We in the Office of Force Transformation do five things.

We try to make transformation a part of national and defense corporate strategy. We try to change the culture from the bottom up, principally, with experimentation and prototypes. Because, frankly, we believe that bottom-up changes are the most enduring.

We develop a theory of competition that’s appropriate for this information age. We try to get the metrics right, and we try to actually create some capabilities that wouldn’t now exist.

And, in doing that, one of the things that we do, one of the techniques that we’ve used, is identifying opportunities for surprise.

It’s frequently said that you cannot predict the future. But, in fact, we know a great deal about the future. And, we have some techniques that help us know some things about the future.

For example, you cannot long sustain a contradiction. We know that if you’re living a contradiction, after some period of time, there will be a policy change.

So, for example, its hard to imagine that a wonderful nation like the United States, with a Constitution, Declaration of Independence, and various founding papers, which extol freedom and democracy, could long live with slavery and women not having the right to vote.

Eventually, this contradiction would be resolved one way or another, and surely it was.

The same thing happens to each of us in daily life. If we can identify a contradiction, that we are experiencing, you know we are going to be surprised by a change.

Another example of a contradiction, perhaps which those of you in industry would find much more obvious, is when you’re operating at a negative return on investment. You know there is going to be a policy change.

And, third, when transaction rates vastly exceed the available resource base. When the transaction rate is not exponential and the resource base is flat, there is going to be a policy change.

And, one of the great historic examples of this was in telephony when, some time around World War I, AT&T executives noticed that their growth in telephone calls was truly exponential.

All telephone calls were operator assisted. And, the executives reasoned, by 1960, at this rate, every American will be a telephone operator. And, sure enough, by 1960, we were all telephone operators.

The fundamental policy change here was taking switching from inside the firm to outside the firm. That put a pull on technologies and industry responded to that stimulus and gave the nation the magnificent switching structure, which we’ve been able to leverage so well for so long.

But, this phenomenon doesn’t just happen in technical areas. We can also observe that our national security transaction rates are growing exponentially, while our resource base is relatively flat.

Note that the national security transaction rate refers to not just defense. Because, it’s not just what the military does.

Nor is it what all the other agencies of the government do, but all the things that private citizens in industry do that have national security implications.

And, it’s our larger, globalized network structure that is forcing transaction rates up at an exponential rate.

When that happens, and the resource base is relatively flat, there’s going to be a policy change. In the world defense, for example, we’re seeing the substitution of capital for labor, to do a recapitalization and transformation. But, particularly, in the case of the Army to relocate people to more valuable areas, to do things which only soldiers can do by themselves.

We’re also seeing an increase in the civilianization and internationalization of defense. When we talk about what industry does, here at home, we have to extend that, not just between the government and civil structures, but also to what it means overseas.

We’re seeing another one of these disparities in the world of intelligence, where our intelligence collection rate far outstrips our ability to do analysis.

So, there is going to be a policy change with regard to intelligence, and it’s going to have to be more than organizational tinkering.

Of course there’s a technical component, because we’ll do automated triage of intelligence. We’ll actually even do some automated analysis.

But, more than anything else, just like in telephony, we’re all going to become intelligence officers. If you go onto the battlefield of today, you’ll see firsthand how this change is taking place in Army tactical operations centers.

Captains or Majors today are doing work and performing tasks, that, fifteen or twenty years ago, only an intelligence officer could do. Right? But, now, by virtue of information access, and a networking structure, their organizational and operational behavior has changed.

The same thing is happening in the fighter squadron ready room. When a pilot plans a mission today, he or she is now doing things that, as recently as ten years ago, only an intelligence officer could perform.

The pilot has information access. He’s networked. He could craft a threat environment through his own route and mission planning systems, and coordinate with all of his colleagues from his seat in the ready room. This could not be done before.

Furthermore, since the most important areas of intelligence have to do with social and cultural intelligence, which is largely unclassified, the wherewithal for intelligence now moves through the public domain more and more. This is yet an additional policy change that is coming.

While perfectly predictable surprises are looming, there also are opportunities for leaders to make change and the great burden for leaders in this time is to recognize the inevitable and turn it into a virtue--that is define a virtuous path to this future.

Applying these techniques to the transformation of the management of defense, I see three big surprises looming. First, there is a growing need for new business models. Second, we require new approaches to industrial competition. Third, there is an overwhelming need for the entire department to adopt a strategic approach to cost.

In terms of business models, this is perhaps best illustrated in the realm of space, where we must move from relatively small numbers of very expensive, high risk, but very critical systems. While we still require these critical systems, we must, in addition, grow new capabilities from the bottom up. The big engine for driving this is Information Technology.

The power per kilogram on orbit of IT is absolutely soaring. Other nations in the world are taking advantage of that phenomenon. We are not yet doing that in national security. But, we can.

This change in the competitive environment has been a force of policy change within our own department and our own government as to how we pursue this.

I’m not saying that there is anything fundamentally wrong with what we are doing now. Rather, I’m saying we need those capabilities, but we need an additional broadened approach, as well.

We can see new approaches to competition. The consortium approach is actually shifting competition to a new, higher value adding plain.

The World Wide Web Consortium, the W3C, based out of MIT, is doing a great deal of that for us with regard to the Internet itself. It allows us to focus our competition more at the application level than arguing about some of the mundane things that are well behind the screen in our laptop or our desktop computer.

The barriers to competition are falling because we live in a vastly more networked world, and because of the universal availability of high quality IT.

And, those barriers, frankly, cannot be controlled strictly by legislation. There are marketplace factors that are going on here.

When we insert ourselves in the process, counter to marketplace factors, we frequently find that we chafe against some unattended consequences. We have this example going on right now with the very vocal debate concerning the shipbuilding industry for military vessels.

The workforce is under stress, by reduced numbers of buys that the Navy can afford to procure every year. Yet, at the same time, we’re really not members of the global competition.

On the other hand, there are second and third tier providers, not just in ships, but also in such things as space and vertical lift, who are capable of competing. But, the deck is simply stacked against them.

We have to consider reshuffling the policy deck. I’m a buy-America person. I really want to buy America, but I want my basis of buying America the fact that we are the best, we are the cheapest, we are in the forefront and at the cutting edge, and we can’t do that if we shield our people from the competition that they need in order to perfect themselves.

The third point is a strategic approach to cost. The Department of Defense has a very good budget strategy. We have always been good at budget strategy.

But, what we really need now is a cost strategy. These are profoundly different things. The new age requires new capabilities that can only be achieved with a different approach to what things cost.

There are five parts that comprise a cost strategy

The reason these issues are so important is that this is the age of the small, the fast, and the many. Numbers do count, and when we have a small number of very high-end systems, we foreclose our options.

If you foreclose options, you narrow your capabilities base. And, as you narrow your capabilities base, you run the risk of being strategically outflanked. Which is exactly what happened to us on September 11th.

Therefore, we want to be able to broaden our capabilities base. To do so we have to decrease the cost, spread it across more capabilities, create more options, and generate higher transaction rates.

I think defense firms should be rewarded for pushing stuff out the door, and pushing stuff out the door at high speed. We can’t do that if we put up barriers. If we use, for example, operational test and evaluation as a barrier, which is not what it was intended to be. Operational test and evaluation is meant to find for us what the boundaries of capability are, not be a barrier to systems introduction.

We can’t do these things if we have a very slow transaction rate. If we really buy one system per career, then our learning rate is flat.

And, we all know, in this information age, where knowledge is so valuable, if you have a flat learning curve, then you’re a loser.

We have to sharply improve our transaction rate to get our learning up, and then we need to develop the general overall system complexity, which means not technical sophistication, but systems complexity, the ability to network a very large number of entities and very diverse entities.

If you look at it from that perspective, then maybe our approach must be a little bit different. The trajectory that we’re on is really a perverse contradiction.

Consequently, there must be a policy change. Or, as management guru Tom Peters would say, “you cannot shrink yourself to greatness.” But, some other way – perhaps headquarters can.

Finally, we are looking at a contradiction with regard to a capabilities imbalance, and there will be a policy change because of this. As we have mastered the traditional battlefield challenges, enemies have moved to the edges. Irregular warfare. Catastrophic warfare. The realm of terrorists, and the like.

In other words, we are incurring national security risks outside of the main focal point of our strategic capabilities. Therefore, we must rebalance the force. The Department is trying very hard to do that. That will, of course, necessitate not just a rebalancing of resources, but an intellectual rebalancing, as we realize that national security is not just defense, but it’s indeed all else, plus defense.

But, capabilities are wanting. Within the Department of Defense, we have seen our planning, our timelines, shorten dramatically, by more than an order of magnitude. Planning for a major operation, which used to take thirty days to do, can now be done in less than two. And, the quality of the plan is superior. The reason is because we have high quality vertical and horizontal integration for collaborative planning purposes.

However, right now, that’s confined to the Department of Defense. We need to push that out across government, because we now realize, of course, that national security is all else, plus defense.

We are talking about a new kind of convergence now. A new, higher level of jointness. It’s creating a pull. I believe that technology will respond. Firms will respond. And, indeed, I think many already have, as they’ve put forward these collaborative tools. Perhaps what we’re doing in defense could be used as a model for that.

Amidst all of this change I see a role for industry, and I see a role for Congress too. Industry, of course, will rise to the occasion. Over seven years ago, when we launched the concept of network centric warfare, almost everyone missed it.

This is the point in its gravity that industry didn’t. Industry paid attention, and actually turned out to be a leader. Their responses to Requests for Proposals were crafted in network centric terms, and they, essentially, led the department in this direction. It is now taken for granted that we’re in the network centric age.

Similarly, the Congress played a major role in creating the high level of jointness that we have today. The Goldwater Nichols Act was, of course, part of it, but it was more than that.

It was the language in each individual bill. It was the meetings, it was the general leadership that was expressed by members of Congress, which was so powerful in overcoming obstacles within the department to jointness.

Now, those same skills have to be brought to bear across the full expanse of government. This is an enormous new challenge for the Congress. But, where else is there to go?

That is, indeed, the type of thing that I believe our magnificent Congress expects to undertake to make this a better and safer world and nation. Thank you all very much.