John Luddy’s Speech: Defense Acquisition Reform

This speech was given by John Luddy at Lexington’s Defense Acquisition Forum on June 3, 2016. Luddy is Vice President, National Security Policy, at the Aerospace Industries Association.

Mac, distinguished fellow speakers, staffers and acquisition experts: Thank you for inviting me to contribute to today’s important discussion.

As Aerospace Industries Association’s (AIA) Vice President for National Security Policy, I’m proud to represent more than 300 innovative and dedicated member companies and hundreds of thousands of patriots in the aerospace and defense industry who arm and equip our forces. I commend Mac and my former Lexington office-mates, Loren Thompson and Dan Goure, for their steadfast efforts to draw attention to our complex defense acquisition system. Today’s event is happening at a perfect time – the intellectual work of Lexington, AIA, and other policy and advocacy groups represented here; some tough political choices being made in Congress; and clear vision by senior leadership in the Department of Defense (DoD) – have combined to create the best conditions for acquisition reform in a generation. It’s an honor to be even a small part of that momentum.

Of course, acquisition reform is not a new subject. The defense acquisition system has been changed dozens of times, and every administration and Congress has made some changes. But there’s something different this time: for the first time since the 1940s, acquisition reform is not just about saving money – ‘more bang for the buck’ – it’s about removing barriers to innovation and eliminating unnecessary bureaucracy so that we can stay ahead of threats and provide faster solutions to our fighting forces. Fundamentally, we have begun to realize that the United States alone does not determine the extent of our advantage – the bad guys are getting better and better, faster and faster, all the time.

This concern has driven DoD’s Third Offset Strategy, which is specifically intended to help us maintain a qualitative technological and operational edge. It has driven Congress to propose significant legislative initiatives over the past two consecutive years, focused on expanding the availability of commercial products for defense procurement, rebalancing the role of the Services in the acquisition system, and better protection for industry’s intellectual property. And the heightened drive for innovation permeates our amazing defense industry – we are continually expanding the reach and effectiveness of American technology.

So everyone – DoD, Congress, and industry – gets the basic problem: we have to get better capabilities, and we have to get them faster. Against that backdrop, I’m going to briefly elaborate on a few areas where I think more progress can be made: commercial items policy; foreign military sales; development contracts; independent research and development; and innovation.

One important area concerns commercial items. In last year’s National Defense Authorization Act (NDAA), Congress took some very positive steps in the direction of broadening the availability and use of commercial items to DoD. Congress also directed reports and analysis that we hope will lay the groundwork for further reform. On balance, these changes will be very helpful to industry; they included: the presumption that a Commercial Item Determination, once made, is maintained for subsequent transactions; that contracting officers consider recent Commercial Item purchase prices by the government in establishing price reasonableness; and a reaffirmed preference for commercial items. We also are pleased to see additional proposals this year to further simplify commercial acquisition.

We understand that the office of Defense Procurement and Acquisition Policy (DPAP) is now revising its rules to comply with the 2016 NDAA, and that it will release its proposed rule and a much-anticipated “Commercial Item Guidebook” this summer for industry comment prior to formal publication and release. (We give DOD credit for this, since it is unusual for DOD to share internal guidebooks for public comment prior to releasing final products for its workforce.) We will closely examine both the proposed rule and the Guidebook to ensure that (1) the provisions and intent of the NDAA Legislation are being fully recognized and implemented in DOD policies and practices, and (2) that DOD has a plan for embedding price analysis skills and techniques in a workforce that today has a decided preference for, and experience with, cost analysis.

We support a robust and varied industrial base for DoD, including access to commercial and nontraditional suppliers. Many of our companies have a large presence in the commercial marketplace (e.g., Boeing, Honeywell, GE, Rockwell Collins) and everyone has a large supply chain with many commercial and nontraditional suppliers. The fundamental question is what will make all companies want to do business with DoD and lower the cost of doing business for everyone. Commercial and non-traditional firms want to sell more of their products to DOD, either directly or through defense and aerospace prime contractors. But in doing so, they will protect the intellectual property they largely paid for out of company funds, and they will shy away from creating separate accounting, auditing and reporting regimes just to satisfy the Pentagon’s unwieldy acquisition regulations – huge costs incurred for an entire company’s processes that cannot be recovered on commercial business, and are not affordable on a small amount of DoD business. They will shy away from solicitations that require them to relinquish IP as an evaluation factor. So we need to work on these issues.

For a variety of reasons, foreign military sales (FMS) are more important than ever. We know that streamlining the FMS system will not only enable the U.S. to build allied and partners capacity, but that it helps to maintain our domestic defense industrial base and reduce the cost of our own procurement. Congressional actions this year to reform the undefinitized contract actions process and support customer preferences for Firm Fixed Price FMS production contracts will be, we hope, the first steps in a broader package of reforms over the next few years. We are very appreciative of Congress’s support in these areas, and we also commend the hard work being done by Vice Admiral Joe Rixey and his colleagues in the Security Cooperation Enterprise to bring more cohesion to the U.S. Government’s approach to FMS and foreign partner capacity development.

We are concerned about legislative proposals to require fixed price development contracts. A generation ago, a series of acquisition disasters (C-5, A-12, V-22, DIVAD) led Congress to put a system in place requiring acquisition officials to consider risk in determining the right contract type for development programs – where development and acquisition risk is sufficiently low, fixed-pricing is appropriate. But we should not pretend that we know enough about the risks inherent in any specific advanced technology development effort to require a fixed-price contract – especially at a time when we’re hoping to foster innovation and the risk-taking it requires. There are strong feelings on both sides of this issue – we look forward to working with Congress to continue finding the right balance between fixed-price and cost-plus contracts.

In the realm of Independent Research and Development (IR&D) DOD and Congress have proposed changes that will stifle, rather than encourage innovation. The most onerous of these rules is DOD’s new requirement for “coordination” with government prior to initiation of IR&D Projects. While this is marginally better than the mandatory “approval” that was proposed last year, “coordination” will still bureaucratize and otherwise hamper industry’s agility, and therefore, innovation.

Our companies initiate thousands of IR&D projects each year. DOD simply cannot ‘coordinate’ on each of these projects without delaying them and creating more bureaucracy. How will the (again) risk-averse acquisition workforce quantify ‘coordination,’ if not with the extensive documentation needed to withstand the auditors? Rather than a meaningful exchange of ideas, which would benefit all parties, this will become a ‘block-checking’ exercise if well-thought-out parameters are not established.

The other proposed IR&D rule seeks to dictate how companies invest their IR&D, specifically those short-term initiatives aimed at improving their product knowledge and ability to capture future business. DOD is attempting to set up a mechanism to identify these costs when they are deemed to be affecting competitive source selections. But ALL IR&D projects, whether long- or short-term, are efforts by our companies to position themselves to compete for business – what else should they do? Likewise, most IR&D projects evolve over time, so how would DOD develop the expertise to make the highly technical determination that one part of the project had no effect on competition, while another part did?

This will lead to an array of protests and untold costs to the government and its suppliers. Ironically – since a company that has made initial IR&D investments can often provide a better product at lower cost – the rule also could result in a less technically proven product at increased cost.

DOD has publicly stated that the goal of this rule is to incentivize contractors to have a better balance of short, medium and long term IR&D investment, but the government has not presented any data that shows an imbalance. Moreover, the proposed ‘allowability’ rule will be yet another barrier to a non-traditional company choosing to compete for federal business. In addition, there are now Congressional proposals to put a cap on IR&D and make the system much more complex from an administrative and contracting standpoint. Taken together, we hope DOD and Congressional leaders will decline to fix something that’s not broken!

Finally, I want to close with some thoughts on innovation. There has been a lot of buzz over the past year or so on DOD’s outreach to Silicon Valley. Defense Innovation Unit Experimental is a worthwhile outreach effort by DOD, but in some respects it’s focused on the wrong end of the innovation challenge. As I’ve suggested, we think the Pentagon’s best approach to fostering innovation will be to look hard at its own acquisition process. There have been meaningful improvements in recent years, but the system is still too slow, inconsistent, and risk-averse. America’s aerospace and defense companies are still the best innovators in the world – if we can help our customer become a more agile and consistent buyer, both traditional defense companies and ‘Silicon Valley’ companies will be encouraged to innovate and do business with DOD. Conversely, if the Department does not reform its acquisition process, these large, commercially-focused companies will have little incentive to engage in the defense business.

So we are also concerned when we see proposals in Congress to create new ‘fast lanes’ for non-traditional contractors with minimal oversight, while traditional contractors remain subject to the high cost premium of complying with myriad bureaucratic requirements. This not only creates an uneven playing field for DoD business, but it leaves fully compliant contractors with high costs that make them less competitive in global competitions. If the goal is streamlining, competition, and speed, why not eliminate burdensome regulations for all contractors? Why should we make the system even more complex? We do not think “reform” should be synonymous with creating new layers of bureaucracy. In fact, it should be the opposite.

Put another way: talk of a ‘fast lane’ for non-traditional suppliers should beg the question – why is there a slow lane?

Again, thank you for the opportunity to meet today and discuss these issues of vital importance to our industry. I look forward to hearing from our other speakers, and responding to your questions.