maybe being a driver more than a contributing element. What I mean by that is just being able to buy a commercial subsystem, for example, doesn't help very much if your underlying cycle time is 12 years. The problem you run into is by the time you field the commercial system, especially if it's computer-based or rich in information technology, by the time you field it 12 years later, you're three generations out of date. So that fact creates what I was describing as the driving force to go back and change our cycle times.
What you want top be able to do is pick that off the shelf and integrate it into a system in which the overall cycle time in fielding and training and preparing for now is a few years, not 12 years.
Q: My second question was, there are some who claim that some of the acquisition reforms have led to more contract award protests in the past. Is that something that you see as... A, is that true, in your view? And also, are there steps that may be taken to try and minimize those? Obviously, that screws up the system as well.
A: I don't think that our reforms have led to an increase in protest. Actually, if there's something that would lead to an increased tendency to protest it has been some of the market forces that have caused our industry to reduce size. That is, some of the awards may a “you're-going-out-of-business-if-you- don't-win-the-award,” so companies want to understand very carefully why did they lose. Were they fundamentally non- competitive?
One of the things we've done to address that is to try to provide a much more thorough debriefing so the companies can get the answer to that question in the debriefing so that they don't have to protest to be able to get sufficient information to get that answer. I think actually, our protest history is improving as a result.
Q: A question on THAAD. You're talking a lot about reducing cycle time and acquisition reforms. And certainly THAAD is a program in which you and the Army and BMDO are trying to speed up the process here. But it seems to me that given its testing record so far, perhaps THAAD might be a candidate for lengthening the acquisition process, not shortening it. What are your thoughts on...
A: Yes. I think I have been on record pretty clearly about being concerned in some areas of trying to go too fast on some elements of ballistic missile defense. We have been leaning forward to proceed as rapidly as we could. In some cases, we may be going too rapidly. We are on the edge of how far I could be comfortable, how fast we could be comfortable going in a few of our programs. I think we really need a serious look at THAAD -- where we are in the design. I've chartered a team to go do that in a period of about six or seven weeks: to look at the design, the margins in the design, as well as the failures.
Q: Emmett Paige this week signed off on the IT management strategic plan. What's your impression of what role this plan might play in this whole environment?
A: This plan, I think, has a key role to play here. Many of our systems are becoming more and more information based and information dependent. Sorting out architectures in which various components will plug and play together is very critical to get leverage from that base: establishing standards, moving to open system standards -- in particular -- to allow for successive upgrades without huge costs are very important to us.
Q: When you started this effort there was, especially on the MilSpec side, there was some concern from the international side that if you team with a U.S. program where all these MilSpecs are gone, some of the confidence might be eroded. How has that played out over the last year?
A: I think it's still an issue, but I noticed a great interest among my counterparts both in Europe and in Japan in our acquisition reform initiatives -- our initiatives to move away from MilSpec. There's great interest. We've had a couple of conferences. Almost every visit that I have from a counterpart acquisition executive will inevitably end up in a discussion -- wanting to know more about our acquisition reform initiatives and how to stay on top of them.
Q: In regard to your chart on acquisition and program stability, this looks a lot like some of the findings that PA&E has come up with over the years, several years ago...
Q: ...in terms of mismatches between plans and the budgets we have to carry them out. I'm wondering if that was a recognition that DoD has had for several years, what have been the obstacles and challenges in getting that more in hand so you aren't wasting...
A: This building and our processes are really very averse to creating any reserves. Also, until we bring ourselves to the point of doing that, we will continue to have these kinds of problems. Any good business which is going off to develop something, to invest in something new... If you go examine the 777 program at Boeing, they had a reserve for the program. Reserve is very critical to meet the milestones and the performance. You can adjust the reserve as you go.
We, too, have had a reserve for our program. The only problem with it has been the sign is negative. It's not been a positive reserve, it's been a negative reserve. You can imagine that creates some real management challenges in terms of trying to execute a stable, investment-oriented program. And we do...
Q: ...turning around in this way, how would you propose to deal with it?
A: We will need to do some work to establish some reserves in our planning in the out years. We will have to do some work to gain better estimates in advance on our O&M requirements because we have been paying last minute bills there that weren't planned for. We need better estimates of our O&M costs. And I think we need a more fundamental tack with EM, with the costs associated with those systems in the inventory.
Q: In reference to the O&M costs. I know in the past the Pentagon has tried to propose to Congress certain ways to either have a separate fund that could pay for those things so you wouldn't have to raid other accounts. In the past, Congress hasn't seemed to be too happy about that idea. Is there anything that can be done to better convince Congress that this really is a problem and it's affecting us not just year by year, but out to the future in working some kind of deal where there could be a reserve that could be used to pay some of these last minute bills?
A: There are two elements of a reserve. One is taking a reserve forward and presenting it to the Congress. I think that's going to be a hard sell. The proposals we're looking at don't include that kind of a reserve.
I think the way we're looking to address this problem, first off, is to budget for known contingencies, either through supplementals or budgeting in advance. Secondly, in the out years in our planning, trying to put some reasonable contingency reserves in our own plans. We don't have to take those to the Congress, they're in our own FYDP. The issue is having the discipline to do that. Also, perhaps, the consideration of putting some reserves in the programs themselves.
Q: What do you do about Congressional add-ons? That doesn't help the process, does it, putting in money for things you haven't asked for?
A: Either adding money in ways that hasn't been planned or taking money away certainly is disruptive to a long-term program.
There have been suggestions by some people of actually modifying the budget process -- going to two budgets. A capital budget with stability for a capital budget program, and an operating budget. Many companies operate that way. It's something we probably need to think about a little bit.
Thank you all very much.