U.K. Defense Contracting Innovations Put U.S. Acquisition System to Shame

I spent the last several days at a conference on defense logistics and sustainment attended by senior military and leaders from the Department of Defense, including an appearance by the Chairman of the Joint Chiefs of Staff, General Martin Dempsey, along with representatives of the defense industrial base. Panel after panel of government leaders and military officers repeated the same themes: defense budgets were under pressure, the department had to find ways of reducing costs, a major place to find savings is in logistics and sustainment, the role of the private sector was critical both to maintaining a viable end-to-end supply chain and to cutting costs and the government wanted a closer partnership with industry.

I believe that for the most part, DoD representatives at this conference truly believe what they were saying. The problem is that, as the old saying goes, actions speak louder than words, and when it comes to actions, the Pentagon is contradicting many of its verbal statements. For example, virtually every government representative lauded the use of performance-based logistics (PBL) as a way of reducing the costs of logistics and sustainment while often improving the availability and reliability of major weapons systems. In reality, DoD has only a limited number of PBL-based contracts and is showing no signs of pursuing a significant expansion in their use. Similarly, representatives from the Defense Logistics Agency (DLA) spoke with great pride of their use of private sector prime vendor contractors to manage the end-to-end supply chain for a number of commodities such as fuel, water and medical supplies. Yet there are a number of other areas, soldier clothing for example, that would benefit from such an approach. So far, there is no evidence that DLA is capitalizing on its successes.

Government representatives at this conference offered all kinds of reasons why they hadn’t done more to employ proven innovative techniques, such as PBLs, or make use of commercial best practices to lower costs and improve performance. There are problems accurately assessing how much it currently costs DoD to do maintenance or run a supply chain. Consequently, it is hard to figure out whether a new approach will save money. Despite being in existence for more than sixty years and spending around $500 billion annually, DoD has difficulty writing good contracts that would, for example, ensure cost reductions in long-term agreements and guarantee the government a share of such savings. When all else fails, they blamed the lawyers or Congress.

More broadly, DoD is pursuing acquisition policies that are likely to increase costs and make the logistics system slower and less responsive. A major example of a bad policy is the drive to increase competition for contracts. Yes, in general, competition is good. But too much of a good thing is bad. There are costs for both the government and private companies associated with conducting competitions. The more frequent the competition, the higher the costs. Also, more frequent competitions means shorter contract periods with less time for companies to recoup fixed costs, move down the learning curve, introduce innovative cost reduction techniques, insert new technology or invest in plant or training.

An example of a defense establishment that not only talks the talk but walks the walk is the British Ministry of Defense (MoD). Several years ago, the MoD ran a competition for lifecycle sustainment of its fleet of Chinook helicopters. The winning contractor, Boeing, was awarded a twenty-five year contract to manage the entire sustainment of the platform. This is a PBL-based contract with performance targets specified. Equally interesting, Boeing also has to agree to reduce costs over time, thereby lowering the price to the MoD.

The newest MoD innovation in acquisition policy is its Munitions Acquisition Supply Solutions (MASS) contract with BAE Systems. Under the MASS contract, the MoD pays BAE Systems a fixed amount to cover the company’s overhead and fixed costs. In return, BAE Systems agrees to provide the MoD with ammunition at a fixed price for five years but with annual reductions in the prices it charges. The MoD has also taken the extremely bold step of committing to forecasting its ammunition requirements three years ahead. According to reports, the MoD is also examining the possibility that MASS will be expanded to include management of the end-to-end ammunition supply chain.

The British MoD’s innovative approach to acquisition, logistics and sustainment should cause U.S. acquisition and logistics leaders to hang their heads in shame. What magic is it that enables the MoD to write good contracts but not DoD? When our closest ally repeatedly takes bold steps to transform its acquisition practices and approach to logistics and sustainment what excuse does DoD have for not being equally bold? The answer is none.