Acquisition Reform Is Not The Same As Reducing Defense Overhead Costs

There is a tendency to conflate acquisition reform and defense overhead costs and to believe that the only way to achieve significant savings is by instituting wholesale changes to the way decisions are made on major weapons systems. So we fiddle endlessly with the number of milestones and decision points in the weapons systems acquisition cycle and weigh the comparative benefit of cost plus versus fixed price incentive fee contracts.

Acquisition reform is hard. It involves structural changes to a system that must remain functional while such changes are being made. The oft-used analogue is of trying to change a car’s transmission fluid while it is traveling at speed down a winding road. There are many stakeholders with lots of contending interests.

While acquisition reform is hard, reducing the overhead costs of the current system, need not be. The reason I say this is because cutting costs involves more a change in ones state of mind, or values, rather than processes and procedures.

Perhaps the most insightful view of the problem and its solutions was provided by John Hamre, former Deputy Secretary of defense and currently President of the Center for Strategic and International Studies. In a two page memo titled “An Honest Look at the Military-Industrial Complex,” Dr. Hamre made the simple observation that the key to our success in the Cold War was relying on private industry to provide the weapons systems, goods and services for our military. The private sector was able to achieve a balance between efficiency and creativity that enabled the U.S. to field the best military in the world without going bankrupt. He went on to say:

We harnessed the energy and creative power of the profit motive to national security. We won the Cold War not because we fielded a bigger military establishment, but because we used advanced technology and private sector initiative to sustain a qualitative military edge over the Soviet Union. Industry became the indispensable partner to our armed forces in the defense of our country.

Hamre warned that we are in danger of seriously damaging this partner, with long-term consequences. There are four factors putting this at risk.

• First, the defense industry is not sitting at the table when hard budget choices are made in the Pentagon. OSD is present, as are the Services and, in spectral form, Congress. Among these powerful forces, the defense industry is a feeble voice.
• Second, the system is being choked by laws, regulations, reporting requirements, and mandated procedures. As Hamre observed, the contract to send a man to the Moon and bring him back safely was written on a single sheet of paper. Fully a third of our procurement dollars are going to “overhead,” much of it dictated by the choking layers of redundant and competitive overseers.

As in other areas of our government, there have been instances of abuse and misconduct. But our responses to these relatively rare instances are vastly disproportionate and the costs they impose in both dollars and the delivery of useful products to our military are substantial and growing. We must have oversight and ensure the efficient use of government funds, but the cumulative scope and scale of our efforts on this front have led us to a point of rapidly diminishing returns.

• Third, most government employees have no experience in the private sector, so they don’t understand what it takes to run a business. They look at a program and only see the total price or burdened labor rates without appreciating how much of that passes right through the private company or is part of the cost of complying with the mountains of regulations. The profit margins for the defense and aerospace industry are significantly less than most sectors of the U.S. economy.
• Fourth, public policy ethics are being forced on the defense industry. While that is a serious blow on its own, the real damage is the signal it sends to talented businessmen — stay away from government contracting. This will only produce mediocrity over time.

Hamre concluded that streamlining processes and real accountability for failures or malfeasance would both save money and speed the system.

To that end, I would propose that Congress and the Executive Branch create a new “Packard Commission” for the purpose of lifting the unsustainable burden of regulations and policies from industry’s neck. The new Commission should be explicitly tasked to identify ways of incentivizing private industry to reduce costs. The first step in this process would be to conduct an updated study of the famous 1996 Cooper and Lybrands Study that sought to quantify the cost of the regulatory and oversight burden on defense activities and to identify the most egregious contributors to the overhead burden.

At its core, the problem Hamre described is a lack of trust between government and industry. But it was precisely a high degree of trust that allowed the defense establishment to place its fate and that of the Free World in the hands of private industry. To cut the defense overhead burden, more trust and less regulation is required.