“Better Buying Power: Mandate for Restoring Affordability and Productivity in Defense Spending”

I. USD(AT&L) Affordability Mandate:
Dr. Carter issued Mandate, to execute Secretary Gates’ Efficiency Initiative from Eisenhower Speech last month. Select Excerpts from “Affordability Mandate”:

• “We are a nation at war, and the Department does not expect the defense budget to decline. At the same time, we will not enjoy the large rate of growth we experienced during the years after September 11, 2001.”
• “The [recent Gates’] Initiative requires the Department to reduce funding devoted to unneeded or low-priority overhead, and to transfer these funds to force structure and modernization so that funding for these warfighting capabilities grows at approximately three percent annually.”
• “[S]avings can be found within programs and activities we do need, by conducting them more efficiently. Deputy Secretary Lynn expects that two-thirds of the savings transferred to warfighting accounts should come about this way.”
• “[Within Modernization,] we need to restore affordability to our programs and activities. I would like us to embark upon a process today to identify and then act on steps we can take to obtain two or three percent net annual growth in warfighting capabilities, without incurring a commensurate budget increase, by identifying and eliminating unproductive or low-value-added overhead; in effect, doing more without more.”
• “The Department is spending approximately $700 billion per year for our nation’s defense… But the remainder - $400 billion – is spent on contract issued to entities outside of the Department of Defense. This $400 billion is divided about equally between products (e.g., weapons, electronics, fuel, and facilities) and services (e.g., IT services, knowledge-based services, facilities upkeep, and transportation).”
• “We, the Department’s acquisition officials, agree to these contracts on behalf of the taxpayer. Each of these contracts contains a statement of these services or products it is procuring; an arrangement between the government and the contractor for how the costs of those items will be paid; and the overheads, indirect charges, and fees that complete the business transaction and make it possible for defense industry to be economically viable.”
• “The guidance memorandum I plan to issue will require each of you, as you craft and execute the Department’s contracts in coming years, to scrutinize these terms to ensure that they do not contain inefficiencies or unneeded overhead. The guidance will give you specific features to examine and targets to hit in the pursuit of greater efficiency. The guidance will focus on getting better outcomes, not on our bureaucratic structures.
• “First, the savings we are seeking will not be found overnight. It has taken years for excessive costs and unproductive overhead to creep into our business processes, and it will take years to work them out. We will be concentrating on new contracts as they are awarded in coming years, to ensure that they reflect new efficiencies.”
• “Second, we in the Department cannot succeed at this task alone…Our industry partners are patriots as well as businessmen. This initiative should contribute to the continuing vitality and financial viability of the defense industry in the era ahead by aligning the direction and incentives of the Department and industry.”
• “Most of the rest of the economy exhibits productivity growth, meaning that every year the buyer gets more for the same amount of money. So it should be in the defense economy. Increased productivity is good for both industry and government. So also is avoiding budget turbulence and getting more programs into stable production.”

II. Paraphrased Summary of Q&A with Sr. Industry Audience
[McAleese has paraphrased detailed Q&A, for ease of reference. Consequently, please do not quote or rely on these as material statements of Dr. Carter, since McAleese may have misunderstood or inadvertently-mischaracterized USD(AT&L)'s specific positions.]

• Budget is not going down, but not going up,
• We need to find the growth internally of 2%-3% annually,
• This is different from past 2 years of Program Terminations, because we are down to Programs we really need,
• This process will take years, but goal is Program predictability and stability,
• New Investments: where Cost will be one of Design Criteria:
  • o Navy SSBN(X)
  • o Army Ground Combat Vehicle (GCV)
  • o USAF Long Range Strike, and Prompt Global Strike”,
• Growth of Defense Acquisition workforce remains priority,
• “We are open to new ideas on acquisition of professional & technical services”,
• “We need to leverage Industry dialogue to gather objective facts,…rather than acting on urban legends or a hunch”,
• “Acquisition of IT is different from weapons, so we need continued innovation”,
• “New York Times’ coverage was inaccurate…Objective is to reduce non-value Cost, not contractor Profits”.

III. Select Excerpts from USD(AT&L) Briefing Charts:

• Providing Incentives for Greater Efficiency in Industry:
• “LEVERAGING REAL COMPETITION: Avoid direct buys and other substitutes for real competition. Use technical data packages and open systems architectures to support a continuous competitive environment.”
• “USING PROPER CONTRACT TYPE FOR DEVELOPMENT AND PROCUREMENT: Phase out award-fee contracts and favor fixed-price or cost-type incentive contracts in which government and industry share equally in overruns and underruns, and overruns have analytically-based caps.”
• “USING PROPER CONTRACT TYPE FOR SERVICES: Phase out Time and Material and sole-source ID/IQ contracts wherever possible. Utilize fixed-price performance-based contracts when requirements are firm and can be measured, with payments tied to performance.”
• “ALIGNING POLICY ON PROFIT AND FEE TO CIRCUMSTANCE: Align opportunity to earn profits/fees to both value to the taxpayer and risk to the contractor. Apply weighted guidelines to profit/fee levels. Reward higher productivity with higher profits. Incentivize investment in innovation.”
• “SHARING THE BENEFITS OF CASH FLOW:”
• “TARGETING NON-VALUE-ADDED COSTS: Identify and eliminate non-value-added overhead and G&A charged to contracts. Limit fees for subcontractor management to reflect actual value provided (risk assumed by prime and continuous subcontractor risk reduction). Limit B&P allowable costs in sole source contracts and encourage effective use of IRAD.”
• “INVOLVING DYNAMIC SMALL BUSINESS IN DEFENSE:”
• “REWARDING EXCELLENT SUPPLIERS:”
• Adopting Government Practices that Encourage Efficiency:
• “ADOPTING ‘SHOULD-COST’ AND ‘WILL-COST’ MANAGEMENT: Use historically informed independent cost estimation (‘will-cost’ estimates) to inform managing of programs to cost objectives (‘should-cost’ estimates).”
• “STRENGTHENING THE ACQUISITION WORKFORCE:”
• “IMPROVING AUDITS:”
• “MANDATING AFFORDABILITY AS A REQUIREMENT: In new programs such as the SSBN(X) nuclear missile submarine, the Presidential Helicopter, the Ground Combat Vehicle, and the Air Force/Navy Long Range Strike Family of Systems, cost considerations must shape requirements and design.”
• “STABILIZING PRODUCTION RATES: To ensure more programs are in stable, economically favorable rates of production and avoid cost escalation, program managers may not adjust production rates downward without head of component authority.”
• “ELIMINATING REDUNDANCY WITHIN WARFIGHTING PORTFOLIOS: Emulate the Army’s Precision Fires Capability Portfolio approach to identify where multiple programs are pursuing similar objectives.”
• “ESTABLISHING SENIOR MANAGERS FOR PROCUREMENT OF SERVICES:”
• “PROTECT THE TECHNOLOGY BASE: Protect the future by sustaining investment while focusing on high value-added work.”