Three Ways the U.S. Department of Defense Can Achieve Its Sustainment Objectives in Challenging Times 1
With the housing market collapse, a rapid rush to new fiscal realities, the healthcare system overhaul, and an ongoing technological revolution, the United States is at an inflection point an interesting and compelling time in history that will alter the country s path for better or worse over the next several years. As a microcosm of the change taking place in the United States, the Department of Defense (DoD) is experiencing its own turning point as it grapples with the drawdown of two major wars and associated reset requirements, pending budget cuts on top of previous cuts, the technical complexity of programs resulting in fielding delays and cost overruns, and rising healthcare costs for active-duty personnel and veterans. Although these and many other forces are at play, one of the DoD s most pressing concerns is the need to wring costs out of sustainment while maintaining required weapon-system performance. Every dollar spent on operations and maintenance reduces the resources available for vital acquisition programs (see figure 1). This level of spending directly impacts the DoD s ability to cushion pending budget cuts, inhibits the flexibility and agility necessary to shift to an Asiancentric strategy, and impedes its ability to acquire defense systems to ensure national security. For more than a decade, the DoD has embraced performance-based logistics (PBL) as its preferred means for reducing sustainment costs. While effective in many cases, PBLs are generally thinly implemented, mostly contract-focused, and executed at the commodity level. Our recently commissioned A.T. Kearney study reveals that PBLs alone will not be sufficient for the DoD to meet both its sustainment needs and performance requirements during the coming period of significant budget reductions (see sidebar: About the Study on page 3). The study also Figure 1 Operations and maintenance is consuming a growing portion of Department of Defense resources Expenditures by category* 7% 11% 30% 4% 13% 20% 2% 9% 18% Other Research, development, testing, and evaluation Procurement Personnel Operations and maintenance 27% 24% 23% 29% 39% 44% 1980 1989 2000 2009 2029e *Expenditures for 2009 include overseas contingency operations funds, such as Iraq and Afghanistan operations. Other includes retirement pay, military construction, family housing, revenue and management funds, trust, and receipts. Sources: Department of Defense comptroller, national defense budget estimates for fiscal year 2013, Congressional Budget Office estimates; A.T. Kearney analysis 2
About the Study Recognizing that performancebased logistics (PBL) is the preferred means of contracting for sustainment services within the defense industry and has both its champions and doubters A.T. Kearney set out to independently and objectively answer one question: Under what conditions do PBLs improve weapon-system performance and reduce costs? Our interviews, although grounded in this core question, were far ranging and open to the direction taken by each interviewee s viewpoint. This mindset and lack of a predetermined agenda, coupled with our external independence, allowed us to pivot our research as hypotheses were disproven or changed and as underlying themes emerged. Research participants, who contributed under conditions of anonymity, represent a broad mix of practitioners, executives, and policyholders with PBL experience and sustainment expertise. They include senior officers and executives from the following: Government, including active and retired members of the services across the DoD Defense industry, including prime contractors and sub-tier suppliers Commercial industry, including executives, practitioners, and observers from commercial aviation, heavy industry, oil and gas, and financial services Our goal was to compile a set of recommendations that are correct and feasible for the DoD enterprise. Although our research findings are not exhaustive or complete nor were they meant to be they represent three actions that will materially improve sustainment performance and meet the long-term goals of national security and taxpayer stewardship: adopting a menu of principle-driven sustainment models, embracing a portfolio mindset, and improving acquisition processes. examines the forces of change at play both inside and outside the DoD, highlighting how they will play out within the context of U.S. national security and the ways in which they will shape the DoD s future sustainment strategy and activities. Our findings suggest that the DoD can meet its sustainment objectives despite a declining budget by looking more broadly at the defense industrial structure and the acquisition process. Indeed, it is possible to substantially improve sustainment performance while also meeting the long-term goals of national security and taxpayer stewardship. This can be accomplished by aggressively pursuing and implementing three strategies: Adopt a menu of principle-driven sustainment models, embrace a portfolio mindset, and make better acquisition decisions. The following outlines each one in more detail. 1. Adopt a Menu of Principle-Driven Sustainment Models For the most part, each DoD program makes its own decisions about whether government or contractor resources will be responsible for its maintenance, with each program manager (PM) navigating the political, technical, legal, and operational minefields to arrive at a programspecific strategy. There are many examples of similar platforms, including aircraft, ships, and other weapons systems, that have evolved to unique end states. 3
This individualistic approach leads to a significant amount of unnecessary variation and related issues within both the public and private sector value chains. In a program-level sustainment system, for example, every weapon system tends to be handled differently, which results in a suboptimal enterprise, drives excessive costs and capacity, inhibits cross-program leverage, and hinders the ability to develop true world-class capabilities. And in a service-centered sustainment system, every service Army, Navy, Marine Corps, and Air Force largely operates within its own silo, which leads to redundant capabilities, runs counter to promoting interoperability, and creates costly excess capacity. Although some variation within value chains is necessary, today s dissimilarity is untenable from an affordability and performance standpoint. A comprehensive effort to define and adopt an essential few standard principle-driven sustainment models across the DoD and its contractors essentially, across the entire DoD enterprise will ensure cost savings and greater efficiency. Principle-driven sustainment models are a limited, fixed menu of sustainment models that, when based on characteristics of the program, represent an optimized DoD enterprise-level product support, maintenance, and supply strategy. The characteristics include weaponsystem life-cycle duration, size, strategic importance (core), and differentiation from other programs, among others. Adopting a menu of standard principledriven sustainment models is not an easy proposition. It is a major undertaking that calls for visionary leaders and broad support. A fixed menu of sustainment approaches is far better than today s ad hoc approach as it removes unnecessary value-chain variation, optimizes costs and performance, and delivers improved outcomes with significant savings all made possible by the following: Relieving the PM from making enterprise decisions Providing consistent direction to industry and government about what is expected and needed from each, empowering both to achieve world-class performance Promoting interoperability across logistics functions: common languages, processes, and technologies Reducing costs by eliminating needless redundancy, such as capital investments Enabling true, long-term strategic sustainment planning earlier in the acquisition life cycle Serving as a steady beacon, if based on first principles, as administrators, defense strategies and threats change over time For example, a limited-life weapon system with significant commercial content is more efficiently sustained by the contractor base, while the government s organic sustainment 4
Figure 2 Principle-driven sustainment delivers better outcomes at lower costs Illustrative Principles Product Life-cycle term Commerciality Commonality Operation War conditions Training fleet Enterprise Capability planning 50/50 contribution Core designation Program 1 characteristics 10-year life, minimal 50/50 contribution, very tactical, different from other programs Product support integrator Supply chain Sustaining engineering Life-cycle management Field support Program 2 characteristics 30-year life, significant 50/50 contribution, strategic, similar to other organic programs Product support integrator Supply chain Sustaining engineering Life-cycle management Field support Government run Contractor run Source: A.T. Kearney analysis organization can best maintain a highly specialized, long-life program (see figure 2). The concept is not unlike most large commercial corporations with diverse product lines that rely on standardization to reduce complexity, promote speed, and maximize profits. Once the models are defined, they can be used to better project the sustainment requirements of future programs and align infrastructure requirements and investments in facilities, tooling, IT, and capability building. The result is improved support at a lower cost. When defined using first principles, these sustainment models will endure throughout the life cycle of the system. While the benefits are obvious, defining and adopting a menu of standard principle-driven sustainment models is not an easy proposition. It is a major undertaking that calls for visionary leaders and broad support. 2. Embrace a Portfolio Mindset The Department of Defense can no longer afford to manage its programs individually, as if each were totally unique. An autonomous approach to program management constrains all efforts to optimize decision making across the DoD enterprise. Rather than mitigating risk, this approach significantly increases security risks by considering cost as an independent variable, which is inappropriate in today s cost-sensitive environment. The result is more engineers, program managers, and earned value management system (EVMS) personnel, and a growing number of unique supply chains, maintenance facilities, and offices, all with their related support costs. 5
A portfolio mindset is needed to leverage resources and achieve new cost and performance levels unattainable by other means. Adopting a portfolio mindset will enable the DoD to better examine products, systems, subsystems, and processes to identify points of commonality, economies of scale, and leverage across the DoD enterprise. There are a number of ways to think about portfolios. For example, a portfolio can be defined by similar programs and products, such as all wheeled and tracked vehicles; by prime suppliers managing all programs rather than a series of individual programs; or by subsystems, such as air-conditioning units. Regardless of definition, effective portfolio management requires balancing the scope, management complexity, and potential savings to the portfolio (see figure 3). The scope is determined by the number of programs and other variants it encompasses. Management complexity increases with the number of stakeholders, organizations affected, contractors, and usages customers. Potential savings come from volume leverage, development cost amortization, infrastructure sharing, and depot activation synergies. Figure 3 Effective portfolio management hinges on balancing scope, complexity, and savings Platforms and products Strategic suppliers Number of stakeholders Organizations affected Number of primes and subs Usage cases and customers Management complexity Potential savings Volume leverage Development cost amortization Infrastructure sharing Depot activation synergies Common subsystems Portfolio scope Number of programs and variants Source: A.T. Kearney analysis The F-35 Joint Strike Fighter program, with its $1.5 trillion cost and numerous developmental delays, may seem counterintuitive to a portfolio mindset, but in fact it is a good application of the concept (see figure 4 on page 7). Without a portfolio mindset, each partner country in the program would be required to pay the full cost of developing from scratch its own version of this fifth-generation fighter jet. According to the Financial Times, Europe cannot afford its own force posture, and it is unlikely that it would be able to handle the financial burden of organic development. 1 As a result, the United States would be obligated to shoulder more of Europe s security risk, adding to the already severe pressures of DoD budget reductions. Yet, before the DoD can make portfolio management successful, it must overcome challenges that are deeply ingrained in its culture and in its Services. For joint programs across the Services, 1 Europe Risks Giving Up On Defence, Financial Times, October, 2012 6
Figure 4 Despite its difficulties, the F-35 Joint Strike Fighter program has a portfolio mindset F-35 program Management complexity Portfolio scope Cost savings Carrier variant Conventional takeoff and landing Short takeoff and vertical landing U.S. Navy Australia Norway Italy Canada Turkey United Kingdom Denmark Israel U.S. Marine Corps Italy Japan The Netherlands U.S. Air Force Source: Lockheed's www.f35.com website there are concerns about Service-level loss of control, loss of accountability, extended development time, and requirements creep. For intra-service portfolios, DoD challenges include program-level loss of control, loss of accountability, and appropriated funding flexibility. Nevertheless, in an environment of declining budgets, it is vital for the DoD to address these challenges so it can quickly and successfully embrace a portfolio mindset. 3. Make Better Acquisition Decisions Although sustainment represents a large percentage of a program s overall life-cycle costs, it is often an afterthought during the design, development, and production phases. For the most part, sustainment is underappreciated, undervalued, and often underrepresented on the priority list in the early stages of decision making. The DoD has made progress in correcting this imbalance through recent efforts such as lifecycle sustainment plans, milestone review deliverables, and elements of Better Buying Power. 2 2 Better Buying Power is a set of best practices designed to strengthen the DoD s purchasing power, improve productivity, and provide an affordable, value-added military capability. 7
But more work is needed. Of note is the need to supply the acquisition workforce with the tools, training, and education to accurately complete trade-off analyses. Making changes across three dimensions in the early-decision acquisition phases can help the DoD achieve better, longer-term outcomes for its programs (see figure 5): Figure 5 Changes in three areas can create long-term advantage for DoD programs Advanced analytics Create cost trade-off visibility and include acquisition and sustainment in process Utilize advanced modeling and simulation tools Product architecture Open system (plug-and-play) Alternative sources Unrestricted data rights Organization and governance Create post-milestone D program review process Ensure tactical alignment of requirements, acquisition, execution, and policy organizations Source: A.T. Kearney analysis Visibility and advanced analytics. The DoD needs discrete visibility into the cost of meeting each requirement with a view to acquisitions and sustainment. Today, most programs define a cluster or increment of desired capabilities with little visibility into what each one costs to acquire and even less into what each will cost to sustain. The ability to perform trade-offs between costs and capabilities will be essential to achieving affordability. Once there is visibility, advanced modeling and simulation tools can be used to project sustainment costs and thus make better, smarter decisions. Product architecture. The engineering, manufacturing, and development (EMD) strategy must ensure and the modernization strategy must preserve at least one of the following on all major subsystems: open-system architecture (plug-and-play), alternative sources, and unlimited rights with transparent cost and design data. Near-term development savings are not enough to offset the long-term sustainment cost increases for durable, long-life programs. Making product architecture decisions early in the product life cycle will define not only its competitive positioning but also a significant portion of its costs over the program life cycle. 8
Organization and governance. Although the department has made significant progress by aligning requirements owners with acquisition executives, opportunities still exist at a more tactical, execution level among requirements, acquisition, policy, and execution organizations. Improvements to the development process post-milestone D (when programs have less oversight requirements but can still have annual sustainment expenses in the hundreds of millions to billion dollars) would also be beneficial. Should-cost and a formal, rigorous affordability and performance improvement program will be particularly beneficial. Reflect, Reorganize, Reengage Since 2001, the United States and the DoD have met many defense challenges head on, including 9/11, Iraq, Afghanistan, and a global financial crisis. While some say now is the time to pause after successfully navigating this trying period in our country s history, experience suggests it is the time to reflect, reorganize, and reengage. PBLs seem to deliver the benefits promised, but they are only part of the solution. New challenges require new solutions. When combined, the three strategies outlined in this paper can propel the DoD enterprise to new levels of performance with reduced costs. Authors Steven Hurt, partner, Dallas steven.hurt@atkearney.com 9
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