Grave New World

vents over the last 12 months have served as a poignant primer for military planners struggling to define and prioritize service modernization goals. From missile launches in North Korea and Iran, terrorist attacks on embassies in Africa, nuclear testing on the Indian subcontinent, cyberattacks against Defense computer systems worldwide, continued Iraqi intransigence over chemical and biological weapons in the Persian Gulf and NATO's war against Yugoslavia, the military faces a full range of threats for which it must be prepared.

Defense acquisition chief Jacques Gansler sees two fundamental changes in U.S. military intervention. In a speech to acquisition officials at the 1999 DoD Procurement Conference in Norfolk, Va., in May, Gansler said: "First, we will see more short, intense regional conflicts-often followed by extended periods of peacekeeping. And second, our military will seek to project power without putting a large number of forces at risk. Massed forces will be replaced by massed firepower, precisely placed on targets."

The luxury U.S. forces faced in the Persian Gulf War, where they had months to deploy and prepare, is not likely to be seen again. In the future, the military will have to deploy forces rapidly, with no assurance of access to friendly ports or airfields, Gansler said.

While advances in technology, such as real-time, all-weather, accurate and secure information systems, combined with long-range, unmanned, highly lethal weapons designed to hit targets with pinpoint accuracy, will largely characterize future warfare, the Pentagon is in no position to replace the vast majority of its major weapons systems, Gansler said.

"For the next decade at least, new weapons will not be deployed in sufficient quantities to replace the vast majority of the current systems. Thus, we will be fighting, for the most part, with what we have now," he said.

Spending Wisely

The Quadrennial Defense Review conducted by the Defense Department in 1997 serves as the planning document for the approximately $85 billion the department spends annually to research, develop and buy weapons systems. Modernization spending bottomed out in 1997, after a precipitous drop for nearly a decade. Now, for the second year in a row, the Clinton administration has requested an increase in funding for defense procurement-an 18.5 percent increase over 1997 spending, according to an analysis by the non-partisan Center for Strategic and Budgetary Assessments.

But there are no guarantees. "The main threat to these plans is that, as has often occurred in past years, future [operation and maintenance] costs will prove higher than anticipated and funding will have to be shifted out of procurement to cover these costs," CSBA reported in an analysis of the fiscal 2000 Defense budget request.

Andrew Krepinevich, executive director of CSBA, told the House Budget Committee in March that much of the discussion over defense spending misses the point. "Nearly all of the recent debate over the defense budget has concerned 'How much is enough?' to fund the QDR program," he said. "Very little discussion has focused on the more critical question of 'How wisely are we spending?' our Defense dollars."

"The Defense Department continues to focus the vast majority of its resources on familiar threats, requiring traditional kinds of forces, despite the fact that future challenges to our security are likely to be very different from those we face today, and thus require very different kinds of forces and equipment," Krepinevich said.

The administration's modernization plan does not sufficiently take into account emerging security challenges, instead placing too much emphasis on modernizing forces to meet today's threats, and too little on preparing for emerging threats, Krepinevich argued. The evidence is in the department's procurement budget, which focuses on producing a few new major systems in relatively large numbers, and a research, development, testing and evaluation budget that has declined by 17 percent in real terms over the department's six-year future funding plan.

"My principal concern is that we are not implementing the changes in our approach to modernization that these revolutionary times demand," Krepinevich said. "We are living in revolutionary times, both in a geopolitical and in a military-technical sense. We must take the change, the uncertainty and the opportunity that such times offer in crafting a budget strategy to modernize the U.S. military."

Instead, the Pentagon is investing heavily in new weapons platforms-submarines, aircraft carriers and tactical fighter jets-with life spans of 25 years or longer, without careful consideration as to how effective those weapons will be in 25 years or more.

'Single Weapon' Phenomenon

Gansler sees a related problem. "We actually find ourselves rapidly coming close to making reality out of [former Lockheed Martin chief] Norm Augustine's prediction that, due to perpetually escalating costs, we would eventually be able to afford only a single weapon," he said. "Weapons that used to cost in the thousands of dollars now cost millions or tens of millions each-some even in the billions each."

Nowhere is the cost of weapons more controversial than in DoD's fighter programs. The Pentagon is currently pursuing three new tactical fighters: the Navy's F/A-18-E/F Super Hornet, the Air Force's F-22 Raptor, and the Joint Strike Fighter, versions of which are to be purchased for the Air Force, Navy and Marine Corps. Various estimates put the development and purchase of the three tactical aircraft programs in the neighborhood of $350 billion.

Given the United States' current air superiority, so clearly demonstrated in the campaign against Yugoslavia earlier this year, and the tremendous costs associated with the three fighter programs, many inside and outside the Pentagon are beginning to wonder if all three programs are necessary.

Concerns over the Pentagon's investment in tactical aircraft were aggravated by the March testimony before a Senate Armed Services Committee panel of Louis Rodrigues, director of defense acquisition issues at the General Accounting Office.
Rodrigues outlined likely cost overruns in the F-22 program of $667 million and took issue with Navy claims that the F/A-18-E/F program is meeting all performance requirements.

Both the Navy and the Air Force have restructured their programs several times to keep them within cost caps established by Congress, but in some cases, they have been able to do so only by postponing testing. By deferring critical engineering tests, the services are often simply deferring cost increases, because they are then not able to make fully informed decisions regarding program scheduling.

In a January report (OCG-99-4), GAO found that unrealistic cost, schedule and performance estimates were a problem across many weapons programs.

"The desire of program sponsors to keep cost estimates as low as possible and to present attractive milestone schedules had encouraged the use of unreasonable assumptions about the pace and magnitude of the technical effort, material costs, production rates, savings from competition and other factors. We continue to find and report on overly optimistic program projections and excessive risks in light of the current budget and security environment," GAO reported.

Affordability Strategy

Procurement risks are not confined to major weapons systems. In a letter to House majority leader Dick Armey last December, DoD Inspector General Eleanor Hill noted, "The vast majority of the several million annual DoD contracting actions involve equipment, ammunition, supplies and services, rather than major weapon end items such as new ships and missiles. The sheer volume and great variety of DoD contracting activity make this a high-risk area."

Acquisition reform initiatives, such as electronic commerce and using commercial practices, hold considerable promise for cutting red tape and expediting procurements, but the acquisition workforce needs to be adequately trained to use such practices appropriately and safeguard operations against procurement fraud and mismanagement, Hill said.

"Despite many positive acquisition reform initiatives, we have seen no appreciable improvement yet in cycle time and unit cost," Hill wrote.

In addition, Hill noted that last year, three audits of prices paid for aviation spares under commercial-type contracts showed that DoD was paying up to several times more per item when purchasing from commercial catalogues than when previously contracting under traditional procedures. She attributed the overpayments to personnel inexperienced with the new practices.

Defense officials acknowledged the need to better train the acquisition workforce in "Into the 21st Century: A Strategy for Affordability," the Pentagon's blueprint for achieving its modernization goals, published in January. The document outlines the Defense Systems Affordability Council's three major goals for the department:

• Field high-quality products quickly and support them responsively.

DoD wants to reduce by half the cycle time, measured from program start to initial operating capability, for all programs begun in fiscal 1999 and beyond; to reduce by half the logistics response time from 36 days to 18, by 2000; and to reduce the repair cycle time for end items and reparable parts by 10 percent in 2000 and by 25 percent in 2001, as measured against 1997 baselines.

"The ability of the United States to preserve its technological advantage is at risk because our modernization, modification and logistics support cycles are so long. Because much of this technology is available commercially, potential adversaries may field it first. We cannot continue to have 10-year weapon acquisition cycles when the underlying technology becomes obsolete in two to five years or less. Similarly, we cannot afford logistics support cycles many times longer than the commercial counterparts," the strategy document notes.

• Lower the total ownership costs of defense products.

Initially, DoD will set cost reduction targets in a series of pilot programs. Targets will be extended to all programs and become increasingly more aggressive as lessons learned are applied across all systems. To achieve the targets, DoD will begin passing more responsibility for manufacturing processes and for total systems performance to its contractors, and will move from a cost-based purchasing system to one based on price.

In addition, program managers for both new and fielded systems will receive greater authority to make trade-offs between research and development, acquisition, operating and support costs. At the same time, they will be held accountable for resources they directly control.

• Reduce the overhead cost of the acquisition and logistics infrastructure.

Defense officials say they will continue to restructure facilities to reduce infrastructure and to turn over to the private sector work that can be done more efficiently there without jeopardizing national security.

Savings Through Reform

Pentagon officials hope to finance some $11 billion in modernization over the next five years by competing nearly 230,000 defense jobs with private sector bidders. Under a program known as "competitive sourcing," the government will conduct formal reviews, under which DoD workers will be required to reengineer their operations and compete with contractors for specific workloads.

"There is no bias towards privatization. We want to use those resources that are most efficient and effective," according to DoD's "Strategy for Affordability," which lays out the rationale for the push for public-private competitions. Other than combat, policy formulation, management of resources and oversight-all functions that must be retained by the Defense Department-functions should be performed by DoD only if they can be done so more efficiently and effectively than in the private sector, the document states.

The competitive sourcing process, governed by Office of Management and Budget Circular A-76, is not new to DoD, but the massive scope of the department's plan is unprecedented. In the 17-year-period between 1979 and 1996, the Defense Department reviewed about 90,000 positions for transfer to the private sector under the A-76 process; through 2005, the department says it will review 229,000 positions. In other words, it plans to compete more than twice as many positions in one third the time.

There are many skeptics, both inside and outside DoD, who believe the plan is driven more by the department's fiscal problems than by a clear rationale for outsourcing work to the private sector. One source of criticism stems from the fact that savings targets were derived before the department conducted a thorough review to determine how many positions could realistically be competed. In addition, the estimated savings have already been programmed into the military services' future budgets.

The competitive sourcing program is the most ambitious in a series of Defense infrastructure and business reforms that fall under the umbrella of the Defense Reform Initiative, Defense Secretary William Cohen's massive effort to improve military support operations by closing more bases, cutting headquarters staff, reengineering business practices and turning over commercial activities to the private sector.

In response to a request by the House Armed Services Committee, GAO examined the Defense Department's future years defense program for 1999-2003 to determine the extent to which the Pentagon was counting on savings from the Defense Reform Initiative to fund the military, and the reliability of the Pentagon's estimates.

In its February report (NSIAD-99-66), GAO found that savings projected from competitive sourcing were not linked to specific functions under study, nor did DoD have in place the systems necessary to provide reliable cost information to accurately identify savings.

"Consequently, it is not feasible to accurately identify current costs of functions to be studied or the potential savings as a percentage of these costs," GAO reported. In addition, GAO found that historical data is of limited use in estimating future savings. Until studies are completed, firm estimates will not be possible, and even then, they would be subject to change.

Nonetheless, Pentagon officials say they are confident they will achieve their $11 billion goal by 2005, and reap annual recurring savings of about $3 billion thereafter. But if the savings levels fall short of Pentagon projections, the services will have to cut spending further to meet the targets.

The Pentagon's competitive sourcing plans will almost certainly save the department money. Even when government workers win an A-76 review, they do so by proposing a more efficient, streamlined organization. But how much will be saved is another matter.

Besides the tremendous time pressure for meeting the goals, GAO reported in March (NSIAD-99-46) that the Defense Department has not funded the up-front costs of conducting competitions (studies show the costs can range from $2,000 to $9,000 per position competed), nor did it factor in the separation costs, such as early retirement benefits, associated with turning jobs over to the private sector.

While GAO auditors generally have high praise for DoD's efforts to reform its business operations, their analysis shows the department's savings projections from competitive sourcing are significantly overstated. That can only be bad news for the service chiefs, who will then have to look elsewhere for savings.