Jon Etherton’s Speech: Acquisition Transformation – What Should We Do Next?

This speech was given by Jon Etherton at the Lexington Institute’s Capitol Hill Defense Acquisition Reform event on June 24, 2015.

The essential elements of any successful enterprise are leadership, accountability and people. The Federal acquisition system is no different. In the NDIA report we prepared for the House and Senate Armed Services Committees and released last November, entitled Pathway to Transformation, we sought to bolster these essential elements with analysis and recommendations aimed at:

• Strengthening authority and accountability for decision-makers;
• Matching the requirements we are imposing on the acquisition system with the workforce resources we have and are likely to have in the future for carrying them out; and
• Moving further toward an analytic, evidence-based approach for assessing the performance of the acquisition process and for developing policies to move it forward.

While these are by no means the only metrics for assessing policy or legislation that should be moved forward, they are at least worthy of a place on a larger list. Chairman McCain and Chairman Thornberry are making good on their stated commitment to launch an overhaul of the defense acquisition system. The House and Senate Armed Services Committees have completed their respective bills and are in the preliminaries of the conference reconciliation process.  Each of the bills contains a robust list of acquisition policy proposals in various titles with the concentration in their respective titles VIII.  There is a remarkable alignment of general policy issues between both bills around which the 120-odd House and Senate provisions and extensive report language cluster.  The issues on the table include:

• The resources and authorities for strengthening the acquisition workforce with the appropriate tools for effective congressional oversight;
• The most effective structure for ensuring sufficient oversight and accountability in managing major programs, as we look to streamline where possible;
• The extent of acquisition responsibilities of the service chiefs and the potential of the chiefs to be the point of integration of the requirements, budget, and acquisition process;
• The balance of DoD access to commercial items, technologies and services with effective pricing approaches and equitable approaches to rights in intellectual property;
• Increase in opportunities for small business;
• The best approach for reviewing current law and regulation structuring the defense acquisition process; and
• The creation of additional tools for increasing DoD access to the so-called non-traditional sectors of the national technology and industrial base.

The next few weeks are going to be a lot of fun. Many of the issues raised in these bills have been kicking around for years, and it is my hope that these provisions will force some productive conversations toward at least some tentative resolution. Unfortunately, the aggressive schedule that the committees are pursuing for completing conference by the end of July may leave minimal time for the careful consideration of the many very significant issues that some of these provisions will require.  All of us have to help bring as much clarity to these conversations as we can over the next few weeks.

But, the fact is that critical decisions will be made, the differences in the two versions of the authorization bill will be reconciled, and I believe that some approach will be found to allow the FY16 National Defense Authorization Act to be signed into law– at some point.  Then, amidst the implementation of the decisions in that bill, the question will be – What next? What are further possible steps on a path to transformation?

I am going to offer three related areas that we might want to look at more deeply:

• Appropriate measures of value;
• Strengthening requirements definition, and
• Assessing the costs and incentives created by the way we budget our resources.

To the first issue, value cuts across a number of different areas and is distinct from requirements. Everyone is familiar with the lowest-price technical acceptable versus best value debate and the issue of value has been raised in that context in Better Buying Power. It is also an issue in commercial item pricing, performance-based logistics, and total cost of ownership. It is one of the major issues to be addressed in the quest to attract the so-called non-traditional firms to the defense marketplace.  It is even an issue in the recent IR&D management debate. Too often, it appears to me, that we only have the capability to measure value in terms of the price we pay for an item or service or program effort in the course of a given transaction. We appear to lack the ability to effectively consider benefits, savings, or costs of acquisition decisions above the transaction-by-transaction level in a manner that the oversight community is willing to validate on a systematic basis, other than occasionally after the fact.

We know that this is not the way the rest of the world tends to work.  All of us deal with proliferating offers of value from companies we deal with day-to-day.  Commercial companies tend to offer a range of different value approaches to the customers as a matter of course.  I understand that the nature of a commercial enterprise may make the value determination and evaluation of different approaches to value an easier process than could be the case in a Federal agency, but there is much greater potential here for looking at value in a more holistic fashion.

Do we need Congress to pass a law mandating a different approach or process on value?  No! Absolutely not! Instead, we should be examining why the broader consideration of value elements does not occur now. It should be a criterion considered in any review of existing statute or regulation as potential obstacles.

Effective requirements definition is critical to any approach that involves acquisition using broader concepts of value. Poor requirements definition is the issue that recurs over and over again as a source of failure in the acquisition of everything from major systems to base support. Congress has tended to focus on major systems acquisition programs in assessing the performance of the acquisition process and inadequate requirements management has been a major area of congressional concern from a number of different aspects for years. In fact, it is an issue addressed in provisions in this year’s authorization bill.  But keep in mind that spending on major programs is only about $70 billion of annual $350-$400 billion acquisition spent and the requirement definition issue pervades the other areas, but often in very different ways depending on the item or service being developed or procured. Because of the disparate nature of the requirements definition process for the great variety of goods and services that DoD buys and the different segments of the workforce involved, some clearly in and some clearly outside the boundaries of the acquisition workforce, make this a very different issue to address in any sort of systematic way.  At the same time, it is obvious that so many good things follow in any acquisition if we get the requirements piece right from sound acquisition planning to contract type selection to contract administration. We have to make progress in this area more than any other if we are to create a system that can effectively accommodate expanded approaches to value in acquisition.

The third related area is our process for budgeting and allocating our resources and the costs and incentives for stakeholders arising from that process. Some of you may have read the Institute for Defense Analysis study authored by Davis McNicol and Linda Wu that was released last September and is posted on the USD (AT&L) website. It is entitled, Evidence on the Effect of DoD Acquisition Policy and Process on Major Cost Growth of Major Defense Acquisition Programs. The study, which looked at the time period from 1970 to FY 2007 and measured Program Acquisition Unit Cost Growth looking at the variables of the periods of acquisition reform activity and the levels of funding available for acquisition in different time periods. The report seems to indicate that the only variable having a measurable impact on major program cost growth is the amount of funding available for acquisition at any point, not acquisition reform. If this report is a guide, the pathway to transformation of the acquisition process we are looking for, at least with respect to major program acquisition, may simply be ensuring very robust funding over an extended period in the R&D and procurement accounts. Something tells me that this may not be an approach that will be available to us.

As I read it, the IDA study assumed a more or less fixed process for allocating and managing resources for defense acquisition over time. If we are serious about transforming acquisition, we need to have a conversation about the current budget process, its impacts and the incentives it creates.  The way we treat money in the Federal budget process is one of the most significant differences with private sector practice, and I suspect that this process drives the behavior of the stakeholders to a greater extent than any other single factor and that it may be a limiting factor in how we may measure value and define requirements going forward. I believe we are in a position now to frame a discussion around those issues and to understand the costs associated with the current process and any conceivable alternatives we might consider. Given the complex and very technical issues around this topic and the number of authorities, processes and government decision-makers involved in the maintenance and operation of the process in and from Congress and the Executive Branch, a meaningful conversation around this issue will may not be possible for a year or longer, but we need begin now to start preparing for it.  I have not figured out how to suggest we do this in any detail, but one lesson I derive from the past attempts is that discussions on pieces of the issue like milestone budgeting, management reserve accounts, and color of money flexibility will not result in any change, only a reaffirmation of the status quo.

If in the end, we decide to leave the current process largely intact, we will at least have much better insight in the costs of that approach relative to the alternatives and that would be progress.  It would greatly enhance our understanding of the art of the possible with respect to strengthening accountability, leadership and people in the acquisition process, which is our overarching concern.

Mr. Jon Etherton is President of Etherton and Associates, Inc.