Assessing the Potential for Civil-Military

Integration: Technologies, Processes, and

Practices

September 1994

OTA-ISS-611

NTIS order #PB95-109666

GPO stock #052-003-01394-1
Recommended Citation: U.S. Congress, Office of Technology Assessment, Assessing rhe

Potential for Ci\’il-Military Integration: Technologies, Processes, and Practices,

OTA-lSS-611 (Washington, DC: U.S. Government Printing Office, September 1994).
.—

Foreword

A

merica's national security and economic well-being have long rested on its technological and industrial prowess. Over the four-decade-long Cold War, the Nation’s

defense technology and industrial base became largely isolated from the commercial base, thus losing some of the benefits of the larger base. This isolation raised the

cost of many defense goods and services, reduced defense access to fast-moving commercial

technologies, and made it difficult for commercial firms to exploit the results of the Nation’s

large defense science and technology investments.

Government officials and private sector executives have advocated the integration of the

defense and commercial sectors (often termed civil-military integration or CMI). The

claimed benefits of CM I include cost savings, increased technology transfer, and an increase

in the number of potential defense suppliers. A CM I strategy, however, demands extensive

modification of acquisition laws and regulations, and concerns over potential costs and risks

of such modifications have hindered change. Although several congressional and administration initiatives have been launched to promote integration, to date, much of the defense

base remains isolated and the promised benefits of integration remain elusive.

This assessment found that greater CM I is possible. It confirms the potential for cost savings and increased technology transfer, but analysis indicates such savings are likely to be

less, and slower to realize, than many previous studies have suggested. Even so, cost savings

of even a few percent of total defense technology and industrial spending would amount to

billions of dollars in overall savings that might be used to meet other vital defense needs. The

most important benefit of increased CMI may be the preservation of a viable defense

technology and industrial capability in an increasingly fiscally constrained environment. Increased CMI appears essential if defense is to take advantage of rapidly developing commercial technologies.

This assessment identified no "silver bullet” policies that might easily achieve CM I

.

 goals. Some policies can have broad effects, but in most instances the barriers to increased

CMI are sufficiently intertwined to demand a comprehensive (and complex) set of policies if

the projected benefits are to be achieved.

In undertaking this assessment, OTA sought information and advice from a broad spectrum of knowledgeable individuals and organizations whose contributions are gratefully acknowledged. As with all OTA studies, the content of this report is the sole responsibility of

the Office of Technology” Assessment and does not necessarily represent the views of our

advisors and reviewers.

(7%z’Q- -

ROGER C. HERDMAN

Director

,,.

Ill
Walter LaBerge, chair

Consultant

Robert Calaway

President

Resource Management

International, Inc.

Gordon Corlew

Vice President, Engineering and

Production

AIL Systems, Inc.

S.P. Desjardins

President

Simula, Inc.

Roger Fountain

President&CEO

Great Lakes Composites Corp.

Jacques S. Gansler

Senior Vice President

The Analytic Sciences Corp.

Herbert Glazer

Professor of International

Business

Business Department

Kogod College of Business

Administration

The American University

General Alfred G. Hansen, USAF

(Retired)

Vice President, C-130 Programs

Lockheed

Joel W. Marsh

Director, Government Acquisition

Policy

United Technologies

Thomas L. McNaugher

Senior Fellow

The Brookings Institution

Christian L. Midgley

Division Manager

RayChem Corp.

F. Whitten Peters

Partner

Williams and Connolly

Louis Rosen

Partner and National Director of

Government Contract Services

Ernst and Young

Martin Rowell

Director, Technology Planning

Allied Signal Automotive

Howard Samuel

Senior Fellow

Council on Competitiveness

Robert W. Selden

Los Alamos National Laboratory

Leonard Sullivan

Consultant

System Planning Corp.

James A. Tegnelia

Vice President, Business

Development

Martin Marietta Electronics &

Missile Group

Nicholas Torelli

Torelli Enterprises

Admiral Harry Train, USN

(Retired)

Division Manager

Strategic Research and

Management Services Division

Science Application International

Corp.

Note: OTA appreciates and is grateful for the valuable assistance and thoughtful cri(iqucs provided by the advisory panel members.

The panel does not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibil~y for the report

and the accuracy of its contents.

iv
. .

Peter Blair

Assistant Director, OTA

Industry, Commerce, &

International Security Division

Alan Shaw

Program Manager

International Security and

Space Program

PRINCIPAL STAFF

Jack Nunn

Project Director

Michael Callaham

Senior Analyst

Dean Cheng

Analyst/Congressional Fellow

James Lamb

(ComSci Fellow)

Christopher M. Waychoff

Senior Analyst

ADMINISTRATIVE STAFF

Jacqueline Robinson-Boykin

Office Administrator

Ellis Lewis

Administrative Secretary

Preject Staff

CONTRACTORS

Ewan W. Anderson

Brian K. Dickson

Gregory D. Foster

Donald Fowler

Alex Gliksman

Madeline N. Gross

Ivars Gutmanis

Edwin Hullander

Leonard E. Johnson

Joe F. Jones

David P. Leech

Joe Raguso

Mary Ann Saour

Elizabeth Sheley

Alfred Skolnick

Paul F. Stregevsky

Paul E. Taibl

Debra van Opstal

Frederick C. Williams

Linette Cooper

Secretary
Preface

Two recent reports by the congressional Office of Technology Assessment (OTA) examined the

nature of the defense technology and industrial base (DTIB) necessary to meet future U.S. national

security needs. 1 These reports considered future military force structure alternatives, defense

technology and industrial needs associated with these forces, characteristics of a DTIB that could fill

those needs, and alternative strategies that might be employed to achieve the desirable DTIB characteristics. One alternative recommended by many industry representatives and government officials is

the integration of the defense and commercial industrial bases.

Other recent studies have examined the benefits of and barriers to integration of the DTIB and the

commercial technology and industrial bases-often termed civil-military integration (CMI).2 They

also recommended a number of possible actions to increase integration. This assessment builds on

their recommendations for possible actions to further integration.

This report responds to requests by the Senate and the House Armed Services Committees to investigate the potential for civil-military integration and the implications of such integration. It is divided

into six chapters and five appendices. Three of the supporting case studies (Composite Materials,

Flat-Panel Display, and Shipbuilding) are being published in a separate background paper.

Chapter 1 summarizes the principal assessment findings and presents policy options for consideration by Congress. Chapter 2 discusses strategies for implementing increased CMI. Chapter 3 provides a general overview of CMI, including a detailed definition and discussion of integration at

several levels; reviews the debate on civil-military integration; provides a framework for considering

CMI; and outlines OTA’s approach to this issue. Chapter 4 addresses the current level of commercial

purchases, the potential for purchasing more commercial goods and services, and the policies necessary to support such a strategy. Chapter 5 examines the current level of process integration in R&D,

production, and maintenance, and the potential for greater integration in these activities. It also considers the steps needed to implement such integration, as well as the benefits and risks associated with

these steps. Chapter 6 examines policies relating to that portion of the DTIB that is likely to remain

segregated. It considers CM I policies that might lower costs and increase the potential for technology

transfer in the segregated base.

1 The Office of Technology Assessment’s earlier study of the defense technology and industrial base resulted in two reports:

Kede.\igning Defense: Planning the Transition to (he Future U.S. Defense Industrial Base, OTA-lSC-500 (Washington, DC: U.S.

Government Printing OffIce), July 1991 and Building Fu:ure Security: Sfraregiesfor Resrrucruring fhe Defense Technology and

/ndu.\trial Base, OTA-ISC-530 (Washington, DC: U.S. Government Printing OffIce), June 1992, and three background papers:

Adju.st[ng to a Ne\i’ Security En\!ironment: The Defense Technolog> and In(iustrial Base Challenge, BP-ISC~-79 (Washington,

DC: U.S. Government Printing Office), February 1991; American Mi/i/ary fo)~er: Fufure Needs. Future Choices, BP-ISC-80

(W~shington, DC: U.S. Government Printing Office), October 1991; and Lessons in Re.\trucruring Defense Indu.itr?: The

French Experience, BP-ISC-96 (Washington, DC: U.S. Government Printing Office), June 1992.

z These studies include Use of Commerclul Components in Military Equipment, conducted by the Defense Science Board in

1986 and 1989; The Center for Strategic and International Studies’ Report on Inregruting the Commercial and Defense Technologies for Narionai Strength, in 199 l; L report by the DOD Acquisition Law Advisory Panel, Streamlining Acquisition Lu)t’s,

/99.;: and a report by the Defense Science Board Task Force on Defense Acquisition Reform, in 1993.

vi
contents

1 Summary and Findings 1

Congressional Interest 2

Some Critical Questions 4

Defining CM I 4

Sources of Segregation 5

Benefits of the Current System 6

Impetus for Change 6

Findings 8

Options for Congress 20

2 Three CMI Strategies 23

Strategy One: Readjustment 23

Strategy Two: Reform 31

Strategy Three: Restructuring 37

3 Integrating the Technology and

Industrial Base: Overview 43

Definition of Civil-Military integration 43

Background 44

Current State of the Debate 50

Framing the Issue 52

4 Buying Commercial Goods

and Services 63

Background 63

Current and Potential Use of Commercial Goods and

Services 66

Policy Options To Increase Commercial Purchases 68

Benefits and Risks of Policies 94

Benefits Outweigh the Costs 98

Summary 98

5 Integrating Processes for Goods

and Services 101

The Current and Potential Use of Integrated

Processes 102

/ “

,.- 1 kzilzl /’

,/’

/

///’

,/’

r–-—– ‘-‘- ‘1

I r———-m af14=tR

I , ‘L .._+ I

vii
Barriers to Integrating Processes 105

Policies for Increased Process Integration 112

Summary 136

6 Continued Segregation 139

The Current and Future Degree of Segregation 140

Why Some DTIB Segregation Will Continue 150

CMI Policy Options for the Segregated Base 152

Summary 159

APPENDIXES

A Abbreviations, Acronyms,

and Terms 161

B Selected Commissions, Studies,

Findings, and Recommendations 171

C Selecting a Representative Industrial

Sample 176

D Data Collection 178

E Workshops and Reviewers 180

Index 185

,.. Vill
I

Summary

and

Findings 1

T

he end of the Cold War has not brought an end to the need

to maintain a viable American defense force. Since 1990,

the United States has fought a major conflict against a

well-armed, if badly led, opponent, and deployed troops

to several regional trouble spots. Although the emergence of a

new global military threat on the order of that of the former Soviet

Union is unlikely in the foreseeable future, demographic changes,

border disputes, and the expansionist goals of some regional leaders have fostered the growth of a variety of lesser threats to peace

and stability. In the longer term (15 to 20 years), however, the reemergence of a major military threat cannot be discounted. The

United States, in concert with its allies, will need to maintain adequate military forces to protect its vital interests against these various contingencies.

These forces must be reconciled with short-term budget

constraints. The remarkable changes in the global security situation accompanying the end of the Cold War have resulted in significant and continuing reductions in the U.S. defense budget.

Assuming no new global military threat, total U.S. defense budget authority is predicted to fall from a peak of almost $390 billion

(constant 1994 dollars) in 1985 to about $200 billion (constant

/

4

1994 dollars) in the first decade of the next century. (See figure

1-1.) Confronted with continued fiscal constraints, the defense /

/

budget may decline even further.

Spending for research and development, procurement of goods

and services, and depot-level maintenance activities necessary to I

arm and sustain American forces in the field could fall from about

$190 billion to between $80 to $100 billion in that same period,

measured in constant 1994 dollars.

11
2 I Assessing the Potential for Civil= Military Integration

400

350

300

250

200

150

100

50

0

~.—– ———

f -- Other

RDT&E I — .—

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

~.. _.._~...—~

Projected

—.—

SOURCE Electromc Industries Assoclatlon Ten-Year forecast of Defense, NASA and Re/ated Markets .E/ecfron/c OpporfunK/es, October 1993

Confronted with declining budgets, many government officials and private-sector executives

advocate the increased use of the commercial

technology and industrial base (CTIB) as one

strategy for preserving adequate technological

and industrial capability to help meet future national security needs. 1 This increased use of the

CTIB, dubbed civil-military integration (CMI),

can take many forms, including purchasing commercially available goods and services, conducting both defense and commercial research and

development in the same facility, manufacturing

defense and commercial items on the same production line, and maintaining such items in shared

facilities.

CONGRESSIONAL INTEREST

Congress has been very interested in the potential

benefits of CMI. But Congress has also been concerned about the potential costs and risks

associated with changing acquisition policy to

promote such integration. Congressional interest

is evident in earlier defense acquisition legislation. The Competition in Contracting Act (CICA)

of 1984, for example, requires federal agencies to

“promote the use of commercial products wherever practical.”2 And the Defense Procurement Reform Act of 1984 mandated that DOD use

“standard or commercial parts” when developing

or acquiring militarily unique products “whenev1 This report uses the modifiers “civil, “ “civilian,” and “commercial” interchangeably when discussing the portion of the national technology and industrial base that sells on the open market on the basis of price. The modifier “private.” however, when referring to a business or sector.

denotes nongovemrncnt ownership.

~ 10 U.S.C. \ 2301 (b)(6).
Chapter 1 Summary and Findings 13

er such use is technically acceptable and cost effective.” 3

Despite several DOD initiatives to increase

commercial purchases and use commercial business practices. many in Congress, industry, and

the executive branch noted a slow acceptance of

commercial goods and services for defense use

and a reluctance to make changes in government

practices that would promote CMI.

The 1990, 1991, and 1993 Defense Authorization Acts all contained language promoting CMI.

The 1990 Defense Authorization Act directed

DOD to streamline regulations governing commercial products and to design and implement a

simplified uniform contract for commercial

items. The 1991 Defense Authorization Act called

on DOD to determine the availability and suitability of nondevelopmental items (including commercial items) prior to contracting for militarily

unique products. The 1993 Defense Authorization

Act directed DOD to modify its acquisition policy

to encourage the integration of the defense

technology and industrial base (DTIB) with the

CTIB.

Although the Clinton Administration has embraced many of the proposed acquisition reforms

designed to increase integration, actual change

has been slow. However, DOD has launched a

number of new initiatives aimed at increasing

CMI, including eliminating the unnecessary use

of military specifications and standards. The Department also proposed several pilot acquisition

programs to test new ways of doing business.

These initiatives hold the promise of producing

important change.

As this report goes to press, Congress has

passed the Federal Acquisition Streamlining Act

(FASA) of 1994. FASA incorporates many of the

proposals from the Acquisition Law Advisory

Panel commissioned earlier by Congress to recommend changes to acquisition law. and includes

a number of provisions that will enhance CMI.

Specifically, FASA provides a new definition of

commercial items, raises the dollar threshold for

simplified acquisition contracts, makes it more

difficult for the government to demand rights in

technical data, removes some of the requirements

for cost and pricing data in the case of commercial

products and/or competitive contracting, and increases potential government purchases of commercial items.

FASA is an important step toward increasing

CMI, but overall cost savings from its provisions

may be limited. They will affect only a portion of

DTIB spending (this is considered in more detail

in the discussion of CMI strategies in chapter 2),

and they may not have an effect on some of the activities where savings might be greatest (e.g., the

integration of processes and also in the reduction

of government infrastructure as a result of CM I).

But even if savings are less than some anticipate.

the effect on the long-term preservation of the

DTIB could still be significant. The provisions for

commercial purchases should increase the potential for gaining access to useful technology in rapidly developing commercial sectors. This access

may be crucial in a fiscally constrained environment.

In their requests to OTA to undertake an examination of the potential for CMI, the Senate and

House Armed Services Committees noted that despite the studies recommending increased use of

commercial industry to support national security

objectives, as well as broad verbal support from

government and industry, “there have been few

changes in the acquisition process to increase

civil-military integration.” The Committees requested that OTA “focus on the technical potential

for civil-military integration.”

3 Streur.nlinltrg Defense ,4cqu[\ltlon Lu)ts. Report of lhe Acqui.silion .bv~ Ad\isorv Punei to Ihe L’nited SI(IICS Con,qre\ i, J;mua~ 1993, p.

8-3. The Defense Procurement Reform Act is Public LaWI No. 98-525, ~ 1202,98 Stat. 2588 ( 1984).
4 I Assessing the Potential for Civil= Military Integration

SOME CRITICAL QUESTIONS

The glacial pace of change in the face of widespread support raises several questions about the

potential for actually accomplishing integration.

These questions are important in considering

policy alternatives for Congress. They include:

m

8

■

■

How much integration currently exists? Where

is this integration occurring?

Are some technologies, industrial sectors, industrial tiers, and activities (e.g., R&D, services) more amenable to CM I than others? Are

there identifiable characteristics that enhance

the potential for integration? If so, can these

characteristics be developed in other technologies, industrial sectors, industrial tiers, and activities?

What are the benefits of increased CMI? What

are the costs and risks? Are the incentives for

CMI sufficient to foster integration?

What are the limitations to CMI in achieving

national security objectives? What are the potential implications for weapons design and

battlefield performance?

An estimate of the current level of integration

and of how and where that integration occurs is

absolutely essential in developing policy alternatives for future integration. In the past, there has

been no systematic attempt to estimate either the

level of integration or the means of that integration. DOD is beginning an estimating process.

OTA conducted a trial industry survey that provided insights on the current and potential levels

of integration and suggested an approach to systematic gathering of integration data. A better understanding of what characteristics might make a

technology, industry, or activity more amenable to

integration could help direct CMI efforts toward

areas that might have the greatest potential for

change. Past case studies, and the analysis in this

assessment, provide some insight into characteristics of amenability. Industry interviews and discussions suggest that amenability to integration

might be promoted in various technologies and industrial sectors through conscious efforts to design for dual-use (commercial and defense) rather

than for military use alone.

Cost savings and access to technology are frequently cited as reasons to integrate, but savings

have been difficult to document or may not necessarily translate beyond a particular case study.

Policy development demands a better understanding of the potential benefits and the associated

costs. This assessment has attempted to provide

more insight on benefits and costs by combining

the findings of individual case studies with: data

from a survey of selected industry sectors; macroeconomic data on defense spending patterns;

and information on the industrial tier structure.

It is clear that the incentives to change the acquisition laws and regulations to enhance CMI

have been insufficient in the past. While the falling defense budget appears to be a major new incentive for integration, it too may be insufficient

to prompt total change necessary to gain the full

benefits of CMI. But a better understanding of the

potential benefits and costs of CMI may add sufficient stimulus to promote change.

Most previous studies have focused on the administrative and regulatory barriers to CMI and on

the need to adjust these. But integration also confronts technical barriers. Some military specifications are absolutely essential. But determining

what is and is not truly essential for military purposes can be difficult. It is clear, however, that

greater reliance on commercial technology will

have an impact on the nature of weapon systems

and on future force operations. These effects will

be evident not only in the systems available, but

also in the ability of the technology and industrial

base to respond to national security requirements.

DEFINING CMI

Definitions are essential—not only for the term

“civil-military integration, ” but also for the various related act ivities, such as “commercial goods”

and “’commercial services.” Policy formulation

for CMI has been handicapped by the lack of a

standard definition of CMI. OTA developed a
Chapter 1 Summary and Findings 15

working definition of CMI (see chapter 3), and

definitions of commercial goods and services (see

chapter 4).4

In this study, Civil-Military Integration

(CMI) is defined as the process of uniting the

Defense Technology and Industrial Base

(DTIB) and the larger Commercial Technology

and Industrial Base (CTIB) into a unified National Technology and Industrial Base

(NTIB). 5 Under CMI, common technologies,

processes, labor, equipment, material, and/or

facilities would be used to meet both defense

and commercial needs.

Although most of the analysis and discussion

of CMI has been focused on activities at the facility level, in the course of this assessment it became

clear that useful integration activities also occur at

other levels. This assessment therefore examines

integration activities that occur at the level of: 1 )

the industrial sector within which firms. government organizations, and academia can share product and process technologies, and 2) the firm,

where certain corporate resources can be shared

(e.g., research, finance) even if the actual defense

and commercial work of the firm is segregated.

In estimating the degree of integration that currently exists, or could exist in the future, this assessment used a broader definition of what

constitutes integration than has been used in many

past studies. During interviews and analysis,

R&D, manufacturing, maintenance, and administrative activities were each considered independently. Thus, a firm that integrates R&D and

separates production is not considered segregated,

but is considered to have one activity segregated

and one integrated.

● Acquisition laws, regulations, and culture

■ Military specifications and standards.

● Militarily unique technologies or products

● Commercially uneconomical orders

■ Emphasis on performance over costs.

● Classified technologies.

SOURCE OTA based on analysls of prev)ous CMI Studies 1994

SOURCES OF SEGREGATION

Previous studies identified a number of sources of

segregation, as shown in table 1-1.

Defense cost accounting rules are the most

often cited reason for segregating operations. In

actual practice, however, the reasons for segregation appear to vary by technology and product.

Still, the current structure of acquisition laws and

regulations—and the culture they engender—-provides few incentives to integrate. Furthermore,

many of the regulations promote an adversarial

relationship between government and private industry and raise product costs. Provisions of

FASA address some of these issues.

Beyond the acquisition culture, segregation has

also resulted from the use of military specifications and standards in situations where they were

not necessary. Full implementation of the new

DOD policy on the use of specifications and standards should solve some of these problems.

Segregation flows from the fact that some military products, services, and processes with specialized uses have no commercial market. And

while some militarily unique items might benefit

J me ~efinitlon ~fcorllmercla] ~(~od, ~irld ~erl ice~ USXI during the as~essment is roughly equivalent to the definition cont~ined in the Federal Acquisition Stream] ining Act of 1994.

5 ThI\ national base is underitoocl to be embedded in the larger Global Technology and Industrial Base. Po] icy makers will have to de~elop

DTIB policies in the context of thii larger base.
6 I Assessing the Potential for Civil-Military Integration

from coproduction on a commercial production

line, they are often ordered in volumes that are

economically unattractive to commercial manufacturers.

The segregation of the DTIB also stems from

the priority placed on developing and producing

high-quality and high-performance equipment—

a result of decisions to spend money rather than

lives to achieve military objectives. This source of

segregation was exacerbated by technological

trends during much of the Cold War period, when

military technology often led its commercial

counterpart.

A final factor has been the need to keep some

types of technology and information (e.g., design

of nuclear weapons) out of the general public domain and away from potentially hostile countries.

The desire to preserve superiority in sensitive conventional technologies, such as radar-absorbent

materials, by limiting dissemination of information about them is another example.6

BENEFITS OF THE CURRENT SYSTEM

Although the policies that created the current acquisition system contributed to the segregation of

the DTIB, these policies were implemented to

achieve important goals, including: public accountability, mobilization readiness, development of high-quality equipment, and preservation

of technology security.

One of the primary objectives of instituting the

cost-based acquisition structure was to guard

against waste, fraud, and abuse. In addition, the

government used the defense budget to attain a

number of socioeconomic goals, including support for small and minority-owned businesses.

While the classification of some development

programs contributed to segregation, such segregation was also beneficial in limiting the flow of

information to adversaries and providing a technological edge on the battlefield. The results were

evident in the active combat of Korea, Vietnam,

and Iraq, and during the Cold War confrontation

with the Soviet Union.

Similarly, the standardization of equipment

following World War 11 was both a benefit to logistical support (providing greater reliability and

faster repair) and a factor in segregation. Despite

the higher costs of equipment, it could be operated

and maintained more efficiently than in the past.

The fact that past policies have had both beneficial and harmful effects makes change more difficult.

IMPETUS FOR CHANGE

The end of the Cold War has provided an impetus

for changing the current structure of the DTIB. Yet

even earlier, it was evident that the current level of

segregation was unacceptable. The demise of the

Soviet Union and the risks it posed to the security

of the United States, however, have removed

many of the constraints on modifying the defense

~ see us, congress, office of Technology Assessment, Proli’eralicm of weapons ofIVu.\s De~tru<tion: Assessing th(’ R1.\k!. OTA-lS~’-559

(Washington, DC: U.S. Government Printing Office, August 1993).
A. . . A , -. ,0 ,- Chapter 1 Summary and Findings I 1

acquisition system. The current system appears to

cost more than the Nation is willing to pay.

Studies show that segregation often increases

initial acquisition and life-cycle costs; limits

flows of information and technology; and reduces

the numbers of firms willing to sell to the government. These studies further suggest that segregation contributes to decreased economic

competitiveness due to the inefficient use of national resources.

Many of the studies have attempted to calculate

the added costs and other negative effects of the

government requirement for cost and pricing data;

unique contract clauses; the use of inappropriate

or unnecessary military specifications and standards; and disputes over technical data rights.

Studies have estimated cost increases of 20 to 60

percent resulting from various government acquisition rules. Some estimates were even more

dramatic. A Defense Science Board study on commercial products, for example, reported that the

militarily specified version of the STU-III classified telephone cost 10 times more than a commercial version.7 Although it is difficult to generalize

the finding of such case studies, it is clear that the

current system has driven up costs and acquisition

times.

Part of the added costs are alleged to result from

the numbers of personnel in private firms needed

to respond to DOD’s reporting demands and to interface with the government’s oversight personnel. Businesses must retain contract specialists

and others to gather and report the information

necessary to comply with current government accounting, auditing, and other requirements.

The government oversight complex is costly

too. DOD employs more than 178,000 personnel

as a part of the acquisition workforce. This runs in

excess of $7 billion per year in salaries alone.

Added to the expense of these personnel are the

expenses of redundancies between private- and

The Anm’ston Army Depof Tank Rebudd Lme E+ part of the

publlc-sector DTIB.

public-sector capabilities in research, development, testing, and engineering (RDT&E), production, and maintenance—almost 370,000 people

work in these functions in public sector facilities

(e.g., Service and DOE laboratories and test facilities, DOD and DOE production facilities, and

Service maintenance facilities). Allowing for

double-counting of some personnel in both the acquisition workforce and the RDT&E effort. the total public sector workforce is estimated between

475,000 to 500,000, costing more than $18 billion

per year.

The segregated nature of the DTIB restricts the

flow of product and process information and

technology between the DTIB and the CTIB, discouraging innovation in both the manufacture of

military systems and the substitution of more advanced components in those systems. In some

cases, the DTIB does not have access to the full

range of technology available in the CTIB.

In sum, studies indicate that the current level of

segregation has resulted in inefficiencies and redundancies that have restricted the exploitation of

scarce national technology and industrial base resources. The decline in defense funding necessi-

—

7 Caution needi (o be applied to all cost savings estimates. The commercitil alternative STU-111 was det eloped se} era] months after [he

defcnw terjion and contained wmne le~s expensi~e, and better, technology not previously aiailable.
8 I Assessing the Potential for Civil-Military Integration

tates greater efficiency in defense acquisition and

makes reform of the current system a priority.

Commercial buy

Current

Key

Cornmerc/a/buy Procured from private fac(lltles on the baslsof a commercial market price

Inregrafed Processes Procured from private facilities that predominantly use common processes for both defense and commercial

goods or services This sharing of processes might occur m R&D,

production, maintenance, or admlnlstratlon R might revolve the use

of common equipment, labor, management, or inventory

Segregatedprocesses Procured from private facllltlesthat have largely or completely segregated their defense work from any commercial

work

SOURCE Industrial survey conducted by the Off Ice of Technology Assessment, 1994

FINDINGS

The assessment resulted in a number of findings

related to the questions stated earlier and other aspects of CMI.

I Some Integration Currently Exists

The current DTIB appears to have a significant amount of integration already. OTA estimates that many of the goods and services coming

from the private-sector portion of the DTIB are already derived from either commercial purchases

or firms using integrated processes. Much of the

DTIB, nonetheless, appears mired in segregated

processes. Figure 1-2 shows an estimate of the

current degree of CMI based on the results of

OTA’s industry survey.8

The figure estimates the value added to national security goods and services through 1 ) commercial purchases, 2) integrated processes, and 3)

segregated processes.

These estimates are based on a limited industrial sector survey. Thus, they should be considered suggestive rather than definitive.

Nevertheless, they do provide valuable insights

on the DTIB.

I Increased Integration Appears Possible

The findings of this assessment confirm that it

is possible to increase commercial purchases,

make greater use of commercial practices, and

promote the integration of processes-if

changes are made in current government acquisition policy, efforts are made to adapt

technologies, and steps are taken to restructure

the DTIB. The level of growth of CMI will depend on the extent of policy change.

OTA’s broad estimates of the potential for increased CMI, based on significant reform, are

shown in figure 1-3.9

The estimate of potential increase of CMI

shown in figure 1-3 does not indicate any particular amount of savings. Estimating cost savings requires considerations of the impact of these policy

changes on the base over time. OTA has made

some estimates of potential savings, discussed later in this chapter and more extensively in the examination of CMI strategies in chapter 2.

x ~e~e estimates tie based on a Macroeconomic examination of the DTIB and an industry survey. The survey is discussed in chapter ‘$? ~x

4-2.

~ In addition to tie industry survey noted earlier, OTA used interviews, case studies, and analyses of selected industrial sectors tO validate its

estimates. A~ain, these estimates are based on a limited sample and should be considered suggestive rather than definitive.
Chapter 1 Summary and Findings 19

Commercial buy

A ’ \

Segregated

processes

\ ,

{,

Potential

—

SOURCE Industrial survey conducted by the Office of Technology Assessment 1994

Case studies and surveys reviewed for this assessment support the industry survey conclusion

that with appropriate policy initiatives, increased

integration is possible. But because almost all of

these studies considered only individual segments

of the DTIB, the case studies provide very limited

insight into the impact of a comprehensive CMI

policy on the DTIB as a whole. The 1993 report of

the Defense Science Board Task Force on Acquisition Reform is an exception. That report attempted to both identify possible increases in

CMI within the entire base and quantify potential

savings.

The potential for increased integration is enhanced by the fact that both Congress and

DOD are actively pursuing CMI initiatives. As

noted earlier, Congress has pushed for greater integration in recent legislation, including FASA.

DOD has responded with several initiatives. Most

recently, Secretary of Defense William Perry issued a directive eliminating the use of many military specifications and standards and placing

greater reliance on commercial specifications and

standards. In addition, DOD has supported further

efforts to simplify contract procedures, and has

nominated seven pilot programs for testing alternative acquisition strategies. 10

Developments in technology reinforce the

trend toward integration of the DTIB and

CTIB. More products and services can meet both

defense and commercial needs. The same model

personal computer, for example, can be used at the

Pentagon or at General Motors Corp. The same

ruggedized laptop computer might be used by military forces in the field or by petroleum exploration teams in remote areas. Components of these

systems are even more interchangeable. The improved quality of commercial integrated circuits,

for example, often make them interchangeable

with devices produced according to military specifications and standards. Some even argue that

commercial items are often superior.

Developments in process technology are increasingly applicable to defense and commerce.

Commercial manufacturing is gaining the capacity to profitably produce small lots of an item.

Some observers anticipate that with advances in

Commercial computers and electronic components can now

meet many defense needs

lo FASA \upP)~ed the implenlcn[atlon of five DOD pilot programs: the Fire Support Combined Arms Tactical Trainer, Joint Direct Attack

Munitions, Joint Primary Aircraft Trwnmg Sy $tern, Commercial-Derivative Aircraft, and Commercial-Derivative Engine.
10 I Assessing the Potential for Civil-Military Integration

More amenable Less amenable

Fills a similar defense and commercial need. Has no related commercial variant (esp. weapons).

Readily customizable from commercial G/S. —

Processes similar to commercial processes. Process is specialized for performance or security reasons.

A service. —

Sourced from lower tier (subcomponent, commodity). Sourced from a higher tier, especially at the prime integration level.

Economically viable volume/predictable rates. Noncommercial volume/uneven rates.

Commercial technology leads defense technology. Defense technology leads commercial technology.

SOURCE Off Ice of Technology Assessment, 1994

manufacturing technology, it will even be possible to produce a single item profitably. Except in

time of crisis or war, the defense base has always

had to deal with small orders and uneven production runs, making such flexibility particularly attractive.

Improvements in commercial product quality

also favor the use of commercial products. Commercial developments in design and development

processes using simulations for virtual prototyping, and concurrent engineering to reduce future

production risks, are applicable to defense as well. 11

Integration occurs not only at the facility

level, but also at the levels of the industrial sector and the firm. Integration should be promoted at all three. Integration at the industrial

sector level involves drawing from the same pool

of technologies, specialized assets, and processes

to meet both defense and commercial needs. Integration at the firm level is characterized by the

sharing of corporate resources to meet both defense and commercial needs. Facility level integration is marked by the sharing of personnel,

equipment, and material.

But not all technologies, industrial sectors,

or industrial tiers are equally amenable to integration. Complex defense systems requiring

high levels of systems integration may not lend

themselves to CMI. Tier 1 prime contractors performing such work may therefore be less able to

integrate commercial and military practices (although common administrative and management

control activities may be possible). Lower tier activities, such as production of components and

subcomponents for those systems, appear far

more amenable to integration. Surveys indicate

that firms at these lower tiers, small or large, may

be more likely to be integrated, and the products

and processes involved may be more amenable to

integration than are those at the prime contractor

level. Indeed, many firms at the lowest tiers may

not even know they are serving defense needs.

Table 1-2 lists some of the factors that may

make a good or service more or less amenable to

some form of integration.

Goods and services that have equivalent defense and commercial uses, and that may be

sourced from a lower tier, appear to be more amenable to integration-either commercial purchase

or integrated processes. Many electronic and aviation components fall into the more amenable

categories. The potential for integration is further

affected by manufacturing processes. Defense and

commercial goods sharing similar production

1 I OTA is Cumently conducting an assessment of defense modeling and simulation that addresses some of these kSUeS as well as examining

the use of modeling and simulation for military operations.
Chapter 1 Summary and Findings 11

processes (e.g., integrated circuits) have a better

chance of integration than those relying on dissimilar production techniques (e.g.. fabrication of

stealthy composite aircraft structures). Security

considerations can limit the suitability of certain

defense manufacturing processes for integration

with commercial production.

Services, which involve the most flexible processes of all, appear particularly amenable to commercial purchases. But there are currently

government constraints against exploiting some

commercial services.

Identifying those technologies, industries, and

tiers that maybe more amenable to integration can

aid policy development and help focus efforts on

areas with higher potential for success. Figure 1-4

shows an estimate of the amenability of the major

procurement categories (e.g., R&D, manufacturing, maintenance and services), and tiers to alternative CM I policies. 12

I Increased CMI Provides Benefits

The findings of this assessment confirm that

benefits can be derived from increased CMI.

The assessment points to areas of potential cost

savings and possibilities for increased technology

transfer that might aid both the defense and commercial sectors. More importantly, the assessment

indicates that increased CMI may be essential for

preservation of a viable future capability to meet

U.S. national security needs.

Potential Savings

The implied estimated savings of 20 to 60 percent

for some individual case studies and savings of

factors of 10 in a few selected cases, do not translate into proportional savings across the entire

DTIB. Potential savings are difficult to quantify. OTA’s analysis indicates that savings may

be lower than some advocates have claimed,

and be more difficult and take longer to

achieve than many anticipate. Still, even if the

percentage increase of total potential savings

from greater CMI is relatively small (2 to 3 percent of the baseline DTIB spending), overall

savings would amount to several billion dollars

per year.

Insight into where and how savings might occur can be gained by considering national defense

spending patterns. For example, the potential for

CMI appears greatest in the lower tiers among activities that are more amenable to integration. Yet

savings from these tiers are likely to be limited because many of the products, processes. and services procured at these tiers are already integrated

or purchased commercially. Further, the total value added at the lowest tiers accounts for comparatively little defense spending. (See figure 1 -5.)

In calendar year 1992, an estimated $180 billion flowed to the U.S. private sector for national

security goods and services. 13 OTA estimates that

another $18 billion was spent for personnel working in the public sector DTIB.

Prime contractors at tier 1 accounted for the

largest single segment of private DTIB value added. Of the estimated $180 billion they received in

calendar year 1992, prime contractors are estimated to have contributed some $99 billion in value added to defense goods and services. and

transferred some $81 billion to lower tiers through

the purchases of goods and services (figure 3-1,

chapter 3, illustrates this flow). Spending at the

prime contractor tier in this model includes not

only money going to large defense contractors,

such as McDonnell Douglas and General Dynamics, but all direct government contracts, includ1 ~ ~1~ ~jtlnlute [j bused on Te$pnses from [he OTA ]ndus~ su~ey and Jhe full implementation of the integration PO] icies associated with a

Rcf{)rm S[ratcgj outlined later in thi~ chapter.

I 3 ~1~ ~~tlTT1u[c ii derll cd fronl Bureau of the cenju~ economic data, and is e~tim:lted b} tier fr~n] [he Bureau of Economic AIIJlj \i\ input

output model. I;itlmtitcj include not onlj fund$ for the Department of Defen\e. but alw for intelligence functi(mj, [he Depwtrncnt of Errcrgj

na[]onal Vxun[] progrtim~, and all other national ~ecurity spending.
12 I Assessing the Potential for Civil-Military Integration

,. .

\

~.

‘L

~. \

‘s\ Calendar year 1992

spending for defense

goods and services

‘4

\

\

=-%,, \.

Comm43rW

(%)

I

private sector

(value added by tier)

Tier 1 $99 billion

I

I

‘\;

\\ \ ,

1

SOURCE Off Ice of Technology Assessment, 1994 Based on data from mdustnal survey conducted by the Office of Technology Assessment 1994,

Bureau of Economic Analysls Data and Bureau of the Census, CY 1992 spending by federal government for national defense (excludes noncornparable Imports and spend[ng for government salar[es [n the publlc sector of the DTIB), and Department of Defense, Figure 1 Composlhon of Defense

and Non-Defense Purchases, ’ Projec(ed Defense Purchases Detad by Industry and Sfafe Calendar Years 1991 Through 1997, November {991,

p 4 Assumes full Implementation of pollcles associated with a Reform Strategy discussed In chapter 2
Chapter 1 Summary and Findings 13

ing those for less exotic activities, such as laundry

services and auto leasing. 14 The bulk of the money

going to the private sector, however, goes to a relatively small number of large contracts. Of the

more than 12 million contract actions in 1992, less

than 3 percent accounted for more than 90 percent

of the money spent. Whether large or small, however, the firms and funds at tier 1 are the most directly affected by the government acquisition

process.

OTA developed estimates of potential savings

resulting from alternative policies, based on findings from case studies, interviews, and surveys.

OTA also conducted some parametric assessments of potential private DTIB savings. Although it is difficult to accurately gauge potential

savings—particularly in the out-years—it does

appear possible to bound the potential savings and

to gain insight into when such savings might

accrue.

A curve illustrating the possible time phasing

of savings from increased CMI associated with

the strategies discussed later in this assessment is

shown in figure 1-6.

Savings, from increased commercial purchases

and buying practices and the elimination of many

military specifications and standards, might begin

to appear relatively soon after implementation of

new policies, but the amount of early savings will

be constrained by the fact that many of the items

that are initially affected (e.g., clothing, subsistence, and fuel) already are purchased commercially.

Savings from the purchase of commercial components and subcomponents require government

and industry to change complex military specifications and standards and retrofit commercially

specified parts into existing systems. These savings are, therefore, unlikely to have much of an

impact for at least a year or two after program implementation. Savings from new items will take

even longer. Given the probable slowdown in new

200

180

160

140

c 120

.-0

-

~ 10 0

80

60

40

20

0

Tier 3

Tier 4

SOURCE Off Ice of Technology Assessment, 1994 Based on data from

Bureau of Economic Analysls Data and Bureau of the Census, CY 1992

spending by federal government for national defense (excludes noncomparable Imports and spending for government salarles m the pubIlc sector of the DTIB)

programs, any real savings from new system development will be unlikely to appear sooner than

seven to 10 years after implementation.

Savings from increased process integration are

derived from more efficient use of available resources. The reduced use of military specifications and standards promises increased process

integration—if changes are also made in cost accounting requirements and the rules governing

technical data rights. Some process integration

savings might begin soon after implementation of

changes in the use of military specifications and

I ~ Da[a u~ed for de~e]oping the numbers for these tiers was collected and assembled by commodity rather than by firm, so that the ~ alue

added by u particular contmctor may appear at both the prime contractor level and at lower tier~, depending on the product.
14 I Assessing the Potential for Civil-Military Integration

0 5 10 15

Years

SOURCE Office of Technology Assessment, 1994

standards-as special testing requirements are

eliminated, facilities are consolidated, and the

necessary industry workforce reduced. But significant savings here will also depend on changing

acquisition rules, eliminating government acquisition oversight personnel, planning products

for dual- or multi-use, and designing for manufacturing with commercial processes. These steps

will all take time to implement.

OTA’s examination of possible savings from

increased CMI revealed that gaining significant

savings may require major restructuring in the

DTIB—for example, eliminating government inventory of commercially purchased parts, adopting long-term (three to five years) service

contracts for supply of goods and services, and

closing government facilities (e.g., depots and

Service R&D facilities) made redundant by such

approaches. Savings from such restructuring

could be significant, but they are unlikely to begin

to appear for five to 10 years after the implementation of change. Even greater CMI benefits might

be derived from redesigning forces, as well as

weapon systems, to take maximum benefit of

CMI.

OTA made its own estimates of savings, as well

as considering estimates from other studies.

Based on the available data, it appears that total

potential cost savings from increasing CMI might

range from a few percentage points to as high as 15

to 20 percent of baseline DTIB spending depending on the set of policies implemented. But given

the complex range of policies being considered

and the time frames within which savings might

occur, narrowing the range of possible savings is

difficult. Applying the estimates of savings resulting from annual efficiency improvements made

by the Defense Science Board Task Force on Acquisition Reform15 to OTA’s estimates of the po1S see us ~pafiment of Defense, Office of the Under Secre[ary of Defense for Acquisition, Reporf Of/he Defeme scf’en~’e ~our~~ ~u.j~

Force on Defen.\eAcquist[ ion Reform, July 1993, Table 1. Estimated Potential Annual Efficiency Improvements (After a 5-year Period), p. C-8.
Chapter 1 Summary and Findings 15

tential for integration derived from OTA’s

industry survey, gives an overall estimated cost

savings in the range of 5 to 10 percent of estimated

baseline spending.

Some observers are more skeptical of possible

savings than was the DSB Task Force. These observers estimates would be lower. There are sound

reasons for caution in estimating high rates of savings. AS noted above, additional savings at the

lower tiers will be constrained by the amount of

ongoing integration and the more limited funds

going to those tiers. Savings at the top tier will be

constrained by the unique aspect of much of the

defense systems integration activity that occurs

there. This is likely to remain true even with significant CMI policy changes.

A few observers are even more optimistic than

was the Defense Science Board report. Their estimates might approach the upper limit of the range

cited above. But regardless of the ultimate size of

the savings, any significant savings will take several years to appear. Achieving savings on the

high end of the estimated range will demand major restructuring of the DTIB and the likely elimination of much of the government DTIB.

Other Potential Benefits

If CMI is successfully implemented, its most

important contribution may not be savings,

but instead the preservation of a capability to

support future national security objectives,

i.e., ensuring the existence of a viable DTIB in

the face of significant defense spending reductions. Increases in commercial purchases, for example, might provide the defense community

access to important technology in some fastmoving commercial sectors—particularly in electronics, soft ware, and some manufacturing

processes-otherwise not available to defense. A

properly designed integration strategy may also

enhance the commercial viability of a number of

industries.

Technology transfer between the defense and

commercial bases should also increase as a result

of integration, but such increases are even more

difficult to quantify than are cost savings. Some

studies, however. indicate that significant intrafirm movement of scientific, technical, and engineering personnel occurs in firms doing both

commercial and defense work. Integrated facilities should enhance such transfer. Firms should be

able to better leverage their investments.

Activities such as the Technology Reinvestment Project (TRP), Cooperative Research and

Development Agreements (CRADA), and DODfunded consortia appear to contribute to technology transfer, but they are unlikely to have much

immediate effect on facility-level CMI unless acquisition barriers such as special cost-accounting

and rights in technical data are addressed. A number of metrics have been suggested to help evaluate the initiatives aimed at increasing technology

transfer. Some of these are discussed in chapter 5.

H Implementing Change Will Not Be Easy

The DTIB necessary to provide goods and services for national security is very complex. The

base contains a wide range of technologies and industrial sectors, and is composed of large and

small prime contractors, with thousands of subtier

suppliers of components, manufacturers, research

and development organizations, maintenance providers, and service industries.

The complexity of the DTIB and of DOD expenditures demands adoption of a diverse set

of policies to increase integration. Some acquisition reforms, such as adopting commercial or

performance specifications and standards, affect

all levels (industry sector, firm, and facility) and

activities. Others are more limited. Operations

and Maintenance, for example. may be influenced

by policies directed at increased purchases of

off-the-shelf commercial items and making greater use of commercial buying practices. R&D, on

the other hand. may be far less susceptible to influence ‘by such policies. It may respond to adopting

research goals that encompass both civilian and

defense uses (dual-use technologies), eliminating

or changing military specifications and standards,

and modifying government requirements for

rights in technical data.
16 I Assessing the Potential for Civil-Military Integration

Tier 1 systems integrators such as shipyards, aircraft

manufacturers, and armored vehicle producers will be difficult

to integrate

But, as previously noted, the data essential for

shaping policy are sparse. Despite recent DOD efforts, available data on the current use of commercial items by DOD remain insufficient to allow

any firm estimates of potential savings from their

increased use (thus, OTA’s use of an industry survey to gain insights). DOD recently estimated that

approximately 6.9 percent of the goods and services are purchased commercially. This estimate,

however, comes only from the first and second tiers. DOD is attempting to refine these data.

The lack of data is due, in part, to the absence of

any concerted effort by the federal government to

track CMI. DOD has not previously gathered such

information, partly because of definitional problems (e.g., lack of agreement on what constitutes

CMI and what is a commercial item), but also because of a lack of interest. While the Census Bureau gathers information on both the CTIB and

DTIB, these data are not collected with CMI in

mind, and are highly aggregated. Thus, census

data provide general information on industrial

sectors, but give little insight into developments at

individual plants and enterprises.

DOD has established working groups to gather

information in support of acquisition reform

policy. Unfortunately, decisions are still too often

based on data from studies that concentrated on

only a few sectors and the higher tiers, although

the 1993 Defense Science Board Task Force Report on Acquisition Reform did consider the entire

DTIB. Absent an understanding of overall DTIB

operation, the available knowledge remains insufficient to set a comprehensive CMI policy.

While case studies provide useful insights,

their findings cannot easily be generalized across

the entire DTIB. Indeed, one obvious problem of

past studies has been a tendency by some to generalize potential savings for the entire budget

based on findings of a particular case study or

group of studies. An industry survey conducted by

the Center for Strategic and International Studies

is currently among the best sources of available

data. 16

OTA’s own industry survey estimates are general indicators and not absolute estimates of current integration or firm forecasts of the potential

for change. OTA estimates were supported by information derived from more than 100 interviews,

site visits, workshops, a random sample of industrial sectors, an examination of 11 other industries, and discussions with industry executives

and government personnel responsible for research, development, manufacturing, and maintenance.

17

The public portion of the DTIB, by definition segregated, is relatively large, costly, and

difficult to change. Public sector activities en16 Debra “m Opstal, In[egra[ing Cil,ii;un and Mili(ar), Teckdogie~: An lndu.sfrial Swv’ey (Washington, DC: center for Strategic aIId hltemational Studies, April 1993).

\ 7 ~ese sectors jncluded: Sbipbui](iing, aircraft, communications equipment, portable laptop computers, flat-panel disp]a~ technology.

apparel, munitions, circuit breakers, fluid power products, gear manufacturing, and composite materials.
Chapter 1 Summary and Findings 17

compass the full panoply of defense-related

processes, including research, development, engineering and testing, manufacturing. maintenance,

and other services. The total number of government employees estimated to be involved in these

activities is about 370,000. These laboratories,

test centers, arsenals, and maintenance facilities

are spread around the country. Any change, with

its potential for personnel cuts, therefore, becomes both a local as well as a national issue. Yet

the rationalization of the public and private sectors of the DTIB and the elimination of unnecessary redundancies between the two sectors hold

promise for cost savings.

I There are Potential Costs and Risks

Policies designed to promote integration are neither cost nor risk free. The drawbacks will affect

how change is implemented.

One of the most discussed risks, and potentially

the most important. is that the goods and services

purchased directly from the commercial sector, or

conforming to commercial rather than military

specifications and standards, will fail in military

operations. While this is possible, there is no inherent reason why it must occur. Current proposals for change include provisions for using special

specifications and standards where they are necessary to ensure performance.

A second risk is that by relying more on the

commercial sector, DOD will become more dependent for off-shore goods and services. While

this too is possible, there is no reason to believe

that increased foreign sourcing necessarily leads

to military vulnerabilities. Further, potential vulnerabilities can be identified and managed.

A third risk involves the potential increase in

fraud and abuse that might result from a reduction

in oversight, such as elimination of the requirement for cost and pricing data, elimination of the

use of special government accounting practice,

and the elimination of in-house quality inspectors.

While there may be some increased risks, most of

the alternatives proposed (e.g., increasing commercial purchases, using commercial quality standards, accepting commercial accounting systems)

provide for continued (but different) oversight of

government spending.

In addition to these risks, CMI is likely to incur

certain costs. at least in the short-term. There are

two broad categories of identified costs. The first

category is personnel costs. This includes both

the jobs lost as a result of eliminating redundancies in the private and public sectors of the DTIB,

and those likely to be eliminated within the acquisition workforce because of changes in oversight requirements (both public and private

sector). Personnel retraining costs are inherent in

providing the acquisition workforce with the

skills necessary to operate in an integrated environment.

The second category is activity costs. This includes activities such as reviewing and eliminating inappropriate military specifications and

standards and the expense of participation in standards setting bodies.

I Strategies to Implement CMI

OTA grouped the policies examined in this assessment into three strategies designed to promote

CMI. The strategies, termed Readjustment, Reform, and Restructuring, were divided according

to the potential difficulty of implementation. The

strategies can be viewed as additive. If taken together, the y provide a phased approach to comprehensive CMI.

Strategy 1: Readjustment

A Readjustment Strategy contains three main elements: 1 ) facilitating commercial procurement, 2)

promoting development and diffusion of technology, and 3) leveraging resources and investments.

It takes advantage of ongoing, often unrelated activities to promote CMI—including several steps

proposed by the Acquisition Law Advisory Panel

and adopted in FASA.

Some of the steps necessary to implement this

strategy (e.g., eliminating unnecessary military

specifications and standards) can be taken by

DOD without additional legislative authority.

Others require congressional action (e.g., eliminating cost and pricing requirements on commer-
18 I Assessing the Potential for Civil-Military Integration

Government facilities often have extensive, specialized

facilities that industry can exploit, such as the Ion Beam

Material Laboratory at Los Alamos National Laboratory

cial purchases—included in FASA). However,

even those steps that can be undertaken by DOD

alone cannot succeed without congressional

support.

Commercial purchases are facilitated by the

elimination of cost and pricing requirements on

such purchases, cessation of unique contract

clauses, and changes in government requirements

on rights in technical data. FASA addresses these

issues.

Development and diffusion of technology require a continuing commitment to R&D, including programs to diffuse defense technologies and

DOD efforts to access technology developed commercially.

Leveraging investments and sharing resources

can occur through the adoption of dual-use

technologies to meet defense objectives. DOD

participation in TRP, CRADA, and consortia provide mechanisms for technology development

and diffusion, as well as leveraging of investments.

The benefits of a Readjustment Strategy include cost reduction, better (and faster) access to

essential goods and services, and an increase in

the number of available vendors.

The strategy does have some disadvantages.

One of its greatest shortcomings is that it leaves

the overwhelming amount of DTIB spending under the cost-based acquisition structure, which industry observers argue is one of the most powerful

factors in segregation. This situation not only limits potential savings but, more importantly, may

leave firms making defense-unique items or performing defense-unique services at a competitive

disadvantage in selling commercial products to

DOD—including newly declared commercial

products that these firms previously made to military specifications and standards.

Some socioeconomic programs may also be

negatively affected, although actions mitigating

the negative impact of any change can be taken.

For example, FASA reduces the use of unique

contract clauses in contracts under the $100,000

Simplified Acquisition Threshold, while reserving these contracts for small business. Of course,

actions to protect affected programs can have a

negative impact on CMI. A further concern is that

the increased use of commercial goods and services could open the door to more foreign sourced

goods and services. Whether such an increase

presents a real military risk depends on how it is

managed.

Strategy 2: Reform

A Reform Strategy builds on the foundation of a

Readjustment Strategy (i.e., assumes that Readjustment policies are implemented as a part of a

Reform Strategy), and takes a more expansive approach to fostering CMI. The strategy rests on

three pillars: further expansion of commercial

purchases, integration of processes, and applying

CMI lessons to the segregated portion of the

DTIB.

Commercial purchases are expanded by:

broadening the definition of commercial items;

eliminating government cost accounting requirements for all commercial purchases; exempting

all commercial purchases from unique contract requirements; limiting government rights in technical data related to these items; and, adopting
Chapter 1 Summary and Findings 19

commercial buying practices. FASA includes

some of these steps.

The second pillar of a Reform Strategy is integrating processes. A key step in process integration is to find alternatives to government cost

accounting to ensure the government pays a fair

price for goods and services that do not have commercial counterparts. Activity-based cost-accounting is one avenue being pursued; facility

exemptions is another; government price analysis

is a third.

Programs that stress dual-use design for products and manufacturing processes are essential.

Increased emphasis can be placed on designs that

accommodate commercial components and processes. DOD can foster developments in product

and process technologies and help coordinate

DOD and commercial acceptance of common

technologies through participation in industrial

sector organizations and consortia.

A final element of a Reform Strategy directs

CM I policies toward that portion of the DTIB that

remains segregated. CMI might be a major factor

in reducing DTIB redundancies. A Reform Strategy would favor the retention of private firms and

contractor-operated facilities (e.g., GOCOs) over

government-owned and operated ones (e.g., GOGOs). The elimination, or reduction, of the redundancies between the DTIB and the CTIB would

help leverage funds, personnel and facilities. A

second objective would be to use commercial

products and processes where possible.

A Reform Strategy would produce additional

cost savings over a Readjustment Strategy

through increased commercial purchases—including large components or systems (e.g., aircraft engines, certain aircraft, and computer

networks). The strategy would enhance technology transfer between the DTIB and the CTIB and a

larger base would be available to meet defense

needs.

A Reform Strategy has some drawbacks. The

lessening of oversight might increase the potential

for fraud and abuse. Greater use of commercial

products might affect the quality of military items.

Rationalization of the base would lead to job disThe Westinghouse MODAR wind-shear radar is an example of

successful dual-use design

placement. There may also be increased prospects

for proliferation of militarily relevant technologies to other countries.

Strategy 3: Restructuring

After successfully implementing the Readjustment and Reform strategies, a Restructuring Strategy might be considered. The strategy would not

only restructure the DTIB, but would also change

military force structure, as well as specific weapon systems, to take advantage of commercial

items and services.

The nature of future conflict and technology

trends will have a profound impact on future

DTIB needs and consequently on this longer term

strategy. A Restructuring Strategy will be designed to exploit changes in technology and to accommodate changes in conflict.

A Restructuring Strategy involves three principal elements: restructuring the DTIB aimed at

elimination of all redundancies between the public and private sector DTIB, restructuring military

forces and weapon systems to take full advantage

of CMI benefits and, finally, movement toward

complete commercialization.

While some rationalization of public and private R&D, production, and maintenance activities

occur under both the Readjustment and Reform

strategies, Restructuring pursues rationalization

to the maximum degree possible. Some countries—Japan and Germany—rely almost entirely
20 I Assessing the Potential for Civil-Military Integration

Tanker aircraft, built around passenger jet airframes, are

examples of major dual-use products already in service,

on the private sector to provide for maintenance

and support, as well as manufacturing.

Restructuring military forces to fully exploit

CMI would be even more controversial than restructuring the DTIB. But there is some precedence for such policies. During the 1970s, for

example, the 9th Infantry Division experimented

with many commercial pieces of hardware, different ways to employ off-the-shelf equipment, and

alternative force structures for employing that

equipment. Weapons more amenable to integration—such as rocket artillery launched from tubes

commonly available in industry, and standoffbombers built around commercial airliner airframes—might replace more militarily unique

hardware—such as tube artillery or penetration

bombers.

Complete commercialization in acquisition

would mean that DOD would purchase goods and

services like other commercial customers but with

one significant advantage: in some areas its purchasing power might give it considerable clout.

Such clout might not exist, however, in important

areas such as electronics.

A Restructuring Strategy represents a radical

departure from DOD’s post- World War II acquisition approach. The more radical reforms outlined

in this strategy promise major benefits from significant rationalization of the private and public

sector bases, better use of the Nation’s technology

and industrial bases, rapid incorporation of new

technologies, and a larger mobilization base.

But restructuring would be costly and involve

significant risks, including uncertainties in the

ability of weapon systems and forces to meet future performance requirements and the responsiveness of commercial firms to national

emergencies.

OPTIONS FOR CONGRESS

This assessment confirms that greater CMI is possible. Benefits include cost-savings, increased

technology transfer, and expansion of potential

defense suppliers. But the assessment also indicates that cost savings are likely to be lower than

some previous studies have suggested. Further, it

will take several years after the implementation of

CMI policies for major savings to occur. Even so,

cost savings of even a few percent of total DTIB

spending could produce billions of dollars in

savings.

The assessment suggests that the most important benefit of increased CMI might be the preservation of a viable defense technology and

industrial capability in a fiscally constrained period. Without increased CMI, the Defense Department may lack adequate access to rapidly

developing commercial technologies and pay a

premium for commonly available goods and services. Therefore, regardless of the size of the potential savings, some increased CMI appears to be

a necessity.

The assessment uncovered no “silver bullets”

that might easily achieve CMI goals, However,

some policies can have broad effects. The elimination of military specifications and standards is

such a policy; relief from supplying cost and pricing data is another. But in most instances the barriers to increased CMI are sufficiently intertwined

to demand a comprehensive (and complex) approach if the projected benefits are to be achieved.

DOD can take some actions to facilitate CMI

without any new legislation. In addition to the actions recently taken, the Department can also

change the incentives for the acquisition workforce. It can move to ensure that cost and ease of
Chapter 1 Summary and Findings 21

production are major factors in program development, and that acquisition personnel have the necessary skills to make sound technical judgments

about commercial products and processes and

have the necessary training to conduct a market

analysis. DOD might also prohibit the use of certification of cost and pricing data absent clear evidence that a market analysis was attempted first

and failed to provide the necessary information.

Congress has an important role to play if the

full benefits of CMI are to be achieved. To date,

congressional initiatives have been central to developing and pursuing CMI. The three alternative

strategies (Readjustment, Reform, and Restructuring) provide a phased approach for considering

implementing CMI.

Should Congress wish to promote CMI, while

retaining strong oversight over defense expenditures, then it may wish to implement some of the

Readjustment policies and stop at that point. A

Readjustment Strategy, directed principally at increasing commercial purchases, provides high

levels of direct oversight while opening the base

to some new vendors and products. Changes in

military specifications and standards open the

base to additional firms and provide for the

introduction into the DTIB of a modest amount of

commercial innovation. Since much of the DTIB

will be unaffected by these changes, however,

benefits (including savings) are likely to be relatively small.

Implementing the DOD policy eliminating

many military specifications and standards will

require the support of Congress. Implementation

will result in the decentralization of many more

acquisition decisions. This will pose problems as

well as provide benefits. In a system that operates

with fewer rules, the price of greater overall efficiency might include some acquisition failures.

While greater benefits (in terms of savings and

technology transfer) could follow from a Reform

Strategy, it also involves increased risks such as

reduced oversight and the potential for weapons

performance shortfalls. A successful Reform

Strategy involves a close interlinking of policies

commercial purchases into rapidly developing

technologies may require a broader definition--or

at least a broader interpretation-of commercial

products and services than exists in the Readjustment Strategy (or FASA). Increasing process integration will necessitate further reduction in the

demand for cost and pricing data, and fewer government demands for rights in technical data.

Congress has important interests in each of these

issues.

Increasing process integration also involves

changes in system design philosophy that may

have an effect on operational performance. Congress may wish to examine the implications of

such changes in detail.

Should the Nation wish to make even greater

use of the civilian base after implementing a Reform Strategy, a Restructuring Strategy could be

pursued. While some actions of such a strategy

(e.g., rationalizing the public and private sectors

of the DTIB) will have begun as apart of a Reform

Strategy, they would be pursued to their limits in a

Restructuring Strategy. Other actions, such as restructuring forces, commence under this strategy.

These actions pose significant questions that demand more study. Congress may wish to examine

possible force restructuring now, in anticipation

of changes in the decades ahead.

I Immediate Considerations

Congress has the option of going no further with

the CMI than it has in its current acquisition

streamlining legislation. Combined with DOD’s

CMI initiatives, FASA provides many of the

benefits discussed in a Readjustment Strategy.

Even if Congress wishes to pause, however, it may

wish to consider steps to assess the effects of current initiatives.

Congress may want to ensure the increases in

commercial purchases are monitored and that any

savings are properly attributed. Although increased commercial purchases should begin to appear within 12 months. significant savings

probably cannot be identified and reported for at

that must be implemented in concert. Expanding least 3 to 5 years. Evaluation of the technology de-
22 I Assessing the Potential for Civil-Military Integration

velopment and diffusion results of the TRP, DOD

supported consortia, and similar initiatives is also

important.

Finally, increased commercial purchases and

the use of commercial vendors, if not properly

managed, could threaten the long-term viability of

the DTIB’s design and engineering base. Congress may wish to monitor trends in DOD management and funding of this vital capability. The

defense technology and industrial base reports

previously requested by Congress will be even

more important in this fiscally constrained environment.

The recent congressional and DOD initiatives

also provide a solid foundation for a continued

expansion of CMI. Should Congress wish to

immediately continue to pursue CMI, the alternatives discussed under a Reform Strategy provide

options for consideration. With significant legislative action already taken supporting the expansion of commercial goods and services, the initial

focus of new efforts might be on the integration of

processes. Process integration appears important

not only for potential cost savings and increased

technology transfer, but also because such integration appears important to retention of the critical

defense system design and engineering capabilities. Integrated firms might combine an understanding of militarily unique technologies and

operational needs with knowledge of developments in commercial technologies in ways that

commercial firms are either unable, or unwilling

to match.

For integration to succeed at the facility level,

additional effort must be made to deal with the difficult issue of how to allow both commercial and

defense activities in facilities while protecting

public funds. These objectives are difficult to reconcile. Some firms are experimenting with activity-based cost accounting, Other observers argue

that accepting data gathered with current commercial accounting systems should be sufficient to

guard against fraud and abuse.

Designing items for dual-use, appears critical

to the ultimate ability to integrate processes.

DOD’s initiative on military specifications and

standards can have a positive effect on dual-use

design, but ultimately such an approach must confront the way in which military requirements are

developed. Congress may wish to consider how

requirements are developed and validated.

Because the defense base is so diverse, efforts

to integrate processes might initially focus on

areas that appear most amenable to integration

(e.g., lower tiers, having commonality with commercial requirements, and services). Figure 1-4

shows one estimate of the amenability of tiers and

activities (R&D, manufacturing, services,

construction) to commercial purchases and process integration.

At the prime level, technologies with many

common commercial and defense requirements

such as transport aircraft, or aircraft engines might

be considered excellent prospects for integration.

Technologies with few commercial requirements

such as tank guns, might be largely excluded from

initial efforts.

A comprehensive CMI strategy must include

provisions for preserving those militarily unique

capabilities that remain largely segregated. A Reform Strategy includes efforts to incorporate

commercial products and processes into the segregated portion of the base. But while this portion of

the base can benefit from CMI changes such as

purchase of commercial components, special efforts will still need to be made to ensure that these

capabilities are preserved. DOD and Congress

will need to ensure that these critical activities remain funded at a sufficient level to ensure their viability.

Finally, although there are immediate actions

to be taken, successful implementation of CMI

will require a long-term commitment. CM] can

provide benefits-but most of these benefits will

take years to appear. Patience and a steady effort

will need to be maintained. Congress will want to

evaluate results over time, and make necessary

course corrections to achieve the full range of

projected benefits of CMI.
T

he Office of Technology Assessment has grouped some of

the policy options discussed in this assessment into three

broad civil-military integration (CMI) strategies that

Congress might consider. The three strategies are delineated according to the anticipated difficulty of implementation

and their potential impact. They incorporate ongoing government

and industry activities as well as possible future actions.

These strategies are not mutually exclusive alternatives: taken

together, they might comprise a phased approach to implementing CMI. For this discussion we have named the strategies Readjustment, Reform, and Restructuring.

STRATEGY ONE: READJUSTMENT

A Readjustment Strategy makes incremental changes that enhance the use of commercial goods and services and promote

process integration at the industrial sector level. It includes many

of the current congressional, Department of Defense (DOD) and

industry CMI initiatives (e.g., many of the provisions in the Federal Acquisition Streamlining Act of 1994 (FASA), and DOD initiatives on military specifications and standards). But the strategy

may have only a limited effect on process integration at the firm or

facility level, and so might be viewed as the first step of a more

comprehensive approach to CMI that includes subsequent Reform and Restructuring (figure 2-1.)

A Readjustment Strategy aims at eliminating some of the barriers to CMI that stem from both the unintended consequences

and misapplication of legislation and regulations and from

inflation,

DOD can take many of the steps necessary to implement this

strategy without additional legislative authority. Other steps,

I

Three

CMI

Strategies 2

123
24 I Assessing the Potential for Civil-Military Integration

A A A

Readjustment Reform Restructuring

strategy strategy strategy

SOURCE Office of Technology Assessment, 1994

such as raising the simplified acquisition threshold, do require congressional action. Even where

DOD can act alone, congressional support may be

essential to ensuring success. For example, although DOD has unilaterally begun to eliminate

the use of many military specifications and standards, Congress will have to decide the level of

support for these initiatives when groups opposing some changes raise their concerns. Further,

Congress may need to provide funds to train the

acquisition workforce to properly implement the

DOD initiatives.

A Readjustment Strategy contains three main

components: facilitating commercial procurement, developing and diffusing technology, and

leveraging investments and sharing resources.

1 Facilitate Commercial Procurement

The principal focus of a Readjustment Strategy is

increasing the levels of commercial purchases and

the use of commercial buying practices. Several

ongoing initiatives are directed at this goal.

Adopt Commercial Specifications

and Standards

Using commercial specifications and standards in

place of military equivalents is one of the most important steps DOD can take unilaterally to increase commercial procurement. But this change

will require time to implement fully, and its benefits may take years to be realized.

According to new DOD guidance, military

specifications and standards will be used only

where no adequate commercial specification or

standard is available. Even when a military specification or standard is necessary, that specification

will be written in terms of desired performance

rather than the physical characteristics or method

of production of an item. Performance-driven

specifications encourage innovation. They re-
Chapter 2 Three CMI Strategies 25

Commercial items were used extensively during the Persian Gulf War. For example, coalition forces

used the Global Positioning System (GPS)—an array of geosynchronous satellites that broadcast positioning Information—to navigate over largely unknown terrain and execute the massive military envelopment

from the west that was key to the ground attack. GPS IS a military system, but contains provisions for commercial use with somewhat degraded positioning Information. Lacking sufficient military GPS receivers,

DOD purchased and successfully used several thousand less accurate and supposedly less durable commercial receivers

United States and allied forces used imagery provided by the commercial LANDSAT satellite system to

plan operations, and leased commercial satellite communications channels to augment the Defense Satellite Communications System.

Other commercial items used included commercial vehicles to haul equipment in the rear areas, and

commercial meal packs (called Meals Ordered Ready to Eat—Contingency Test) that substituted for military meals. 1 The United States also drew extensively on commercial shipping and aircraft to transport

people and equipment to the theater of operations.

1 Department of Defense, Conduct of fhe Persian Gu/f War Fma/ Report to Congress, April 1992

SOURCE Off Ice of Technology Assessment, 1994

quire, however, knowledgeable government per- DOD has also moved to adopt commercial

sonnel to evaluate them.

Case studies have shown that adopting commercial specifications, standards, and business

practices will often produce savings. In some

cases, costs were estimated to have been reduced

by 20 to 60 percent, or more.18 DOD has estimated that adopting performance specifications

might save $550 million over the initial two years

of the program. 19 That estimate appears overly

optimistic, if for no other reason than implementation is likely to take longer than anticipated. Further, there are some in DOD who question moving

“too rapidly” toward reliance on commercial

specifications and standards. Their concerns are

likely to slow the process.

standards such as ISO 9000 in lieu of DOD standards. 20 Proponents argue that accepting ISO

9000 is critical for increasing the international

competitiveness of U.S. firms. But use of ISO

9000 is not without controversy. Some government quality-control personnel oppose the

change. So do some U.S. firms.

Indeed, there is concern about moving too hastily toward reliance on commercial specifications

and standards. Some commercial items were used

successfully during the Persian Gulf War. (See

box 2-l.) But not every commercial item proved

successful. Some chocolate candies melted in soldiers’ hands rather than their mouths. Some comIs In the case of tie STU-111 secure telephone, an estimated 10-fold reduction was achieved.

19 Estimate @ he DOD ~ocess Action Team for Specifications ~d Standards.

20 1s0 9000 i5 Shofimd for International Stmdards org~ization 9000-9004, a series of documents on quality assurance pub] ished by the

Geneva-based 1S0. The five documents outline standards for developing Total Quality Management and a Quality Improvement Process. 1S0

9000 consists of guidelines for the selection and use of quality systems contained in 9001-9003. 1S0 900 I outlines a model for quality assurance

in design, development, production, installation, and servicing. 1S0 9002 outlines a model for quality assurance in production and installation.

1S0 9003 outlines a model for quality assurance for final inspection and testing. 1S0 9004 is not a standard, but contains guidelines for quality

management and quality system elements.
26 I Assessing the Potential for Civil-Military Integration

a

This commercially available Rockwell “Plugger” GPS receiver

IS being purchased by the U S Army.

mercial laptop computers were fouled by the fine

sand. None of the commercially available boots

measured up to the Commander-in-Chief’s requirements. Thus, commercial goods and services, while useful, are not a panacea.

In implementing change, DOD will need to

overcome internal resistance, and work closely

with industry in determining which commercial

specifications and standards to accept, and which

military specifications and standards remain essential. DOD involvement in setting commercial

specifications and standards will be essential to

ensure that defense interests are advanced. Since

DOD accounts for only a small part of the overall

business in most industrial sectors, it may have to

compromise some performance requirements

(thus increasing concerns over possible future

mission failures) or fund special technological developments when commercial items do not meet a

need.

Eliminate Cost-Accounting and

Pricing Requirements

Industry representatives have repeatedly identified cost-accounting and pricing requirements for

commercial goods and services as one of the

greatest deterrents to doing business with the government. Actions taken in a Readjustment Strategy conform with recommendations of the

Acquisition Law Advisory Panel to eliminate cost

and pricing data requirements for all contracts below $500,000.21 The DOD requirement that firms

certify that the government is getting the best

price offered any customer—said to be derived

from the Truth-In-Negotiations Act (TINA)--

would be eliminated. Steps must also be taken to

preclude cost or pricing data from being used in

competitive, fixed-price contracts.22

Adopt a New Definition of Commercial

Items and Services

The lack of a good, common definition of a

commercial item has contributed to the misap2 I As this rew~ goes [0 press, tie ~e~er~l A~qUISitiOn streamlining Act of 1994 (FASA) has eliminated cost and pricing requirements not

only for contracts below $500,000 (included in the Readjustment Strategy), but also for all commercial purchases (an action included in the

following Reform Strateg} ).

22 This raises tie issue of ho~ Iegls]dtion is implernen[ed. T1~A is intended to ensure that the price of products sold to the government is fair

and reasonable. While TINA provides exemptions for contracts with adequate price competition or catalog or market prices on commercial

products, in practice “competition” and “commercial” have often been misapplied, requiring cost and pricing data in competitive markets and

even for some commercial products. Further, TINA allows for price analysis as an alternative to cost analysis-but, reportedly, because DOD

contracting officers are often not trained to perform such analysis, they instead opt to require certification by the contractor that the government

has received the most favored customer price. A major problem thus arises less from legislation than from lack of training and experience.
Chapter 2 Three CMI Strategies 27

plication of cost and pricing data. Acceptance of a

definition such as that in the Federal Acquisition

Streamlining Act of 1994 (FASA) will eliminate

some cost and pricing problems and expand the

usc of commercial products. This definition, however, might still exclude items with little or no

commercial market if those items have not

evolved from a product that is on the market. The

FASA definition might thus preclude DOD from

rapidly acquiring some leading-edge technologies

that have not yet established a commercial market.

Reduce Requests for Rights

in Technical Data

DOD could promote the development of technology by limiting its requests for rights in technical

data. This would encourage vendors to provide

their best product technologies. DOD could, for

example, expand on practices in the Technology

Reinvestment Project (TRP) and the Department

of Commerce Advanced Technology Program

(ATP), allowing firms to retain rights to technology developed partly at government expense.23

FASA provides for the presumption of commercial ownership of data on commercial products,

thus placing the burden of proof of ownership on

the government. But this change is insufficient to

answer many industry concerns. Anticipated

DOD changes, in response to recommendations

from the government/industry technical data

committee established under Section 807 of the

1992 Defense Authorization Act, may eliminate

many of the disputes over rights in technical data

between DOD and industry.

I Develop and Diffuse Technology

A second major component of a Readjustment

Strategy is the collective development of technologies by the defense and civilian sectors for defense and commercial use.

The source of new technology is unpredictable.

It may emerge from defense or commercial research, or result from the development of a particular weapon or commercial product. Therefore,

ensuring effective technology transfer may depend on a variety of approaches. Further, an effective plan to promote development and diffusion of

technology requires mechanisms to measure the

returns on investment.

Rationalize Research Funding

With fewer available resources, DOD might

choose to direct more of its funds into research

that is not strictly defense-related, but holds promise of producing dual-use technology. Through

the Advanced Research Projects Agency (ARPA),

DOD already funds general research. Such research may become more important in the face of

reduced defense budgets. Previous modifications

to the law governing independent research and development (IR&D) should also promote the exploration of nondefense technologies.

But it is essential to identify technology areas

in which DOD support of dual-use technology development in the private sector can make a difference. Resources for research in areas that are

thought to be militarily unique may be scarce, so

every effort will need to be made to avoid funding

duplication.

Exploit Individual Programs

DOD might make better use of efforts within specific programs to develop and diffuse technology.

The Manufacturing Operations Development and

Integration Laboratories (MODIL) developed by

the Strategic Defense Initiative Office (SDIO) is

an example. In this program, SDIO used small

amounts of seed money to fund joint efforts

among companies, universities, and laboratories

directed at developing space optics.

Use Current Diffusion Programs

Cooperative Research and Development Agreements (CRADAs). originally designed to transfer

2? The gt)k ernmcnt docs hay e the right to uw the duta and, in some cases, to promote its commercialization if the ciet eloping firm does not

br]ng a product m marhct.
28 I Assessing the Potential for Civil-Military Integration

This hydraulic clamp IS available for use by clients at the

Great Lakes Composites Consort/urn for limited production

cellence in manufacturing in the private sector.

The Army lists 12 university science and technology centers in 7 different research areas (including

electronics, rotor craft, mathematics, high performance computing research, and others). DOD is

attempting to bring order into its science and

technology process. Readjustment would include

stronger coordination of programs.

While efforts such as the TRP, CRADA, and

consortia can positively affect development and

diffusion of technology, in the aggregate they account for a small portion of defense technology

and industrial base (DTIB) spending. In the longer

term, development and diffusion of common

technologies depend on acquisition reforms that

allow businesses to integrate firms and facilities

profitably.

I Leverage Investments/Share Resources

A third component of a Readjustment Strategy is

leveraging investments in technology and industry to derive the maximum benefit from public and

private spending. Some of this sharing will come

runs or prototyping from selecting common technologies for defense

and commercial exploitation. Some CRADA and

technology out of the federal laboratory system, TRP projects that include government laboratoare now viewed as a means to facilitate two-way ries, manufacturing centers, and other governtransfer, helping government laboratories gain ac - ment facilities already do this.

cess to commercial technologies.

The TRP program allows firms to keep data

rights as an enticement in technology development. This approach may enhance technology

development, but not diffusion. The TRP’s Manufacturing Extension Partnership Program, on the

other hand, might promote technology diffusion.

So too might DOD participation in regional

manufacturing centers and consortia that perform

research of interest to both defense and commerce.

The Great Lakes Composites Consortium and

SEMATECH are examples.

Support for many of these activities is decentralized, with organizations vying for funding

from the Office of the Secretary of Defense

(OSD), the Services, and defense agencies. The

Navy, for example, supports five Centers of ExOther high-cost resources, such as R&D and

test facilities, could also be shared. Commercial

use of the Navy’s David Taylor Model Basin for

design of ships is an oft-cited possibility. Unique

government computer capabilities could be made

available. Los Alamos National Laboratory and

other DOE laboratories, for example, provide support to industry on a fee basis. The Army’s National Automotive Center plans to draw industry and

government researchers together to develop new

dual-use product and process technologies.

While sharing resources makes great sense on

paper, there can be problems in practice. Industry

managers, for example, worry about timely availability of test facilities. More importantly, many

in industry question whether the government has

much to offer. The proof, however, is probably in
Chapter 2 Three CMI Strategies 29

act ions rather than words. Private-sector representatives are reportedly making more approaches to

government facilities.

1 Benefits of Readjustment

Actions taken as part of a Readjustment Strategy

should reduce some costs, provide better (and

faster) access to essential goods and services, and

increase the number of available vendors. For example, a relatively simple reform, the Defense Logistics Agency’s use of commercial air-delivery of

medicine to U.S. forces in Alaska, has lowered

medicine costs, eliminated waste associated with

excess inventory, and reduced transportation and

handling expenses. But savings may be diminished by the limited nature of the changes a Readjustment Strategy makes in cost accounting and

pricing requirements, rights to technical data, and

the DTIB structure.

Actions taken in the Readjustment Strategy can

affect a large percentage of the total contract actions (estimated over 98 percent), but not the majority of the DTIB budget. If commercialization

were to reduce the number of government oversight and processing personnel handling these

millions of actions, however, there might be significant savings. The 1993 Defense Science Board

Task Force on Acquisition Reform estimated a $4

billion annual savings from a reduction of about

45,000 government acquisition personnel alone.

This savings estimate appears high, based on cost

figures supplied to OTA by the DOD Comptroller,

but $1.5 to $2 billion in annual savings may be

possible. Greater government personnel reductions (and more savings) could occur under both

the Reform and Restructuring Strategies.

Figure 2-2 illustrates how the potential savings

from a Readjustment Strategy might phase in over

time.

Exact savings are impossible to determine, but

case studies and surveys provide the basis for estimates of how much and when savings might occur. Savings could result from changes in the

specifications and standards themselves (e.g., certain required military quality tests might be eliminated) and from increased competition as

The David Taylor Model Basin, the long building in the center,

is an example of a government facility that has excellent

dual-use possibilities.

commercial firms bid for defense business. Other

savings may result from changes in contracting.

Further in the future, savings might be derived

from manufacturing technology transfer, which

could drive down production costs. Some of the

case studies reviewed suggest relatively high savings for particular items. DOD’s earlier commercial products program for purchasing, however, is

estimated to have produced an approximate average cost saving of about 10 percent on commercial

items.

The elimination of military specifications and

standards will probably have their initial effect on

the purchase of consumables—food, paper, motor

oil, and services that are purchased regular] y. Savings could appear within months of the implementation. But many consumables and serviccs

are already purchased commercially—so initial

savings might be quite small.

Savings derived from the purchase of component parts may take more time—possibly beginning to be felt 12 to 18 months after the initiation

of new procedures, when orders are made. Retrofitting parts specified to commercial standards in

deployed systems is possible, but there may be

constraints. It may take time to gain acceptance of

such changes by system operators and producers.

Firms may question whether the use of commer-
30 I Assessing the Potential for Civil-Military Integration

I

Technology

transfer at industrialBuy commercial sector level

parts and services

Buy commercial

for new systems

parts and services for

deployed systems

Buy commercial

consumables

{

, l~i

o !5 10 15

Years

SOURCE Off Ice of Technology Assessment, 1994

cial specifications and standards will increase

their legal liability. And the nature of the limited

modification of the laws governing technical data

rights under a Readjustment Strategy may lead

some firms to continue to refuse government business, particularly in the case of commercial items

that are adopted for government use.

It may take 8 to 10 years after the implementation of a Readjustment Strategy until new systems

incorporating commercial items and built to

commercial standards are developed. Fiscal constraints are likely to limit new starts and associated savings.

Finally, technology investment programs, such

as the TRP, manufacturing centers, and consortia,

should promote acceptance of common technologies, affect new product and process technology,

and even further reduce costs in the longer

term—10 to 15 years. If these savings amount to

an additional one percent,24 total annual cost savings over the projected baseline might fall between 3 to 5 percent of total DTIB spending.

There may be some additional savings related

to any reduction in personnel processing contracts

and engaged in oversight. These savings could begin in the first year, but the maximum effect is not

likely to occur for 5 to 10 years after a Readjustment Strategy is implemented.

Of course, cost savings are not the only benefit

of pursuing a Readjustment Strategy. Increased

purchase of commercial items provides defense

access to rapidly moving commercial technologies. And with the defense market open to more

potential vendors, a more responsive DTIB might

be available in times of crisis.

24 Studies attempting to identify the returns on commercial R&D investments provide a wide range of potential effects. However, the totals

spent in these activities area relatively small proportion of the DOD budget—any future savings derived from these investments are likely to be

correspondingly small.
Chapter 2 Three CMI Strategies 31

U Disadvantages of a Readjustment

Strategy

There appear to be few disadvantages to a Readjustment Strategy. A major disadvantage is that

the strategy leaves much of DTIB spending untouched and the current cost-based acquisition

structure would remain in force for much of the

base. This situation not only limits savings, but,

more importantly, it may also leave some defense

firms at a distinct disadvantage in competing for

sales of commercial products, because they will

be required to maintain government cost-accounting for their militarily unique products. Since

these firms may contain the key design and engineering teams essential for developing new military systems (said to be the “core” of the DTIB),

some provision must be made to ensure the survival of such teams.

Some socioeconomic goals may be undermined, although steps can be taken to avoid this.

For example, FASA reserves contracts under the

$100.000 threshold for small business. Job losses

are probably also inevitable, but the y will be offset

at least in part by new jobs in the commercial marketplace.

Training costs may rise as a result of the elimination of the established military specification

and standards system. Further, the increased use

of commercial goods and services might open the

door to foreign competitors. But foreign sourcing

need not be a vulnerability. Proper management

should reduce any problems.

STRATEGY TWO: REFORM

The second major strategy—Reform—builds on

the foundation of a Readjustment Strategy and

takes a more aggressive and expansive approach

to fostering CMI. But to achieve greater benefits,

Reform presents more difficult choices.

A Reform Strategy rests on three pillars: further

expansion of commercial purchases: integration

of R&D. manufacturing, maintenance, and services; and application of CMI policies and practices to the segregated DTIB where possible. For

this more comprehensive strategy to succeed.

however. a concentrated effort to acquire better

data is crucial.

Current CMI information relies heavily on anecdotal evidence and a limited number of case

studies, and is difficult to apply to the DTIB as a

whole. Future data collection for CM I needs to be

more systematic. It requires interagency cooperation and needs to be collected in ways that allow

the findings to be applied to the DTIB as a whole.

OTA conducted a trial industrial survey (outlined

in box 4-2 in chapter 4) that illustrates how such

data might be collected. The Census Bureau might

perform a more detailed industrial survey to obtain better data.25

1 Expand Commercial Purchases

Commercial purchases in a Readjustment Strategy may be constrained by requirements for rights

in technical data; by continued demand for cost

and pricing information, requiring government

cost accounting; by insufficient change in government buying practices: and by an acquisition

workforce not used to buying commercial products. A Reform Strategy would seek to remove

these hurdles.

Buy Commercially

FASA eliminates government cost and pric ing requirements for all commercial purchases. This is

essential to further increase commercial goods

and services. There is, however, some skepticism

about whether contracting officers will demand

pricing information that might continue to make

special accounting necessary.

Exempting all commercial purchases from socioeconomic-related contracting requirements. is

another alternative for increasing commercial

procurements. The objectives of these unique contract requirements might be met in other ways.

FASA makes a start. but implementation of FASA

requires DOD to conduct a waiver process. The

‘i Ohwm at]tlns on wlcctin: ;i rcprcvmtati\c indu\trlal Mmple and gathering data are prc~entcci in appcndice~ C and D
32 I Assessing the Potential for Civil-Military Integration

Acquisition Law Advisory Panel concluded that

where DOD contract requirements duplicate existing federal, state, and local laws, these laws

could be applied instead. Where special government efforts are considered essential to achieve a

desirable socioeconomic objective, the actual requirement might be implemented differently—

possibly as a part of a “best value” contract

evaluation rather than within a contract clause.

The idea is to establish the desired socioeconomic

objective as an industry norm rather than an additional individual contract requirement.

DOD can further facilitate greater commercial

purchasing by revamping its bid and proposal

process to be more flexible and timely. The use of

electronic transactions with commercial vendors

is a useful start to the process. Giving procurement

officials the same authority enjoyed by commercial buyers would speed acquisition.

Develop a Trained Workforce

The expansion of commercial purchases requires

a highly trained, high-quality acquisition workforce. A new acquisition corps of “smart buyers”

should have training in market research, the technical competence to evaluate purchases, and the

authority to act on their findings. The current acquisition corps might be retrained or—if it proves

to be too deeply entrenched in its old ways—DOD

might gradually replace the corps through attrition

or early outs.

A critical change in promoting commercial

buying practices is to modify the current incentive

structure. The new system must include the development of new measures for judging and rewarding the performance of procurement officials.

1 Integrate Processes

The second main element of a Reform Strategy involves policies designed to integrate R&D,

manufacturing, maintenance, and service processes. Process integration eliminates redundancies within firms and facilities, generating

economies of scale and allowing the government

to piggyback on commercial operations. It would

yield direct, facility-level technology transfer between the commercial technology and industrial

base (CTIB) and DTIB.

A Reform Strategy might reap these benefits

through implementation of the following policy

options:

Change

Perhaps

Cost-Accounting Requirements

the most important step to integrating

processes at the facility level is finding alternative

means to assure that the government is paying a

fair price for militarily unique goods and services.

The least intrusive but possibly most risky option is for DOD to rely solely on internal DOD

price and cost analyses. This option places DOD

in the same position as commercial buyers seeking to purchase unique items. Some goods and

services lend themselves to this form of cost estimation, notably those involving tasks and products that are well understood and have known

material costs.

DOD might also accept the data generated by

the contracting firm’s own cost accounting system. Some firms are moving toward an activity

based cost-accounting system that might provide

much of the data requested by DOD without adding unnecessary overhead to the firm’s commercial activities.

Change Contracting Approach

Unique contract requirements or unnecessary demands for rights in data stifle process integration

in much the same way they stifle commercial procurements. Focusing DOD contracts solely on the

products and not the process would help foster

process integration.

“Form, fit, and function” specifications detail

the general type of product, how it should interact

with neighboring components, and how it should

perform. Their use in place of detailed “how to”

standards may open numerous opportunities for

using commercial goods and services. They

would also facilitate quick incorporation of new

commercial technologies into defense goods. The
Chapter 2 Three CMI Strategies 133

new DOD directive on military specifications and

standards appears to address these issues.

While FASA makes some changes on rights in

technical data, these changes do not appear to address concerns firms have over the possible loss of

privately developed manufacturing technology in

integrated facilities. Government’s demand for

rights in technical data might be further restricted

in a Reform Strategy. Where obtaining rights is

critical, the technical data might be protected in

escrow or compensated through licensing arrangements. As noted in the Readjustment Strategy, new DOD data rights procedures are expected

as a result of recommendations by the Section 807

committee.

Change Acquisition Philosophy

CMI studies on process integration have argued

for a concerted effort to change DOD design philosophy to use more dual- or multi-use technologies. DOD military specifications and standards

initiative addresses this issue. The design of

equipment upgrades should include more commercial components and subcomponents.

New systems specifications should emphasize

designs that accommodate commercial components and processes. This could be achieved by

making the cost of a system a more important design criterion than in the past. Designing for commercial processes might allow a militarily unique

item to be manufactured or maintained in a commercial facility rather than at a segregated site.

Streamlining Oversight

DOD can use alternatives to current visual inspections by residential government personnel to ensure quality. Such changes are implicit in the

changes in military specifications and standards—if fully implemented.

The commercial market provides quality information as well as pricing data. Buyers research

and track the quality of products. Firms inspect

suppliers’ quality and sometimes have a representative at a supplier facility. Firms also rely on statistical process controls and other means of

quality monitoring. The government could apply

Terry Manufacturing produces uniforms for both the U S

Army and McDonald's in the same facility wlth the same

workforce

all of these approaches. If still unsatisfied, DOD

could do inhouse testing of a statistically significant sample of the product. FASA directs DOD to

rely on standard commercial product warranties.

Preserve the Base

DOD will need to foster development of product

and process technologies to help preserve the

base. Participation in industrial-sector organizations and consortia, as discussed in the Readjustment Strategy, can help coordinate DOD and

commercial efforts. In some cases, it might be in

DOD’s interest to promote particular technologies

of clear benefit to the military.

Similarly, DOD has a role in fostering process

technologies. Trends towards increased flexibility y

in manufacturing could permit commercial plants

to accommodate defense needs even with historically uneconomical production volumes.

Finally, the government may need to make a

special effort to help defense firms be competitive

despite the shift toward commercial procurement.

Absent substantial reorganization, many of these

firms are unlikely to be able to compete. Moreover, defense firms may now find themselves in

the position of producing recently redefined commercial items and militarily unique items in the

same facility and facing cost accounting and oversight rules not applicable to commercial firms.

Since these are the firms that maintain the design

and engineering teams essential to future weapons
34 I Assessing the Potential for Civil-Military Integration

development, the government may wish to help

them by treating their products preferentially for a

limited time. They might also be exempted from

certain requirements (e.g., defense cost accounting) so that their commercial ventures are not unduly burdened by continuing defense work.

1 Apply CMI Lessons to the

Segregated DTIB

Policies directed at the segregated segment of the

DTIB are a final aspect of a Reform Strategy.

These private and public entities develop, produce, and maintain goods and services that are

highly unique, complex, and/or classified.

Use CMI as a Criterion for the

Elimination of Redundancies

The segregated DTIB, like the rest of the DTIB, is

currently undergoing significant downsizing and

restructuring. DOD might leverage limited funds

by eliminating redundancies within the segregated DTIB as well as by shifting work to the integrated base.

If policy makers decide to emphasize private

over public organizations, they may also want to

strengthen these segregated industries to ensure

their survival during downsizing. Ensuring that

antitrust barriers to business mergers in critical industrial sectors do not preclude rational downsizing might help protect core competencies that

would otherwise be lost, and could help achieve

more economical production volumes as well.

Apply Commercial Buying Practices

Under a Reform Strategy, the segregated portions

of the DTIB will continue to operate according to

different rules than much of the rest of the DTIB.

But it should be encouraged to procure goods and

services from commercial firms and companies

with integrated processes to the maximum possible extent. DOD can promote such procurement

by shifting the incentive structure toward the use

of the commercial and integrated markets.

Encourage Technology Transfer

Technology transfer with the segregated DTIB

must be encouraged, Intra-firm technology transfer in companies that conduct both commercial

and defense operations can be promoted by facilitating sharing of labor, management, research

centers, and other resources.

Firms and public sector organizations that do

only defense work, are probably limited to industrial sector-level technology transfer, via consortia, standards bodies, shared test facilities, etc.

~ Benefits of a Reform Strategy

The policies outlined above have a number of potential benefits, including cost savings, technology transfer, and crisis responsiveness.

Reform Strategy savings will come from increased use of commercial products, lower overhead costs in integrated and segregated facilities,

higher production volumes in integrated firms,

expanded adoption of commercial buying practices, and a further reduction in numbers of” government DTIB personnel.

Savings from increased commercial purchases, just as in the Readjustment Strategy, will

not be immediately evident. (See figure 2-3.)

Commercial purchases may increase gradually

over the first several years after implementation,

although because of the increased volume, savings should be more immediate than under a

Readjustment Strategy. Development of dual-use

technology and systems may begin to influence

savings in the mid-term (3-5 years). Integration of

processes and redesigning with cost and manufacturability as key criteria are likely to further reduce costs in the medium term. But any savings

related to new programs are like] y to begin only in

the longer term (8- 10 years) and can be affected by

the expected reduction in new starts.

OTA developed a table of possible savings in

the private sector DTIB based on assumptions

about the potential savings related to CM I policies

discussed in chapters 4,5, and 6 and the estimated

change in total CM] derived from OTA’s industry
Chapter 2 Three CMI Strategies 135

.-?

%

: Reduced use of

b military specifications

>

0

and standards

cost

accounting

reform

New products Technology

designed to take transfer at

advantage of dual-use facility level

technologies \

\

\

o 5 10 15

Years

SOURCE Off Ice of Technology Assessment, 1994

survey. The proposed policies used for the survey

correspond to those in a Reform Strategy. While

the table does not provide a definite estimate of

savings, it does bound the range of potential savings. Combined with other information, it can be

used to better define likely savings. The data from

the table are shown graphically in figure 2-4.

Overall, savings from a Reform Strategy (including those private sector savings derived from

the Readjustment Strategy) might yield private

DTIB savings ranging from O to about 17 percent.

a range we believe shows the limits of the potential returns from the policies discussed. While it is

possible that savings in the segregated portion of

the base might exceed 10 percent, average savings

from past commercial purchases are estimated by

some in DOD to be closer to 10 than 30 percent,

Thus, even with far greater expected savings from

the segregated base, total estimated savings from

the private sector DTIB are likely to stay well

within the boundaries described in figure 2-4.

Applying DOD estimates of a possible IO-percent average savings on commercial purchases, a

15- to 20-percent average savings from integrated

processes (a figure that many observers believe is

too high), and a 10-percent savings in the segregated portion of the base might provide overall

savings of 5 to 10 percent of private sector DTIB

spending. In the future base such estimates might

produce savings of $5 to $10 billion per year. Less

optimistic estimates would, of course, result in

lower estimates.

Additional savings not included in figure 2-4

might come from reductions in personnel, resulting from reduced oversight requirements. Another $1.5 to $2 billion in savings might be possible

over the long term.

Further personnel savings might be achieved

by eliminating redundancies between the private

and public sectors of the DTIB, e.g., closing government research, development, testing, and engineering, and maintenance facilities. These

reductions might begin 2 to 3 years after implementation, but could take 8 to 12 years or longer to

complete. Congress has been reluctant in the past

to close public facilities.
36 I Assessing the Potential for Civil-Military Integration

16.5% max. (1 O% chapter 6 savings)

15.39’. max. (5% chapter 6 savings)

20

14.1% max. (O% chapter 6 savings)

mmc (Excess precision carried for clarity)

.-

$ 15

E

al

~

: 10

i=

o 15- 20”/0

a)

~

.— 5

k m 10- 15“/.

3

75 k

d’

,––.

5- 100/0

o

I 0- 5CZ0

SOURCE Office of Technology Assessment, 1994

Other Benefits

A Reform Strategy should expand direct technology transfer at the firm and facility levels between

the DTIB and the CTIB. At a minimum, opportunities will grow for spin-on from the CTIB to the

DTIB and spin-off from the DTIB to the CTIB.

Broadening the use of business-like approaches

and technology transfer as part of a Reform Strategy could also strengthen producers of militarily

unique goods and services.

A Reform Strategy is likely to result in a larger

—perhaps global—mobilization base, given the

increased number of firms that engage in defenserelated production. Promotion of flexible and

agile manufacturing would further expand the

number of potential defense suppliers.

Finally, a Reform Strategy could enhance U.S.

global economy competitiveness. Integrating the

entire NTIB means that the benefits of research

and development in manufacturing, information

management, and specific product technologies

are widely shared across U.S. industry. Elimination or reduction of the redundancies between the

DTIB and the CTIB will leverage funds, resources, facilities, and highly trained personnel.

U Disadvantages of a Reform Strategy

Together with significant benefits, a Reform

Strategy has some drawbacks. These include the

cost of training and/or recruiting new acquisition

personnel; increased costs for some products or

services; greater risk of fraud and abuse of public

funds; potentially lower quality for some military

items; the possibility of job loss; and risks of

proliferation of defense technologies to other

countries.
Chapter 2 Three CMI Strategies 137

OTA did not attempt to quantify the costs and

risks. While they are real, they appear to be far

lower than are the potential benefits of pursuing a

Reform Strategy.

The possibility of lower quality items and a resulting combat failure is the most worrisome, but

those advocating change argue that commercial

specifications and standards should only be used

in cases where they meet performance requirements. Adherence to this standard should avoid

this problem.

The potential for greater fraud and abuse of

DOD funds, for example, is difficult to estimate.

Many observers argue that the current system is

not particularly protective of government funds.

Since it was imposed, in part, in reaction to egregious cases of fraud and abuse, however, removal

of such controls may lead to more such cases.

Reform policies will likely result in a shift in

employment away from traditional defense companies and public facilities and toward commercial firms. Some defense firms will not be able to

make the transition. The ongoing consolidation

within the defense industry would suggest that the

private sector is already taking actions to cope

with the changing environment.

Socioeconomic programs may be negatively

affected if efforts are not made to find less intrusive ways to promote these goals.

Finally, new policies might increase proliferation of advanced technologies to third parties. If

weapon technology is merged with commercial

technologies, then exports of advanced commercial technologies could offer other states access to

U.S. weapon technology.

STRATEGY THREE: RESTRUCTURING

The third CMI strategy, Restructuring, might

achieve an even higher level of CMI. This strategy

would not only restructure the DTIB, but would

also change military force structure and weapon

systems to take advantage of developments in the

CTIB. Due to its encompassing nature, a Restructuring Strategy carries a greater degree of risk.

A Restructuring Strategy assumes that the policies associated with Readjustment and Reform

have been implemented. A Restructuring Strategy

involves extensive rationalization and privatization of the public and private sector DTIB, changing requirements for military systems forces, and

progress toward what might be termed complete

commercialization of the base.

~ Which Future?

The changing nature of warfare will influence the

use of the DTIB to support military requirements,

and the nature of any Restructuring Strategy. If future security threats are similar to those of the past

(e.g., direct military threats from nation states),

then there may be fewer opportunities to radically

alter either the shape of the DTIB or military requirements. DOD might, however, still benefit

from further CM I as a means of extending scarce

dollars.

Alternatively, a decline in major military

threats to U.S. interests could promote a fundamental reorientation of military forces away from

traditional war-fighting and toward different missions, including peacekeeping and humanitarian

assistance. Under such a reorientation, the armed

forces might need to be differently equipped, organized, and trained. Light, versatile capabilities

might take precedence over heavy, durable, sustainable ones. The requisite DTIB might then be

materially different and, possibly, more similar to

its commercial counterpart.

Between these two extremes lies a variety of

potential futures, requiring a DTIB with varying

amenability to CMI.

Tighter restrictions on conventional arms exports could have a significant impact on an industrial base that now depends on overseas sales to

sustain important capabilities. The denial of such

markets might even precipitate changes in requirements and increase CMI.

Concepts of future military operations also

have implications for our industrial posture. Reducing human presence on the battlefield, for example, suggests a concentrated pursuit of such

technologies as autonomous vehicles, robotics,

and extended-range smart munitions.
38 I Assessing the Potential for Civil-Military Integration

Future military operations, such as those depicted here, will

probably mix new and old military equipment. A strong CMI

strategy might have a significant effect on the nature of that

equipment

Technology trends and choices will also have a

significant effect on the nature of future conflict

and the DTIB. Technological advances and diffusion are likely to accelerate in the future, with

potentially profound effects on the technology life

cycle—from concept origination to product

obsolescence. Process technologies, for example,

will increasing y accommodate integrated

processes.

1 Rationalize and Privatize the DTIB

Some rationalization of public and private R&D,

production, and maintenance activities occurs under both the Readjustment and Reform Strategies.

A Restructuring Strategy would pursue rationalization to the maximum extent possible, with the

goal of relying on private-sector capabilities.

Some countries, Japan and Germany for example, depend almost entirely on the private sector

for maintenance and support. Japan turns to the

private sector for R&D. The United States might

adopt this position.

DOD could promote the consolidation of the

defense support infrastructure around private,

rather than public, entities. Less controversial

within the military, but perhaps more so in Congress, would be the elimination of most of the

public sector military support infrastructure and

its replacement by private contractors. The most

obvious savings might come from privately run

maintenance depots and air logistics centers, but

there are numerous other services that might be

spun off from DOD, including transportation and

inventory control.

At the extreme, DOD could contract with a private company to handle defense procurement.

While on its face this seems a questionable approach, the Nation has done precisely this with

much of the U.S. nuclear arsenal. The Department

of Energy has provided overall funding and general guidance for the national laboratories, and relied on the laboratories to design, develop, and

produce the Nation’s nuclear weapons. Indeed, it

is the laboratory director, and not a government

official, who certifies the reliability of nuclear

weapons and the nuclear stockpile.26

One advantage of having a private contractor

fulfill this role is the private sector’s ability to attract the best and the brightest of America’s talent

through its flexibility in management, personnel

practices and pay. A private contractor is better

positioned than a government agency to size itself

efficiently according to the workload.

26 It Should ~ noted ~a[ his approach appears to have worked well with regard to the development of the nuclear stockpile, but Pos,sibly

less well with regard to the overall running of the laboratories and their full range of missions.
Chapter 2 Three CMI Strategies 39

Rocket artillery IS widely used by the United States and other nations

I Restructure the Military Forces

and Weapons

Restructuring portions of the military itself would

provide opportunities to increase CMI dramatically. Some of these changes would be relatively

minor and easily acceptable. Others would be far-

-reaching and extremely controversial.

Just as individual weapon systems can be designed to take advantage of commercial or integrated components, parts, hardware, or services.

the armed forces themselves could be configured

to take maximum advantage of commercial goods

and services. During the 1970s, the Army’s 9th Infantry Division experimented with many commercial products (e.g., dune buggies with

mounted anti-tank weapons) and examined alternative ways to employ off-the-shelf equipment.

New weapons that are more amenable to integration (e.g., rocket artillery launched from tubes

commonly available in industry, or standoff

bombers built around commercial airlines airframes) might replace more militarily unique

hardware (e.g., tube artillery or penetration

bombers).

The opportunities for such shifts in force structure will increase in coming years as older weapon

systems and equipment become obsolete and need

to be replaced. Replacement decisions could be

heavily influenced by an understanding of the

commercial market. DOD already requires procurement officers to examine alternative tactics

and nondevelopmental items (including commercial items) before initiating a new militarily

unique development project. Similarly, DOD

planners might use CMI as one factor when reallocating roles and missions among the Services.

I Move Toward Complete

Commercialization

Finally. the acquisition process might be completely redirected by abandoning efforts to apply

special rules to defense contracts. (See box 2-2. )

Instead, DOD’s procurement agency (whatever

form it might take) would buy its goods and ser-
40 I Assessing the Potential for Civil-Military Integration

The French and Japanese defense acquisition systems differ significantly from that of the United States.

France possesses one of the five largest defense industries in the world. It is the only European power

currently producing the full range of advanced military weapon systems from fighter aircraft to nucleararmed and -powered submarines. Japan, too, has a substantial arms industry that produces advanced

weapon systems. The Japanese effort is supported by the world’s second largest economy and a technologically sophisticated, consumer-oriented industrial base.

The French Ministry of Defense obtains its defense goods and services via a centralized procurement

agency, the General Delegation for Armaments (DGA). The French government owns directly or indirectly

nearly four-fifths of its defense industry. The French DTIB is consolidated: the manufacture of fighter aircraft, armored fighting vehicles, and aircraft engines are each the responsibility of a single company, Dassault Aviation, GIAT Industries, and SNECMA, respectively. Government ownership provides these industries with a degree of multiyear funding stability not found in the commercial market or in the U.S. defense

market. In fact, the Ministry of Defense has virtually carte blanche in the allocation of resources, as the

French Parliament has no line-item authority over the defense budget,

The Japan Defense Agency (JDA) procures its weapons entirely from Japanese private corporations,

whose main focus is commercial, Unlike the French, or even the United States, there are few governmentowned or operated facilities, and no government-owned weapon manufacturers. There is, however, considerable concentration within the DTIB. Defense production is almost entirely in the hands of the largest Japanese keiretsu (conglomerates), including Mitsubishi Heavy Industries and Mitsubishi Electric Corp. Firms

specialize, and often expect to be awarded certain contracts.

Procurements are managed by a central procurement authority. Procurement requests for equipment

come from the JDA, with the blessings of both the Ministries of Finance and of International Trade and

Industry. Priorities in Japanese defense production are determined and influenced at least as much by the

agendas of the Ministry of International Trade and Industry (MITI), individual corporations, and the powerful

Japanese Federation of Economic Organizations (Keidanren), as by the JDA. These organizations are genvices like any other large commercial customer.

Many large commercial customers manage to operate effectively, despite having little direct insight into the cost accounting of their vendors.

DOD could observe these businesses, see how

they determine the relative value of specialized

items with little or no available market price information, and apply these lessons to its own procurement activities.

1 Benefits of a Restructuring Strategy

A Restructuring Strategy represents a significant

departure from DOD’s acquisition approach since

the end of the Second World War. The more radical elements in this strategy hold the promise of

major savings and benefits. In particular, it may be

possible to derive savings from heightened efficiencies within the newly privatized portions of

the DTIB, from increased use of commercial

goods and services within DOD itself, and from

use of CMI as a factor in the requirements process.

Cost savings derived from the Restructuring

policy options depend on the mix applied. A

60-percent reduction in the public sector R&D,

production, and maintenance workforce might result in an estimated $9 billion in yearly savings—

some significant portion of which might be due to

CMI. Savings over time are illustrated in figure

2-5.

9 Disadvantages of a Restructuring

Strategy

Restructuring the DTIB would be costly and entail

risks of failure in implementing these radical al-
Chapter 2 Three CMI Strategies 141

erally more Interested in the development and commercial exploitation of new technologies than in developing advanced weapons A major focus of Japanese defense procurement IS thought to be the utilization

of defense contracts as a means of facilitating the development of advanced technologies, particularly

those with commercial or dual uses

Both France and Japan accord other priorities to their arms industries beyond the production of the

most advanced weapons possible, For the French, ensuring that the French arms industry remains viable,

primarily through the development of weapons that are affordable for both the French military and the international arms market, IS a high priority In the Japanese case, the interest IS in the development of high

technology The attendant manufacturing processes appear to have as much Importance as the creation of

advanced military capabilities.

In general, neither the French nor the Japanese DTIB possess the array of regulatory and Iegislative

barriers that compel the segregation of the U.S. DTIB from the CTIB. Commercial processes, technologies,

components, and practices are applied to defense goods, and commercial and defense goods are often

developed and, where possible, produced side-by-side. But the DGA and the JDA often rely on administrative means rather than competition, to control cost and quality. These measures include fixed price and

cost-plus contracts for militarily unique systems. In contrast with the United States, both the French and

Japanese armaments industries enjoy close relations with their governmental customers, Indeed, in neither

France nor Japan do government and industry engage in the same degree of adversarial relations that

have marked the United States’ government-industry relationship.

SOURCES George K Krlkorlan American Defense Preparedness Assoclatlon, Analysis of the Weapons Acquisition Process of SeIected Fore/gn Governments (France, Un(ted Kingdom, German~ Israel) for the Acqumtlon Law Advisory Panel (Washington, DC

Department of Defense Systems Management College, 1992), U S Congress, Off Ice of Technology Assessment, Lessons m Restructuring Defense /ndustry The French Experience, OTA-BP-ISC-96 (Washington, DC U S Government Prmtmg Off Ice, June 1992),

U S Congress Offlceof Technology Assessment, lntegratmg De fenseand Commerc/a/ Industry. The Chinese andJapanese Experience (Washington DC U S Government Prlntlng Office), forthcoming

tematives. There are threats to the effectiveness of abuse of public funds. Third, eliminating all re

U.S. forces in the field, the viability of the mobilization base, potentially greater vulnerability to

foreign embargoes, and the possibility of proliferation of sensitive technologies.

The most serious risk is that commercially

available weapons and restructured forces may

not meet the challenge of future conflicts. A restructured DTIB may no longer give forces the

same qualitative edge they now enjoy. The current

acquisition process pushes the edge of the technological envelope, although at significant cost. Restructuring the armed services to take maximum

advantage of CMI may well gain economic efficiency at the price of technological superiority.

Second, privatization of purchasing may eliminate controls needed to avert waste, fraud, and

dundancies between the private and public sectors

may leave DOD with insufficient expertise to be

a smart buyer. Fourth, closing bases and terminating personnel will not be cost-free. Further, while

the size of the mobilization base may expand with

commercialization, the mobilization base may become more fragile. If key components, products,

or processes must be sourced abroad, they may be

inaccessible to the United States in a crisis.

Finally, even more than in the Reform Strategy,

the Restructuring Strategy holds the possibility of

increased proliferation of advanced technologies

to potentially hostile countries and organizations.

While this may not be a problem with regard to

controlled technologies (e.g., nuclear weapons
42 I Assessing the Potential for Civil-Military Integration

I

I

I

Restructure forces

and weapons

Privatization of

public facilities

Complete

commercialization \~

o 5 10 15

Years

SOURCE Off Ice of Technology Assessment, 1994.

design), it may become a real threat in the case of might become available to pariah or unstable

dual-use items. Relatively advanced--and pre- states. U.S. forces could find themselves opposed

viously limited—technologies, such as miniatur- by forces equipped at an equivalent technological

ized electronics and hardened guidance systems, level.
Integrating the

Technology and

Industrial Base:

Overview 3

T

his chapter reviews the debate on civil-military integration (CMI). It explains what CMI means, discusses the

sources of segregation, presents the arguments for and

against increased integration, and summarizes the findings of past studies. The chapter provides a framework for examining CMI, outlining OTA’s approach to this issue,

establishing the context for CMI policy alternatives, and presenting some preliminary findings.

DEFINITION OF CIVIL-MILITARY INTEGRATION

There is no single definition of CMI. The term encompasses a

number of different activities, each of which is viewed as an element of integration. For example, those advocating the increased

use of nondevelopmental items, including commercial off-theshelf items, consider such use to be CMI. Analysts recommending changes in government acquisition laws to promote

combined R&D, or production of civilian and defense products

on a single assembly line, consider such changes to be CMI. Others maintain that CMI involves increased cooperation between

government research facilities and the private sector, in both

R&D and manufacturing technologies. Still others claim that the

rationalization of private and public depot-level maintenance facilities (e. g., transferring jet aircraft engine maintenance and

overhaul from military facilities to existing private sector facilities) is a component of CMI.

r

1

LL-..—. . )

143
44 I Assessing the Potential for Civil-Military Integration

■

●

●

■

●

●

■

●

✘

■

■

m

Hoover Commission on Business Organization of

the DOD (1955).

Blue Ribbon Defense Panel (1970).

Commission on Government Procurement (1972).

Defense Science Board Report on Specifications

and Standards (1 977),

Grace Commission Office of the Secretary of

Defense Task Force (1 983),

Packard Commission (1986).

Defense Science Board Studies on the Use of

Commercial Components in Military Equipment

(1986, 1989)

Bolstering Defense Industrial Competitiveness

(1988),

CSIS Report on Integrating the Commercial and

Defense Base (1 991).

Report of the Acquisition Law Advisory Panel (1993)

CSIS Report on Military Specifications and Standards

(1993)

Defense Science Board Task Force on Defense

Acquisition Reform (1 993)

—. .—

SOURCE Off Ice of Technology Assessment, 1994

These definitions are not mutually exclusive.

Accordingly, OTA has incorporated all these elements in its definition of CMI as:

The process of merging the Defense

Technology and Industrial Base (DTIB) and

the larger Commercial Technology and Industrial Base (CTIB) into a unified National

Technology and Industrial Base (NTIB).l

More specifically, in an integrated base, common technologies, processes, labor, equipment,

material, and/or facilities would be used to meet

both defense and commercial needs. Decisions on

how to use integrated resources would be based on

the same technical, legal, and economic reasoning

that commercial firms use when servicing global

markets.

I Degrees of Integration

Much of the current DTIB is isolated from the

CTIB, but the degree of isolation is a matter of debate. The perception of isolation is often affected

by the definitions of CMI used. Previous studies

have indicated that changes in acquisition laws

and regulation could increase integration. A highly integrated base might ultimately require radical

changes in acquisition laws and regulations, and

in force structure and military requirements.

A fully integrated base, however, is likely to

exist only in theory. The defense market is a monopsony, characterized by a single dominant customer—the DOD. Unique defense requirements

for goods and services (including security), and

the need to ensure the proper use of government

funds, shape this market,2 and to some degree will

limit the amount of integration.

BACKGROUND

For over 40 years, government commissions, as

well as government and private sector studies,

have examined ways to adopt the products and

practices of the commercial sector to meet defense

needs. Some of the most important commissions

and studies with CMI relevance are listed in table

3-1.3 Although most of these reports did not specifically concentrate on CMI, they nonetheless

provided insights into the sources of DTIB segregation, the rationales for promoting CMI, and

some of the risks and costs of CMI.

9 Sources of Segregation

The isolation of the DTIB is rooted in the extended nature of the Cold War, the magnitude of

the military threat the nation faced, and the structure of our society and government. The sources

1 The NTIB includes other, noncommercial elements, such as public utilities and other non-DOD government procurements. The national

base is also embedded in the larger Global Technology and Industrial Base.

2 see Jacquess Gmsler, The DeJen$e /n&o-v (Cambridge, MA: MIT Press, 1980), for a discussion Of the underlying economic factors of

the defense industrial base.

3 A more complete listing of study findings and recommendations can be found in appendix B.
Chapter 3 Integrating the Technology and Industrial Base: Overview 145

● Acquisition laws, regulations, and culture,

● MilitariIy unique technologies or products.

_ Commercially uneconomical orders.

● Military specifications and standards.

● Classified technologies

● Emphasis on performance over costs,

G Initial military use

SOURCE Off Ice of Tecbno ogy Assessment, 1994

of segregation have been well documented in previous studies and are only briefly discussed here.

(See table 3-2.)

Acquisition Laws, Regulations, and Culture

One source of the current isolation is the elaborate

defense acquisition system developed over the

four decades of Cold War. This system was designed to assure open competition among all qualified bidders, proper accounting of public funds,

quality control of defense products, protection of

critical national industrial capabilities, and advancement of social and economic goals.

Compliance with acquisition laws and regulations raised defense firms’ overhead costs and

made their commercial product lines less competitive. Moreover, the laws and regulations provided few incentives to incorporate new

processes. Compliance with DOD contracting

rules required actions that were totally unnecessary for commercial sales. The firms therefore frequently chose to separate their commercial and

defense activities,

The adversarial relationship between DOD and

business-caused partly by a government acquisition structure that provided few incentives

for contractors to reduce costs and placed great

stress on government oversight—has exacerbated

this situation. The situation was made still worse

by centralized government decisionmaking, a

lack of expertise among some procurement personnel, and the criminalization of the procurement process in response to some cases of

financial abuses.

Militarily Unique Technologies or Products

Some military products and their attendant

technologies may have little or no counterpart in

the commercial market and involve manufacturing processes that overlap little with those

employed in commercial production. Among the

most defense-oriented industries (e.g., ammunition, tanks, shipbuilding, and guided missiles),

there are few, if any, sales to the civilian sector.4

Moreover, defense products often differ significantly from their commercial counterparts (e.g.,

naval combatants versus commercial transport

ships in the shipbuilding industry).

But while final assembly of some of these systems might be militarily unique, many weaponsystem components could be commercial. FurMilitary unique production lines, such as this one for 155mm

shells, are unlikely to have many commercial customers for

their products, even with increased CMI.

~ T}]~r~ arc ~().ca]]cd .’commercla]” sa]es in these sec(ors 10 foreign militaries, but these are not the commercial sales Of 131iIln iJlterfX to thli

rcptjrt, Duta from Buretiu of Fzonomic Analyses, 1987 Annual lnpuf-Oufpuf Tables, unpublished.
46 I Assessing the Potential for Civil-Military Integration

Some defense industries, such as those that produce nuclear

weapons and missile warheads, will almost certainty remain

highly classified and therefore segregated

ther, both the components and the systems might

be built using commercial processes.

Commercially Uneconomical Orders

Even when defense goods and services are not

unique, commercial firms may avoid defense production if DOD orders are uneconomical. For example, the production volumes for some

specialized defense computer chips are too small

to justify even a commercial test-run, much less a

production line.

Moreover, given that defense budgets and purchases of goods and services can fluctuate unpredictably, some firms are unwilling or unable to

make the investments necessary to maintain facilities or retain a skilled cadre for military

equipment.

Military Specifications and Standards

Many of these militarily unique technologies and

products have been defined by military specifications that describe their shape, composition, and

function, and military standards that determine

the manner in which they are produced.5 While

such specifications and standards are often useful

in defin ing performance or nature of the product to

be procured, they are criticized as being misapplied in cases where commercial equivalents exist. Other criticisms of current specifications and

standards include that they are out-of-date and applied by fiat or in a contradictory manner. “How

to” standards are often criticized for limiting

manufacturing innovation and increasing costs.

Although some commercial products are defined by military specifications and standards,

often the difference between commercial and defense specifications and standards can eliminate

any economies of scale to be gained from using

the same production line or even the same facility.

In other cases, the special processes and oversight

required by DOD may raise overhead costs and

lead firms to segregate defense and commercial

work to remain commercially competitive.

The changes in the use of military specifications and standards directed

fense William Perry in June

many of these problems.6

Classified Technologies

by Secretary of De1994, may eliminate

DOD aims to develop products and processes that

provide it with a military advantage over its adversaries. The Department is naturally reluctant to release such technologies to the commercial market,

where they might be exploited by potential adver5 MOre ~Fci~callY, ~i~ifar}, ~peci’cafiOm Me Comp]e[e &sCrip[iOns of products that are either intrinsica}]y military in character or signifi-

.

cantly modified commercial products requiring special features, design, packaging, or quality assurance to satisfy military needs. kfilifar~ .\/andards are used to describe engineering and management processes, methods, design criteria, data generating requirements, testing techniques,

and definitions. U.S. Department of Defense, OffIce of the Under Secretary of Defense for Research and Engineering, An O\er\ie\tofrhe De-

~en.se Standardi:arion and Spec@curion Program (DSSP), Standardization Document SD-8, May 1, 1983.

6 William pew, Mem~ran~um for the Secretaries of the Military Departments, Subject: Speci$cations and S~andard*A lve~%’ Wa.v of Doing Bustness, June 29, 1994.
Chapter 3 Integrating the Technology and Industrial Base: Overview 147

saries. This is particularly true for technologies

such as nuclear weapons and their delivery

systems.

Emphasis on Performance Over Costs

During the Cold War, the United States stressed

the need for technological advantages to compensate for the enemy’s quantitative superiority. Furthermore, American values demanded that U.S.

troops be provided with the best equipment in order to minimize their casualties. The result was an

acquisition philosophy that valued product performance (e.g., speed, range, durability, and reliability) far more than cost. By contrast, in the

commercial base, while quality and performance

are important, products are much more costsensitive.

Thus, even in areas where similar technology

could be applied to meet both defense and civili an

needs (e.g., aviation, electronics, and land vehicles), military performance requirements often

obviated the likelihood of integrated production.

Initial Military Use

Finally, the initial development of some technologies is driven by military needs. The technologies

develop commercial appeal only later. Computers

and communications satellites are examples.

Consequently, military specifications sometimes

predate, or even constitute the basis of, civilian

specifications. This is especially the case of aviation parts and equipment. Many products sold on

the global commercial market are designed and

manufactured to U.S. military specifications and

standards—and are often so advertised.

As a further complication, combining government and private funds in new product development can lead to disputes between government

and industry over the rights to the results of research and development. Concern about potential

disputes can further isolate defense activity.

I Rationale for Integration

Key arguments for increasing CMI are listed in

table 3-3 and are detailed below.

■ Lower initial acquisition costs and development risks

to government.

● Greater access to new technologies

■ Lower life-cycle costs

■ Reduced acquisition time

■ Larger available base

● Greater U S economic competitiveness

SOURCE Off Ice of Technology Assessment 1994

Lower Initial Acquisition Costs and

Development Risks to Government

Proponents of CMI argue that purchasing commercial goods and services will reduce the government’s development risks and time, reduce

tooling and facility costs, and eliminate the expense of government oversight. Integrating the

manufacturing and maintenance processes promotes economies of scale and thus lowers costs.

Integrating R&D facilitates maximum use of

commercial products and processes and ultimately facilitates integrated manufacturing.

Greater Access to New Technologies

Increased integration would also ease the transfer

of product and process technology from commercial to defense—and vice versa. For example,

commercial advances in key technologies such as

electronic memory devices and fiber optics have

military application, while military advances in

the use of composite materials have application in

commercial aviation.

Lower Life-Cycle Costs

In addition to cutting initial acquisition costs,

CMI might also reduce the cost of operations and

maintenance. The sources of these savings include

lower costs for commercially available spare

parts, a reduced need for government inventory,

and increased competition among potential maintenance providers.

Reduced Acquisition Time

The purchase of commercial goods (whether end

items, components, or parts) and services, should
48 I Assessing the Potential for Civil-Military Integration

~ Inadequate government oversight

~ Degradation of wartime performance.

■ Negative impact on socioeconomic goals.

■ Increased foreign dependence.

● Loss of technological superiority.

● Implementation costs.

■ Job displacement.

‘Not ranked

SOURCE Off Ice of Technology Assessment, 1994

shorten the acquisition cycle, allowing for faster

acquisition in peacetime, and potentially easing

mobilization in crisis or war.

Larger Available Base

Studies by the Defense Science Board and others

have concluded that one consequence of government acquisition laws and regulations is an unwillingness on the part of some firms to do

business with the Department of Defense.7 Acquisition reform might expand both the numbers

of firms providing goods and services to the government, and the size of the potential technological and industrial base available to meet crisis or

conflict situations.

Greater U.S. Economic Competitiveness

Finally, CMI proponents argue that integration

will promote economic competitiveness. Reasons

cited include:

■

●

Reduced defense acquisition and life-cycle

costs will release resources for private or government competitiveness programs.

Resources spent on the inefficient duplication

of processes, equipment, facilities, and accounting systems may be freed for more productive uses.

■

9

m

9

9

Technology transfer will facilitate rapid commercialization of defense technologies.

Economies of scale can work in both directions.

Incorporating commercial items in defense

goods will help make otherwise nonexistent or

nascent commercial goods viable.

Employing advanced commercial technologies

in defense products could make these technologies more competitive in the global defense

market.

Risks and Costs of CMI

While there is general agreement that increased

integration of the DTIB and CTIB will have some

positive benefits, there is less agreement about the

extent of these benefits. Further, a number of concerns about the risks and the potential costs of integration have been raised. Some of these are

listed in table 3-4 and are discussed below.

Inadequate Government Oversight

Critics of increased CMI worry that the risk of

waste, fraud, and abuse will increase if laws and

regulations are eased to promote integration (e.g.,

changes in cost accounting requirements, changes

in auditing requirements, and reduced government presence in defense plants). Moreover, these

critics question whether DOD will be able to negotiate acceptable prices for goods and services

that were formerly procured under DOD cost accounting rules.

Degradation of Wartime Performance

Critics are also concerned that the use of commercial products and processes may lead to reduced

system performance and reliability. They worry

that commercial items will not be tested as rigorously or built to the tolerances and standards currently achieved by the military system.

Moreover, some contend that commercially

procured services may be less responsive and de7 see, for ~Xample, OUSD(A), Defense Science Board, Use of Comrnerciai Compcmenrs in J4ilifary Equipment (Wmhiw=ym DC: D~’paflment of Defense, June 1989), p. 1.
Chapter 3 Integrating the Technology and Industrial Base: Overview 49

pendable in wartime than dedicated government

support and maintenance personnel. There is always the risk that commercial service enterprises

will be preoccupied with other customers, have a

different political view of the ongoing conflict, or

suffer from bankruptcy or strikes and be unable to

support the military effort.8

Negative Impact on Socioeconomic Goals

Critics note that CMI proponents wish to eliminate some special contract clauses that promote

affirmative action, bolster small business, and

support other national social and economic goals.

These critics contend that DOD continues to

represent a high percentage of direct government

spending on goods and services and that special

contract clauses remain essential.

Increased Foreign Dependence

Another potential problem of increased CMI is

greater foreign dependence, since the CTIB is itself increasingly a part of the global technology

and industrial base. Such dependence could: 1)

make U.S. forces vulnerable to a foreign cutoff of

spare parts, components, etc.; 2) promote job creation abroad rather than at home; and 3) strengthen foreign commercial competitors, ultimately

jeopardizing U.S. industries and future U.S. technological leadership.

Loss of Technological Superiority

Increased reliance on commercial products and

processes could ultimately reduce the technological superiority of the U.S. military over potential

adversaries having access to much of the same

technology.

The use of commercial Global Positioning System (GPS) receivers during the Persian Gulf conTo ensure future availability, DOD has started several

initiatives aimed at developing and supporting an American

fiat-panel display industry.

flict is a case in point. The United States and its

allies were equipped with commercial GPS receivers with attenuated capabilities, as well as

more accurate military ones. Had the Iraqis had

commercial GPS receivers, they would have had

access to navigation data that played a decisive

role in the allied victory.9

Implementation Costs

Integration is not cost free. For example, reviewing, changing, or eliminating the more than

38,000 military specifications and standards

alone—a process already underway—may require substantial resources from both government

and industry. 10 Restructuring the acquisition and

oversight functions will also incur significant

front-end costs (e.g., closing facilities, moving

and reducing government workers, retraining the

acquisition workforce). Furthermore, DOD may

already be procuring some goods and services at

below commercial market prices. Reliance on the

X For a further discuf~ion of these views as they relate to commercial maintenance services, see U.S. Congress, OffIce of Technology Asses$men[, BuI/dIn,~ Future .$erur[t>, Srrafegie.$for Re.!tr14ct[4rrn<q rhe Dejen ~e Technolog-v und lnduso-iul Base, OTA-ISC-530 (Washington, DC:

U.S. Go\emment Printing Office, June 1992), pp. 130-133.

~ blnti/ Rt,[j(jrl ~c) C{jngrt, \,r: conduct ofthe Persian Gulf War, pp. T-227-T-228, April 1992, Washington DC,

I(J ofcour\e, Such ~rlo~lc reviews we essential, so in fact we are merely paying for something we have too long deferred. Indeed there now .

are fiie-j ear ret iews, but critic~ argue these are (OO often “rubber-stamps” of the current specification and or standard.
50 I Assessing the Potential for Civil-Military Integration

commercial market may therefore increase the

cost to the government of some goods and

services.

Job Displacement

Finally, increased CMI will place traditional defense firms into competition with commercial

vendors. Though it is not a foregone conclusion

that the defense firms will lose in the competition,

they will face major hurdles to become competitive, including learning commercial marketing

techniques in lieu of defense bid and proposal procedures. Further, as noted above, firms with

continuing defense business—and associated

government oversight and overhead costs—may

be noncompetitive when bidding against commercial firms unencumbered by these government

requirements.

Loss of work to commercial firms will result in

displacement of defense workers although some

defense workers are likely to find positions with

commercial companies. The magnitude of this

displacement will depend on the degree of competition in a particular product niche, the agility of

defense firms in adopting commercial practices,

and changes in government procurement policy.

CURRENT STATE OF THE DEBATE

Congress has initiated much of the recent CMI debate. In 1991, it established the Acquisition Law

Advisory Panel, which reviewed DOD acquisition laws and suggested changes that would facilitate the purchase of commercial goods.11

Congress also passed CMI measures in recent defense authorization bills:

m

●

■

The 1990 Defense Authorization Act directs

DOD to issue streamlined regulations governing the purchase of commercial products and to

design and implement a simplified uniform

contract for commercial items. 12

The 1991 Defense Authorization Act directs

DOD to determine the availability and suitability of nondevelopmental items to meet its

needs, prior to making a contract for DODunique items. 13

In a clear statement of support for CMI, the

1993 Defense Authorization Act directs DOD

to modify its acquisition policy to encourage

integration of the civilian and military industrial bases. 14

While the Bush Administration acknowledged

the importance of CMI, it was reluctant to intervene directly to support the defense industry, and

was very wary of actions that might have been interpreted as “industrial policy.” The Administration was particularly concerned that by its actions

it could in effect be picking commercial winners

and losers in a way that was contrary to the tendencies of the market.

In its 1991 industrial base report to Congress,

for example, DOD argued that “the ability of the

base to meet future DOD needs will depend in

large measure on the ability of individual companies to shift from defense to commercial production and then back again, when required.”] 5 DOD,

however, took few steps to support such flexibility.

The Clinton Administration, by contrast, appears to favor a more activist approach to CMI.

The Administration’s $21.6 billion defense reI I Some of we panel’s findings and recommendations are discussed in more detail in chapter 4.

1 J National ~fense Authorization Act for Fiscal Years 1990, P.L. No. 10 I -189, Sec. 824.

IS National Security Act for Fiscal Year 1991, P.L. No. 101-510, Sec. 814.

14 ~b]ic Law No. ]02-484, $4211, 106 Stat. 2315, 2662 (1992), enacting 10 U.S.C. Sec. 2501 (c).

15 (Jndersecretw of Defense (Acquisition), Assistant Secretaw of Defense (~oduc[ion and Logistics), Repot-r to Congress on /he Defense

lndusfrial Base, November 1991, p. ES-7.
Chapter 3 Integrating the Technology and Industrial Base: Overview 151

investment and conversion plan is focused on

commercial developments and the transfer of defense technology to the private sector via research

partnerships. 16

In an April 1993 speech in Mountain View,

California. President Clinton noted that DOD

could and should use more commercial products

to meet its needs, and argued that DOD procurement laws and regulations must be reformed to

make it possible to do so. ] 7

Similarly, Secretary of Defense William Perry

has cited defense acquisition reform as a top priority. Previously. as the Co-Chairman of the Defense Science Board Task Force on Commercial

Components, he coauthored the 1986 and 1989 reports on the use of commercial components in

military equipment. As Chair of a 1990 Carnegie

Commission study that resulted in a report entitled New Thinking and American Defense

Technology,, he argued that “efficient acquisition

of high-technology defense systems requires a

vigorous defense technology base that is strongly

tied into the large and fast-moving commercial

technology base. "

18 More recently, Secretary Perry announced his determination to attack barriers:

“contracting procedures, our military specifications, and our security procedures, . . . that keep

the defense industrial base separated from the rest

of the national base.”19

In February 1994, DOD published a white paper entitled Acquisition Reform: A Mandate for

Change, outlining its vision of future defense acquisition. This vision incorporated many elements of a CM I strategy. including increased

commercial purchases: greater use of commercial

specifications and standards; reduced administrative burdens on providers of defense goods and

services: and the adoption of some commercial

business practices by the DOD procurement bureaucracy. In early March, DOD released its first

report measuring progress in the acquisition of

commercial and nondevelopmental items.20 In

June, the Secretary of Defense issued a directive

changing the use of military specifications and

standards. 21 

Additional acquisition reform legislation was

introduced in 1993. The Federal Acquisition

Streamlining Act of 1994 (FASA) was passed as

this report went to press. The FASA incorporates

many of the acquisition law reforms proposed by

the Acquisition Law Advisory Panel. The Act

specifically y addresses the purchase of commerc ial

items and services; provides a clearer definition of

commercial items and services for use by the contracting community; eliminates the requirement

for cost and pricing data on commercial items; and

makes it more difficult for the government to demand rights in technical data for items developed

with private funds.

In addition, the Act addresses a number of other

reforms that should make it easier for commercial

firms to do business with DOD (e.g., raises the

Simplified Acquisition Threshold, reduces the

use of unique socioeconomic clauses in certain

categories of government contracts). The Act represents an important step in increasing CMI.

1 b The TRp ,$ included in thii program, w hi~h has gro~n from the original estimate of over $19 billion for defense rein~’e~tment and economic grow th initiatives (between 1993 and 1997) that President Clinton initially announced.

1 T ~: peter W’i::trlfon, “Pre\ident Plan\ Change\ in DOD Procurement Policy,” American Forces Information Service. Apr. 5. 1993.

I x ~f’l] ] Iiilll J pen} ~[ a],, ,\’e\t T}llfl~lnq utlf/A~~er/[ar~ Dejen.$e Technology] ’.” A Reporf c]ffhe Curne<qle Comml.$rlon on S~’1[’~~~’e, T~)C~~~IO~O,~II.

LJnd Gm er-nmenf (W’a\hington, DC: Carnegie Comrniwion on Science Technology and Got emrnent, August 1990), p. 14.

1‘j I<uc} RCIJI} .hlcc[ ~fr, pr~~~remcn[ Reform: Washington Technolog) Inter} icw with W’iliiam pew’,”

,. Nash lngton Technology>, N4ay 6,

I 993, pp. 9-10.

2( R, Noel lmnguemore, “hlemorandum for Deputy Secretary of Defen\e: Mea\uring DOD Progreif in Acquisition of Commercial and

olhcr N{~nde\elopr~lcnt;il ltem~.” Mar. 4, 1994.

~ I Perry, op. cit., footnote 6.
52 I Assessing the Potential for Civil-Military Integration

While most defense industry associations support legislative changes that increase the procurement of commercial goods and services, some

firms have expressed concerns about how these

changes might be implemented and whether the

changes might be unfair to firms operating under

current acquisition rules.22 Furthermore, many in

industry argue that some of the most visible recent

programs described in the new policy statements

(e.g., the Technology Reinvestment Project) will

have little impact on integrating the defense and

commercial bases at the level of the factory floor

unless administrative and regulatory acquisition

barriers are also removed.23

Nevertheless, consensus is growing among

Congress, the Executive Branch, and industry that

something must be done to promote CMI. Implementation, however, is still a matter of substantial

disagreement.

FRAMING THE ISSUE

The lack of a common framework for discussing

CMI is a problem underlying the debate. Since

CMI is such a broad and diffuse topic, people debating CMI are often addressing very different notions of integration. This situation is compounded

by a lack of good data on the current degree of

CMI or CMI trends. Until recently, DOD saw little

reason to invest time and resources to track or

study CMI. Most of the studies and commissions

cited earlier focused on other topics and address

CMI only tangentially. More recent studies—

such as those conducted by the Defense Science

Board, the Center for Strategic and International

Studies (CSIS)----found that data on CMI were

scarce. A CSIS survey of government prime contractors added some very useful information on

CMI,24 but the survey base was limited by the voluntary nature of the study.

This data situation may improve. The March

1994 DOD report on measuring progress in acquisition of commercial and other nondevelopmental items, for example, reported that 6.9

percent of the Army, Navy, and Air Force funds

examined were spent for commercial items, as

were 18.3 percent of the Defense Logistics

Agency funds examined.25

~ Data: Getting Beyond the Limitation

of Earlier Studies

Findings on CMI by earlier studies and commissions relied primarily on expert opinion and anecdotal evidence from case studies of the aerospace

and electronic industrial sectors—sectors that

have been seen as more amenable to CMI than

most others. Less attention was paid to other,

more mundane sectors, such as truck and tank

manufacturers, and shipbuilding industries that

are arguably less amenable to CMI (key case studies are listed in table 3-5).

The studies have found that the various approaches to integration, including the purchase of

commercial items for military use, integrated

manufacturing and R&D, and the adoption of

22 One expressed concern already noted is tl-ia( DO13 will initiate changes promoting the purchase of commercial items, but ~ ill ~onl]nue to

demand that defense firms labor under unique auditing rules (thus driving up the costs) while not requiring the same of new commercial entries

into the defense market.

‘~ George Leopold, “DOD Hawks Technology P1an,’’De~ense= New’s, April 12, 1993; and the Electronic Industries Association report DuulU.se—Fool’s Gold or A401her Lode, briefing at EIA 22d annual spring Technology and Budget Conference, Washington, DC, Mar. 31, ]993,

argued that “Technology is not the Problem,” Unique DOD/Govemment Procurement Policy, Practice, Culture and Politics are the Major Problem.”

24 Debra van Opstal, Integruring Ci\’iliun and Milirar)’ Technologies: An Industrial Survey (Washington, DC: Center for Strategic and International Studies, April 1993).

25 OTA did not have access to these DOD data during most of the assessment. Their existence does little to change the conclusion that data

are scarce. The reports focused on research, development, test and engineering, and procurement for high dollar value items and was further

limited to the major component level of first-tier subsystems. This is better than anything available in the past, but short of a comprehensive v iew

of the base.
Chapter 3 Integrating the Technology and Industrial Base: Overview 153

Case 1.. .

Company J Study 1AerospaceLElectronics Other

Greater Use of Commercial Products and Buying Practices

.-

MI L-VAX Raytheon DE C

~DÊ‹---- :-- -1 /:

.—— ——

CSIS, 1993 DSB -

J

.—

KC- I 35 Engines GE- CSIS /–

Frequency Agile Signal Hewlett-Packard CSIS, 1993 DSB /4

Simulator

Microwave Semiconductors

—

Hewlett-Packard CSIS -

J

Semiconductors

~;“;F--l --- :

.—— ——— — -——— -- —

Intel CSIS /

.- — ..——- ——— . ——

Machine Tools Sterling Hobe Corp CSIS /

Future Service Voice System

—-— ——–-— —

Motorola CSIS - ‘- J“

Integrated Circuits (1) 1986 DSB d —

Avionlcs — Section 800 - ‘-; d -1

Panel

GPS Ground Receiver - — “-

, OSD / - ‘-

‘Shipboard Copiers

———— —-–- ——— —-——-—– ——

1986 DSSP J

Underway Replenishment 1986 DSSP

--l

/

Winches

+———

Shielded Cable — 1986 DSSP d

Communication Satellite

— ——

‘Rand -i

Commodities C-Cap, DOD “-

‘----”” i-T ‘--

/

Non-Developmental Items — OSD d

Computers and Software (1) 1986 DSB /“ –

“--+:””--- --- ”

-

-

————

Commercial Utlllty Cargo KSG /-

/Vehicle (1)

-— — ~-—

Military Clothing KSG

-

~+-

d

250-C30R Helicopter Engine Alllson 1993 DSB J

—+— -–. ——

Government v Commercial 1 DSMC Commercial ‘ “– /

Practice Practices

Guidebook

(confmued on next page)

commercial cost accounting practices, have had they were not necessarily generalizable across the

positive results. These studies provided insights

into the barriers to integration previously discussed and policies to reduce or eliminate these

barriers. They further indicated that some activities, technologies, or industrial sectors might be

more amenable to integration than others. But, the

studies suffered from a significant drawback: they

often lacked sufficient empirical evidence to validate their conclusions. Where data were available,

entire national security budget.

There are additional problems. While identifying technologies and industrial sectors that are

amenable to CMI is useful in effectively targeting

reforms in these sectors, basing CMI analysis entirely on the most CMI-amenable industrial sectors may not help find solutions to the DTIB as a

whole. For example, while studies might help

DOD obtain 30-percent savings on the production
54 I Assessing the Potential for Civil-Military Integration

Case Company Study Aerospace 1---- Electronics Other —

Integration of Commercial and Military R&D

Lithography I Los Alamos CSIS I I I d I

I I I

Supercomputing Los Alamos I CSIS

,–-- ,

Superconductivity

—

HP, DuPont CSIS /

t

Optical Fiber Coating HP CSIS J

Specialty Metals Sandia CSIS J

Communications Satellites ~ Hughes I Beyond Spinoff 1 J ~

Modular Avionics Radar Westinghouse I EIA I / ~

Integration of Production and/or Maintenance Facilities

Avionlcs Processors IBM CSIS / 1

Fiber Optics Alcatel CSIS J I

- ——– — --+- –– ——— —

Inertial Navigation Systems I Litton rCSIS ‘

- -

”

- -

F

- - -

T

- 

~

Satellite Technologies

—-.—

Hughes CSIS d

Jet Technologies UTC ~ CSIS J

Aircraft Boeing

— CSIS 1~1 !-- ‘-

Microelectronics TRW, Motorola I CSIS

(1) Also under Integration of ProductIon and/or Maintenance Facllltles

SOURCES

CSIS Center for Strategic and International Studies, krtegratmg Cornrnercia/and Mhtary Technologies ~or Natior-ial Strength, 1991

1993 DSB Repofl of the Defense Science Board Task Force on Acqwsmon Reform

1986 DSB Report of the Defense Science Board on the Use of Commercia/ Components m Mdltar’y Equipment

SectIon 800 Panel Report of the Acqu@lon Law Advisory Panel to the Unled States Congress, Streamhrmg Defense AcquisKlon Laws January

1993

OSD Off Ice of the Secretary of Defense selected case studies.

RAND Commerclaland MLtary Commurvcaons Satellite Acqumtlon Practices, 1985

DSMC Defense Systems Management College, Commerc/a/ Practices for Defense Acqumrlon Guide Book

KSG Kennedy School of Government

Beyond Spin-off John Alic, et al , Beyond Spinoff” Md;tary and Commercla/ Techno/ogles m a Changing Wor/d, 1992

of a particular electronic component, such savings

may not be transferable to other components, to

say nothing of the entire industrial sector. Similarly, lessons learned in one sector may have little

relevance to reforms in another sector. Unfortunately, such extrapolations have been used in the

CMI debate.

OTA was unable to fully overcome the lack of

good data on CMI. OTA did, however, fill in some

gaps in case studies—using interviews (including

indepth surveys of selected industrial sectors), directed case studies (including the shipbuilding industry, flat panel displays, composite materials,

and several shorter studies), and a limited industrial sector survey (see box 4-3 in ch. 4). Further,

OTA assessed available macroeconomics data for

insights on defense activities within industrial

sectors and differences between industrial tiers.

By combining macroeconomic data with findings from case studies and interviews, OTA was
Chapter 3 Integrating the Technology and Industrial Base: Overview 155

L

OTA found the available data on CM I to be largely anecdotal and not generalizable to the entire DTIB

There are a number of alternative methods that might be used to gather information

The Utility of Case Studies

Case studies have been, and continue to be, essential to the study of CMI. Case studies can serve any

or all of three purposes

1 Cases are useful as anecdotes, to illustrate degrees or varieties of CM I or barriers to CMI,

2 Cases can provide essential Information and insights on critical firms or sectors, and

3 Randomly selected cases can be used to represent the larger population of companies, contracts, or

programs from which they were drawn,

The Utility of Macroeconomics Analyses

Case studies are very time consuming, and many must be done to provide good Insight into the base

Examination of available macroeconomic data or larger surveys are useful to providing additional CMI information The DOD or the Census Bureau could make better use of available Industrial base data and

could also conduct Industrial surveys In addition to determining the current degree of CMI, such surveys

could address the critical barriers to Integration and assess why some commercial businesses avoid defense work While surveys have the benefit of reaching an under-studied population, they 1 ) demand extensive private sector time, 2) provide far less detailed information than that obtained from case studies,

and 3) are expensive to conduct. Appendix D suggests an approach to gathering data.

OTA’s Approach

Previous case studies on CMI have served the first two purposes noted above. OTA conducted case

studies directed at the first two purposes and also conducted randomly selected industrial sector case

studies Appendix C outlines one method for picking a representative sample of industrial sectors. Box 4-2,

in chapter 4, discusses how OTA conducted its trial survey of randomly selected industrial sectors and

how it used the survey to form rough estimates of the current and potential degree of CMI,

SOURCE Off Ice of Technology Assessment, 1994

able to obtain a better understanding of the possible effects of CMI policy options. The data also

allowed OTA to make rough estimates of the current degree of CMI and the possible impact of

CMI policies on cost savings, as outlined in chapters 4, 5, and 6. Box 3-1 summarizes CMI data

collection in general and OTA’s approach in particular.

1 A Framework for Understanding CMI

The following sections lay out a framework for

understanding the complexities of CMI. First, it

details how the federal government spends money

on national defense goods and services and how

these funds flow from prime contractor to subcontractors. Tracking this disbursement flow reveals

nuances in the DTIB structure that are not evident

when one focuses solely on total DTIB spending

or on DTIB payments to prime contractors.

Second, previous studies and OTA’s own analysis indicate characteristics that make particular

defense goods and services more amenable to

CMI than others. Some goods and services appear

relatively easy to commercialize (e.g., food or

photocopying), whereas others may never have a

viable commercial market (e.g., main battle tank

final assembly or advanced armored technology).

Not surprisingly, defense goods and services

that have similar characteristics benefit from CMI

policies. OTA found that defense goods and ser-
56 I Assessing the Potential for Civil-Military Integration

vices could be comfortably divided into three

CM] policy groups:

1. those that are or could be procured commercially (many commodities, electronic subcomponents);

2. those that are noncommercial, but are or could

be sourced from highly integrated facilities (integrated circuits); and

3. those that are or must be purchased from primarily segregated facilities (submarines,

tanks).

Finally, OTA found that useful integration

might occur at three different levels—the facility,

the firm, and the industrial sector. Each of these

levels has its own peculiarities and is affected by

different sets of policy tools.

Where DTIB Money is Spent

The OTA assessment team used Department of

Commerce data and an input-output model to

trace federal government DTIB spending and to

derive spending estimates at various tiers (figure

3-1).26 The figure shows the flow of funds through

the private sector defense base and the value added

at each tier of the base.27

Of the almost $314 billion the federal government spent on national defense outlays in calendar

year 1992, about 37 percent was spent within the

federal government. Of that, an estimated $18 billion was directed at the federal portion of the

DTIB, which includes both government providers

of defense goods and services (e.g., the national

laboratories, military depots, and government arsenals) and acquisition personnel.28 Potential

CMI savings derived from government personnel

reductions will be bound by this figure.

The remaining 63 percent of the national defense budget in 1992 was spent on goods and services from the private sector. About half of this

money went to domestic prime contractors.29

In the private sector, prime contractors—-those

firms directly contracting with the government to

provide goods and services and most subject to its

rules and regulations—represent the single greatest segment of value added in the DTIB. In this

chart, however, they are not limited to the large

prime assemblers of major weapon systems usually discussed, but include all firms with direct government contracts, such as manufacturers of

government-furnished equipment (e.g., aircraft

engines), and small firms with direct service contracts to the government (e.g., a $25,000 contract

for laundry services in the Gambia). This $99 billion represents the value added by all firms having

direct government contracts for defense goods and

service. While there are many small contracts (in

1992, for example, 11.8 million of approximately

12.1 million total contracts at the first tier were

26 The total calendar yea 1$)92 spending of$313.8 billion (current dollars, here roundedto$314 billion) was estimated by the Department

of Commerce’s Bureau of Economic Analysis (BEA). The fractions spent in various tiers were estimated by OTA on the basis of round-byround analysis of BEA’s unpublished 1987 annual input-output tables, which BEA provided to OTA for this research. These tables were the

latest BEA estimates available at the “6-digit” level of detail (i.e., for 6-digit input-output account numbers, which include 541 interindustry

sectors). These estimates were found to be generally more accurate than extrapolated data from previous years. Other data came from U.S.

Department of Commerce, Economics and Statistics Administration, Bureau of Economic Analysis, National Income and Wealth Division and

Government Division, “National Income and Product Account Tables,” Survey OJ Currenr Business, August 1993, pp. 52- 119; esp. table

3. 10-National Defense Purchases on p. 76; R.E. Miller and P.D. Blair, lnpuf-OufputAnalysis: Foundations and Exienslons (Englewood Cliffs,

NJ: Prentice-Hall, Inc., 1985).

27 Value added represents the amount of money renined at each tier for providing goods and services. Thus although the prime COIltraCtOrS

received a total of $180 billion, they are estimated to have passed on about 45 percent of this to lower tiers.

28 OTA estimates that approximately 475,ooo federal employees are involved in acquisition and public sector aspects of the DTIB.

29 A~u[ $18 bil]iOn was estimated tohave been spent on imports. OTA does not have good visibility into defense imports. one deficiency Of

using an input-output model for breaking down defense spending is that the DTIB has some different constraints than commercial industry. For

example, defense imports are probably overcounted by such a model, because the model does not take into account DOD “Buy America” restrictions. Moreover, OTA was unable to determine the American content of components and subcomponents of foreign goods.
Chapter 3 Integrating the Technology and Industrial Base: Overview 157

/4,Ql,

I

I I

Payments for goods and services

purchased by Federal government for

national defense

$314 billion

$18 billion Government DTIB

I

!-+.-lmDorts $18 billion

— 1

“:”’’’””” L_____J

Value added $99 billion

Purchases

r

> Imports $6 billion

$75 billion

1

Purchases

● Imports $2.6 billion

Value added $17 billion

.Purchases ➤ Imports $1.2 billion

I

Non-DTIB government

workforce

Prime contractors

Subcontractors

n

(-J+ CIOOCIDOOUD!J 4

Subcontractors

Subcontractors

and suppliers

SOURCE Bureau of Economic Analys:s Data and Bureau of the Census CY 1992 spending by the federal government for national defense
58 I Assessing the Potential for Civil-Military Integration

More amenable Less amenable

Equivalent or nearly equivalent to commercial

G/S.

Readily customizable from commercial G/S,

Processes similar to commercial processes,

A service.

Sourced from lower tier (subcomponent,

commodity)

Economically viable volume/predictable

rates,

Commercial technology leads defense

technology.

Has no related commercial variant (esp

weapons),

—

Process IS specialized for performance or

security reasons.

—

Sourced from a higher tier, especially at the

prime integration level,

Noncommercial volume/uneven rates,

Defense technology leads commercial

technology

SOURCE Off Ice of Technology Assessment, 1994

worth less than $25,000), large contract actions

dominate monetarily, accounting for over 90 percent of the $99 billion consumed at this tier.

Beyond the first tier, there are second, third,

fourth, and lower tiers that provide goods and services to the tiers above them. Understanding the

flow of funds and the value added at these tiers can

improve CMI analysis.

For example, a transport aircraft may have special military requirements that prevent it from being produced alongside commercial jets. If one

looks only at first-tier spending, policy makers

would see little potential for CMI savings on such

a plane. The prime contractor for the aircraft, however, may contribute only 40 to 50 percent of the

actual value of the aircraft, relying on lower tier

firms for components and parts. The technologies

employed by these subcontractors may be amenable to CMI. But such firms are also more difficult

to assess than prime contractors. Indeed, at the

lowest tiers, firms may be largely integrated and

unaware that they supply a defense customer.

Amenability to CMI

Having outlined the flow of defense spending, the

next step is assessing the appropriateness of defense goods and services to CMI. The OTA assessment team used past studies, supplemented with

interview data, to develop a profile of technologies, products, and services that might be most

amenable to integration. These characteristics,

summarized in table 3-6, can influence the effectiveness of CMI policies.

The similarity of a defense good or service to a

commercial counterpart clearly eases its susceptibility for integration. The difference between the

proverbial military fruitcake and one received as a

holiday gift is negligible. Alternatively, there is

seldom any commercial demand for a large weapon system.

The potential for integration also appears to be

affected by manufacturing processes. Defense and

commercial goods sharing similar production

processes, regardless of the difference in end

product (e.g., integrated circuits), may make

integration easier than products relying on dissimilar production techniques. The security classification of certain defense manufacturing processes

may block their integration with commercial production.

Services, which involve the most flexible processes of all, appear particularly amenable to integration. But the OTA assessment team was

surprised at the degree of separation in services re-
.

Chapter 3 Integrating the Technology and Industrial Base: Overview 59

ported by participants in the OTA industry sector

survey. There should be little difference between

how a commercial painter does his actual work

and how a defense painter does hers. But service

sectors report many of the same acquisition barriers that exist in manufacturing. Services, however, account for a smaller share of both direct and

indirect purchases for national defense (see figure

3-2) than in the broader commercial sector.

The reasons for greater amenability to integration of lower tier firms over higher tier firms are

less apparent. However, the higher tier firms, especially the prime contractors dealing directly

with the government and its auditors, are subject

to the government regulations that segregate the

base and are more likely to be producing items that

are militarily unique than are lower tier firms.

Lower tier firms (subcontractors and suppliers

of subassemblies, components, parts, and basic

materials) are shielded from government regulations—although government requirements frequently flow down to them—and make products

that are often common to both defense and commercial systems. But many defense firms tend to

be prime contractors on one contract and subcontractors on another. Such firms are affected by the

government’s rules even when a particular product may be exempt from those rules. At the lower

tier levels, however, case studies and surveys indicate that firms may be naturally integrated in product development and production.

Defense goods are often produced in volumes

that have been too small to be attractive to commercial enterprises. Defense goods procured in

commercially viable numbers create opportunities for integration. Similarly, DOD’s unpredictable procurement patterns may make defense

goods and services an unattractive business.

Trends in manufacturing technology maybe moving toward greater flexibility in production volumes and rates, permitting the manufacture of low

and high volume orders on the same production

line and thus achieving economies of scale at lower production volume.

Rapid commercial developments may also provide a strong motivation for DOD to integrate

within that sector, and thus reduce self-imposed

barriers. If, however, DOD enjoys a technological

advantage in a given sector, it might want to preserve that advantage and may see little benefit in

sharing the technology with the commercial

world. One way to remain strong technologically

and maintain competitive advantage may be to exploit dual use.

CMI at Different lndustrial Levels

Integration should be analyzed not just at the facility level, but at three separate levels—the technology or industrial sector, the firm, and the facility.

Each presents its own unique set of policy challenges.

Integration at the technology or industrial sector level is characterized by the DTIB and CTIB

sharing common technologies, processes. and

specialized assets (e. g., unique test stands, wind

tunnels, and industrial research centers). An industrial sector can be said to be integrated if its defense goods or services are drawn from the same

pool of technologies, specialized assets, and processes (and, by extension, standards) as are commercial goods or services. However, while

integration at the sector level aids the development of common products, it does not assure that

defense and commercial products will be the

same, that they will be produced in the same facilities, or that they will be less expensive.

Integration at the firm level is characterized by

the sharing of corporate resources to meet both defense and commercial needs. These resources include management, workers, research centers,

equipment, stocks, and common facilities. A corporation that readily moves staff between defense

and commercial work and transfers manufacturing and product technologies back and forth can

be considered integrated at the firm level, even

though it may separate its operating divisions

along commercial and defense lines.
60 I Assessing the Potential for Civil-Military Integration

Defense final purchase

Indirect or lower tier

defense purchases

Composition of

OTA industrial survey sample

(combined direct and indirect)

Nondefense final purchase

Indirect or lower tier

nondefense purchases

● Other includes construction,

agriculture, and mining

SOURCE Department of Defense, “Figure 1 Composltlonof Defense and Non-Defense Purchases, ” Pro/ectedDefenseF’urchases DeraJby/ndustry

and State Ca/ertdar Years 1991 Through 1997, November 1991, p 4, with data from an industrial survey conducted by the Off Ice of Technology

Assessment, 1994
Chapter 3 Integrating the Technology and Industrial Base: Overview 61

What might be

Level of integration integrated

Industrial sector All activities in an industrial sector, including companies,

Industry groups,

standards bodies,

government labs, defense acquisition officials, and academia

Firm

Facility

Corporate management, divisions,

branches, and assets

of an individual company or corporation

R&D, production,

maintenance and/or

administrative processes within a single

facility.

Examples of

integration at this

level —

Use of common

technologies, processes, and specialized assets (e g ,

unique test stands,

wind tunnels, and industrial research centers) within an industrial sector.

Sharing of corporate

vision and resources,

Including management, workers, research centers, accounting and data

systems, equipment,

stocks, and facilities

Sharing of personnel,

equipment, material

and administration

within a single facility, joint defense and

commercial activity

on a production Iine,

in a work group cell,

or at an R&D lab

bench

Examples of

barriers to further

CMI

Differing commercial

and military product

and process requirements, separate

specification and

standard systems

go-it-alone attitude in

businesses or the

DOD, classification

Need to shield commercial work from

DOD oversight and

added overhead

costs, different accounting/data systems, different management and marketing environments,

classification.

Need to shield commercial work from

DOD oversight and

added overhead

costs, different accounting/data/supply

systems, military

uniqueness, use of

military specifications

and standards Iimits

on uses of government equipment,

Rationale for

further CMI

Product and process

technology transfer

reduced costs by

avoiding duplication

Increased competitiveness, leverage

Iimited R&D funds

Internal technology

transfer, maintenance

of capabilities in

commercial or defense downturns,

economies of scale

Increased long-term

stability due to diversification, capital

availability.

Source of cost savings, economies of

scale, reduction of redundancies, lower

capital investments

and overhead costs.

less worker retralning, direct process

technology transfer,

job retention

classification

SOURCE Off Ice of Technology Assessment, 1994

The third and deepest level of integration is at

the facility level. Integration at this level is characterized by the sharing of personnel, equipment,

and stocks within a single facility. In an integrated

facility, defense and commercial goods would be

manufactured side by side, with differences in

production processes and parts dictated solely by

product function. Table 3-7 illustrates some of the

difference among these three levels of integration.

I Approaches to CM]:

An Assessment Overview

As noted, defense goods and services that have

similar characteristics may benefit the most from

similar CM I policies. OTA’s analyses indicate that

integration policy options might be divided into

three broad categories. To facilitate its assessment, OTA has characterized defense goods and
62 I Assessing the Potential for Civil-Military Integration

Chapter 4 Chapter 5 Chapter 6

BUY COMMERCIAL INTEGRATED PROCESSES CONTINUED SEGREGATION

Laptops Satellites

Metals/composites P-GP S

Textiles Clothing

I

Jet e ngines

Cargo panes

General purpose vehicles

Foodstuffs Sea-lift ships

Helicopter assembly Fighter assembly

Test equipment Missile assembly

Large-caliber munitions

Heavy trucks Armored vehicles Armor plate

Surface combatants Submarine hulls

Basic services Depot maintenance Classified goods/services/materials I

Commodities

I

Jam-pro f radar/radio Nuclear weapons

Purely commercial Purely defense

—

SOURCE Off Ice of Technology Assessment, 1994

—

services accordingly, while recognizing there is ■ defense goods and services procured largely

some overlap across categories. These categories from a segregated defense base.

correspond to how defense goods and services are These categories serve as the subjects for chapters

currently procured and how they might be pro- 4, 5, and 6, respectively, of this report.

. . . -

cured in the future: Figure 3-3 suggests how some defense goods

m

m

defense goods and services bought commer- and services might be distributed across the three

cially; broad categories. The figure is intended to be

noncommercial defense goods and services illustrative rather than definitive of the types

created with integrated processes (R&D, pro- of goods and services discussed in chapters 4, 5,

duction, and maintenance); and and 6.
c

ommercial goods and services have been an essential element of defense procurement since the founding of the

Republic. Prior to World War II, the majority of nonweapon defense materiel was purchased commercially.

During the war, commercial industry often used civilian facilities

and methods for war production. The use of commercial, nonstandard products and parts, however, created logistical difficulties. After the war, the military shifted towards the

standardization of products built to military specifications and

standards. This not only served to streamline logistical support, it

also helped open DOD contracts to more bidders.

But, this approach contributed to the segregation of the defense

technology and industrial base (DTIB) from the commercial

technology and industrial base (CTIB). The segregation was exacerbated by the complex rules developed to protect tax dollars.

ensure fairness in contracting, and pursue national socioeconomic goals. The level of separation is now deemed unacceptable,

given reduced defense spending and economic change. Greater

reliance on commercial products and services and greater use of

commercial buying practices are seen as critical elements of reintegration.

This chapter analyzes policies designed to increase the use of

commercial goods and services to meet defense needs.

BACKGROUND

Over the past two decades, studies and commissions hare advocated making increased use of commercial products and practices

to meet defense needs, resulting in legislative and executive

branch efforts to promote their use.

I

I

Buying

Commercial

Goods and

Services 4

6 3
64 I Assessing the Potential for Civil-Military Integration

9 Congressional Initiatives

Legislative support for the use of commercial

products dates back at least to the Competition in

Contracting Act (CICA) of 1984.1 CICA called on

federal agencies to “promote the use of commercial products whenever possible.”2

That same year, Congress also enacted the Defense Procurement Reform Act, which mandated

that DOD use “standard or commercial parts”

when developing or acquiring defense-specific

products “whenever such use is technically acceptable and cost effective.”3

In 1986, Congress instructed DOD to redefine

its military requirements so that they could be

more easily met with nondevelopmental items

(NDIs), a category including both commercial

items and previously developed military equipment. Congress directed DOD to undertake market research to determine if available NDIs could

meet the anticipated requirements, perhaps with

modification.

In 1989, Congress directed DOD to streamline

regulations governing commercial products, rescind conflicting and inconsistent regulations,

and design and employ a simplified commercial

contract. Congress further prescribed that inspection and warranty clauses be consistent with commercial practices. 4 The fiscal year 1993 National

Defense Act called for the reduction of federal

government barriers to the use of commercial

products, processes, and standards.5

Legislative initiatives introduced in 1994 (the

Federal Acquisition Improvement Act of 1994-

House of Representatives 2238, and the Federal

Acquisition Streamlining Act—Senate 1587)

contained a number of provisions aimed at increasing the amount of commercial goods and services used by DOD. Congress passed the Federal

Acquisition Streamlining Act of 1994 (FASA),

incorporating elements of both bills, as this report

went to press.

1 DOD Programs

Since at least 1976-when the Office of Federal

Procurement Policy issued the first of a series of

memoranda governing procurement of commercial products—increasing the use of commercial

products has been a formal part of DOD policy.

Subsequently, in 1978, DOD initiated the Acquisition and Distribution of Commercial Products Program (ADCP), designed to facilitate the

acquisition of commercial products by eliminating government specifications and contract

clauses that did not reflect commercial practices.6

Other DOD efforts include making increased

purchases of commercial commodities under the

Commercial Commodity Acquisition Program.

More recently, the Defense Logistics Agency

(DLA) has moved to purchase food from local

markets and acquire commercial petroleum products, drugs, and medical instruments. Efforts are

being made to purchase commercial equipment

that is designed to meet similar defense and nondefense specifications, such as telecommunications gear, computers, light trucks, and sedans,

1 This discussion draws heavily on the report of the U.S. Department of Defense Advisory Panel on Streamlining and Codifying Acquisition

Laws (also known as the 800 Panel, hereafter called the Acquisition Law Advisory Panel), S[reumlining Defense Acqui~ifion LaHs, Reporf of

lhe Acquisition L.a}t Adt’isory Panel (o rhe United Sfules Congress, chapter 8, Streamlining Defense Acquisition Laws, January 1993.

2 ]0 u.SC$ 2310 (b)(6).

3 Acquisition Law Advis~~ pmel, op. Ci[., fwtnote 1, pp. 8-3. The Defense Procurement Reform Act of 1984 is ~blic Law No. 98-525! $

1202,98 Stat. 2588 ( 1984).

4 Acquisition Law Advisory Panel, op. cit., footnote 1.

5 ~b]ic Law 102-484, $4211, 106 Stat. 2315, 2662 ( 1992), enacling 10 U.S.C. $2501 (C).

6 W.T. Kirby, E.rpanding the Use of Commercial Products and ‘<Commercial-Style” Acquisition Techniques in Defense Procurement: A

Proposed Legal Frame\~ork in the Presidenr’s Blue Ribbon Commission on Defense Management, Finul Report: A Questfiw Excellence, appendix H, 1986.
Chapter 4 Buying Commercial Goods and Services 165

DOD currently advocates an increase in the

purchase of NDIs. Directive 5000.1, for example,

requires that the maximum practicable use shall

be made of commercial and other nondevelopmental items.

More ambitious programs for commercial

items have been proposed. Responding to a fiscal

year 1991 congressional authority to conduct pilot

programs to determine "the potential for increasing the efficiency and effectiveness of the acquisition process using standard commercial and

industrial practices,” the Clinton Administration

formally nominated seven pilot program candidates. 7 For example. DOD hopes to purchase

commercially 85 percent of the Global Positioning System guidance hardware for the Joint Direct

Attack Munitions Program.8

Among other pilot programs DOD planned to

use were: commercially derived Boeing 767 airframes as a platform for AWACS being built for

Japan and NATO; commercial engines in the C-17

and other aircraft; commercial training aircraft as

its Joint Primary Training Aircraft Trainer; and

off-the-shelf computers in the Fire Support Combined Arms Tactical Trainer.9

Secretary of Defense William Perry’s June

1994 memorandum directing DOD to implement

changes in the use of military specifications and

standards is the most significant action taken to

date.10 The memorandum included provisions

that will positively affect the ability to purchase

commercial items. These will be discussed later in

this chapter.

Commercial airframes have been used for AWACS,

transports, tankers and surveillance aircraft.

To date, however, in the face of persistent obstacles to commercial purchasing, these executive

and legislative branch efforts have had only modest success in increasing commercialization.

FASA and Mr. Perry’s directive can both provide

significant support for civil-military integration

(CMI).

While purchase of commercial products and

services for the bulk of the country’s defense

needs appears to be the simplest, most straightforward way to integrate the commercial and defense

base, concerns over accountability of public funds

have inhibited the adoption of this approach. A

further hindrance to integration is the fact that

most major weapon systems—such as battle

tanks, fighter jets, and submarines—and many of

T I ~ usc z430 $809 Major ~>fen~e Acquisi(ic)n Pilot Program. The legislative authority for the original six pilot programs te~inated

September 30, I 99;:

x John Boatman, “Conm~erclal Bu} \ Key to Acquisition Reform,” Jane’s Defence Weekl}. Nov. 6, 1993, p. 14. The Joint Direct-Attack

Munition i$ a new program :iimed at developing a guided glide bomb expected to arm most U.S. bombers, fighters, and other aircraft. The competitive first pha~e of engineering and mimufacturing development has been awarded by the U.S. Air Force to Martin Marietta and McDonnell

Douglas Aerospace,

9 Department of Dcfen\e, Acqui,\i/i<m Refi)rm:.4 Mandarefor Change, Feb. 9, 1994, p. 15. The Federal Acquisition Streamlining Act of

1994 authorized the Secreto~ of Defense 10 &signare five acquisition programs for participation in the pilot acquisition program: the Fire Support Combined Arnl\ Tactical Truirmr, the Joint Direct Attack Munition, the Joint Primary Aircraft Training System, the Commercial-Derivative

Aircraft, and the Con~mercial-Deri\ atl~ e Engine.

I () Secretary, of ~fense Will ianl .I, perry, ,werl{>run[/um@ ,%cretaries of (he Milirar> Departments, Subject: Specifications ~ Standards: A

,VewS W’a} of [X)(nq L’u\[ne\\, June 29. 1994.
66 I Assessing the Potential for Civil-Military Integration

the underlying components, subsystems, and services have no commercial market. Therefore, we

can expect a separation of some portion of the base

to persist. But even here, segregation can be ameliorated if defense purchasing expands into areas

where qualified commercial alternatives exist.

CURRENT AND POTENTIAL USE OF

COMMERCIAL GOODS AND SERVICES

OTA obtained some unofficial estimates of the

amount of nondevelopmental item and commercial item procurement from the Army, Air Force,

and DLA, but was unable, until very late in this assessment, to obtain an official estimate of the total

amount of commercial items currently purchased

by the government or by defense contractors for

use in defense systems. Indeed, prior to April

1993, when the Services were directed by the Secretary of Defense to provide information on commercial purchases, they had no compelling reason

for gathering such information and no mechanism

for gathering it.

The Army, early in the assessment, provided

OTA an unofficial estimate that about 45 percent

of its procurement dollars are spent on NDIs,

many of which are commercial or have high commercial content, e.g., bulldozers and tactical

trucks. ’2 Senior Air Force personnel estimated

that some 10 to 15 percent of current Air Force

procurement is commercial.

Better official estimates became available in

March 1994. ’3 DOD reported that 6.9 percent of

the funds spent on “high dollar value items” (further limited to “major component level of first tier

subsystems”), were spent on commercial items.

The DLA also estimated that 18,3 percent of its

spending went for commercial items.

Distinguishing commercial from noncommercial NDIs has been particularly difficult, as some

commercial NDIs are produced to military specifications and standards, e.g., aviation parts.

While direct DOD commercial procurements

appear heavily concentrated in the Operations and

Maintenance (O&M) account, which provides for

much of the day-to-day needs of a military—

housing, food, clothing, fuel, general maintenance, and office supplies-commercial defense

procurement is spread across the procurement

spectrum, particularly in components, parts, and

services purchased by defense contractors. This

holds true even for militarily unique systems. (See

box 4- 1.)

I OTA Estimates

A better understanding of the existing level of integration is essential to policy development. But

previous surveys, although useful, examined only

portions of the DTIB. Case studies were even

more limited. Data from DOD, even in its recent

survey, were also selective.

In the absence of good data on the current use of

commercial goods and services, OTA developed

and tested a survey method for gathering data and

making these estimates. The resulting trial survey

provided estimates of the current and potential national defense use of commercial goods and services, the levels of process integration, and the

size of the segregated base. Because of the limited

nature of the trial, these estimates should be

treated with caution. They should be viewed as

indicators of general trends, useful for guiding

analysis. They should not be construed as definitive answers. The estimates have been

compared with the results of other, more targeted,

I I DOD ~eP~ed]y s~n[ $32 bi]]ion on NDIs in fiscal year ] 993. However. [he definitions and rneawrcment system u\ed In thi S tally repo~-

edly do “not take into account the use of commercial items and ND1 in support of major systems, such as wbmw-ine~ and bombers. That is, DOD

figures look only at direct purchases while ignoring the complexities of the lowrer tiers. DOD hopes next year to de~ elop a procedure to [ake a

closer look at commercial support itcms.” (Anon.), “Going Commercial,” Dej2n.se D[lil~, Dec. 13, 1993, p. 369.

I ~ Inten iew, w i[h tie Senior Acquisition Executive, Army Materiel conll]l~d.

I ~ R NMI 1.ongueI1lare, ~incipal D~puty. Under secretary of Defense (Acquisition and Technology), Mc,t?lc)rull(fl<nlji)r /~c/)Mf}’ .kcrerr} of

[left’n.r(-S14bjt’[t: ,~e(~.vur[ng DOD Pro,qre.s.s in Acquisition of Cornmerciul und ,V{)rl(it’\t’lol)rtltrllui Items, Mar. 4, 1994.
Chapter 4 Buying Commercial Goods and Services 167

The Advanced Medium-Range Air-to-Air Missile or AMRAAM (AIM-120A), was designed to replace the

AI M-7 Sparrow as the Navy’s and Air Force’s medium-range air-to-air missile, Its advantages over the Sparrow include greater speed, Increased range, greater maneuverability, all-aspect look-down-shoot-down capability greater resistance to electronic countermeasures, a terminal seeker, and better maintainability and

reliability The AMRAAM program Includes the missile, rail launchers, aircraft Interfaces, support equipment, and aircraft modifications for testing. 1 The Hughes Aircraft Co. was awarded the full-scale development contract in 1981 and began low-rate initial production in 1987 The Raytheon Co. was designated a

second-source manufacturer

The AMRAAM Incorporates high technology that is military specific.2 The missile does not Incorporate

any major commercial components, and it has few identifiable subcomponents and specified materials that

are nonmilitary But a 1990 Institute for Defense Analyses (IDA) study found that foreign sourcing in the

AMRAAM Increased at the more difficult to track fourth and lower supplier tiers. While IDA lacked the resources to do a complete survey, it IS reasonable to assume that the constraints on commercial items were

similarly loosened at these levels

For the life of this missile, it IS unlikely that many components will be procured commercially But there

are “value engineering” projects ongoing to Incorporate some commercial components. It is too early to

forecast the results Subcomponents, such as generic semiconductors, wires, connectors, fasteners and

basic materials, might be bought off-the-shelf. For example, IDA identified numerous electronic subcomponents as commercial in origin, though they were tested to meet military standards.3

The potential savings for Increased commercial procurement at the lower hers (tier 3 and below), however, appear to be a very small fraction of program costs, as these tiers—in the overall base—receive less

than 10 percent of total DTIB spending. (See chapter 3 ) However, while the monetary savings might not be

great the potential exists for Increased access to technology that might enhance system performance and

indeed preserve a viable defense base, But the incorporation of commercial components raises Iogistics

concerns A recent Air Force study recommended adopting a modular approach to systems design that

might make it easier to use commercial components as long as they contain standard interfaces 4

‘ U S Government Accounting Off Ice “Mlsslle Development Advanced Medium Range Alr-to-Alr Mlwle (AM RAAM) Cert,flcatlon

Issues GAO-NSIAD-86-124BR July 1986 p 6

2 This box IS the first of a series of three that briefly discuss the AMRAAM technology and industrial base as t relates fo the poIIcy

Issues addressed m chapters 4, 5, and 6

3 See Erland H Heglnbotham el al Dependence of(./ .S Defense Systems on Foreign Technologies, IDA Paper P-2326 lnstltute

for Defense Analyss December 1990, pp B-III-7 and B-III-1O

4 U S A r corce Joint Command Comrnercla/ Ofl- The-She/f (COTS) Supportablhty Working Group (CSWG) Final Report June

1991

SOURCE Off Ice of Technology Assessment, 1994

.-

surveys and case studies, and more recently with fense is estimated to be spent on commercial

the available DOD data. Box 4-2 outlines how the goods and services. Note that this estimate inOTA survey was conducted. eludes the commercial purchases by defense conFigure 4-1, on page 8, shows OTA’s estimates tractors and subcontractors of components, parts.

of current and potential spending on commercial and services, as well as direct government purgoods and services. About 15 percent of the value chases. Figure 4-1 presents OTA’s estimate of a

added in the private sector portion for national de- potential tripling of the value added directed to-
68 I Assessing the Potential for Civil-Military Integration

OTA’s estimates of current and potential commercial purchases, integration of processes, and levels of

segregation in the base are presented in a series of pie charts depicting the portion of the private sector

DTIB that might be affected by the policies discussed in the relevant chapter.1 These estimates also serve

as a guide in discussing the possible range of CM I cost savings associated with proposed policy changes,

OTA’s estimates of DTIB integration were derived from an informal survey of industrial sectors randomly

selected from 541 sectors that sell some national security goods and services. The 20 industrial sectors

were selected according to their total value added to national security purchases of goods and services.

Because of the method used to select the sectors (selection, with replacement) three of the sectors were

selected twice. One was discarded because of a data error. The value added by these sectors accounted

for over 40 percent of national security spending in 1992.

OTA interviewed representatives in each sector to learn about the amount of current integration in their

respective sectors, the barriers to integration, and their views of the possible impact of selected Iegislative

reform on possible Integration in this sector. The data from the interviews were then weighted and merged

to form the estimates presented in each chapter The data were also checked against data from previous

case studies, surveys, and Bureau of the Census information.

In analyzing DTIB data, OTA focused on “value added, ” instead of more easily obtained ‘(gross sales”

figures. Sales data incorrectly attribute the entire value of a product to the industry from which it was purchased, thus Ignoring the value of components, parts, services, etc. that came from other industrial sectors. Moreover, the use of gross sales figures would significantly double-count defense spending.

Whale OTA lacked the resources necessary to conduct a full-scale, formal CMI survey, this trial can

serve as a guide as to how a more comprehensive assessment of CM I might be approached. Appendices

C and D provide a more detailed discussion of methodology relevant to data gathering.

10TA ~a~ IImlted ,n Its ,nput.output analysls to the prwate portion of the DTIB Although this PortIon Is by far the most s19nlflcant,

future estimates should mcludethepublic portion of the DTIB Bydeflmtlon, the publlc porhonofthe DTIB IS segregated from the CTIB

at the facll!ty level

--

ward commercial goods and services if the United

States were to substantially alter its acquisition

policies.

It is this incremental portion of DTIB spending

that is most affected by the policies discussed in

this chapter, and from which most of the savings

and other benefits that accrue from increasing

commercial purchases will come.

Some major end-items, such as aircraft engines, transport ships, and transport aircraft,

might be purchased commercially—some of

these were included in OTA’s survey. But the largest near-term gains in commercial procurement

would probably be derived from purchase of components, commodities, and services from the second and lower tiers. 14

POLICY OPTIONS TO INCREASE

COMMERCIAL PURCHASES

Previous studies have identified significant barriers to the purchase of commercial goods and services. These barriers were mentioned repeatedly

to OTA during the course of this assessment. Bar1~ Since s~nding in tie lower tiers and for direct services totaled about 56 percent of private sector total DTIB spending in I W2, the rolJghly

45 percent estimated increase is possible, but must include a significant portion of prime contracts, too.
Chapter 4 Buying Commercial Goods and Services 69

SELECTED INDUSTRIAL SECTORS

Aircraft

Aircraft & missile engines & parts (1)

Aircraft & missile engines & parts (2)

Guided missiles and space vehicles (1)

Guided missiles and space vehicles (2)

Mgmt. consulting services; testing & research labs

Engineering, architectural, & surveying services

Communications; except radio and TV

Automotive rental and leasing; without drivers

Real estate

Personnel supply services

Other business services

Ammunition; except for small arms; n.e.c.

Royalties

Blast furnaces and steel mills

Mechanical measuring devices (1)

Mechanical measuring devices (2)

Industrial organic chemicals

Small arms ammunition

Engine electrical equipment

1 ( 1 I t

I I I !

1 I I I

1 1 I 1

}

A I I i I

!

I

1 , h

k+

I /

E==!

II - 541 total sectors in

increasing 0/0 value added I

k‘ - 7 -1 00/0\-

/‘

/

0 200 400 J

b___J——/ i 1 ( I I

o 1 2 3 4 5 6

Percent value added

SOURCE Off Ice of Technology Assessment, 1994

riers that appear to have the greatest impact are

listed in table 4-1.

If the percentage of goods and services commercially purchased is to be significantly increased, DOD must adopt a number of acquisition

policy changes to lower these barriers.

I Definitions of Commercial

Goods and Services

There has been no generally accepted definition of

commercial goods and services. Instead, DOD has

defined commercial goods and services in a variety of ways. Critics charge that the inconsistent

and largely inadequate definitions of commercial

items and services have been an important element of the debate over defense acquisition

reform.

The Market’s Definition

A commercial good or service, according to the

market, is an item or service that is legally for sale

(e.g., it is not a prohibited drug or stolen merchandise). The commercial market contains a wide variety of these products and services: some are

expensive and one of a kind (Trump Towers), others are inexpensive and mass produced (Barbie

dolls). Similar products can vary in quality and

price. Consumers base their choices on whether

they need the product (a new car) and whether it

meets their requirements (high gas mileage or

high acceleration). They also make trade-offs between price and quality. Sellers tout their products

with messages that appeal to a combination of

characteristics designed to make them desirable.

In the give and take of the marketplace, sellers and
70 I Assessing the Potential for Civil-Military Integration

Commercial buy

‘ \ \

\

Commercial buy

Current Potential

SOURCE Industrial survey conducted by the Off Ice of Technology Assessment, 1994

buyers have various degrees of power to influence

the transactions. Prices for the same or similar

products can vary. Donald Trump can specify his

requirements—including, say, marble in the restrooms—and negotiate with the builders to lower

their price. Consumers can buy their Barbies at a

discount store-or quit buying them and move on

to another product,

Quality cannot be assumed; some products are

shoddy. But some companies focus on developing

and advertising quality goods. Voluntary boards

set standards for specific products. Independent

testing agencies, such as Underwriters Laboratories, test products. The government mandates

minimum safety standards on many products.

Consumers interested in quality can look for products that have been independently tested, or they

can test the products themselves before making a

purchase.

The give and take of the commercial market assures some degree of quality control (assuming

consumers want the best product) and cost regulation (high prices associated with high profits can

attract other, lower price sellers into the market).

The government hopes to take advantage of these

market forces by buying commercial goods and

services to help set price and quality in many defense areas. But there are limitations to this tactic.

While the private purchaser risks his/her own

money, the government purchaser uses public

funds and bears responsibility for those funds.

Importance of a Government Definition

Setting a definition of a commercial good or service for the government is thus not simply an academic exercise. Items meeting the “definition” of

commercial will be much easier to obtain under

most acquisition reform proposals. As defense

R&D funding decreases, DOD access to the fruits

of commercial R&D will become even more important. DOD is currently attempting to identify

defense-related technologies where the commercial sector leads. Without changes in acquisition

policy that encourage commercial purchases,

however, DOD may be forced to spend its limited

resources to duplicate private sector R&D, and

continue to develop separately technologies that

are already commercially available. For example,

one defense contractor interviewed by OTA

claimed the firm was precluded from buying electronic components from a U.S. manufacturer for

the valid business reason that the firm refused to

comply with DOD cost and pricing requirements.
Chapter 4 Buying Commercial Goods and Services 71

As a result, the contractor was ultimately compelled to purchase less capable, but adequate, Japanese components.

The choice of definition will limit the impact of

reform policies dealing with commercial items

and services. A definition that is too narrow may

result in policies that fail to fully capture the potential savings associated with increased commercial procurement. It may limit commercial

purchases to everyday items, such as food and motor oil, while bypassing more sophisticated product areas, such as electronics. Access to rapidly

developing commercial technologies may be the

most important benefit of commercial purchases,

outweighing the cost savings of buying consumables or commodities commercially.

Conversely, a definition that is too broad may

promote policies that apply commercial buying

practices to goods and services that have no viable

market other than DOD, and, therefore, are not

commercial. Without a viable commercial market, DOD may have difficulty assessing whether it

is paying a fair price for an item.

Government Definitions of a

Commercial Item or Good

Several alternative definitions for commercial

items have been proposed. The 1989 edition of

The DOD Dictionary of Military and Associated

Terms defines commercial items as:

. . . articles of supply readily available from established commercial distribution sources,

which the Department of Defense inventory

managers have designated to be obtained directly or indirectly from such sources.

This definition tightly limits the range of goods

deemed commercial by opening the process

only to those goods supplied by established and

designated sources.

● Government cost-accounting requirements

~ Procurement process, culture, and skills

● Citation of military specifications and standards.

■ Rights in technical data

● Unique contract requirements.

———

SOURCE Off Ice of Technology Assessment, 1994

The Acquisition Law Advisory Panel proposed

a much more expansive definition (see box 4-3),

one broad enough to permit the purchase of: 1)

new technology, 2) items modified for DOD,3)

commercial items not yet available to the public,

and 4) items with a limited commercial market.

The definition of commercial items adopted by

Congress in the Federal Acquisition Streamlining

Act of 1994 (FASA) draws on the Advisory Panel’s definition. The new definition appears broad

enough to allow for the acquisition of new

technology if it evolves from an item of the type

generally used by the general public, but is available “through advances in technology or performance and that is not yet available in the

commercial marketplace, but will be available. . .

in time to satisfy the delivery requirements under

a Federal Government solution.”] 5

The conference report notes the intent to ensure

that commercial products incorporating technological advances are included, while at the same

time ensuring that there are sufficient commercial

marketplace opportunities to provide for measuring price and product quality.

The Advisory Panel definition was even more

broad and might be more difficult to implement.

Grey areas would exist for items supposedly developed for the commercial market, but without a

market yet, or for items with relatively low comi~ Federa] Acqui Jltion Sweanl]ining Act of 1994, Section 8W1. (a) Definition, (B).
72 I Assessing the Potential for Civil-Military Integration

“(A) Property, other than real property, which (i) is sold or Iicensed to the general public for other than

Government purposes, (II) has not been sold or licensed to the general public, but is developed or IS being

developed primarily for use for other than Government purposes; or (iii) IS comprised of a combination of

commercial items, or of services and commercial items, of the type customarily combined and sold in combination to the general public.

(B) The term ‘commercial item’ also includes services used to support items described in subparagraph (A), such as Installation, maintenance, repair and training services, whether such services are procured with the commercial item or under a separate contract; provided such services are or will be offered

contemporaneously to the general public under similar terms and conditions and the Government and

commercial services are or will be provided by the same work force, plant or equipment,

(C) With respect to a specific solicitation, an item meeting the criteria set forth in subparagraphs (A) or

(B) if unmodified will be deemed to be a commercial item when modified for sale to the Government if the

modifications required to meet Government requirements (i) are modifications of the type customarily provided in the commercial marketplace or (ii) would not significantly alter the inherent nongovernmental function or purpose of the item in order to meet the requirements or specifications of the procuring agency;

(D) An item meeting the criteria set forth in subparagraphs (A), (B), or (C) need not be deemed other

than ‘commercial’ merely because sales of such item to the general public for other than governmental use

are a small portion of total sales of that item, and

(E) An item may be considered to meet the criteria in subparagraph (A) even though it is produced in

response to a Government drawing or specification; provided, that the item IS purchased from a company

or business unit which ordinarily uses customer drawings or specifications to produce similar items for the

general public using the same work force, pIant, or equipment. ”

SOURCE U S Department of Defense Advmory Panel on Streamlmmg and Cod@ngAcqumtlon Laws (also known as the 800 Panel,

hereafter called the Acquwt!on Law Adwsory Panel), Sfreamhningf3ef ense Acqu/smon Laws, Report of the AcquIs/ffon Law Advisory

Panel 10 the Urvted States Congress, Chapter 8, Streamlmmg Defense Acqum!lon Laws, January 1993, pp 8-17 and 8-18

—

mercial demand,16 where market-based pricing Definitions of a Commercial Service

and competitive innovation might not exist. Yet Services account for about one-third of total dethe Panel did not intend that its definition bear the

entire weight of determining when commercial

contracting should be applied-other factors

would be considered. The FASA definition

appears broad enough to incorporate more new

technology. But using a broad definition of commercial items will require greater flexibility in

purchasing rules, involving the delegation of authority in making procurement decisions. Absent

such changes, a broad definition may not be helpful.

fense spending (see figure 3-2 in chapter 3), and

represented over 30 percent of the direct and indirect purchases for national defense in OTA’s survey of industrial sectors, including: engineering,

architectural, and surveying services; personnel

supply services; and other business services.

The Advisory Panel decided not to recommend

amendments to current law addressing commercial services because it could not identify any legal

16 For examp]e, subparagraph (D) of tie Pane] definition would alfo}+’ vehicles such as the High Mobility Multipurpose wheeled vehicle

and similar systems sold only in small quantities to the public to be considered “commercial items” for acquisition purposes, but it would not

require them to be deemed commercial items.
Chapter 4 Buying Commercial Goods and Services 73

impediment to commercial service contracting

other than the Service Contract Act.17 The Panel

reported its conclusion that firms providing services to the government generally were not as

constrained by existing acquisition laws as were

firms providing manufactured products.18

The Advisory Panel, however, concluded that

the services used to support commercial goods

sold to the government should be considered commercial, provided that such services are, or will

be, offered to the general public under comparable

conditions and are, or will be, provided by the

same workforce, plant, and equipment. FASA includes “installation services, maintenance services, repair services, training services, and other

services if such services are procured for support”

of a commercial item defined in the bill. 19 Like the

Panel, the congressional provisions stipulated that

such services had to be offered to the public and

employ the same workforce.

But Congress went further and included services offered and sold competitively in substantial

quantities, in the commercial marketplace based

on established catalogue prices for specific tasks

performed and under standard commercial terms

and conditions.20

While the negative effect of current acquisition

laws and regulations are less evident than are the

arguments concerning manufacturing, there is

some evidence that firms providing services to

DOD face acquisition barriers that raise costs and

discourage some firms from working with DOD.

OTA found, for example, that although service

activities appear more amenable to integration

than manufacturing activities, many of the service

firms interviewed report that they currently face

special government cost-accounting requirements, audits, and special contract clauses.

While firms providing services on a time-andmaterial, commercial-style contract would still

need to provide an accounting for reimbursement,

OTA concluded that integration might be facilitated by a broader definition of commercial

services.

The existence of a commercial market from

which the government can obtain pricing information—thus avoiding the need to collect cost data

separately—is the common thread in the definitions of both commercial items and services offered here.21

Even with acceptable definitions of commercial goods and services, however, significant barriers to exploiting commercial products remain.

The more salient policy changes that might address some of these barriers follow. These include

measures designed to ensure that commercial

goods and services reflect true market prices, meet

military quality requirements, and will be available in crisis and over the long term.

1 Government Cost-Accounting

Requirements

Government cost-accounting requirements have

been cited repeatedly as a major barrier to expanded commercial procurement. The Acquisition

Law Advisory Panel, for example, noted that:

. . . one of the most expensive and disruptive

procurement requirements involves mandatory

adherence to cost principles and accounting

1741 U.S.C. $~ 35 I -35g. The Act raises the minimum wage in the se~lce industry.

,.

18 me ~pa~ment of ~fense Acquisition Law Advisory Pane], .$treum]inin~ DefenseAcqui,Tirion /A\$%.S, L’.lef’ufiitc .$ummur>%.” Report <)f f}l(’

DOD Acqur.r][lon Law Ad\i.rory Panel, Defense Systems Management College, March 1993, p. 15.

19 Federa] Acqui$i[ion s~eam]ining Act of 1994, Section 8001, (a) Definitions, (E).

20 I bid., (F).

2 I DOD accounting ~fconlmercla] ~oo~~ and ~er~lce~ is further ~~nfused by the use of [he term ND]. officiall~. NDI\ inc]ude commercia]

goods as a subset, but they are often referred to as separate entities. Formally separating the two might facilitate future discussions of NDls and

commercial good~ and serv icej.
74 I Assessing the Potential for Civil-Military Integration

Special cost and pricing requirements limit the number of enterprises willing to do business with DOD.

An example is the General Services Administration’s (GSA) recurring problem with major computer software vendors, Last year, a collection of vendors, including some of largest and most popular—Microsoft,

Lotus, and Borland—refused to give GSA all the information it requested as a condition of being listed on

the GSA Multiple Award Schedule The schedule allows government officials to procure small quantities of

commercial items at the lowest possible price, while avoiding the paperwork and delay of competitive bids,

The vendors felt that GSA requests for Information were unreasonable, arguing that they did not collect

such information or supply it to other customers. Moreover, if mistakes were made in the information presented to GSA, company officials could be held criminally Iiable--a risk they never faced in commercial

transactions. Eventually, however, the boycott crumbled as competitive pressures in this annual $100 milIion market pushed companies to accept GSA conditions.1 Whether this would have occurred in the face of

a more robust commercial market is not clear.

Similarly, to avoid governmental Intrusions into its bookkeeping, one of the main domestic suppliers of

canned tuna wiII not sell directly to DOD. Instead, it has established a distributor for military sales, whose

books are open to the government 2 The result, however, IS that DOD buys its tuna at the added cost involved in having a middleman,

1 see John Burgess, “software Firms Turn on Each Other as Boycott of GSA Unravels, ” The wash~ngton post, JUIY 1019931 PP

F1 -2

Zlntewlew With Defense Personnel Support Center staff

SOURCE Office of Technology Assessment, 1994

standards enumerated in statute, in the FAR

(Federal Acquisition Regulations), and by the

Cost Accounting Standards Board (CASB).22

The 1993 Defense Science Board Task Force on

Defense Acquisition Reform called the current

“cost-based contracting” system, with its unique

cost accounting. the single most intrusive element

of the process.

23 (See box 4-4.)

Cost accounting affects not only prime contractors. Cost and pricing data requirements flow

down from defense prime contractors to their subcontractors, extending the cost accounting barrier

to the lower tiers—thereby limiting potential suppliers.

The Truth-in-Negotiations Act (TINA), which

requires contractors to provide cost and pricing

data to demonstrate that their prices are fair and

reasonable, is cited as a particular problem, Although TINA specifically exempts commercial

items from its provisions, the past inadequacy of

the definition of commercial item has meant that,

in practical terms, companies wishing to sell to the

government are often required to provide cost and

pricing data.

Commercial firms producing hundreds of

thousands of units per year—many of them tailored to meet individual orders--do not routinely

collect cost data by individual contract covering

an individual item in the manner required by the

government. Instead, they examine costs by product line or manufacturing unit. Hence, the detailed

cost information required by the DOD program

22 Acquisition Law Ad\isory Panel, op. cit., footnote 1, pp. 13-14.

23 Office of the Under Secretary of Defense for Acquisition, Report of the Defense Science Board Task Force on Acquisition Reform, July

1993, p. 4.
Chapter 4 Buying Commercial Goods and Services 75

office may simply not be available from a commercial accounting system. Further, even if the information were available, companies may be

unwilling to accept the inherent risk of either civil

or criminal penalties possible as a result of simple

errors in such data. The costs of installing a data

management system that tracks such information

can be prohibitive. OTA ran across several

instances in which firms refused to sell to the government because of such requirements.

The government’s “most favored customer”

provision. requiring the company to offer the government the lowest price paid by any commercial

customer, means that all invoices must be checked

in order to document the lowest price. In many

cases, because of promotional sales, the company

may not know the lowest selling price.

The negative effects of such requirements are

illustrated in the convoluted purchase of several

thousand commercial Global Positioning System

(GPS) receivers-cited in box 4-6 as a commercial technological success—in the Persian Gulf

War. Faced with an immediate military need, the

Army waived all military technical requirements

and specifications related to the purchase of commercial GPS receivers. But no responsible procurement official could be found to waive the

requirement that the company certify that the government was being offered the lowest available

price. Nor would any company official so certify—and risk a felony charge—since the seller

could not be sure that this widely sold item was

not being offered somewhere at a lower price. In

the end, the Japanese government purchased the

receivers without a price certification and donated

them to the U.S. Army, subsequently crediting the

purchase against the Japanese financial contribution to Desert Storm.24

In the current government contracting environment, the disincentives associated with collecting

unnecessary cost and pricing data (e.g.. higher

costs to the government, reduction of potential

suppliers) have not been apparent to government

contracting personnel, while the costs of not collecting such information (e.g.. potential over-billing, second guessing by others) are all too

apparent. Therefore, such data are often required.

even in procurements judged to be competitive .25

While the Acquisition Law Advisory Panel acknowledged a need for a “uniform, specialized accounting system which protects the government

from the imposition of unreasonable charges” in

the case of “cost plus” or complex incentive contracts, it concluded that applying the same requirements in instances where market information is

available incurs unnecessary additional costs and

may lead firms to refuse to sell to the government.

The results are separation of defense and commercial activities and avoidance of government work.

A Center for Strategic and International Studies

(CSIS) survey of 206 firms that sell to the government supported these observations. Half of the respondents had established a separate data

collection system to provide cost and pricing data.

Some 32 percent separated their administration in

order to ease reporting requirements.26 The cost of

this separation is passed on to the government in

higher prices and increased overhead charges.

24 U.S. Department of Defen\e, Acquisition Law Advisory Panel, Execuri\e Summur}, op. ci[., footnote 18, p. 5.

25 The Aero\pace lndu~trief Association reported that a survey of 40 top aerospace contractors estimated that the firms spent appro~imately

$ZSO Illl]liou ~ear supplying ~uch data in competitive procurements.

2(’ Debra vm Op\tal, /nregraring C~\//[an and A4i/itury Technologies: An lndu.stry Sur\e) (1$’a\hington, DC: The Center for Siratcgic and

Intcmational Studies, April 1993), Twenty firms separated administration only, three \epar-ated R&D as well, nine sepfiratcd production and

admm i~tratlon, tind 34 \eparated R&D, production, and administration. Although these firms were not random] y wlected, and therefore the

data cannot be generalized to the broader base, they were principally defense manufacturing firms and repre~ent about 13 pcrccnt of the totul

DOD DTIB \pcndlng. OTA”\ own interviews found instances of both separated accounting and of refusal to sell to the go\ emmcnt,
76 I Assessing the Potential for Civil-Military Integration

Eliminate Certain Cost Accounting

and Pricing Requirements

The elimination of special government cost accounting requirements for commercial goods and

services is the change in policy most often suggested for lifting this barrier. This would allow

market pressures to provide cost control.

The Acquisition Law Advisory Panel, among

others, recommended that the threshold for cost

and pricing data requirements be stabilized at

$500,000. DOD not only concurred with the Panel

recommendations, but has also recommended

broadening the exemption to include “commercial products and leading edge commercial

technology.” 27 A $500,000 threshold affects more

than 98 percent of DOD contract actions, reducing

government oversight costs. The $500,000

threshold was incorporated in FASA.

Other recommended changes include extending the exemption for adequate price competition

in TINA to goods purchased from a business that

sells the same or similar items commercially, using the same or similar production processes. Exempting contract modifications to those contracts

awarded under the expanded definition of adequate price competition or under catalog or market

pricing has also been recommended. Such provisions reduce costs for many commodities, reduce

government oversight requirements, and ultimately produce savings through elimination of

oversight personnel. These provisions were included in FASA.

Many of the benefits of provisions for exemptions have been thwarted in the past by either the

failure to use them, or the fact that the contracting

officers have had the discretion to ask for cost and

pricing data on any contract above $25,000. Further, critics noted that the attempt to limit the requirement for cost and pricing data on commercial

items (in DFARs subpart 211) was rarely used in

its first 18 months and is limited by the lack of a

consistent definition of commercial items.

Again, definitions are important. The more

constraints included in the definition, the more

likely that a particular good or service falling under that definition will have a large enough market

to ensure competitive market pricing. For example, if the criterion for a commercial good is that

there must be a minimum number of commercial

vendors and that the defense purchase would

constitute a small percentage of total product

sales, then DOD could be reasonably assured of

obtaining a true market price. But these conditions

will be more difficult with some products, particularly those that are new and have yet to establish a

significant market.

Commercial buyers deal with this problem every day. For example, there are many goods and

services available only from a limited number of

vendors. Examples include commercial aircraft,

power generation equipment, and heavy construction equipment. Competition is nonetheless fierce

in these areas.

Similarly, commercial customers of one-of-akind goods and services avoid price gouging

through bargaining, based on an understanding of

relative market values. Part of bargaining is a

readiness to forego certain purchases if the proposed price exceeds estimated value.

Estimates of the value of a commercial good or

service that does not yet have competitive pricing

are made using standard price analysis methods.

This method is already used for some federal procurements under the FAR to provide DOD with

the necessary information to be a smart buyer.28

A problem remains. Eliminating cost accounting requirements for some items may place defense contractors—whose products include a mix

27 U.S. Dep~ment of Defense, Office of the Assistant Secretary of Defense (Public Affairs), News Release, DOD’~ Acquisition Rt)fbrm

Recommendations to 800 Punel Reporr, No. 517-93, Oct. 28, 1993.

ZS Cost analyses are also done, once DOD has access to cost accounting data. Commercial firms almost never release this cost data to Other

businesses.
Chapter 4 Buying Commercial Goods and Services 77

of commercial and defense and thus remain subject to DOD cost accounting rules—at a disadvantage. One way of dealing with this issue is to move

to a firm, rather than a product, exemption.

Independent of whether DOD chooses to purchase commercial goods and services according to

a narrow or a broad definition, in some cases it

may pay more than it would under the current cost

accounting regime.

Commercial transactions can be complex. In

calculating whether to buy an item commercially,

government buyers will need to examine the purchase within a larger context. For example, a supplier of aircraft parts to both defense and

nondefense customers may sell individual parts to

defense cheaper than it sells such parts to its commercial customers under current contract procedures. Yet this may not be the bargain it appears to

be if, for instance, the firms deliver to their commercial customers more rapidly, provide them access to new technology, maintain their parts

inventory, and offer maintenance and other services as a part of an overall contract. The commercial customer often buys not only the part, but also

a long-term service commitment (often competed

every 5 years or so) that eliminates inventory and

inventory tracking requirements. Some estimates

of total savings to the commercial firms over the

total cost to the military customers are on the order

of 50 to 80 percent. But achieving such savings

for the government requires a dramatic restructuring of the entire DOD support (e.g.,

eliminating government depot maintenance

and inventory control for the items), as well as

its acquisition system.

Proponents of CM I argue that the current cost

accounting system is very expensive and that the

net savings from commercial procurement would

dwarf any instances of higher prices or “waste”

due to instances of government buyers not getting

the best available price. For example. the two major manufacturers of large aircraft engines, Pratt&

Whitney and General Electric, have estimated the

burden of special government accounting rules

ranges from $5 to$12 million per year, per firm. In

that very competitive industrial sector, savings

might be expected to be passed back to the government.

Should Congress decide to eliminate cost accounting requirements from the commercial portion of the DTIB, however, it must be prepared to

defend the change against the inevitable revelation of price gouging and illegal behavior by one

vendor or another. Still, the projected benefits of

unleashing a large percentage of the DTIB to commercial procurement appear to be worth the potential risks. These are discussed in more detail later

in this chapter.

I Procurement Process, Culture,

and Skills

The current acquisition culture, with its special

cost accounting, use of military specifications and

standards, etc., has been established for over four

decades. The experience and skills of procurement officials, few of whom have worked in any

other environment, could serve as an obstacle to

the acceptance of commercial items and practices.

The Grace Commission warned, “the long-standing nature of the problems makes them particularly difficult to remedy, since cultural as well as

technical issues are involved.”29

Under the current system, acquisition personnel need to know more about how to apply the regulations than about the actual products they buy.

One business executive, explaining why his company had ceased to bid on government paint contracts, said that “after 20 years of selling paint to

the government, my company dropped bidding on

government contracts because the process was

nonsensical, costly, and filled with mind boggling

hassles.” He was particularly troubled by ‘*contract administration officers who know almost

~“ The Prc\idcnt’\ Prl\ atc Sector Survey on Co\t Control in the Federal Govemmcnt, Report of(he Office of fhe Secretury ofl)~fi’njc 7ii\L

[ ~Jr( t, Jul} 13, 1983. reprinted in U.S. Congre\s. House. Committee on Amled Service\. Defense Acqu~,~i(lon: Mujor U..S. C~mmII\,\IIJtI Rep{)r(j

( /w). /(),Y,Y), \ 01, 1, tooth” c-ongrc~s. 2d !3e\sion, Committee Print No. 26 (Washington. DC: U.S. Government Printing Office, No\. 1, 1988).
78 I Assessing the Potential for Civil-Military Integration

nothing about the paint they are purchasing, since

they lack any chemical or engineering background.” 30

The way in which the defense procurement system operates reinforces this culture. Uniformed

officers, for example, are often rotated in and out

of acquisition assignments, moving on just as they

come to understand the projects they supervise

and thus depriving projects of institutional

memory. Further, the intensity of congressional

and media oversight of the acquisition process can

make it appear safer to err on the side of conformity than to take the initiative by using waivers that

allow cost-saving even under the current system.

This process has resulted in an acquisition

workforce without many of the skills or the inclination to buy commercial products or to operate

in a commercial manner. Furthermore, the slowness of the process alone—it takes months or

years to get the funds authorized and appropriated,

bids let, and proposals evaluated—along with its

adversarial nature and the seemingly endless paperwork, have discouraged many commercial

firms businesses from even attempting government work.31

Adopt Commercial Buying Practices

One change in process and culture said to be essential to taking full advantage of the commercial

market is the adoption of commercial buying

practices. There is no single definition of buying

practices that can be termed “commercial.” The

Defense Systems Management College (DSMC),

however, has included under this rubric techniques, methods, customs, processes, rules,

guides, and standards normally used by business.

32 Box 4-5 discusses how commercial businesses buy goods and services.

The Advisory Panel on Acquisition Law identified many statutes whose flow-down requirements disrupted normal business patterns. These

include creating “a subcontracting obligation that

is inconsistent with normal commercial practices,

in which subcontracts are arranged well in advance of shipments.”33 FASA addressed some of

these issues, but still has provisions for small and

minority-owned business restrictions. Adopting

commercial buying practices will affect not only

commercial purchases, but will also promote integration of commercial and defense R&D,

manufacturing, and maintenance (chapter 5).

Management of the militarily unique segment of

the base will also be affected (chapter 6).

DOD has launched a number of initiatives

aimed at making its purchases more like those of a

commercial customer. For example, the Navy has

instituted a combined system of best value procurement and vendor preelection. In this process,

vendors are interviewed and their past efforts reviewed to form a ranked order of preferred vendors. When a contract is drawn up, the first

company on the preelection list is brought in for

negotiations. If the negotiations fail, the next vendor is contacted. Each of the Services has also experimented with multiyear procurements, but

Congress has been generally unwilling to release

this authority to DOD.

Raising the simplified acquisition threshold

from $25,000 to $100,000 reportedly would lift

the burden of the more complex purchasing proce30 H, peter Tepperma, “procurement pains: Why My Company Stopped Bidding on Government Paint Contracts,” Washingmn PosI, Sept.

19, 1993. Tepperma is CEO of Seagrams Coating Corp., and Chairman of the Government Paint Suppliers Committee of the National Paint and

Coating Association.

St DODI~ Acquisition Reform Recomme~a[ion~ to 800 Panel Report, op. cit., footnote 27. DOD reported that the average lead-time for

contract awards below $25,(XX3 is 26 days. Above $25,000, the average lead time is 90 days for simple sealed bids and 210 days for competitively negotiated contracts.

32 ~fense systems M~agemen[ Co]]ege, comnlerciu/Prac/f ce$ for L)ejen~eA~,qulSi/lon Gui(iebook, (Washington, DC: U.S. Government

Printing Office, 1992), Summary, p. 1-2.

33 E,re~utive Summar): Report of the DOD Acquisition Law’ Ad~’i.~ory Panel, Op. cit., footnote 18, p. 100.
Chapter 4 Buying Commercial Goods and Services 79

Commercial businesses use a number of approaches to buying goods and services, including pricing,

price analyses, negotiations, and past relationships Businesses can buy just Iike the public Business purchasers can walk into a store or thumb through a catalog, make a selection of the items on display, and

pay the marked price Commercial services can also be purchased the same way, paying for services

according to posted hourly wage rates, or a set fee for completion of a task. A company buyer decides to

pay the fixed price if it meets the company’s expectations of an acceptable value. What constitutes an

acceptable value varies from one company to the next, but includes assessments of need, price relative to

other sources, quality relative to other sources, timeliness of delivery, quality of customer service, and

Iocation One advantage businesses often have over the individual consumer is the opportunity to pay less

for an item by buying in bulk

Businesses engage in price negotiation over commercial products. The seller has the advantage of

knowing how much money he or she needs to make from the deal, The buyer mayor may not have a good

idea of the market price for the item, but should have assessed what the product IS worth to the company

The less competition, the more important it is for the buyer to conduct price analysis and an internal value

assessment The buyer can seldom be certain of having obtained the best deal, only that the deal was

good enough for the company’s purposes. This uncertainty IS what concerns many critics of government

commercial purchases 2 Businesses must function in this uncertain environment daily, relying on the skills

of their buyers to make the best possible transaction

In practical terms, businesses do not shop for the best deal on every purchase Even the federal government does not do that, giving local buyers discretion over small purchases and Iimiting competition to a

few sources Businesses often develop long-term relationships or “strategic partnerships” with suppliers

and subcontractors that meet their special needs (e g , quality and timeliness). Even though the price of

the product may not always be the lowest available, the buyer believes it constitutes the best available

value In this way, commercial business limits the certainties of the process and tries to get the best available service over the long term. Special relationships in defense procurements, however, have been

viewed as undermining free and open competition, although there has been Increased willingness to seek

the “best value” in contracting

One trend in the commercial sector is the qualification of a company’s supplier base. This selection

process allows firms to obtain quality products from companies without having to rely on new bids or market analyses for each purchase, Although different firms use different processes, the basic elements are

the same. The buying firm establishes a set of quality standards that suppliers must meet. Some firms

inspect their suppliers’ facilities and quality control processes, others rely on product testing, quality recognition awards, or periodic reports. In all of these relationships, however, trust is seen as critical. Violations of that trust can result in removal from the approved vendor Iist.

Finally, commercial buyers avoid many of the problems of owning their own goods by Ieasing or renting

goods from others This option IS seen as especially useful for items that are difficult to maintain overtime

(e g , cars, computers, offices) or when the firm’s need for such items fluctuates Buyers decide if a particular lease IS a good value in the same way they decide for purchases, factoring in the depreciated value of

the product over the length of the lease

T TP IS discussion IS based on OTAS lntervlew of 12 commercial firms

z The term Commercial purchase” IS used rather broadly here 10 ease the discussion Business-to-business Sales are often referred to as industrial purchases

SOURCE Off Ice of Technology Assessment, 1994
80 I Assessing the Potential for Civil-Military Integration

Many military needs can be met directly with commercial

products

dures from approximately 40,000 contract actions

(with a value of about $2 billion) each year.34 This

change was made in FASA.

The DLA, which has responsibility for purchasing many common Service items, has initiated several programs whose ultimate result, if

successful, will be to operate more like a commercial business. These programs include:

Best Value Buying+ valuates performance

and quality factors in addition to price.

Long-Term Business Instruments-considers

options for future purchases, indefinite quantity contracts, and multiyear terms.

Electronic Commerce--uses electronic networks to solicit bids, and to evaluate purchase

orders.

Direct Vendor Delivery-streamlines the acquisition process, reduces inventory costs.

Long-Term Contracting—provides an increased planning horizon and incentives for

manufacturing process investment for future

contracts.

Many of the DLA initiatives cut costs by reducing the number of times that items must be handled by the government. Thus, DOD customers

can buy directly from civilian vendors, eliminating depot middlemen. The DLA anticipates that

such moves should generate significant savings

and quicker response to the needs of the military.

Medical supplies to Alaska, for example, are

now being delivered by Federal Express instead of

the Military Airlift Command, saving an estimated 50 percent in delivery costs while providing faster service. The use of a commercial

delivery service, coupled with better inventory

control, ultimately reduces waste. In the past, for

example, about 25 percent of the military’s stocks

of medicine in Alaska expired on the shelf each

year.

35 This is no longer the case.

There has been concern over the possibility that

the government’s drive for efficiency, including

long-term contract arrangements and best value

buying, might “bundle” several contracts together

into a larger single contract and, in the process,

eliminate opportunities for small business to participate. While some bid protests were registered

early in the DLA restructuring process for precisely these reasons, DLA personnel report that the

agency has paid special attention to assuring that

small firms are not eliminated. DLA argues that

bundling contracts is not an objective and that

their procedures have been supported by the General Accounting Office. Nevertheless, these concerns illustrate one potential problem of buying

commercial.

Change the bid and proposal process

One of the most important steps in adopting more

commercial buying practices is changing the current bid and proposal (B&P) process. The traditional B&P process has been characterized by a

lengthy series of paperwork hurdles, with the possibility that the contract award will be challenged

by a bid protest, thereby lengthening the process

further.

+$ DOD<~ ~(qlil,jltiorl R@r-rrl Re(-ontr~tt,rt(iu(iorl.v” to 800 Puncl Repor-:, op. cit., footnote 18.

35 Bri~fin~ frO1ll Me~i~~} Dire~[~r~tc, Defense Personnel Support Center, DLA, May 25, 1993.
Chapter 4 Buying Commercial Goods and Services 81

FEDERAL EkPRESS
82 I Assessing the Potential for Civil-Military Integration

The executive branch provides a mandated 15

days notice before releasing requests for bids and

proposals and allows 30 days for companies to respond before a contract is awarded. Many factors

can force extensions to this process. Though intended to promote competition and enhance small

business opportunities, the process is now an impediment to both. For example, the mandated notice prevents the routine use of electronic bulletin

boards to announce new business opportunities

and electronic data exchange systems to rapidly

receive quotes.

In the future, many of the contract actions

might be accomplished electronically, without the

currently dictated delays. While the process is

more efficient, businesses, especially small businesses, must learn to operate in this new environment and will require some training.36 FASA’s

Federal Acquisition Computer Network (FACNET) is designed to help facilitate electronic commerce.

Increase market analysis/investigation

As DOD gives up many of its traditional buying

practices, it will need to develop a better understanding of the commercial market, have the ability to determine whether there are commercial

products that can fill defense needs, and be able to

set a fair price for those products. FASA directs

the use of market research to determine if commercial items are available to meet an identified

need.

DOD will have to increase the use of its market

surveillance and market investigation techniques.

37 Market surveillance provides buyers the

initial information on the general availability of

items to fill possible needs. It is an activity conducted by acquisition personnel striving to remain

technically current and aware of market trends in

their areas of expertise.

A market investigation, on the other hand,

takes place only after a specific need is identified.

It determines whether a particular item can satisfy

a particular defense use. (See box 4-6.)

Market surveillance and investigation takes

time, and requires technical understanding of

products and training. Market analysis also requires that DOD gain access to existing commercial databases and help develop and update others

in product areas where none exist.

Retrain or Rep/ace Procurement Staff

Almost everyone OTA interviewed agreed with

findings of previous studies that adopting commercial buying practices will demand a new set of

skills in the defense contract community. A

DSMC study of commercial practices for defense

acquisition argued, for example, that inadequate

acquisition training “is probably the single biggest inhibitor” to government adoption of a commercial approach.38 The study further noted that:

Acquisition personnel are not usually trained

in how to conduct market research, surveys and

analyses . . . [and] . . . acquisition managers at

all levels are not sensitive to their benefits and

do not require them as a matter of course nor as a

part of normal acquisition routine.39

A lack of training can have many consequences. Contracting officers reportedly require

certification of most favored customer price (e.g.,

lowest cost) because they are not properly trained

to conduct proper market research.40

An Air Force group studying the use of commercial products also reported potential personnel

barriers to reform, noting that “Air Force personnel attempt to fit commercial acquisitions into

36 DLA’5 ~fense personnel Support Center, for example, conducts training for small firms.

37 Office of tie Assistant Secre[ary of Defense for Production and Logistics, Bu]’ing ND/: SD-2, October 199[), pp. 3- I to 3-5.

38 DSMC, Commercla/ Practi

ce.v for Defense Acquisition Guidebook, op. cit., footnote 32, p. 2-6.

39 Ibid.

40 Jeff Bingamm et al., /nlegraling Commercial an[lM1/ltarF, Technologies for Nationul security: An Agenda for Change (Washington, DC:

The Center for Strategic and International Studies, 1991 ), p. 35.
Chapter 4 Buying Commercial Goods and Services 83

One of the more frequently cited recent examples of a commercial product successfully filling the needs

of soldiers in the field is the small lightweight Global Positioning System (GPS) receiver--termed the SLGR.

This success was partly the result of a market investigation.

During the Persian Gulf War, DOD bought several thousand commercial GPS receivers to augment the

more expensive and bulky military GPS receivers on hand, These receivers relay geographic position (latitude, Iongitude, altitude, and velocity) and time Information based on data received from the GPS, a

constellation of navigation satellites Given the almost featureless terrain of parts of the Iraqi desert, these

devices proved Invaluable, enabling ground troops to maneuver in areas that had not been mapped,

The primary technical difference between the commercial and military versions of the GPS receivers is

accuracy DOD sought to share some of the navigational benefits of the system with the rest of the world

while keeping certain advantages to itself. Military GPS receivers thus have an accuracy of + 10 to 20

meters Commercial receivers accuracy is Iimited to about + 80 meters, Military receivers are also said to

be more rugged than the commercial version used in the Gulf

The Army launched the SLGR program in 1986 to determine whether Iightweight commercial GPS receivers could meet Army requirements.1

 In March 1987, the Army began a market Investigation with the

goal of procuring a Iightweight, preferably hand-held, low-cost, commercially available GPS receiver that

could be used by a wide variety of personnel with minimal training. 2 Following a period of research, the

market investigation team drafted a Iist of minimum requirements and additional desired capabilities, and

published these in Commerce Business Daily. Nine companies responded with 11 products, Three of the

11 products had all the required features In 1989, Trimble Navigation was declared the contract winner

and 1,012 SLGRs were purchased for field trials.

Several thousand commercial receivers were purchased from multiple sources to meet Gulf War

needs 3 While the SLGR represents a technical success, it was not, as noted earlier, a procurement success, Because of the inability to waive the lowest cost certification, many of the devices had to be purchased by the Japanese for the Allies.

‘ Off ce of the Secretary of Defense DOD Caselette “Nondevelopmental Item Acqumtlon Abbreviated Case Study Small Llghtwelght GPS Rece~ver ‘

z u s ,Ar~y SLGR Market Survey July 31, 1987 P 2

s u s Depar~rnent of Defense, COndUCt of the Persian GuV War Fma/ Reporf to Congress, appendices A-S, April 1992

SOURCE Off Ice of Technology Assessment, 1994

traditional development processes,” rather than The amount and nature of training required is

adapt to the use of commercial items.4] The group likely to differ according to the type of product

recommended that a major training effort be initi- procured. The Defense Logistics Agency’s

ated, including special courses at the DSMC and Defense Personnel Support Center—already

the Air Force Institute of Technology. practicing commercial purchasing and selected to

~1 Joint <T{)nlnlcln(i ~’onlnlt,r(lui Off- Th[,-Sheij (COTS) Supportuhiiir> hhrklng Group (CSWG) Finai Report, June 1991.
84 I Assessing the Potential for Civil-Military Integration

Electronic data interchange is already changing the way the

military does business. Here, U.S. Marines at Parris Island

engage in electronic commerce

participate in one of DOD’s pilot commercial acquisition programs—suggests that acquisition

workforce training might best focus on the use of

new technological tools, such as Electronic Data

Interchange, necessary to implement Electronic

Commerce, and new contracting alternatives.42

Other commands, with more complicated products, might use training to foster an understanding

of available product technology. But DOD will

have to consider allocating training dollars toward

commercial buying practices in any case. Still,

new training may not cost additional funds—there

is considerable training underway. It will, however, require a different focus.

Replacing the current acquisition workforce

with personnel from the commercial sector is

another alternative. Such an approach could be

used to rapidly create a force of buyers trained in

commercial business techniques and in the product technology for which they will be responsible.

But such an approach would likely be very disruptive. Government organizations interviewed for

this assessment argued that the current workforce

could be properly retrained. They argued that the

problem has been a matter of process, not people.

The existing system provides no incentive to buy

commercially and no time on the job to become, or

remain, expert in particular areas.

Regardless of the means used to develop the

qualified future acquisition workforce, personnel

will require better technical training and longer

job tenure than in the past. They will need the opportunity to conduct continuous market surveillance, so that they are aware of available products

and technology and can make early use of this

knowledge in procurement decisions. To allow

the rapid procurement of off-the-shelf items, they

will need support for conducting market investigations. They will also need the mental agility

and technical knowledge to recognize cases when

militarily unique products are the best choice. The

goal is to maximize the use of commercial goods

and services, not to sacrifice military capabilities.

(See figure 4-2.) Achieving this goal requires a

considerable increase in the responsibility, authority, and initiative of procurement officials.

Develop Incentives for Using Commercial

Goods and Services

Changing the current procurement culture involves fundamentally altering the incentive structure to promote greater use of commercial goods.

Efforts towards this end have already begun. Secretary of Defense Perry has stated “the desire to

turn the system on its head.”43 Secretary Perry’s

June Memorandum on Military Specifications

and Standards is the first step in that process. A

program manager who chooses a militarily unique

product must justify that choice. But procurement

personnel must be made to feel that decisions to

procure commercially will not, in and of themselves, bring the system to a halt, or jeopardize

their jobs.

The OTA assessment team was informed in

several interviews that the threat of a bid protest—

and the subsequent suspension of work––was

enough to make some contracting officers shift a

~Z Discussions with DPSC Vrsonnel.

43 Lucy Reilly, ‘4 MILSpECS in peITy’s Sights at pentagon, “ Washington Technology, 3, May 6, 1993, p. 8.
Chapter 4 Buying Commercial Goods and Services 85

[

1

> Mission requirements

L

I Define product I

>1 requirements 1<-

p

.–l form, fit, and function)

Market analysis/

investigation

e ‘0----’+

Yes

No

v

o

Might

a dissimilar

commercial produc

fulfill need?

[

Buy commercial

product )

Yes

‘fes—

SOURCE Off Ice of Technoogy Assessment, 1994
86 I Assessing the Potential for Civil-Military Integration

procurement decision away from commercial

specifications. The impact of the recent DOD military specifications and standards decision on this

behavior remains to be seen. But many recommend that the current system be changed to promote more responsible protests.

Additional incentives for change must be

created. Firms considering the use of commercial

components deserve financial incentives to do so.

Government acquisition personnel need a new

structure in which lowering system cost is

weighed against projected performance of militarily unique items.

The Grace Commission44 argued that contractors were in the best position to appreciate the cost

impacts of specifications. It recommended that

DOD should authorize the use of financial incentives to encourage contractors to challenge unimportant or irrelevant standard requirements when

responding to an RFP. These incentives might

consist of cash payments.

45 The current approach

to incorporation in systems involves the “value

engineering” clause of FAR. Its use is reported to

be limited and to vary by program.

1 Citation of Military Specifications

and Standards

During the past four decades, many studies have

identified the excessive and, at times, inappropriate citation of military specifications and standards as a particularly formidable barrier to the

use of commercial products. Critics have argued

that military standards and specifications often

differ from commercial standards and specifications so dramatically that they effectively prevent

the use of equivalent or even higher quality commercial goods and services. Shipbuilders, for example, have argued that this is the case for the

future Navy sealift ships. Often the cited specifications and standards were seen as simply unnecessary—sometimes merely copies of old

documents. Certainly there is little reason to have

detailed military specifications for off-the-shelf

consumables. Mr. Perry’s initiative on military

specifications and standards, if properly implemented, should change this.

Specifications and standards have also differed

from Service to Service. A contractor producing

similar items for more than one Service may need

to comply with different standards for each. In

addition, some military specifications and standards have been updated too infrequently, falling

behind best commercial practices, forcing companies to use obsolete processes.

A recent Office of the Secretary of Defense

publication noted that:

The problem for a commercial company. as

with government-unique accounting principles,

is that compliance with government standards

often requires a departure from commercial

practices, not to mention the company’s own

processes which have led to commercially successful products.%

Such departures from established processes can

raise costs, reduce quality, and convince a commercial firm not to undertake DOD business.

Military specifications and standards, however, often serve a valid purpose, (See box 4-7.)

Indeed, the 1983 Grace Commission argued that

“MILSPECs have long been a target of misdirected criticism.” The proper target, the authors

maintained, should be procurement officials who

are not sufficiently selective in citing military

specifications requirements in contracts. Misapplication of military specifications and standards

has been the primary problem.

~ The Office of tie Secretary of Defense Task Force of the President Private Sector Survey on Cost Control in the Federal Government.

45 Relj{)rt of the O@Cp Of the Securitv of Defense Task Force, op. cit., footnote 29. pp. ‘778-779.

~ Depafimen[ of Defense, Office of the Assistant Secretary of Defense (Public Affairs), NeMs Release, “DOD’S Acquisition Reform Recommendations to 800” Panel Report,” Oct. 28, 1993.
Chapter 4 Buying Commercial Goods and Services 87

The DOD-chartered Process Action Team

(PAT) for Specifications and Standards, whose

November 1993 report formed the basis for Secretary Perry’s June Memorandum on specifications

and standards, developed a strategy to decrease reliance on military specifications and standards.

The Secretary “wholeheartedly” accepted the report and approved the recommendations “to use

performance and commercial specifications and

standards in lieu of military specifications and

standards, unless no practical alternative exists to

meet the user’s needs.”47

The PAT report specifically recommended that:

performance specifications be the preferred method of buying new systems, modifications, and

NDI, including commercial products; manufacturing and management standards be canceled or

converted to performance or nongovernment standards; new proposals and contracts be flexible,

providing incentives for a contractor to submit alternative solutions to military specifications and

standards; the use of military specifications and

standards be restricted; and oversight using process control and nongovernment standards be prometed. 48

The program of change outlined by PAT and endorsed by the Secretary of Defense calls for heavy

involvement by senior DOD leadership, extensive

training, and long-term commitment to change if

the overuse of military specifications and standards is to be eliminated.

Make Performance Specifications the

Preferred Method of Buying

Moving to performance specifications would

have a great impact on integrating processes as

well as easing the purchase of commercial items.

The initial impact will be observed in the purchase

of commodities—food, personal items, etc., that

are continually purchased. Over time, as new systems are procured, greater benefits will accrue.

47secretary Wi]llam ptHT-yq memorandum, Op. cit., footnote 10.

Commercial Hummers (front and rear) were developed from

the militarily specified Hummer (center)

Studies indicate that such a move would reduce

the need for government oversight and ease the

problem of technical obsolescence since new

items might be retrofitted into military platforms.

PAT estimated that adopting performance specifications might save $550 million over the next two

years. Though this estimate appears optimistic.

significant savings appear possible.

There is reason to believe that performance

specifications will promote the transfer of

technology into the defense arena. But the use of

performance specifications increases prospects

that those defense firms continuing to develop

militarily unique products and retaining engineering and design capabilities will prove noncompetitive for newly defined commercial products. To

the extent that such firms restructure or are replaced by commercial firms with those capabilities, this problem might be managed. But care

must be taken to ensure that the design and engineering talent essential to develop and build new

systems—held to be the core of the U.S. defense

base—is retained.
88 I Assessing the Potential for Civil-Military Integration

The U.S. Army—and the other Services to a lesser extent—employ large numbers of light tactical vehicles in a wide variety of roles, Two vehicles—the High Mobility Multipurpose Wheeled Vehicle (HMMWV)

and the Command Utility Cargo Vehicle (CUCV)--accounted for 85 percent of the military’s Iight tactical

vehicles in fiscal year (FY) 1992. This share was projected to rise to 97 percent in FY 1993.1 The two vehicles are a successful example of using commercial items where appropriate, and military specifications

where needed.

The M-988-series HMMWV, more commonly called the Hummer, IS a Iightweight, diesel-powered, fourwheel-drive vehicle built by the AM General Corp. in Mishawaka, Indiana. It was designed specifically for

the military. It is used by the three Services in a number of configurations (cargo/troop carrier, ambulance

armament carrier, TOW missile carrier, and shelter carrier), all constructed on a common 11⁄4-ton chassis,

The Hummer is an example of a military product whose manufacturer is Iooking to expand into the commercial market.2 The vehicle’s main selling point is extreme ruggedness. As of June 1994, more than 1,000

Hummers have been sold commercially. To compete head-to-head with other commercial 4 x 4s, each

commercial Hummer comes with a 36-month/36,000 miles bumper-to-bumper warranty. In July 1993, AM

General also Introduced a lower cost commercial model to meet the market demand for a basic work truck

An Important market for the commercial vehicle may be organizations such as the Forest Service, or mining

and petroleum firms requiring reliable transportation across difficult terrain.

Somewhat surprisingly, the early commercial variant of the Hummer costs $10,000 to $15,000 more than

its military counterpart. This price differential arises from the need to meet Department of Transportation

safety laws, Environmental Protection Agency emission laws, and market expectations for comfort. To meet

highway safety standards, for example, the commercial Hummer required a new door design Addition-

‘ U S Army, Tank-Automotive Command, Fleet Planning Office, U S Army Tacflca/ Ve/?ic/e F/eetbook, January 1993, p 117

2AM General may get Competltlon from an unusual source, the Uhanovsk Automobile Plant AS Part of a new Iolnt venture, thl~

RussIan plant has announced plans to sell Its version of a mllltary all-terrain vehicle on the American and Canadian commercial markets Like Its American counterparts, the jeep-llke UAZ WIII need to be modified to meet U S safety and enwronmental regulations

Early models are expected to compete prlmarlly on their exceedingly low price tag of about $10,000 See James H Rub[n, “Russians

Roll In U S Jeep Market Boxy UAZ Vehicle IS Called Pride of the RussIan Mlllfa~, ’” The Wash/ngfon Post, July 9, 1993, p Cl 1

Cancel Military and Adopt Commercial 5,617 (a51 -percent increase)” and that “the numThis is at the heart of the Secretary’s June 1994

Memorandum. It can largely be accomplished

within the current acquisition structure. Indeed,

DOD already had a number of initiatives to permit

greater exploitation of commercial electronics

components prior to Perry’s memorandum.

The Assistant Secretary of Defense for Acquisition Reform reported in October 1993, for

example, that DOD had “increased the number of

adopted non-government standards from 3,279 to

ber of commercial items descriptions had increased from 1,973 to 4,857 (a 146 percent

increase over the past seven years).”49 But while

forward movement has been evident, it has been

slow. The Secretary’s communication should

speed the process. Further, while the cancellation

of these military specifications and standards appears to be a straightforward task, the entrenched

nature of the bureaucracy could make it Herculean, Successful reform is far from assured, as the

49 ~ew,$ Release, OP. cit., footnote a
Chapter 4 Buying Commercial Goods and Services 89

ally, high volume buys can lower the per unit vehicle price to the military Military prices are affected by

the sophistication of the variant purchased For example, a basic cargo/troop carrier is less expensive

than an ambulance

AM General has realized some savings in the commercial Hummer, but the savings/penalty equation is

complex For example, components for the 12-volt commercial electrical system are cheaper and easier to

obtain than the less standard 24-volt system required by the military, but the entire electrical system must

be different from the military type And while the commercial Hummer is constructed on the same manufacturing Iine using many of the same components, interior outfitting and exterior painting occur in a separate

building

AM General purchases about 65 to 70 percent of the cost of a military HMMWV from lower tier vendors.

Three of the major subsystems are modified commercial off-the-shelf products the engine, the transmlssion, and the T-case Many of the individual components and fasteners are also procured commercially

The rest of the vehicle, however, is manufactured to military specifications and standards, including most

of the chassis, the radiator, the axles, and the tires—although the tires have since been added to the

Goodyear catalog—and by some criteria may now be considered commercial

The 11⁄4-ton CUCV, on the other hand, IS a commercially designed, 4x4 Iight tactical utility and cargo

vehicle built by General Motors in Flint, Michigan from 1983 to 1986, The CUCV is closely related to the

Chevrolet C/K series full-sized pickup and Blazer Like the Hummer, it has an automatic transmisslon and a

diesel engine It was built in five configurations cargo, utility, ambulance, shelter carrier, and chassis only

Some of the shelter carriers have been modified with dual rear wheels.

Both the Hummer and the CUCV were procured on fixed-price contracts, as nondevelopmental items

built to performance specifications. The CUCV was not intended as a front-line vehicle Military modifications Include camouflage paint, Iifting eyes, blackout marker lights, and slave cable receptacles. A subcontractor fabricated and installed specialized ambulance items.

During the Persian Gulf War, the CUCV was used more widely in the field than anticipated. It proved

insufficiently rugged for off-the-road field operations It has since been slated for Corps-level and higher

operations that require little off-road driving At division level and below, Hummers are replacing the CUCV.

SOURCE Off Ice of Technology Assessment 1994

meager results of no less than seven major initia- tematically review and update specifications and

tives intended to decrease reliance on militarily standards.

unique specifications and standards have

shown. so Adopt New Methods of Quality Control

It is difficult to identify a risk to canceling inap- Market forces help to ensure quality within the

propriate and outdated specifications and stan- commercial base. Given a reasonable degree of

dards. Though there will be costs associated with competition, firms with poor quality control will

reviewing the standards, such review will have to find it difficult to stay in business. Conversely,

be undertaken in any event. Indeed, the current companies known for consistent high quality will

problem arises in part from an earlier unwilling- often attract new customers. Thus. it is in a venness to pay the costs (in time and money) to sys50 lbl~.
90 I Assessing the Potential for Civil-Military Integration

Onsite inspections are one method of ensuring quality but

(here are alternatives

dor’s self-interest to maintain quality. This is accomplished through product tests, employee

quality programs (e.g., total quality management), and statistical process control. Firms may

underscore their commitment to quality through

product warranties.

In the past, the requirement for quality testing

often arose in areas in which defense technology

was on the leading edge and manufacturing techniques were uncertain. Now the commercial sector leads in many key areas, particularly

electronics. In these areas, accepting commercial

quality standards can increase commercial purchases while preserving high quality.

The Under Secretary of Defense for Acquisition and Technology has authorized the use of

American National Standards Institute/American

Society for Quality Control and the International

Organization of Standardization quality standards

in place of MIL-Q-9858A and MIL-I-45208A in

defense acquisition programs. This new policy

will be incorporated in the next update of DOD

Instruction 5000.2.5]

For many goods and services, market surveillance might provide sufficient information on

which to base a purchase decision. In some markets, DOD could follow the lead of commercial

customers and conduct plant visits to inspect quality control mechanisms. Other goods and services, especially those with less competition or

with more product uncertainty, might warrant internal DOD testing.

Participate in Commercial Standards

Bodies and Consortia

If DOD is to place greater reliance on commercial

products and standards, it will need to become

even more involved with the standards bodies and

industry consortia that set industrial specifications and standards. Industry will adopt rules that

provide tangible benefits rather than meet DOD

desires. 52 But DOD involvement may help steer

industry in desired directions. For example, DOD

might help create commercial standards for a

“ruggedized” product, thus increasing the chance

that DOD could rely on ruggedized commercial

products and thereby allow greater exploitation of

the commercial sector.

DOD participation in standards development is

not cost free, and there is an inherent risk that excessive DOD involvement in developing commercial standards might negatively affect U.S.

industrial competitiveness. But given the diminished role of DOD in overall purchases, the potential of this occurring appears small, and the risk is

certainly manageable.

1 Technical Data Rights

Government demand for rights in technical data

has been a contentious issue. There are two facets

to this problem. The first concerns the kind of data

the government will receive and in what format.

The second is with what rights the data will be

delivered.

5 I un~er Secretarl, of ~fenje John M, Deut~h, Mt,n~cv-un(114nl j{jr Secre(uries of the Mllitur) Departments and[]!rectors of[>ef(’n.ie A,gen- . ,

cies on the L’se of Conmwrciul Quality S>,$tcm Slundurds in the Department of Def[’n>e (DOD), Feb. 14, 1994.

sz ~e ADA ~CJmputer ]mguage is an Cxamp]e of a military standard that industry has ken unwilling to accept.
Chapter 4 Buying Commercial Goods and Services 91

Data requirements are defined by data item descriptions (DID)—a kind of military specification—in the technical package of the contract. In

many cases. the government will specify the data

needed to operate, maintain, or repair the item;

train its personnel; or reproduce the item. The last

tends to be particularly contentious, since for

many companies manufacturing process data is

treated as sensitive proprietary information.

To complicate matters further, DOD often requires that data be presented in a militarily unique

format that can increase costs. For example, in one

purchase of a commercial vehicle, the government

waived cost and pricing requirements, but then insisted upon a data item description for the manual.

This required the company to rewrite its commercial vehicle manual, without financial compensation—since the vehicle’s price was set in the

commercial marketplace.

The use to which the government puts the data

it receives (e.g., its rights) is another problem area.

Government use of data falls under one of three

categories of data rights: limited rights that obligate the government to protect all data received

under a contract; government-purpose rights,

which permit the government to share the information with any number of other contractors

under assurances that it be used only for specified

government applications; and unlimited rights,

which grant the government license to disseminate the data in any way it chooses,

The last is particularly contentious. Sometimes, the government requests unlimited rights

simply to ensure that the product will be available

if the original supplier goes out of business. At

other times, the purpose is to generate competition

through a second source—without having to pay

twice for the same development—to reduce, or at

least hold down, costs. From the government’s

point of view, being tied to a single supplier for the

decades that the system may be in service can pose

a significant and undesirable financial burden.

While it is difficult to quantify the costs of such

a policy, it is clear there are negative effects. Many

firms have refused to compete for government

contract money for R&D, to sell products to DOD

that incorporate commercially developed components, or both.

The implications can be serious. The most innovative firms are protective of their R&D and

manufacturing processes. By demanding unnecessary rights in technical data, DOD may deprive

itself of access to the most advanced and innovative technologies and processes. As a result, DOD

may be decreasing the number of firms willing to

do business with the military, further eroding

competition.

To address these problems, DOD needs to alter

its approach to technical data rights. In place of demands for expansive access to technical data with

unlimited rights to that data, it should exempt

most purchases from technical data rights clauses

and focus its energies on the limited set of technologies and processes for which such data are vital.

These objectives might be met through license or

escrow agreements.53

Exempt

To maximize commercial purchases, DOD might

pursue technical data rights only in cases where

there is a genuine need. Products that are deemed

both critical and not easily replaceable would likely fall into this special category, A procurement

officer could be required to demonstrate that the

need for technical data rights is compelling before

demanding the data.

This exemption should also extend to contract

evaluation. For example, some companies have

reportedly had to “release technical data rights to

f? LInder F-ASA Conlmcrcla] itcms “~ha]] bc pre~umed to be developed at private expense un]ess shown otherwise. ”
92 I

win

Assessing the Potential for Civil-Military Integration

a contract even when providing it is not legally required.”54

License

Presumably, increased commercialization should

reduce the numbers of unique items and processes

and obviate the need for data rights in many cases.

But the DOD mission and some of the unique performance characteristics and logistical requirements will continue to necessitate rights in

technical data in some instances.

In these cases, the increased use of licensing arrangements would be appropriate. Licenses might

resolve issues of proprietary R&D and access to

innovation, thus allaying the concerns of vendors

that granting government access risks a loss of

technology and a lack of sufficient compensation.

Escrow

An alternative solution would be to limit access to

technical data rights to dire events, such as mobilization and war, or when the firm has gone out of

business. Placing relevant technical data rights in

escrow is one way to accomplish this. The firm

could thus protect commercially valuable

technologies except in extraordinary circumstances.

9 Unique Contract Requirements

The myriad of contract requirements is another set

of barriers to buying commercially. These include

source preferences policies such as the Buy America Act and the requirement to use American shipping. In addition to these two, source preferences

and mandates in seven other critical areas were

noted by firms in the CSIS study:

● domestic specialty metals,

■ jewel bearings,

● certain domestic commodities,

●

m

●

●

miniature and instrument ball bearings,

precision components for mechanical time devices,

high-carbon ferrochrome, and

high purity silicon.55

Affirmative action and socioeconomic directives, such as set-asides for minority-owned business and other special groups, constitute another

set of unique contract requirements. Socioeconomic contract provisions cited in the CSIS report

include those requiring use of:

small business concerns,

women-owned small businesses,

labor surplus area concerns,

affirmative action for special disabled and Vietnam-era veterans, and

affirmative action for handicapped workers.56

Imposition of source preferences and socioeconomic contract conditions disrupts normal commercial business practices in picking vendors, and

requires certification and training to ensure compliance. Inefficiency is the byproduct.

Such regulations also hinder DOD efforts to exploit the international market. Ironically, this international market includes many U.S. firms with

global operations. For example, one of the largest

producers of canned fruits and vegetables, Dole,

has been unable to sell its canned pineapple to

DOD because it procures overseas the bulk of its

pineapple for canning. Instead, DOD pays a premium to buy canned pineapple from the few domestic canners still in business.

Limiting purchases to domestic sources often

raises the overall cost of DOD goods and services.

Buy America legislation, for example, while protecting American firms vital to U.S. defense production, has at times required the purchase of

domestic products that could be bought more

cheaply abroad. Thus, for years DOD purchased

coal in the United States and shipped it at a pre54 U.S. Congress, Of flee of Technology Assessment, Building Future Security :Stralegies for Restructuring the Defense Technolo~~’ and

/ndusfria/ Base, OTA-ISC-520 (Washington, DC: U.S. Government Printing Office, June 1992), p. 94.

55 Jeff B~gam~ et a]., Integra(jng commercial and Military Technologies for National Strength, Op. Cit., footnote 40, P. 66.

56 Ibid., p. 67.
Chapter 4 Buying Commercial Goods and Services 93

mium to U.S. troops in Germany. The indiscriminate nature of this legislation may render it less

effective in protecting vital U.S. sources of supply

than other approaches, such as that available under Title III of the Defense Production Act.

The Acquisition Law Advisory Panel reported

that the problem with these requirements is not in

any one specific contract requirement but in the

overall system. Firms are reluctant to deal with a

DOD that applies “a combination of frequently

changing requirements—some inconsistent with

others, most requiring audit and the generation of

reports, and all inconsistent with commercial

practice.” 57

The Acquisition Law Advisory Panel reviewed

114 socioeconomic statutes, either separate sections of the U.S. Code or specific sections of various public laws. The Panel found that the defense

contracting officers themselves are hard pressed

to keep up with changing federal procurement

policy and procedures, including these socioeconomic statutes. While many defense firms have

become adept at negotiating the tangle of laws and

regulations, commercial firms with only a small

potential defense market are less likely to bother.

FASA raised the Simplified Acquisition

Threshold to $100,000. This will permit “99

percent of DOD’s contract actions . . . to be accomplished using simplified procurement procedures,”58 and exempts such purchases from many

unique contract requirements.

FASA directs that the Federal Acquisition Regulation include a list of provisions of the law that

are inapplicable to contracts or subcontracts under

the threshold. These changes should greatly facilitate the contract process for the vast majority of

contract actions.

Still, unique clauses remain an issue for the

contract actions that account for the bulk of the

Legislation requires U S Navy warships to be constructed in

U S shipyards

DOD budget (e.g.. those above $100,000). Here

additional actions might be considered.

Eliminate Clauses and Rely on Civil Law

Some of the special contract clauses and requirements involve social goals, such as nondiscrimination in employment practices, that largely

parallel coverage in general federal law. Where

federal law exists, many observers argue that it—

rather than a special contract clause—should be

used.

In other cases, such as small business, there is

no parallel coverage. In those cases some observers argue that the social goals might be met in a

different way than through contract clauses—perhaps becoming a factor in some selections or considered as a part of a “best value” selection.

Advocates of such an approach argue that the

problem is the contract-by-contract application of

57 Acqui~ition Law &jviSo~ panel, Execufive Summury, op. Cit., footnote 18* P. 28.

58 Ne~,s Re/ease, op. cit., f~tnote 46.
94 I Assessing the Potential for Civil-Military Integration

such requirements. There should be other ways,

such as best value selection, to guide firms to

adopt pro-social-goal strategies.

In either case, the idea of change is not to ignore

the social goals of each of these programs, but to

achieve the goals in a less disruptive manner.

Identify and Support Critical

Technologies and Sectors

A primary justification given for the continuation

of Buy America provisions is the need to retain a

core of technologies and capabilities within the

American DTIB. While such considerations

would presumably be reduced by greater integration, support is likely to continue to be required in

some technologies and sectors.

Critics of “Buy America” provisions argue that

the government could be more selective in choosing technologies and industries that are vital to

American defense. DOD currently has an effort

aimed at identifying the vital technologies and industrial sectors it might support in the future.

Subsidize Parties Directly

Finally, a variety of mechanisms (e.g., tax exemptions, grants, or programs through the Commerce

Department) could promote the current beneficiaries of unique contract requirements, such as small

business, disabled veterans, and the U.S. specialty

metals industry, without involving the DOD acquisition process directly. This would eliminate

much of the paperwork that undermines expanding DOD’s commercial supplier base. It would not

preclude these firms from effectively competing

for defense contracts.

BENEFITS AND RISKS OF POLICIES

Past studies, along with the surveys and interviews conducted for this report, confirm that a

number of obstacles within DOD’s acquisition

structure discourage the use of commercial products, services, and practices. The policies outlined

in this chapter can reduce these barriers. This section briefly summarizes some of the potential

benefits and risks of increased use of commercial

products and services.

9 Benefits of Policies

Projections of savings from increased commercial

purchases vary. The Grace Commission estimated

that: 1 ) eliminating the requirement for contractors to comply with military specifications would

save 1 percent on weapon acquisition; and 2) increased use of commercial hardware and equipment and industry standards (in lieu of military

ones) would save 0.5 percent.59

The case studies in support of the Acquisition

Law Advisory Panel cite savings ranging from 30

to 50 percent on particular items if commercial

items are used in lieu of militarily specified items.

The DLA estimated the savings on medicine in

Alaska (cited above) as up to 25 percent a year.

DOD has estimated average savings of about 10

percent for commercial purchases based on its experience with the ADCP Program in the late

1970s. Some savings have been even more spectacular.

The case studies in the final report of the Defense Science Board’s 1986 study on the use of

commercial components in military equipment

were the most carefully controlled and well-documented comparisons of military and commercial

product costs that the OTA assessment team reviewed. The DSB identified several commercial

and militarily specified systems with essentially

the same functional requirements. It found:

. . . the cost of military equipment can be from 2

to 10 times more expensive. Acquisition time

can be much longer, and reliability may be no

better—indeed in two cases it was much worse.

In several cases, the size of the militarized

equipment is significantly smaller, reflecting

weight and volume constraints in weapon syss~ me ~esiden[’s ~iva[e Sector Survey, Report of [he Ofice of lhe Secretary of Defense Task Force, op. cit., footnote 29, p. 790. OTA was

unable to find the studies on which these estimates were said to be based.
Chapter 4 Buying Commercial Goods and Services 95

tems. The continuing trend of miniaturization in

commercial electronics should lessen the need

to repackage to meet military needs.

We believe this data indicates the range of

cost and schedule savings possible, without sacrifice of reliability when DOD can fulfill system

and subsystem needs with commercial products.

60

OTA did not attempt to calculate a precise

amount of savings that might accrue from policy

changes that increased commercial purchases. We

did, however, attempt to outline a range of possible savings based on the OTA industrial sector

survey and the savings suggested from the case

studies in order to give policy makers a better understanding of the potential returns from implementing policies of the type discussed in this

chapter.

The estimated range of savings shown in table

4-2 are based solely on the private sector DTIB

and on the assumption that benefits are principal y

derived from activities that change categories—

e.g., move from either process integration or segregation to commercial purchases.

The table indicates that, while expanded commercial purchases in specific cases might yield

substantial savings. resultant net DTIB savings

might remain relatively small. For example, even

if DOD saved 30 percent on every new commercial purchase. DOD would still only achieve a 10

percent overall savings from funds going to the

private sector.

A total savings of 10 or even 15 percent applied

to the sizable private sector DTIB budget would

be significant, but nowhere near the often implied

savings of 30 to 50 percent. Further, such savings

will not be immediately available.

Savings associated with the purchase of consumables (e. g., food and clothing) might begin

immediately. but savings related to more expenEstimated average Impact on total private

savings DTIB budget

0% 0%

5 % 2 %

10“/0 3%

15“/0 5%

20 ”/0 60/0

250/o 80/0

30 ”/0 10“/0

aBased on OTAS irtdustrlal sector survey est mate that about 32 percent

of prvate DTIB spending IS changed as a result of chapter 4 policy options Only includes the Impact on the prlvale sector at the fac Ilty level

SOURCE Off Ice of Technology Assessment, 1994

sive spare parts and new systems might not occur

for several years. Given that the development of

new defense systems that take advantage of commercial parts is likely to be slow in a potentially

fiscally constrained environment, savings will be

even slower in appearing. The 1993 Report of the

DSB Task Force on Acquisition Reform recognized this delay and projected its savings would

occur over a 5-year period. Even that time frame

appears optimistic. however, not only because it

will take time to incorporate or retrofit commercial items in defense systems, but also because defense spending is likely to be lower than the DSB

considered. 61

Achieving additional significant savings will

probably demand more change than simply modifying rules so that items can be purchased from a

catalogue. For example, in the civilian sector,

firms operating similar equipment. such as airlines, achieve savings not only by negotiating

lower prices on individual spare parts, but through

contracted arrangements that may include rela-
96 I Assessing the Potential for Civil-Military Integration

tively long term (3 to 5 years) maintenance and inventory control services as a part of the overall

purchases. These firms save money not only on a

particular part, but also eliminate the need for the

airline to maintain and track an inventory. The service agreement may also include upgrades to the

system. The firm providing the parts and services

may assume configuration control over its parts.

Such an approach would require major restructuring in the DTIB.

Significant savings, however, might accrue

from the elimination of activities (e.g., parts stockage and inventory tracking) in the public sector

DTIB and from reductions in government contracting and oversight personnel associated with

current acquisition practices. A 10 percent reduction in the public sector DTIB might translate into

a $2.2 billion/year savings. This too, would take

several years to be fully realized.

Savings, of course, constitute only one of the

benefits of greater commercial purchases. Greater

access to new technologies, reduced acquisition

times, and a larger mobilization base are also important. These benefits are most likely to accrue if

a broad definition of commercial goods and services is adopted.

Commercial purchases should provide DOD

greater access to state-of-the-art commercial

goods and services, particularly in rapidly developing technical areas, such as electronics, telecommunications, and computers. Though these

changes will have some effect among prime contractors, it is at lower tiers that commercial purchases are most likely to occur. Here the increased

“dual-use” purchase of components might also

enhance commercial competitiveness and preserve the DTIB.

Improved access to technology would not be

limited to so-called “high-tech” items. Past efforts

at commercialization indicate that the availability

and quality of products improved in almost all

cases where commercial substitution occurred.

Evidence from interviews and DLA programs indicates that purchasing commercial goods and

services reduces the time needed to acquire both

advanced technology items and more basic goods

and services.

We cannot point to concrete evidence that increased commercial purchases promote American

global economy competitiveness. To the extent

that DOD embraces commercial purchasing,

however, fewer government dollars will be wasted

on redundant capabilities and paperwork, and a

greater share of DTIB dollars might go towards

strengthening the CTIB.

I Costs and Risks of Policies

There are costs and risks associated with the increased use of commercial goods and services.

These fall into two major categories: 1 ) short-tomedium-term costs and risks associated with the

immediate transition, and 2) longer term costs and

risks associated with the future viability of the

DTIB and the ability to meet future defense needs.

Shifting to more commercial goods and services entails some upfront costs in retraining of

government personnel, changing and eliminating

inappropriate military specifications and standards, and increasing the use of market surveys

and analyses,

Reductions in oversight personnel might initially entail additional personnel costs (e.g., retirement packages). Some of the policies allowing the

greater use of commercial goods and services

(e.g., raising the commercial acquisition threshold) may result in greater opportunities for waste,

fraud, and abuse. Indeed, it has been suggested

that “raising the commercial acquisition threshold

is likely to last only ‘until somebody embezzles

money with one of those simplified procurement

processes, and then you will see the regulations

come back.'”62

It is unclear how large this risk might be. While

GAO has reported that DCAA identified almost

$3 billion in “defective pricing” charges to the

62 David A. Fulghum, “Congress Lowers Goals for Acquisition Reform,” Aviarion Week & Space Technology, May 9, 1994, p. 78.
Chapter 4 Buying Commercial Goods and Services 97

government between 1987 and 1992, the actual

amount of funds finally identified as fraudulently

claimed are far smaller. For example, testimony at

congressional hearings indicated that only about

$1 million of a total of almost $2 billion originally

identified as fraudulently claimed was finally

levied against firms.63

Even if there is no increase in misuse of government funds, in the event of more widespread use

of commercial products and services, some firms

may make higher profits on defense contracts.

This may be viewed as a form of unfair profiteering.

Critics argue that pursuit of a policy of best-value buying may exclude smaller or newer firms in

favor of larger, more established ones. The Small

Business Administration is reported to have expressed concern that the increase in the small-purchase threshold from $25,000 to $100,000 would

“undercut small vendors’ ability to compete on

contracts.” 64

Expanded commercialization may therefore

put smaller defense-dependent businesses at risk

in favor of larger firms-including foreign

firms-that are better able to demonstrate qualifications to perform on time. This may be exacerbated by some of the tools of market analysis and

surveillance. As the more limited number of acquisition personnel do their market surveys their

findings may be skewed towards larger firms-effectively limiting suppliers to larger, betterknown brands and firms,

Currently integrated defense firms making

both commercial and defense items may also be

threatened by the increased use of commercial

products and services. Managers interviewed

pointed out that elimination of government accounting requirements for individual contracts

will work against companies with other defense

business involving militarily unique equipment,

still requiring government cost accounting.

There are also some longer term risks associated with increased commercial purchases. One

concern is over increased foreign dependence for

critical items. The commercial base appears to be

much more internationally intertwined than is the

current DTIB. Further, the current foreign content

in U.S. defense systems appears to be greater at

the lower tiers—the tiers most amenable to commercial purchasing. A 1992 Department of Commerce study of three Navy systems (the Harm

missile, Verdin communications, and the MK-48

torpedo), for example, found the greatest foreign

sourcing occurring at lower tiers; about 5 percent

of the purchases at tiers 2 and 3 were supplied by

foreign sources.65

Greater dependence on foreign suppliers is a

situation that is bound to concern policy makers.

Reports, for example, that spare parts from overseas suppliers were delayed during the Gulf War

aroused significant discussion in the United States

after the war. Concern about the reliability of supply from abroad will persist, absent legislation in

key supplier nations allowing preemption of commercial customers.

Compatibility of components and services provided under expanded commercialization is a further concern. The use of commercial parts and

services raises the specter of interoperability problems. Some suggest that, even with “form, fit, and

function” requirements, there may be situations in

~~ ln,$l(ie the Pentagon, “’Defen\e Contractors Still Abusing Overhead Cost Guidelines,” Oct. 12, 1993. According to House staff, however.

thi~ situation may be due to the unwarranted dismissal of fraudulent claims. Specifically, some congressional staffers *’speculate that in practice

the DCAA prc~ents que~tionable claims to the contracting officer who, confused about allowable claims, may just split the expenses down the

middle and asses~ no penaltiei ugainst the contractor. ”

~~ Joyce Endo\o, “SBA Battle\ pentagon’i Attempt to Raise Small Purchase Threshold,” Gmwwnenf Computer News, Aug. 2, 1993, P.s.

.

The resulting legi~lation increawd the thre~holci, but reserved contracts under S 100,000 for small business unless no small business can be

found to do the work.

by u s Depafi,llent ~}f Conlnlercc, Bureall of Export Admini\[ra[ion, Nu!ionul Spcurity A.~.re.r~mcn! Of lh~ DOnle.~!lc un~~ F~r~>wn SUb~Qn-

. .

(ructors: A Sfu<l) of Three ,\’a\-v W’e(ipcm.s 5~\tern.\, March 1992, pp. 11-III. .,
98 I Assessing the Potential for Civil-Military Integration

which subcomponents are not interchangeable,

particularly in field maintenance.

Finally, some observers fear that the increased

use of commercial products and practices will lead

to reduced system performance. There is, however, no inherent reason why this has to be the

case. Personnel interviewed by OTA all argued

that commercial specifications and standards

were only appropriate if they met the military performance requirements.

BENEFITS OUTWEIGH THE COSTS

Despite the difficulty of quantifying the results,

the benefits of increased use of commercial products, services, and practices appear to outweigh

any costs or risks associated with their increase.

Many of the actual cost savings will occur over

time as new products and services are purchased.

Possibly even more important than cost savings,

however, may be access to the new technology

embedded in commercial products and services.

Without such access the United States may be unable to maintain a leading-edge DTIB.

SUMMARY

Many of the actions discussed in this chapter can

be taken by the executive branch alone. But congressional support for such changes will still be

essential. Changes in specifications and standards, for example, are likely to prompt concerns

among small defense-dependent firms, some of

which may require major internal changes to compete with more efficient commercial firms. Congress will have to consider whether the potential

gains from the preservation of the DTIB outweigh

the potential negative effects on these individual

firms.

DOD can also begin retraining its acquisition

workforce to make maximum use of commercial

goods and services. But congressional funding

support is key to such training. Congressional

backing is also important in implementing the

system of market surveillance and analysis that is

necessary if the United States is to take full advantage of the commercial marketplace.

Other changes, however, depend on congressional actions. One of the most important issues

involves defining what constitutes commercial

goods and services for defense procurement.

FASA addresses this issue. As noted earlier,

broadening the definition of commercial goods

and services to allow the purchase of items not yet

in the commercial sector, or that maybe purchased

by only a few commercial customers, could promote the use of new technologies by the defense

sector, but at the risk of insufficient commercial

market to assure competitive pricing. A narrow

definition might ensure that purchases are backed

by adequate pricing data, but leave military

purchasers vulnerable to losing out on new

technology.

Eliminating the requirement for special government accounting for small contracts will reduce the expense of maintaining special cost

accounting systems and lower the price of some

products purchased by DOD, but it could increase

instances of profit-taking at the government’s expense. Yet it appears that the potential overall savings far exceed any additional costs.

Commercial purchases, however, might result

in a greater percentage of foreign purchases. On

the other hand, global competition may lower

prices and improve U.S. quality. DOD will need to

monitor the trends and the potential for technology vulnerability.

Eliminating the unique contract requirements

that support socioeconomic goals may negatively

affect some national socioeconomic goals. Some

argue that the contract clauses are redundant, since

many of these provisions are also embedded in

U.S. law. Others hold that maintaining special

DOD provisions remains important because it is

easier (0 assure compliance using governmentcontrolled defense spending. At the same time,

many firms have come to view these special provisions as their avenue to economic growth. Congress will want to consider these alternatives.

Ultimately, the increased purchase of commercial goods and services can help achieve the integration goals of saving money and increasing
Chapter 4 Buying Commercial Goods and Services 99

access to technology. Its most important contribu- ability to achieve these objectives will depend on

(ion, however, may be to help preserve a future de- (he degree to which changes such as those outlined

fense technology and industrial capability. The in this chapter are implemented.
c

Processes for

Goods and

Services 5

hapter 4 examined opportunities for increased use of commercial goods and services to meet defense needs. Some

defense requirements, however, are so highly specialized

that they cannot be met by the commercial marketplace. It

may nevertheless be possible for the Department of Defense

(DOD) to obtain many benefits of the commercial market through

a procurement environment that encourages integration of commercial and defense R&D, manufacturing, and maintenance at all

levels: industrial sector, firm, and facility.

An integrated process is one in which common assets—

technology, people, facilities, and administrative organization—

are used to produce both defense and commercial goods and

services. At the industrial sector level, examples of integrated

processes might include joint industrial and government standards bodies, shared national test facilities, and the use of common technologies. At the firm level, integrated processes might

include common corporate functions (e.g., planning, personnel,

training, and possibly R&D) but separate defense production facilities. At the facility level, integrated processes might entail

commercial and defense products being developed, manufactured, or maintained side-by-side by the same personnel.

Many of the processes used to design, develop, produce, and

maintain military and commercial equipment are technically

identical or very similar. But current acquisition policy often

makes military processes substantially more costly and time consuming. Eliminating process integration barriers might lower acquisition and life-cycle costs, provide both sectors with greater

access to innovative technologies, reduce acquisition time, ex101
102 I Assessing the Potential for Civil-Military Integration

pand the potential defense technology and industrial base (DTIB), and even enhance U.S. commercial competitiveness.1

This chapter opens with a survey of the current

level of process integration and estimates of the

potential for further growth. The chapter then

builds on the analyses in chapters 3 and 4 in assessing the barriers to process integration. It concludes with a discussion of policy options for

increasing integration across all levels and analyzes potential implications of such policies.

THE CURRENT AND POTENTIAL USE OF

INTEGRATED PROCESSES

Estimates of the current and potential use of integrated processes are even harder to obtain than estimates of commercial purchases. In large part,

this is because DOD has not collected relevant

data.

The lack of estimates is also due to the inherent

ambiguities in defining process integration. These

ambiguities stem from the wide variety of processes that may or may not be integrated. At the facility level, a manufacturing plant may include a

number of general processes (e.g., receiving,

stocking, internal transport, manufacturing, packaging, shipping, cost accounting, maintenance,

and R&D) and specific processes (e.g., use of a

particular stamping press, touch labor by a particular employee, and quality inspection), any of

which may be divided along commercial and defense lines.

Commercial businesses with no connections to

DOD do not, in fact, necessarily integrate all similar processes. While they commonly separate

many of their processes along product lines, businesses base their decisions to integrate on a variety

of factors (e.g., proximity to sources of supply or

transportation nodes, differing equipment requirements, differing production volumes, and

special labor skills). (See box 5-1.)

Determining which processes have been segregated for economic reasons, as opposed to those

segregated primarily because of the DOD procurement environment, is extremely difficult, and

often the results are subjective.

While data on integration are scarce, a 1992

Center for Strategic and International Studies

(CSIS) survey of 206 government prime contractors asked specifically about current levels of integration. 2 The survey found that 15 percent of

those surveyed did no commercial business, while

13 percent sold only off-the-shelf commercial

items to the government. Thirty-nine percent of

the respondents segregated their commercial and

federal business operations. Twenty-one percent

set up unified management systems within a

single operation to comply with government requirements. Only 12 percent conducted both government and commercial business in the same

‘ Certainly, many of the technologies and industrial sectors of interest to DOD-including aircraft, aircraft engines, electronics, communications, and avionics—have significant commercial, as well as defense, value. U.S. aerospace firms, for example, exported over $43 billion

worth of aerospace products in 1991, over 80 percent of which was civil aerospace products. Firms have long argued that better integration of

their R&D, manufacturing, and maintenance processes not only could lower the cost of aerospace goods purchased and maintained by the U.S.

military but also would help make U.S. producers even more competitive abroad. U.S. Department of Commerce, “Aerospace,” U.S. Indusrriul

Ourlook 1993 (Washington, DC: U.S. Government Printing OffIce, January 1993), pp. 20-25. In that same year, the aerospace industry accounted for more than 25 percent of the Nation’s R&D expenditures, while DOD ordered $22.7 billion in aircraft engines and parts, and funded

more than $6 billion in aeronautics R&D. This market has declined, with 1993 exports of $39.6 billion, and 1994 exports estimated at less than

$34 billion.

2 Debra van Opstal, Integrating Ci\4ilian and Milimry Technologies: An Indu.wy Smey (Washington, DC: The Center for Strategic and

International Studies, April 1993), p. 5.
Chapter 5 Integrating Processes for Goods and Services 103

At the systems-integration level of production, the Advanced Medium-Range Air-to-Air Missile

(AMRAAM) is a militarily unique item. The missile is built by Integrated firms (Raytheon and Hughes), but

prospects that the missile could be assembled on an Integrated production Iine in an Integrated facility

alongside commercial items appear practically nil. At the subcomponent level, in the lower production

tiers, some manufacturing processes are Integrated. There appears to be room for further Integration in the

future For example, a current ARPA-funded project involving Hughes and a smaller firm seeks to use commercial gyros in the AMRAAM. Research is ongoing to upgrade the AMRAAM’s computers, computer software, sensors microelectronics circuits, and advanced composite materials These technologies overlap

the defense and nondefense sectors Therefore, R&D might be accomplished by Integrated firms, possibly

in Integrated facilities, and the resulting products might be dual-use

Estimates on the amount of Integration possible for R&D, manufacturing and maintenance, or from system Integrator to the lowest hers, are difficult to make Industry representatives interviewed for this report

were optimistic that much more Integration could occur, but they noted that Incentives for Integration were

Iacking.

One way to judge Integration potential is to compare the technologies embedded in the missile with the

technologies in commercial products. The AMRAAM and other guided missiles draw from a number of advanced technologies, including

microelectronic circuits fiber optics

photonics explosives

computers software

Of the 10, only two (rocket motors and propulsion, and explosives) primarily serve defense The remaining technologies have significant commercial applications

The figure shows that while the first tier of

suppliers to the two AMRAAM prime contractors depends heavily on military and government business, vendors in the next tier are far

less dependent on government sales About

44 percent of the vendors in the first tier depend on the military/government for more than

75 percent of their business volume, and 45 of

the 135 first-tier vendors produce more than

90 percent of their output for defense.

Second-her vendors have a much more commercial orientation.1 It is not difficult to understand why software, optical sensors, and

microelectronics are among the driving forces

of modern electronic products for industry,

business and the home

sensors and components radar

advanced composites

rocket motors and propulsion

Concentration of AMRAAM Vendors in

Military/Government Business

J

m First tier (Hughes& Raytheon)

m Second tier (Raytheon Only)

d

50<75 75-100

Percent of military/government sales

SOURCE Ivars Gutmanls Analysls of the Clvtl-Mllltary Integration Feaslbllty for Selected U S Industry Sectors Washington, DC

I [t,5 ,Mportant t. remember however, tha[ wb,lle a firm may perform both commercial and defense work the work they do for each

IS not necessarily related

SOURCE Ivars Gutmanls “Analysls of the Clvll-Mllllary Integration Feaslbllty for Selected U S Indwtry Sectors Report for the OTA

Assessment on CwlkMlllary Integration Washington DC, 1993
104 I Assessing the Potential for Civil-Military Integration

Segregated Commercial

Segregated

processes

Commercial

processes buy

processes

Integrated

c~

Current Potential

SOURCE Industrial survey conducted by the Off Ice of Technology Assessment, 1994

facilities. The amount of segregation observed in

the CSIS sample is noteworthy because the firms

surveyed were concentrated in three industrial

sectors that appear to be amenable to integration

of processes:3 aircraft, aircraft and missile engines, and radio and TV communications

equipment.

1 OTA Estimates

The responses to OTA’s industrial survey (outlined in chapter 4, box 4-2) suggested that approximately 46 percent of the value added to goods and

services in the private DTIB is from integrated

processes. (See figure 5-1.) These estimates include both direct and indirect purchases.4

While the pie charts depicting current and potential degrees of integrated processes seem to

suggest a reduction in the “integrated processes”

wedge, this change reflects what actually are major shifts from “integrated processes” to “commercial buy” (discussed in the previous chapter)

and from “segregated processes” to “integrated

processes.”

Previous studies and OTA’s own analysis of

additional selected industrial sectors5 indicate

that lower tiers of industry are more integrated

3 The OTA definition of integration is more expansive than that used by the CSIS study team. As noted in chapter 3, OTA considers integration at various levels from sector, to firm, to facility and workbench or assembly line. OTA was given access to the CSIS data and could therefore

apply its definition to CSIS data. OTA’S assessment of the CSIS data would show a somewhat higher level of overall integration than would the

CSIS’S interpretation of the same data, but still shows considerable segregation.

4 The expmsive OTA definition of integration attempts to identify and estimate integration at discrete points in the development, production, and maintenance process, and OTA’S estimates of current integration therefore may be higher than other estimates.

5 In addition t. tie OTA sumey of r~dodyselected sectors and its case studies, OTA earlier examined 11 industrial sectors and conducted

extensive interviews with personnel in firms that produced products ranging from large weapons systems to basic raw materials. The sectors

were: shipbuilding, aircraft, communications equipment, portable laptop computers, flat-panel display technologies, apparel industry, munitions, circuit breakers, fluid power products, gear manufacturing sector, and composite materials. Also see Office of the Under Secretary of

Defense for Acquisition, Defense Science Board Task Force Report, Engineering in fhe Manufacturing Process, Aug. 21, 1992.
Chapter 5

than are the prime-contractor system integrators.

Opportunities for increasing integrated manufacturing are greater at the lower industrial tiers, but

the lowest tiers are already extensively integrated.

The policy options considered in this chapter

are designed to foster the shift from segregated

processes to integrated processes. The OTA industrial sector survey estimated that this shift will

affect about 15 percent of private DTIB value added. After accounting for those goods and services

estimated to shift to the commercial category, the

OTA industrial survey produced an estimate that

about 30 percent of the future value added will

come from integrated processes. The policies

principally affect the 15 percent of goods and services moving from the segregated base, but may

also produce savings and enhance technology

transfer even in those operations that do not shift

categories.

Many DOD efforts to increase the use of integrated processes have occurred at the industrial

sector and facility level. The policy options discussion later in this chapter considers measures of

effectiveness of current DOD programs.

BARRIERS TO INTEGRATING

PROCESSES

There are many well-documented barriers to process integration. Some are inherent in the technology—a technology may have no immediate

commercial value. Technology barriers limit the

amount of process integration that can take place,

how rapidly such integration can occur, and, ultimately, the amount of money that might be saved.

Other barriers, such as unique acquisition policies, are imposed by DOD and could be quickly

lowered to promote DTIB process integration

with the commercial technology and industrial

base (CTIB).

9 Inherent Barriers

Many defense technologies are not amenable to

process integration for a number of reasons, including the absence of a commercial market, uneconomic production rates, or classification.

Integrating Processes for Goods and Services 105

Weapons and other military systems meant to

perform and support combat missions, for example, are often complex and expensive, incorporating unique technologies with few, if any,

commercial counterparts. The electronics for

fighter aircraft and precision-guided munitions

often require greater miniaturization and the ability to withstand more extreme stresses than the

electronics aboard commercial aircraft. And although the polymer composite material in stealth

aircraft may be the same basic material used in a

commercial airliner. the precision construction of

a radar-evading aircraft is far more demanding

than is the construction of a commercial aircraft.

Such differences extend to manufacturing itself. Many of the skills and technologies involved

in the construction of a nuclear submarine, for example, are unique to the military. Similarly, the

ammunition sector is estimated to be more than

90-percent segregated. Much of this separation is

likely to continue in the future. Unique product requirements, coupled with the absence of a commercial counterpart, make it difficult to envision

profitable civilian and defense R&D or manufacturing of ammunition.

These inherent barriers are exacerbated by the

low rates of production characteristic of military

items. Over the past decade, for example, modern

fighter aircraft have been produced at a rate of

about two to five per month. Aircraft carriers are

produced at the rate of about one every five years.

Attack submarines have been produced at the rate

of three per year. Other products, such as smallarms ammunition, clothing, and rations, may involve highly varied production rates that change

with little notice. Such fluctuation in production.

combined with the military character of the products, promotes the growth of specialization in

which contractors are dependent on defense

business.

Finally, some technologies are deliberately

kept off the commercial market. The nuclear

weapons industry is a case in point. Much of the

industry involved in the fabrication of weapons

and in the processing and reprocessing of nuclear

materials remains highly restricted.
106 I Assessing the Potential for Civil-Military Integration

1 Imposed Barriers

There are, however, many defense goods and services that might be appropriate for commercial

processes, even if the final product is not itself

commercially viable. Further, some rapidly

evolving commercial technologies may offer

DOD more advanced capabilities than are available from purely defense sponsored R&D efforts.

Computers, for example, share much of their

hardware and production techniques with their

commercial counterparts. Commercial computers

may not need to be as rugged as military ones, but

some civilian uses are nearly as demanding, such

as oil exploration and field research of various

sorts. Many of these computers could be developed in a common R&D program, produced on a

single line, and maintained by a common labor

force using common procedures.

But just as many goods and services that might

be purchased commercially currently are not,

many of the goods and services that are amenable

to integration continue to be produced in segregated facilities or production lines. While the total

amount that is needlessly segregated due to laws,

regulations, and current procurement culture is

unclear, OTA’s survey estimated that at least an

additional 15 percent of goods and services might

be moved from the segregated into the integrated

process category.

Most of the barriers to the use of commercial

products discussed in chapter 4 also impede process integration, albeit within a different context.

The primary barriers are:

■ government cost-accounting requirements;

■ procurement process, culture, and skills;

■ military specifications and standards;

■ rights in technical data; and

■ unique contract requirements.

These barriers are listed roughly in the order of

their overall effect as reported in the CSIS industry survey and in OTA’s interviews.6

Government Cost Accounting Requirements

Special cost accounting and oversight requirements

may be an even greater barrier to integrating processes than they are to purchasing commercial items.

Indeed, the Defense Science Board Task Force on

Defense Acquisition Reform called the current

cost-based contracting system, with its unique cost

accounting, “the most important single intrusive

element of the current process.”7

A principal part of the problem, as noted in

chapter 4, is that government accounting standards do not conform to modem commercial accounting practices. Government contracts require

far more detail in allocating costs than do commercial management information systems. Firms

doing defense work must carefully track all hardware and components, not only to ensure the reliability of the parts but also to verify their cost.

They must also track personnel billing against

specific contracts and monitor the use of government furnished equipment. In addition, prime

contractors are required to collect cost and pricing

data from suppliers, although the suppliers are not

required by law to supply such data to the prime

contractors.

The risk of criminal penalties for errors compounds the burden, discouraging some business

executives from seeking defense work. Industry

representatives report that government accounting requirements increase the amount of oversight, which, in turn, raises the cost of the goods

and services supplied to the government.

Industry observers think that the Federal Acquisition Streamlining Act (FASA) of 1994 may

b AS noted elsewhere, r~king ei~er [he most import~t barrier, or the most important response is difficult. There are differences among

industrial sectors and among tiers. Lower tier firms, for example, are often more concerned about rights in technical data than are weapon systems assemblers. Firms responding to the CSIS industry survey placed provision of cost and pricing data and accounting requirements as number one, followed by unique government contract requirements, protection of proprietary data, penalties for certification errors, and technical

requirements and quality control standards (military specifications and standards).

7 Office of~e Under SecretaV of Defense for Acquisition, Report of the Defense Science Board Tusk Force on Defense Acqu;~ifion Reform,

July 1993, p. 6.
Chapter 5 Integrating Processes for Goods and Services 107

have little effect on these issues for firms making

militarily unique items.

The problems imposed by government cost accounting extend to R&D as well as manufacturing. The 1993 CSIS industry survey, for example,

reported that firms ranked cost and pricing data requirements as a primary reason for segregating

their R&D activities. An earlier CSIS CMI study

reported that some firms’ reluctance to engage in

defense R&D could be traced to past experience

with government cost-accounting rules.8

The precise costs associated with the government cost-accounting system are difficult to measure and may differ across industrial sectors. Both

General Electric and Pratt & Whitney, the two

principal U.S. producers of jet aircraft engines,

have reported several million dollars a year in

additional costs associated with meeting defense

orders. Much of this is attributed to cost accounting requirements. Intel Corp. reportedly spent $2

million in a failed attempt to put an acceptable

government cost accounting system in place.9

Government cost accounting was introduced to

maintain oversight on tax dollars. Supporters of

these procedures argue that they remain necessary

to control waste, fraud, and abuse. As proof, they

cite continuing reports of inappropriate charges by

defense contractors. 10

A lack of data on the relative costs and benefits

of the current government oversight regime forestalls analysis of the utility of government cost accounting. Reports by the Defense Contracts Audit

Agency (DCAA) and the General Accounting Office stress the problems found and largely ignore

the costs of oversight itself.

Some studies suggest, however, that the present system for preventing waste, fraud, and abuse

is ineffective at holding down government costs.

A recent study by the Defense Science Board Task

Force on Defense Acquisition Reform, for example, argued that “the public protection offered by

the current system is not a very high standard.’”

It characterized the current system as one that "encourages increases in the price of goods and services, discourages investments in efficient

production, and creates a regime of contention between the government and its suppliers.”] 2

Procurement Process, Culture, and Skills

The acquisition workforce poses somewhat different challenges for process integration than for

commercial purchases. Commercial purchases

raised questions about: the workforce’s knowledge of available goods and services, the definition of what constitutes a commercial product,

and requirements for cost and pricing data on

commercial goods and services. While process integration also raises some of these issues, they

must now be considered within the context of program management, plant oversight, and quality

control. What is at issue here is the ability of the

acquisition workforce to adopt commercial

manufacturing standards and quality controls in

place of existing defense operating methods.

The estimated acquisition workforce, as defined by the Packard Commission and according

to dataasofDecember31, 1993, is approximately

178,000, 94 percent of whom are civilians. This

includes 23,000 contracting personnel and 4,500

contract auditors in DCAA. (See table 5-1. ) Many

observers argue that the 23,000 contracting personnel are hard-pressed to keep up with current

contracting requirements and that this situation

will continue even with legislative changes.

X Jeff Blngaman et al,, Inlegru!ing Commercial and A4ililary Technologies for National Security: An Agenda for Chunge (Washington, DC:

The Center for Strategic and International Studies, 1991 ), p. 18.

v Defen\e Science Board Task Force on Defense Acqulsi(ion Reform, op. cit., footnote 7.

10 ~ee for exanlple, ]nside the pentagon.

. , “Defense Contractors Still Abusing Overhead Cost Guidelines,’” Oct. 12, 1993,

I I ~fen~e Science Board Task Force on Defense Acquisition Reform, Op. cit., footnote 7, p. 1 ~.

11 Ibid.
108 I Assessing the Potential for Civil-Military Integration

Army Navy Air Force DLA DOD totals

Civilian 40,479 73,610 30,638 22,366 167,093

Military 1,356 2,836 7,012 — 11,204

Total 41,835 76,446 37,650 22,366 178,297

SOURCE Defense Manpower Data Center, 1993

Changes might include far less onsite government presence and fewer industry reports. The

government workforce could adopt techniques

such as statistical process control. They might, for

example, conduct periodic inspections rather than

be onsite. Some changes are already occurring.

The government is examining and accepting new

process control techniques—including accepting

the use of commercial manufacturing standards in

place of military standards.

The Army has also instituted a program to

eliminate many program management tools that

had been designed, in turn, to prevent a repeat of

earlier acquisition failures and are frequently included as contract deliverables. These include: development of integrated logistics plans; risk

management plans; and the numerous meetings

between government and contractor personnel to

discuss these plans.

Such costly government requirements have not

been a focus of private sector concern, since contractors were paid for them. In some cases they

have added millions of dollars to a contract. The

Army has concluded that since these activities are

inherent in good program management the Army

does not need to check the plan-just the results.

Differences in the manufacturing standards

adopted by each Service have led firms to make

similar items for different Services in separate facilities. Integrated firms producing militarily

unique and commercial items still face several different government oversight requirements. Developing a common DOD standard would

improve prospects for integration with commercial operations too.

Facility exemptions have also been advanced

for streamlining direct government oversight.

Past efforts have included: the Exemplary Facility

Program; the Army’s Continuous Process Improvement Program; and the Defense Contracts

Auditing Agency’s Corporate Risk Assessment

Guide (CRAG). These have often been viewed as

unsuccessful by industry. They involve upfront

costs paid by participating firms, with few guarantees of recouping those costs. The Office of the

Secretary of Defense (OSD) discontinued the Exemplary Facility Program, for example, after little

discussion with the companies involved. Firms

also argue that relief from oversight in one area

merely invites oversight in another area.

Overall savings from changes in the culture and

skills of the acquisition workforce maybe partially quantified by considering the potential reductions in oversight workforce. The Defense

Science Board Task Force on Defense Acquisition

Reform estimated that a 30-percent reduction in

the acquisition workforce might be possible,

which could translate into a $4 billion annual saving. OTA’s own estimate of potential savings is

about $2.1 billion. This estimate is based on a

178,000 person acquisition workforce earning an

average of $40,000 per person. ] 3

13 Average provided by the office of the DOD ComP~oller
Chapter 5 Integrating Processes for Goods and Services 109

The complexity and difficulty of changing and applying specifications and standards are evident in the

argument over alternates for predicting reliability in electronic equipment, MIL-HDBK-217, the “Reliability

Prediction of Electronic Equipment Handbook” currently used to estimate the reliability of military electronics, has been criticized as being out-of-date and inaccurate, Critics argue that it does not reflect emerging

technologies, leads to costly overdesign, and prevents higher reliability from being achieved. For example,

they point out that the Handbook has a

bias toward MIL-SPEC screened ceramic parts that essentially precludes consideration of modern plastic-encapsulated parts that can be more reliable than more costly ceramic-packaged chips in many military and aerospace

applications. 1

Supporters of the Handbook counter that it provides “a necessary standardized medium for assessing

reliability and comparing designs, ” based on careful analysis. They maintain that any problems result from

misuse or misinterpretation of the Handbook. Moreover, they argue that the Handbook is a flexible analytic

tool, designed to provide a database for comparing design options, Identifying over-stressed parts, and

providing input for analysis. They further hold that very Iittle money IS spent to keep the Handbook current

In June 1992, the Army authorized $1 million to pursue an initiative aimed at providing alternatives to

the Handbook The Air Force and Navy are both reportedly Interested in the Army project.

1 George Watson “MIL Rel[ab!llty A New Approach, ” IEEE Spectrum August 1992, pp 46-49

Military Specifications and Standards

As discussed in chapter 4, military specifications

and standards have been used to define not only

the physical characteristics and expected performance of the product, but also-most importantly

from the perspective of issues addressed in this

chapter—many of the manufacturing processes to

be followed. Standards that describe, among other

things, how the system is to be built and tested and

how the work is to be managed are cited as major

cost drivers and impediments to process integration. The Defense Science Board Task Force on

Defense Acquisition Reform, for example, estimated a “20 percent to more than 50 percent” additional cost to a product when compared with best

commercial practices. 14

According to the Advisory Panel on Acquisit ion Law Reform, military standards often require

commercial companies to depart not only from

commercial practices but also from a company’s

individual processes that often lie behind the

firm’s commercial success. 15

Debates over the appropriateness of particular

military specifications and standards can be contentious. Box 5-2 looks at one example from electronics. Critics argue that this is an area in which

acceptance of commercial standards and integration of processes might be particular y appropriate

for DOD.

The flowdown of specifications and standards

to lower tier contractors makes it more difficult to

acquire dual-use materials, components, and subsystems for major systems. There have been few

incentives for prime contractors or suppliers to

seek alternatives to militarily specified components, or to propose changes in process standards

I ~ ~~cnie Science Board Task Force on Defense Acqu/si(ion Reform, op. cit., fOOtnOte 7. p. 6.

15 me ~fen~e S~ ~(em~ Management Co]iege, “Streamlining Defense Acquisition Law, ” E.wcufl\e Summury: Report of !Ae Acqui.$ir\on

Labi AdI l.s<]rj Purwl l<> Ihe L’nitcd Stule5 Congress, 1993, p. 14.
110 I Assessing the Potential for Civil-Military Integration

The Pratt & Whitney Canada JT15D turbofan engine is

designed for small executive, commuter and military training

jets.

used. That situation is changing with Secretary of

Defense William J. Perry’s June Memorandum on

Military Specifications and Standards, which endorsed the recommendations of DOD’s Process

Action Team for Specifications and Standards and

directed the Service Secretaries and other Service

personnel to implement changes. 16 The Team recommended that:

■

m

●

■

Manufacturing and management standards be

canceled or converted to performance or nongovernment standards.

Future contracts provide incentives to contractors to propose alternative solutions to military

specifications and standards.

The use of military specifications and standards

be prohibited except where required for truly

militarily unique needs.

Process control of nongovernment standards be

used in place of quality control testing and inspection, and militarily unique quality assurance systems. 17

DOD had already begun to act on some of the

recommendations even before Secretary Perry’s

memorandum. For example, in February 1994,

Under Secretary of Defense John M. Deutch authorized program offices to use ANSI/ASQC Q90

and the ISO 9000 service standards in contracts

for new programs. The offices could also use these

standards for follow-on efforts to existing programs instead of MIL-Q-9858A (Quality

Program Requirements) and MIL-I-45208A (Inspection System Requirements). Under Secretary

of Defense Deutch stated that the purpose was to

improve process capability, control, and quality

“by endorsing a single quality system in any contractor facility.” 18

Case studies have attempted to document the

costs associated with the inappropriate use of’ military specification and standards when commercial standards would do, but the cases available,

while providing insights on the costs, do not provide a basis for generalization. The Defense Science Board Task Force on Acquisition Reform

estimated savings from 10 to 25 percent or more

from integrating the production of transport aircraft, jet engines, electronics and software, and

similar items. 1 9 Such savings are difficult to document across the budget. But in individual cases it

is clear that adoption of commercial standards

sometimes offers dramatic savings. DOD can

make many, if not all, of these necessary changes

under its current authority.

Rights In Technical Data

Almost half of the respondents to the CSIS Industry Survey listed protection of proprietary data as

a reason for segregating operations. While there is

lb Secre(w of ~fen5e Wiljiam J. Peq, Memorandum for the Secretaries ojthe Military Departments, Subject: Specijicufions and stundards-A Ne~’ Way of Doing Business, June 29, 1994.

IT Briefing: process Action Team for Specifications and Standards Final Report, NOV. 19. 1993.

IS Under Secre(au of Defense, John M. Deutch, l.femorardum for Secretaries of rhe Milifary Deparonen[s, Subject: Use of Comnterciul

Quality S}stem Standards m the Department of Defense (DOD), Feb. 14, 1994.

(g ~fense Science Board Task Force on Defense Acquisition Reform, op. cit., footnote 7, p. 8. Estimates of savings on some individual items

were far greater-examples of gloves and radar provided an estimated 60-percent savings and some communications equipment was estimated

to cost only one-tenth that of similar militarily specified items.
Chapter 5 Integrating Processes for Goods and Services 111

general agreement between government and industry that the government should have access to

the data it needs to install, operate, and maintain

its systems, tension arises concerning other uses

of data that could compromise commercial proprietary information.

Chapter 4 noted that the government’s ability to

distribute a contractor’s technical data can have

the advantage of creating new producers in the

supplier base (theoretically driving down costs)

and/or ensuring continued capability. Since the

government maintains many of its systems in service for decades, the cost and risk of dependence

on a single supplier can be significant. From the

contractor’s viewpoint, however, this approach

can put at risk the very technologies and processes

that convey competitive advantage in the commercial marketplace.

There are three categories of rights the government can acquire:

● limited rights—which allow the government to

use all delivered data for government purposes:

 government purpose license rights—which allow the government to distribute the data to

others under a limited use restriction (e.g., the

third party promises not to use the knowledge

acquired in other activities); and

■ unlimited rights-which grant the government

the right to distribute the data without restriction.

Under any of these arrangements the government may receive and use internally any data delivered under the contract. But there is

disagreement over the government’s requirements for unlimited rights to the manufacturing

and process data needed to reproduce an item

(e.g., to distribute the technical package to other

contractors; to order, redesign, or manufacture an

identical product or system).

Under current regulations, the government

may require unlimited rights in data when the

technology was specified by, developed during, or

required for the performance of a government

contract or subcontract. This gives the government wide latitude to demand unlimited rights in

data or software for products or technologies used

in or modified for DOD systems and presents

problems for a competitive firm.

An example illustrates the problem: The government fully funds the development of a part or

system and the item is then built in a privately financed manufacturing facility. The government

clearly has a right to data pertaining to the operation, installation, maintenance, and repair of that

part or system, but in requiring the data that would

permit it to second source the item, the government also obtains de facto rights to the privately

funded process technology. Industry argues that

the government merely exercises the contractor’s

manufacturing capability and expertise; it does

not own the process, only the product to which

that process was applied.

While the provision in FASA that provides the

presumption that technical data under contracts

for commercial items are developed exclusively at

private expense may have a positive effect on commercial purchases, it does not appear to address

many of the problems facing those attempting to integrate processes (e.g., potential requests for a commercially developed manufacturing process used to

make a militarily unique item).

These technical data rights rules are grave disincentives for commercial firms to employ stateof-the-art products or processes in DOD systems.

Under the current system, any producer willing to

integrate facilities risks compromise of proprietary process information. The Defense Science

Board noted: “the unique DOD demand for data

rights beyond normal commercial practice . . . results in separate processes being developed for

DOD and commercial work.”20 During interviews, the OTA assessment team found a number

of cases that supported this conclusion. Disputes

over rights to data are likely to escalate with any

increase in the use of commercial products and increased integration of processes.

Z() ~fenje Science Boar~ TaJk Force on Defense Acquisition Rcf{mz, Op. Cit., fOOtnOtc 7. p. f.
112 I Assessing the Potential for Civil-Military Integration

Whatever the costs of duplicating production

facilities, the real cost of this barrier is probably its

negative impact on DOD’s ability to access cutting-edge process technology.

Unique Contract Requirements

A host of unique requirements appear in government contracts. Five categories are said to create

serious barriers: affirmative action laws, procurement integrity statutes, small business subcontracting plans, domestic sourcing requirements,

and contractor responsibility laws. All are intended to achieve important national goals beyond government procurement.21 Some specific

examples were outlined and discussed in more detail in chapter 4.

The effect of these unique contract requirements on processes is to disrupt long-term supplier relationships by requiring alternative suppliers;

and disrupt normal business processes by requiring tracking and reporting of compliance. Critics

argue that attachment of these conditions as specific contractual obligations adds incremental

cost to the procurement process for possibly small

social benefit (in the case of the existence of other

relevant law).

The negative effects of these contract requirements on integration of processes are concentrated

at the firm and facility level. Tracking and reporting on compliance adds to the operating costs.

Full compliance may undermine the development

of long-term business relationships with suppliers. This may be a particular problem as the base is

down-sized. FASA is viewed as providing no relief in this area for the bulk of DOD funds (e.g., in

the case of contract actions greater than $100,000

for militarily unique items).

POLICIES FOR INCREASED

PROCESS INTEGRATION

A number of approaches to reducing or eliminating the imposed barriers that impede process integration have been suggested. To succeed, they

must be tailored to the three broad activities

(R&D, manufacturing, and maintenance) that

govern the life-cycle of military goods and services. Furthermore, although integration is usually discussed with regard to the facility level

(manufacturing line or R&D lab bench), it might

also occur at the industrial sector and firm levels.

To be effective, policies must be tailored for the

level or levels at which they might have positive

effects. Table 5-2 provides some examples.

A truly integrated approach would address all

commercial and defense technology and industrial processes from R&D, to manufacturing and

services, to maintenance.

i The Impact of Technology

Modem technology may be facilitating a shift toward integrated processes. (See box 5-3.) A recent

example of process integration from the outset is a

new modular avionics radar designed by Westinghouse to detect wind shear. The basic designs of

both the defense and commercial versions share

many common characteristics and can be modified to fit on a variety of aircraft.22 An often cited

example of earlier integration is the Air Force’s

KC-135 tanker and the commercial Boeing 707.

Both aircraft were spawned from a common jet

transport prototype developed by Boeing.23

In the past, integration has often involved

“spin-off,” i.e., the transfer of technology from the

military to the commercial sector. Radar, computers,

21 Debra Vm Opstal, “white paper On Barriers m Commercial-Military Manufacturing Process Integration” (Washington, ~: center for

Strategic and International Studies, Dec. ]0, 1992).

22 James j. Hughes, Making D~/-use Techwlogies Work (Baltimore, MD: Westinghouse Electronic SYstems), 1993.

23 Job A. Alic et al., Beyo~ Spinofi. Military ~n~ Commercla/ Tech~logies in a C~nging World (Boston, MA; Harvard Business S~hool

Press, 1992), p. 69.
Chapter 5 integrating Processes for Goods and Services 113

Level of M/hat might be

integration integrated

Industrial sector All activities in a

particular industrial sector, including companies, industry

groups, standards bodies,

government labs,

defense acquisition officials, and

academia.

Firm

Facility

Senior management, divisions,

branches, and

assets of an individual company

or corporation.

R&D, production,

maintenance,

and/or administrative processes

within a single

facility,

Examples of

Examples of barriers to

integration at further process

this level integration

Use of common

technologies,

processes, and

specialized assets (e. g., unique

test stands, wind

tunnels, and inindustrial research

centers) within an

Industrial sector.

Sharing of corporate vision and

resources, including management,

workers, research

centers, accounting and data systems, equipment,

stocks, and facilities.

Sharing of personnel, equipment, stocks, and

administrative

processes within

a single facility;

joint defense and

commercial activity on a production Iine, in a

work group cell,

or at an R&D lab

bench.

Differing commercial and military product and

process requirements, separate

specification and

standard systems, go-it-alone

attitude in businesses or DOD;

classification of

technologies, absence of measure

of long-term effectiveness, opposition by Services and parts

of the government.

Need to shield

commercial work

from DOD oversight and added

overhead costs,

different accounting/data systems;

different management and marketing environments,

classification.

Need to shield

commercial work

from DOD oversight and added

overhead costs;

different accounting/data/supply

systems, military

uniqueness; use

of military specifications and standards; Iimits on

uses of government equipment,

classification.

Rationale for Policies for

benefits of increasing

further process process

integration integration

Increase process

technology transfer; reduce costs

by avoiding duplication, increase international competitiveness; leverage Iimited R&D

funds.

Internal technology transfer;

maintenance of

capabilities in

commercial or

defense downturns; economies

of scale; inincreased long-term

stability due to

diversification,

capital availability

Cost savings;

economies of

scale, reduction

of redundancies,

reduction in capital investments;

less worker retraining; lower

overhead costs,

direct process

technology transfer; job retention,

——.— .—

Foster DOD participation in commercial consortia and

standards-setting

bodies, open

unique government facilities to

commercial use;

rationalize the

DTIB and increase

reliance on the

commercial sector; promote joint

development of

manufacturing

technologies,

accept common

technologies.

Change requirements for rights in

technical data,

modify the use of

military specifications and standards; design for

dual-use, create

more predictability

in defense budgets through multiyear contracts.

Streamline acquisition rules and

reduce direct oversight; promote

commercial standards; develop

function-based

standard data

packages, design

for dual-use; fund

technology areas

rather than individual technologies.

SOURCE Office of Technology Assessment, 1994
114 I Assessing the Potential for Civil-Military Integration

The Defense Science Board and others have noted that many important technologies are converging in

products with both military and civilian applications.1 These developments may enhance the ability to integrate CTIB and DTIB processes, Convergence is especially prevalent in the electronic industrial sectors,

where commercial technologies often lead their defense counterparts and where commercial firms emphasize consistent quality and durability.

In addition, advances in computers, manufacturing, and communications technology hold the promise

of more flexible or agile manufacturing. Many believe these advances will cause a fundamental change in

mass production to “mass customization. ” Several benefits could follow from this shift:2

●

■

■

the flexibility to produce at low rates, with cost and quality similar to that in high-volume production,

the capability to mix production—converting rapidly from one product to another with minimal retooling

costs or delays—in cases where products are procured in small quantities; and

the ability to adapt and rapidly Incorporate new product and manufacturing technologies in existing or

new products,

Simulation and modeling techniques are increasingly useful in testing designs. Reportedly, “the adoption of rapid prototyping technologies has reduced by 50 to 80 percent the time Involved in getting prototype parts.”3 These techniques can help validate manufacturing, maintenance, and management processes, While some of these tools are becoming available even at the smallest firms, the more complex

tools still require expensive computing equipment. Firms or facilities might benefit from the capacity to

easily share the costs of such equipment across defense and commercial product lines. DOD would benefit from this cost sharing, as well as from the direct benefits of modeling, such as rapid prototyping.

Meanwhile, various testing and quality control methods or philosophies, such as statistical process control or ‘(zero defects, ” have improved the reliability of commercial products, often to the point that they are

more reliable than defense items produced on assembly lines run according to military standards. Studies

have argued that many of the military manufacturing standards developed in the past may be both unnecessary and detrimental to production (e. g., visual testing of electronic parts).

These developments may provide new opportunities to manufacture specialized military products on

the same assembly line as similar, or related, commercial products, employing the same tools, stocks, and

labor, Even if process Integration is more applicable in components and subcomponents than in final assembly, it could still have a major impact on overall weapon systems costs and the size of the potential

base. DOD might especially benefit from manufacturing flexibility, since peacetime production rates are

often relatively Iow—essentially batch production—while wartime production rates might be much higher.4

The Defense Logistics Agency (DLA) has been experimenting with harnessing technical developments to

hedge against wartime needs using contractual agreements that take advantage of such flexibility. The

DLA, for example, has negotiated and exercised standby agreements with commercial firms and supported the Introduction of new technology to ramp up production of military clothing in the event of a national crisis

.

1 Defense Science Board 1986 and 1989 Studies on The Use of Cornrnercla/Cornponenfs m M1/lfafy Equlprner?t A(SO see John A

AlIc et al Beyor_rd Spmoti M/lraryand Cornrnercla/ Techno/ogles ma Changing V/odd (Boston, MA Harvard Business School Press

1992), p 47

pManufa~turlng Systems Committee, DOD MANTECH Advisory Commlftee, Mar?utac[urmgsystems stra~eglc P/an, March 1993

p 59

Sofflce of the Under Secretary of Defense for Acqulsltlon, Defense Science Board Task Force Report, Engineering m the Manufac

hmng Process, Aug 21 1992, p F9

4Analysts note, however, that the total capacltyof a flexlble Ihne might be relatively mflexlble, because such a IIne would be planned

for use at near full capacity during peacetime The ablllty to Increase defense products, therefore, WIII depend on dlsplacmg nonde

fense products on demand
Chapter 5

and composites are examples of spin-off technologies. But technological changes and the shrinking

defense base suggest that in the future there may

be more “spin-on” of commercial product and

process technologies. applied to defense needs.

Raytheon’s MILVAX computers, manufactured

under license by the Digital Equipment Corp., are

military versions of Digital VAX computers and

can use commercial software .24

Some technology, however, will undoubtedly

still be transferred from the military to the commercial sector. A recent example involves Raytheon Corp. ’s design of its first gallium arsenide

monolithic microwave integrated circuit (MMIC)

chip for commercial use. The commercial chip

was produced in the same facility that produces

chips for Raytheon’s Missile Systems Division.

Raytheon reports that the chip is of high quality

and meets the commercial market demand for

high-performance devices, without the use of

DOD testing and documentation.25

Policy changes should seek to take advantage

of technology trends, to facilitate technology

transfer both into and out of the DTIB, and to reduce duplication of effort.

I Process Integration at the

Industrial Sector Level

Government policies affecting process integration may be easiest to institute and least controversial at the industrial sector level. Recent broad

policy initiatives, such as the Technology Reinvestment Project (TRP), will affect integration at

all three levels, but the important technology development effort will have immediate, and possibly greatest, effect at the industrial sector level.

As noted in table 5-2, at the industrial sector

level, process integration may involve cooperation in the development and distribution of procIntegrating Processes for Goods and Services 115

ess and product technology. It may also involve

rationalization of specialized technical or industrial assets to meet defense and nondefense needs.

Sector-level integration allows the DTIB and

CTIB to work from the same base of knowledge

and make better use of resources. While all

technologies in a sector might not be relevant to

both defense and commerce, many technologies

might be---especially if efforts are made to exploit

dual-use opportunities.26

Commercial participants in the integration of a

particular industrial sector might include business, labor, professional organizations, and standards and testing bodies. Defense participants

might include defense firms and representatives

from the public sector (DOE and DOD laboratories, depots and other maintenance facilities,

manufacturing arsenals, and test centers). The degree of overlap in private sector representatives

from the DTIB and CTIB might provide an indication of current integration.

Industrial sector integration might involve developing common manufacturing or maintenance

techniques; participating in standards and testing

bodies; establishing joint centers for R&D; conducting common trade conferences and exhibitions; and sharing assets, such as wind tunnels,

launch pads, and test stands. Sharing resources

can help ensure that an industry is not permanently divided into a DTIB and a CTIB. The aircraft

engine industry, for one, has had a long-term, Air

Force-sponsored engine development program in

which the results are shared by military and commercial participants.

DOD and DTIB involvement may influence

decisions (e.g., on research emphasis, test protocols, and maintenance techniques) in directions

that benefit DOD needs, but decisions also must

be commercially sound. For this reason, propo24 Ib]d., p. 73. Chapter 4 dlscu~scs the option of buy ing many commercial items directly. thus taking full advantage of the commercial R&D

embedded in thow itcm~.

25 “R:ij theon Ek~ign\ MMIC Chip for Commercial Use,” A\ia[/on Nkek und Spucc Technolo<q), July 20, 1992, p. 50.

2(’Such integration CIOCJ not imply centralized industrial planning, but rather a concerted effort to take ad} antage of available resources and

dm eloprnent~.
116 I Assessing the Potential for Civil-Military Integration

nents of integration argue that a fundamental principle for successful integration is the design of

defense equipment to make optimum use of dualuse items.

The SEMATECH consortium, for example,

uses government funding to develop manufacturing technology for future generations of microchips—a development that may be more critical to

international industrial competitiveness than to

defense. The recent DOD initiative on flat-panel

displays is designed to support the development

of a commercial industry that might also meet the

needs of a more limited defense market. Underlying assumptions in both efforts include that civilian developments in these fast-moving sectors

drive technology and that future defense needs can

be ensured at lower cost through a strong commercial industry.

But critics of such efforts argue that government initiatives are unlikely to be as efficient as

the market in supplying defense needs. Such efforts, they allege, will “waste money, fall prey to

political pressure and distort competition.”27

Still, most critics do not deny that there is a role for

government in technologies of importance to defense—what they question is the size and character of that role. (See box 5-4, pp. 119-120.)

Three key objectives of a industrial sector-level

process integration effort are: 1) leveraging funds,

2) increasing the level of knowledge in the sector,

and 3) diffusing new technology.

Leveraging funds is especially important

given the downward trend in defense spending.

Increasing industrial sector-level process integration might allow DOD to eliminate redundancies

that exist between the public and private sectors of

the base and focus future DOD efforts on militarily unique technologies that have no commercial

market, rather than duplicating commercial efforts.

Limited government funds might be directed at

these militarily unique areas, with some continued

spending in commercial sectors such as microelectronics, where government seed money may

be important.

The ability to leverage funds depends on

DOD’s readiness to exploit technologies with

both defense and commercial application. This is

not always possible, since the military may have

specific performance requirements (stealth aircraft) that do not exist in the commercial sector.

But even where differences in the final application exist, it may be possible to identify processes

applicable to both defense and commercial products. Software and design technologies, for example, are important to both the commercial and

defense composites industry. Both markets are demanding increasingly sophisticated product designs. An Army Research Office effort to develop

design software that will reduce the time from

product concept to delivery has both defense and

private-sector applications.28

Rationalization of public and private R&D,

production, and maintenance activities will also

leverage funds. One of the principal R&D integration challenges, for example, is to identify proper

public and private roles and to effectively rationalize the activities. In the past, 30 to 40 percent of

defense R&D was conducted in military service

laboratories or in Department of Energy (DOE)

weapons laboratories. These public-sector facilities generally focus on technologies with high

military potential, and pursue research with a potential for long-term payoff. Future research will

have to take maximum advantage of commercial

developments, while maintaining some militarily

unique research.

Cooperative Research and Development

Agreements (CRADAs) can also help leverage

funds by transferring technology from federal labZT Ro~~ J. Samuelson, ‘Lnat Screens and Subsidies,” The Washington Posf, May 19, 19% p. A23.

28 OTA Comwsi[e Materla]s Case Study, forthcoming background paper supporting this assessment.
Chapter 5 Integrating Processes for Goods and Services 117

FY 1995

FY 1993 FY 1994 Authorization

Awards Appropriations conference bill

Technology reinvestment project

ARPA Dual-Use Partnerships

Commercial-Military Integration Partnerships

Advanced Manufacturing Technology

Regional Technology Alliances

Manufacturing Engineering Education Program

Manufacturing Extension Program

Dual-Use Technology Assistance Extension

TRP-related Small Business Innovative Research

Subtotal

Reprogrammed funding

MARlTECH

82

42

23

91

28

87

91

7

451

—

—

150

100

30

100

24

0

0

NA

404

120

30

245

96

30

80

24

25

0

NA

500

50

Other dual-use technology programs

Agile Manufacturing and Enterprise Integration 29 35 35

Advanced Materials Synthesis and Processing 29 30 30

U S -Japan Management Training 9 5 10

Subtotal 67 70 75

Small Business Innovative Research (SBIR) 85a 145a 161a

Nonpartnership dual-use technology programs

High Definition Systems

Optoelectronics

Multi Chip Modules

Advanced Lithography

Advanced Simulation

Other Materials and Electronics Programs

New Navy lnitiative

Subtotal

Grand total

92

23

22

71

—

32

—

240

758+85

85

32

29

58

59

64

—

327

951 +145

68

26

25

60

21

32

50

282

907+161

-.

a SBIR funding IS an estimate no speclflc amount mandated by law

SOURCE Off Ice of Technology Assessment, using Defense Budget Project, CBO, and DOD data, 1994

oratories to the private sector. The use of CRADAs has expanded as a result of changes in the

law. There also appears to be more real interest at

government laboratories in the face of budget cuts

and mission changes, and greater interest by

business.

The Technology Reinvestment Project (TRP)

can also leverage government and private-sector

funding. (See table 5-3.) The TRP is divided into

several broad areas: Technology Deployment,

Technology Development, and Manufacturing

Education and Training. Its goals include diversification from defense to commercial products, integration of defense and commercial production

facilities, deployment of technology to and from

commercial industries, and development of dual-
118 I Assessing the Potential for Civil-Military Integration

The Oak Ridge Manufacturing, Prototyping, and

Demonstratlons Center offers commercial companies

expertise and demonstration equipment m a variety of

manufacturing technologles, including multiaxis and

nontraditional machining.

use technologies. 29 It can potentially leverage investment through the commercial-military

technology partnerships, defense dual-use control

technology partnerships, and defense advanced

manufacturing partnerships.

TRP received $404 million in fiscal year 1994,

of a total of about $1.7 billion for defense conversion and dual-use technology programs government-wide. This effort centered more on

technology development and less on deployment,

with priority given to developing dual-market

items for the defense and commercial markets.30

The project may have its most immediate impact at the sector level. In the long run, however, it

can affect integration at the firm and facility levels

too, by creating dual-use technologies.

Although TRP has received significant support

from Congress, the program has raised concerns

about how technical research areas are selected,

whether DOD and ARPA should be managing the

project, and how the success of the project is ultimately to be determined.

Finally, the government is attempting to leverage past investments by making available the

unique capabilities of government R&D facilities.

The naval ship design facility at the David Taylor

Model Basin has been touted for new commercial

ship designs. Other facilities under discussion include the Arnold Engineering Center aerospace

test facilities and supercomputer facilities at Los

Alamos and Lawrence Livermore. The Oak Ridge

Y-12 Production Facility has organized 15 Centers for Manufacturing Technology and is applying expertise developed during the Cold War to

commercial manufacturing problems.

Increasing the level of knowledge in an industrial sector is a second key industrial sectorlevel goal. Achieving this goal will require an

understanding of defense and civilian technology

needs.

While the military Services have long had science and technology plans aimed at pursuing useful technologies, a comprehensive DOD-wide

plan has only recently begun to emerge. In response to congressional requests to develop a

process for evaluating the allocation of resources

in the late 1980s, DOD developed a “critical

technology plan.”31 The yearly submissions of

this plan, however, were criticized as being a listing of interesting technologies rather than a guide

to resource allocation. The DOD Key Technologies Plan, released in July 1992 and tied to the Department Science and Technology Strategy, was

thought by some to be nearer the mark.32 The S&T

strategy contained seven research thrusts directed

at military forces and operational requirements.

N Advanced Research %oject Agency Briefing, APr. 6$ 1993”

30 Ibid.

~ 1 p.L. I 01.1891 os stat. 1512 ptiagraph Zsog(a) directed the Secretary of Defense, working with the Secretary of Energy, 10 submit annually to the Armed Services Committees of the House and Senate a plan for developing the technologies considered most critical to cnsurmg the

long-term qualitative superiority of U.S. weapons systetns.

~Z us ~pannlent of ~fense, Director of Defense Research and Engineering, DOD Key ~echnofugie.~ ~lan, JUIY 19~2.
Chapter 5 Integrating Processes for Goods and Services 119

The government will undoubtedly continue to play an Important role in both commercial and defense

R&D. The figure below-left shows total estimated R&D spending by source for 1993 The federal government provided $69.7 billion, about 42 percent of the total, Twenty-five federal agencies were engaged in

funding R&D But 93 percent of the funding comes from the six shown in the figure below-right DODs

share has dropped from a peak of 64 percent in 1986, to an estimated 52 percent in 1993, This IS expected

to drop to about 51 percent in 1994.1 Increased Integration of commercial and defense efforts might

streamline the national R&D effort by eliminating personnel and avoiding unnecessary duplication

There are a number of initiatives, aimed at better coordination of the government R&D effort, that can

potentially have a positive effect on the Integrated base. The development of a National Science and

Technology Council (NSTC) raises coordination of government science and technology to a Cabinet-level

group with the authority to establish budgets and resolve conflicts.2

R&D Funding by Source, 1993 Estimated Federal Obligation, 1993

%

nt

Other

60/0

Total $160.7 billion

N ASA 1

DOA

DC

Other 7%

Total $69.7 billion

SOURCE Nallonal Science Board, SclenceandEng/neerlng lndicafors, National Science Foundation (Washington DC U S Government Prlntlng Off Ice 1993) (NSB93-1 ) pp 92 and 111

1 NationalSclerce Board Sc/ence and Er?gmeermg Indlcafors, National Science Founda[ton (Washington, DC U S Government

Prlntlng Off Ice 1993) pp 104-111

Zwpere N. POIICy Has Gone Before , “ Washmgtori Technology, Mar 10, 1994

(conhnued)

. —
120 I Assessing the Potential for Civil-Military Integration

DOD initiatives to promote R&D integration include Project Reliance, a program designed to streamline

Service activities, improve coordination, and avoid unnecessary duplication. Reliance could result in substantial savings. Second, the Off Ice of the Secretary of Defense and the Services are all examining opportunities for using civilian R&D in place of DOD-funded efforts. But efforts to identify specific civilian scientific activities of interest to defense are only just beginning. Third, the Services plan to direct more research

effort to projects with potential commercial application. The Air Force, for example, plans to spend from 10

to 20 percent of its research funds on such projects. Both the Navy and Army plan to improve coordination

of research involving Service laboratories, industry, and universities in order to leverage their limited research funds. Fourth, all the defense laboratories have increased their participation in technology transfer,

The National Science Foundation notes that technology transfer activities can run the “gamut from the informal exchange of ideas between visiting researchers to contractually structured research collaborations involving the joint use of facilities and equipment.”3 They include Cooperative R&D Agreements (CRADAs),

Patent License Agreements (PLAs), and technical outreach programs. The government, for example, expects to have more than 3,200 CRADAs in effect in 1995, many with defense-oriented laboratories—especially the DOE weapons Iaboratories, CRADAs are designed to allow transfer of technology to the private

sector. Under these agreements, federal laboratories and the private-sector collaborators share resources

in collaborative R&D. The laboratories also assist industry, both on a reimbursable basis and in an informal

manner by responding to requests for information Oak Ridge National Laboratory, for example, provides

support on technology development in materials forming and processing, and researchers at Los Alamos

National Laboratory provide technical advice to small business, The government can thus assist industry

Informally, provide more formal consulting help on a reimbursable basis, and grant licenses of technology

developed within the government,

Government organizations also support and participate in a number of R&D consortia with defense and

commercial applications, including the Great Lakes Composites Consortium, SEMATECH, and the Advanced Battery Consortium. DOD also provides support for activities led by other government agencies,

such as the Automated Manufacturing Research Facility at the National Institute of Standards and Technology

The Advanced Research Project Agency is supporting several integration activities under its Technology Reinvestment Project (TRP). TRP is a mix of eight individual programs whose goal is to bolster the economic competitiveness of defense-dependent resources and increase the availability of dual-use technologies for national security purposes, TRP involves competitive awards, participation of a wide range of

Industry, universities, nonprofit organizations, and state and local governments; and cost-sharing,

But government Involvement in many of these activities is not universally supported. While many in

business welcome government activities, others in the business and academic communities complain that

federal laboratories are competing directly with the private sector—and doing so unfairly because of U.S.

government backing, These concerns have resulted in moves in Congress to bar federal laboratories from

conducting research and services that “conflict with existing capabilities in the private sector.”4 The divid -

ing line between government activities viewed as helpful and those viewed as threatening differs by firm,

Drawing that Iine will be difficult.

3

1 bid p 119

4“Competltlon from Department of Energy Laboratories Gets Capitol HIII Attention,”’ Technology Transfer News, p 8
Chapter 5 Integrating Processes for Goods and Services 121

One—Technology for Affordability—was specifically intended to promote technologies that

would result in more affordable defense

systems .33

But DOD has never made a strong link with

commercially relevant technologies. A 1991 report by the National Critical Technologies Panel

compared DOD critical technologies, the Department of Commerce “’Emerging Technologies,”

and the Panel’s “National Critical Technologies.”

There were to be sure many areas of overlap, but

little evidence that DOD has sought to systematically exploit civilian technology investments.

This may be changing. The Director of Defense

Research and Engineering (DDR&E) is reportedly reviewing Department R&D efforts to identify

research needs and determine those that can be

met in the civil sector.

DOD and defense industry involvement in

standards-making bodies can supply insight into

developments of interest in the commercial sector.

But a conscientious effort to incorporate commercial technology into defense systems is ultimately

the most important step for the Department. Such

a commitment, if enforced, will force military

equipment designers and the Services to maintain

an up-to-date understanding of commercial developments in their sectors.

Diffusing new technology is the third key aspect of integration at the industrial sector level.

Many observers argue that the U.S. government

can play a major role in diffusing technology.

They argue that America’s international economic

competitors owe part of their success to a government role in developing critical manufacturing

technology and in diffusing that technology

throughout industry.

According to a 1988 Defense Science Board report, for example, the Japanese Ministry of Industrial Trade and Industry (MITI) “engages in

effective, long-range planning for development of

both the defense and civil sectors. This broad industrial planning effectively transfers technologies and products originally developed for civilian

goods to the defense sector and vice versa.”34 Although there is a growing recognition that MITI

has been neither all-powerful nor infallible in

selecting and supporting technology, it has facilitated the development of government-commercial partnerships and has championed the

growth of key industries.

CRADAs are one means of diffusing technology. DOD has developed a number of other mechanisms to help diffuse technologies. One involves

government-commercial consortia to perform research in areas of mutual interest such as the Great

Lakes Composites Consortium and the Great

Lakes Industrial Technology Center, both of

which conduct research on matters of interest to

DOD and act as conduits for technology between

the defense and commercial sectors.

The Army’s National Automotive Center

(NAC) at the Army’s Tank-Automotive Command also appears to address sector-level capabilities. NAC promotes collaborative R&D in

dual-use technology in the automotive sector. It

has CRADAs with Chrysler, Ford, and General

Motors. NAC is also working with the Advanced

Research Projects Agency, DOE, and the U.S.

Council for Automotive Research on the clean car

initiative that seeks to produce high-performance,

fuel-efficient vehicles. The Army hopes to save

millions in development costs through such cooperation and believes that the research has commercial benefits.35

Program-specific actions can help diffuse

technology at the sector-level, but less wide] y than

33 me thm~t~ ~ ~re ~k)bal sur~ Cl[lance and communications, precision Strike, Air Superiority and Defense, sea control and under~ea

Superk)ritj. Advmced land Combat, Synthetic Environments, and Technology for Affordability.

7.$ Office of the Under secretary of Defense for ACqu]\itlon, FIrM] Report of the ~efen.se science Board 1988 sun~n~(’r Slu(i)’ ~~1 t}~e D@n.~e

Industrrul and Technology>’ Ba.\e, October 1988, p. 18.

35 Stacey Ever\, “Lockheed Charts Course Through Defen\e Cuts,” A\iarion Week & Space Technology}, Jan. 3, 1994, p. 60.
122 I Assessing the Potential for Civil-Military Integration

The government and industry are forming consortia to

develop new dual-use technologies. Here, the Great Lakes

Composites Consortium applies advanced robotics to

composite fiber placement.

broader efforts. The DOD Manufacturing Technology program (MANTECH) often funded

manufacturing technology efforts directed at a

specific program problem and made solutions

available to industry. Another interesting example

is the Manufacturing Operations Development

and Integration Laboratories (MODILs) Program

developed by the Strategic Defense Initiative Office (SDIO). The program promoted process integration at the industrial sector level, as well as at

the firm and facility levels. (See box 5-5.)

Developments in integrating manufacturing

technology can potentially benefit both the defense and commercial sector. The DOD Manufacturing Technology Advisory Group on Materials

Processing, for example, argued that:

The most immediate and obvious spin-off

benefit of [its processing and fabrication] plan

will go to the U.S. commercial aircraft industry.

These same manufacturing technologies developed for military systems are directly scaleable

and transferable to commercial airplane

systems .36

A DOD advisory group on manufacturing strategy argued that:

The most important government roles in advancing the technologies of manufacturing systems are to provide seed money for promising

technical opportunities that would not otherwise

be pursued and to bring individual companies

together for mutual leveraging in areas of common need.37

The group concluded that a broad-based strategy—rather than programs aimed at a particular

weapon system or company—was essential. The

payback period on technology is far too long, the

risks are too high, and the development costs are

too great for individual companies or even entire

industrial sectors to handle alone. Rather, the

group argued, DOD and its contractors must join

with the commercial sector in stimulating the development of manufacturing systems technologies and commercial products based on those

technologies in advancing appropriate standards,

and in sharing implementation experiences.38

The NIST manufacturing extension centers,

partially funded through TRP, provide help to

smaller manufacturers in adopting new manufacturing technology. There are other avenues,

though, that DOD might explore in diffusing

knowledge across sectors, including supporting

standards-setting bodies. With reductions in military standards and specifications, and greater

reliance on commercial specifications and stan36D0D Manu fac[urlng Technology Adv]so~ Group, Materials processing & Fabrication COmmi[tee, M~teriah prc~ces’sing & ~“ubri~’a~i~n

Technical Committee Strategic Plan, Apr. 21.1993, p. 11.

57 Manufacturing Systems Committee, DOD MANTECH Advisory Committee, Manufacturing Systems S(rafegic Plan, March 1993, p. 3.

38 Ibid.
—

Chapter 5 Integrating Processes for Goods and Services 123

Manufacturing Operations Development and Integration Laboratories (MODILs) were designed by the

Strategic Defense Initiative Off Ice (SDIO) to bring unique government capabilities together with industry

and university participants to develop and demonstrate new production and automation processes for specific technologies SDIO’s objective was to ensure that an industry would exist to produce items that might

be developed through its R&D program. With a relatively small budget of $5 million to $7 million per year,

SDIO used a combination of focused workshops, joint projects, and equipment testing in its MODILs.

The Optics MODIL at Oak Ridge National Laboratory, for example, uses state-of-the-art precisionmachining equipment to support collaborate experiments, Other MODILs Included the Advanced Infrared

Sensors MODIL and the Signal Processing MODIL, both at Sandia National Laboratories, the Software

MODIL at the National Institute for Standards and Technology; and the Space Fabrication and Test MODIL

at Lawrence Livermore Laboratory Cuts in funding for strategic defense resulted in a loss of funding for the

MODILs Only the Optics MODIL at the Oak Ridge Center for Manufacturing Technology will continue The

other MODILs are being terminated.

Although the original purpose of the MODILs was to ensure that a future capability would be available to

support weapons production, and not dual-use technology per se, the efforts developed technology in precision finishing and coatings and diffused that technology to firms for both defense and commercial applications.

dards, DOD might reasonably contribute to

setting standards in sectors that serve both commercial and defense needs.

A recent example is a report by the Air Force

Commercial Acquisition Streamlining Team urging electronic firms to adopt certain military

specifications and standards as commercial specifications and standards. The report also urged

DOD to use Qualified Manufacturing Lists to allow increased integration.39

9 The Maintenance Base

At the industrial-sector level the maintenance

base will benefit from acceptance of common defense and commercial technologies. But the most

important civil-military integration maintenance

policy issue is rationalizing the public and private

bases and eliminating redundancies. If defense

and commercial activities use common technologies and equipment, then the preservation of a

unique government maintenance base may no

longer be necessary, and in an era of much reduced

spending, it is surely less affordable.

The Benefits anti Costs of Sector-Level

Process Integration Policies

The potential benefits of industrial sector-level integration, outlined earlier, include: 1 ) leveraging

limited R&D investment funds, thus lowering

costs to both defense and commerce; 2) increasing

the potential defense suppliers by diffusing

technology; and 3) providing access to new

technology through increased involvement in

consortium.

The potential savings in the rationalization of

the public and private maintenance and overhaul

base are substantial. But getting savings from rationalizing this portion of the base will require

closing facilities and elimination of many government jobs. Current legislation strictly limiting the

amount of maintenance that can be performed by

the commercial sector would have to be revised or

39 Pat Cooper, “DOD Study Touts Military Standards for Microelectronics,” Defense Ne}+’s, June 6, 1994.
124 I Assessing the Potential for Civil-Military Integration

Many armored vehicles, originally manufactured by private

companies, are maintained and upgraded at army depots

repealed. There is also resistance to closing government R&D facilities.

Deciding how much time, money, and energy

to invest in policies aimed at sector-level integration is a challenge. Past studies have illustrated the

difficulty of linking specific research funding

with ultimate results.40 Current initiatives may be

even more difficult to evaluate. But, both TRP and

CRADA raise questions on how to evaluate program effectiveness. If such activities are not to be

viewed simply as jobs programs, then some metrics will need to be developed to judge their

success.

A number of possible benefits in addition to

new technology developments have been suggested for TRP. Deputy Secretary of Defense John

Deutch has argued that the teaming of defense and

nondefense firms is itself a measure of success. So

too, he said, is the increased cooperation within

the government. He has advised waiting until

1996 before making a broad judgment on the success of the project.41

But any benefits have to be weighed against the

fact that TRP costs the U.S. government several

hundred million dollars per year in direct funding

and some tens of millions more in reimbursable

independent research and development (IR&D)

funds for proposal writing. Additional sums, perhaps tens of millions in nonreimbursable R&D

funds, are spent by business on associated research and matching funds.

CRADAs can also transfer technology from

laboratories to business, and introduce technology to the laboratories. But again, long-term program effects may be difficult to measure.

Supporters envision the results of billions of dollars in federal research being transferred to U.S.

business to promote international competitiveness and solve other nondefense problems. But

skeptics argue that much past research has had

little commercial potential. Further, some argue

that CRADAs constitute a “mining of U.S. R&D

investment.” Without continued long-term investment in fundamental research, there will be

eventually little new knowledge to transfer.

The most commonly suggested metrics for

measuring TRP, CRADA, and other industrial

sector-level activities, unfortunately, are all shortterm, input metrics: dollars spent, TRP projects

proposed, number of CRADAs, consortium established, and other input-oriented activities.

While such measures may be of some initial use,

they are insufficient in the longer term.

An effort to measure both short-term effects

and long-term economic benefits of projects has

been undertaken as part of the Advanced Technology Program at NIST. (See box 5-6.)

Several metrics that focus on measuring longterm effects of the TRP and other DOD programs

have been suggested. These include: the number

of patents granted or products developed over a

given period of time; the amount of technology

transferred from the public sector to the commercial and vice versa; and the relative success of

industry in comparison with America’s international competitors. (See box 5-7.)

aIn tie 1960S ~d 1970s, two studies, operation Hindsight and Project Traces, attempted to link DOD research investment to product

development. Neither was very successful in doing so.

41 “Deutch: TRp unites Industry Bases,” Defense Conversion, May 23, 1994.
Chapter 5 Integrating Processes for Goods and Services 125

I

The ATP, begun in 1990, invests in projects that support technologies with strong potential for economic

benefit The ATP evaluation plan stresses measurable goals whenever possible.1 The program has tracked

and reported input data on nearly 1,000 applications and awards to nearly 90 projects, The ATP also sponsors third-party studies to track project results.

Tracking the short-term and intermediate project results provides an indication of ATP’s Immediate effect

on participating companies. ATP tracks how well businesses follow through on the business and commercialization strategies outlined in their ATP proposals Project managers collect the information during quarterly. year-end, and end-of-project reviews ATP IS field testing a new, customizable questionnaire designed

to gather more detailed data than are now available A key goal is to gather data in a form that allows for

easy updating and minimizes the reporting burden Several measurable short-term effects are thought to

also provide Indicators of long-term economic success So, in addition to straightforward tracking of technical milestones, other Indicators are examined, including:

■ Increased R&D Investment and R&D in new areas leveraged by ATP funds,

● increased Industrial collaborations and strategic alliances,

● strengthened technological Infrastructure,

■ shortened R&D cycles,

● Investment in production capacity, and

■ productivity Improvements.

Long-term economic impact is the bottom Iine for ATP. Program goals include Increased U S economic

growth, Increased Industrial competitiveness, and creation of high-value jobs, Measures of the long-run

success of ATP include:

■ creation of new industries or industrial capabilities,

■ Improvements in manufacturing costs, product quality, and time-to-market;

m increased worldwide market share;

● job creation, and

■ private and social rates of return on investment.

At present, NIST says it is too early to measure long-term effects. Several products Incorporating the

results of ATP-supported research have been Introduced or are near commercialization In addition, one

company has Introduced ATP technology into a manufacturing process on a pilot scale, In general, however, almost all ATP projects are still in R&D. In most cases, it will take several years before a long-term

effects study can be undertaken.

The planned approach to these long-term studies IS to use macroeconomics case studies to estimate

specific benefits and costs of new technologies developed under ATP. Statistical sampling techniques will

be used in selecting specific projects and programs for detailed study.

NIST reports that the measurement of long-term economic impacts of ATP requires three major efforts

= development of quantitative measures of the influence or effect that ATP has on the introduction and

diffusion of each new technology it supports,

■ development of quantitative and qualitative measures of the Influence or effect of each ATP-funded

technology on the economy, and

■ estimates of private and social aggregate economic benefits and costs from each new technology developed under ATP funds.

~ NIST u s Department of Commerce Seffmg Prm///es andkfeasurlng Resu/ts at the Nationa//nst/tute of Standards and Technology U S Department of Commerce, Jan 31, 1994, p 13

I
126 I Assessing the Potential for Civil= Military Integration

Any evaluation of TRP would be more extensive and difficult than that of ATP, since its eight programs

Involve several different goals education and training, technology development, and technology deployment

Possible measures for manufacturing education and training include:

■ Number of students trained and placed per year.

● Client satisfaction with trained personnel.

The outcomes of technology development and deployment activities are more directly traceable to the

mission of TRP. Several measures might be employed to evaluate technology development activities:

■ Number of technical successes.

■ Number of technologies adopted by military programs,

■ Number of patents and citation of patents.1

■ Number of organizations that form joint research ventures as a result of their experience in TRP.2

■ Number of reapplications to the TRP.3

To some extent, these same metrics may also apply to TRP’s technology deployment activities. Since

the deployment activities include both the creation of technologies and the provision of extension services,

the following supplementary metrics might be considered

● Changes in defense dependence-defense sales/total sales—attributable to deployment services or

technologies.

● Increases in produchvity—increase in output per worker attributable to deployment services or technologies.

■ Increases in market share attributable to deployment services or technologies,

■ Customer satisfaction.

Assessing synergies across program activities would be a valuable way of measuring TRP’s overall impact This will take time.

1 Numerous studies have shown that citation-weighted patents are highly correlated with other measures of technological ancl

economic Importance See, for example, F Narln et al , “Patents As Indicators of Corporate Technological Strength, ” Research Po/my

(16) 1987, pp 143-155, M Albert et al , “Direct Valldatlon of Cltatlon Counts as Indicators of Industrially Important Patents, ” Research

Po/Icy (20) 1991, pp 251-259, A FJ Van Raan (ed ), Handbook o~CMantitatwe Stud/es o/Science and Technology, (North-Holland

1988), M Trajtenberg, “A Penney for Your Quotes, ” Rarrd Journa/ otEcorrorn/cs, No 1, 1990, pp 172-187

z A Link and L Bauer, Coo~erafwe Researchjn U S. A4arrutacrurmg (Boston, MA D C Heath, 1989), suggests that firms cooperatively engaged In research not only revest more m R&D than they would have done m the absence of the relationship, but also that thelf

other R&D IS more productwe owing to the transferability of basic technical knowledge and related research skills

3 Firms applylngto the Baldrldge Award process report that they learn somethmg useful about their Organ lzatlon every flrne they

apply In fact, many companies go through the process several times without any hopes of wlnnlng The same phenomenon might

apply to TRP Also, If the actlvmes undertaken by awardees would not have been undertaken In the absence of TRP money and II

awardees reapply, th[s may mdtcate that know-how markets are being created by the award process

Technology development efforts are by nature ture. For these reasons, any evaluation process

risky. The industry sector-level efforts are rela- should be ongoing and designed to assess the

tively long-term. Some will succeed and some progress of each major effort rather than a few

will inevitably fail. Their primary impacts are in- high-profile projects.

tended to come to fruition at some time in the fu-
Chapter 5 Integrating Processes for Goods and Services 127

Costs and Risks

The policies directed at integrating processes at

the sector level have a number of potential costs

and risks. CRADAs, for example. have been criticized as potentially detrimental to the laboratories’ defense mission, diverting critical personnel

to short-term problem-solving rather than longer

term scientific discovery. If the government has

only limited R&D dollars, some argue that they

should go exclusively toward technologies that

the commercial sector cannot provide.

Some of the government personnel interviewed

for this assessment expressed the concern that if

process integration is too extensive, the government may lose all of its inhouse capabilities. It

might lack sufficient technical expertise to be either a “smart buyer” or an “intelligent manager” of

the technology it needs to support the nation’s

security.

Such concerns may be overdrawn. Other countries (e.g., Japan) do not have comparable public

sector defense capabilities. 42 Still it would appear

prudent to ensure that sufficient inhouse defense

capability continues to exist to buy and maintain

new technologies.

A concern raised in Congress, DOD, and industry is the amount of money earmarked by Congress for integration. Representative George

Brown has noted that $103.8 million of the $474

million appropriated for dual-use technology for

fiscal year 1994 (22 percent) was earmarked.43

Representative Brown stated that $145.6 million

of the $377-million conversion fund appropriated

in the Operations and Maintenance accounts was

earmarked as well. Those concerned about earmarking claim that the loss of financial flexibility

will make development of a coherent integration

program much more difficult, Certainly, such

mandates have sometimes limited DOD flexibility to make economically sound choices. Representative Brown pointed out that earmarks make it

difficult to follow the law mandating competition

in spending of government funds for TRP.

Final] y, the government does not al ways appear

to be of one mind about various measures aimed at

increasing industrial sector-level process integration. Rationalization and consolidation between

the private and public elements of DTIB are important. Yet the Services disagree about the extent

to which commercial firms can meet maintenance

needs. While the Navy is reportedly willing to

make maximum use of industry’s production capabilities and capacity for aviation depot-level

maintenance, the Air Force has been far less enthusiastic about reducing the size of its depot

system.

Given the large numbers of high-paying jobs at

government facilities, Congress has been reluctant to rationalize R&D and maintenance bases,

Retaining some inhouse capability is extremely

important to guide technology developments in

ways that are most helpful to operational commanders. These issues are discussed in more detail

in chapter 6.

E Process Integration at the Firm Level

Firm-level integration—the sharing of corporate

resources (management, finances, possibly R&D)

across divisional lines—is primarily a privatesector issue. There are public-sector organizations

that engage in both defense and commercial activities (e.g., the DOE weapons laboratories): these

were discussed under industrial sector-level integration. In the context of this discussion, an integrated firm is one that continues to do both

defense unique and commercial business—but

chooses to use separate divisions and facilities.

It maybe to the government interest for firms

to integrate internally (e.g., go to facility-level integration). in order to reap the maximum benefit

from shared resources. But the government cannot

mandate such integration, nor. except in crisis and

4J Supporter\ (>t Inhouw ci]p:ibllitlcs note. howcy cr. that the Japanese have not yet htid to battle teit their equipment.

~; ..pc[ project, I~lldurc ~t DC ICIISC Dwpitc Opposition b) Brc~\* n, “ Federal T2chno/ogjI Repot-t, ?Jo\. 25.1993, TRP fupportm ha~ c iirgud

thiit despite iitt~nlpt~d curnuirhin:, compcti[ion h:i\ governed project selection.
128 I Assessing the Potential for Civil-Military Integration

war, can it compel the use of private capabilities to

perform defense work. It can, however, influence

integration by removing some of the acquisition

barriers outlined in this chapter. Still, as long as

businesses fear that their commercial activities

may be forced to carry burdens from defense

work, they will choose to separate their activities.

Retention of special government cost accounting,

for example, even with the elimination of the use

of many military specifications and standards and

the elimination of rights in technical data requirements, is likely to result in retention of separated

facilities.

Integration at the firm level, however, offers

benefits to the government. Most importantly, it

may allow the government to retain world class

commercial firms in defense business--even if

these firms separate those defense divisions from

their commercial operations. Firms doing both defense and commercial business have access to,

and might continue to develop, dual-use technology. The past view that integration at the firm level

is a problem, and unacceptable, appears less valid

now than during the Cold War. In the future, it will

be a challenge to keep internationally competitive

commercial firms involved in defense work. Certainly, the trends are toward consolidation and

specialization—potentially increasing technological and industrial segregation just when access to

commercial technology is most critical.

An integrated firm has advantages over a segregated defense producer. A recent study on dualuse technology indicated that firms doing both

defense and commercial work may facilitate

technology transfer through a policy of transferring personnel between their defense and nondefense operations, or at least not prohibiting such

movement. The study found indications that between 1982 and 1986, about 24 percent of the scientists and engineers working on defense moved

from defense to nondefense work, and about 27

percent moved in the opposite direction.44 Personnel movement can increase the flow of information and technology, even if facilities

themselves are segregated.

The main benefits of process integration at the

firm level are: 1 ) preservation of a viable base, 2)

stronger and more competitive firms involved in

defense work, and 3) greater technology transfer—both spin-off and spin-on.

The elimination or reduction of current procurement barriers might persuade firms to adopt,

or continue to pursue, a firm-level integrated

strategy. Changing the rules on rights in technical

data would eliminate the disincentives to incorporate commercial, company-developed technology

(product or process) into defense products. Eliminating the use of many military specification and

standards will move more components into the

commercial category. Dropping the requirement

for costs and pricing information on commercial

products will promote the use of components from

a firm’s commercial division.

While firm-level integration may produce fewer directly measurable benefits than might facility-level integration (e.g., savings on individual

products), it appears preferable to relying on totally segregated firms to conduct defense manufacturing, since the latter may have less access to

commercial technology. Profitability and access

to technology are incentives for integration. Government policies to promote firm-level integration will have to address these incentives. Even in

the absence of radical acquisition reform that

would promote facility-level integration, firms

might still undertake defense work if such work

allows them to leverage their technology, personnel, and assets; acquire new technology; and diversify into other areas.

Defense work will have to be profitable, or, if

access to novel technology is available, at least not

lose money. A strong advanced technology development program may entice some firms, particularly in sectors amenable to integration, such as

.$4A] ic et ~]., Be}{)n<f spino~, op. Cl[., foomo[e 23, pp. 112-1 I 3. According to the report, indirect evidence indicated hat most of ~1~ move

-

ment occurred within firms with both defense and nondefense divisions.
Chapter 5 integrating Processes for Goods and Services I 129

aviation and electronics. In more mundane production sectors, contracts will have to be of sufficient size to attract the interest of a firm that also

engages in commercial operations. Multiyear

contracting and government use of more commercial buying practices may also provide incentives

for engaging in defense activity at the firm level.

DOD use of commercial specifications and standards, or military performance specifications,

may provide some incentives to pursue defense

work even if acquisition rules continue to result in

segregated activities.

Leveraging technology is especially attractive

to firms in technologically intensive industrial

sectors. Indeed, a Harvard study indicated that

some firms have actively sought both defense and

commercial business in order to fully exploit their

competitive advantages. Thus, in the aerospace

industry, many firms “(notably Boeing in aircraft,

GE and Pratt & Whitney in engines, Hughes in

satellites) have been able to specialize their design, marketing, and management for each market

[commercial and defense] while leveraging a substantially common technology base.”45

Similarly, communications satellite producers

have leveraged technology. Westinghouse Corp.

has reported leveraging the technology and expertise gained from decades of defense work to develop products such as a Modular Avionics Radar

(MODAR), a dual-use product designed for lookahead detection and avoidance of wind shear.46

Studies indicate that the incentives for sharing

technology, labor, and equipment within a firm

vary. Firms with large commercial sales relative to

their defense sales may have little interest in increasing defense sales, especially if defense sales

volume is uncertain, profit is low, and there are

few if any potential technology benefits. In the absence of changes in the government’s approach to

rights in technical data, integrated firms will be

cautious about sharing technologies between divisions. The OTA assessment team found a number

Firm-level integration allows Hughes to leverage corporate

resources, benefiting both its defense and commercial

satellites.

of instances in which a firm's commercial division

refused to supply technology to its defense division because of government demands for rights in

technical data and for cost and pricing data.

One firm, for example, reported a case in which

its corporate parent decided it could not risk disclosing the results of millions of dollars of commercial, company-financed research for a

relatively small government development contract whose terms included a demand for the

technology used in the item. Therefore, instead of

using the advanced technology available in the

parent corporation, the division searched out a

small firm with similar, but less advanced,

technology to support its research effort. The corporate parent of that defense division is now considering getting out of defense work altogether.

Acquiring new technologies and processes to

allow a firm to better meet current or future needs

has been another reason for corporations to integrate. The General Motors Corp. ’s purchase of

Hughes Aerospace might fall under this category.

Firms might still stay in defense work if they deem

the work to have sufficient overlap with other corporate objectives. A strong DOD research emphasis on dual-use products might attract such firms.
130 I Assessing the Potential for Civil-Military Integration

Finally, firms may integrate to diversify the

portfolio of their capabilities and subsidiaries.

Corporate diversification was a major business

strategy during the sixties, seventies, and early

eighties, but was called into question during the

mid- to late- 1980s as U.S. firms lost global market

share-partly because of loss of quality in many

firms’ critical core areas. Studies indicate that successful corporate diversification involves an effort to retain and use a common core of interests

and capabilities rather than develop entirely new

ones.

47 If DOD is going to retain high-quality

firms as defense suppliers, it will need to seek synergistic ways to exploit and enhance the core capabilities of these firms.

The Benefits and Costs of Firm-Level

Process Integration Policies

As discussed earlier, during the Cold War when

U.S. defense budgets were high, concern over civil-military integration largely focused on integrating facilities. Integrated firms-those with both

civilian and defense divisions—were common.

Proponents of integration sought to reduce the acquisition barriers that they identified as contributing to segregation within a firm and subsequent

increased costs resulting from redundancies in facilities, workforce, etc. Yet there were benefits

derived from integration at the firm level, internal

transfer of technology probably being one of the

most important.

The future defense situation is likely to be even

more fiscally challenging than CMI proponents

have previously anticipated. Under these circumstances, the government may well lose the services of many firms. The principal benefit to be

derived from retaining integrated firms (e.g., retaining as much of the segregated portion of the

future DTIB as possible within commercial firms)

may not be cost savings, but the potential for

shared technology between divisions within

firms. Firms may transfer personnel (or allow the

transfer of personnel) between defense and nondefense work and thus promote both spin-on and

spin-off technology transfer. This is critical if

DOD is to rely more on commercial technology in

the future. Such firms may also integrate some

critical activities—possibly having a combined

R&D facility—while separating the remainder.

While the chief benefit is the potential retention

of quality firms doing defense business, there are

also risks. One risk is that specialized defense capabilities might atrophy if too much emphasis is

placed on shared (i.e., commercial) technologies.

Electronic warfare systems, for example, may use

many technologies similar to other commercial

electronic systems, but still require a set of specialized skills (an up-to-date understanding of the

electronic threat) that demands full-time attention

and does not overlap with the commercial base.

An integrated firm also faces risks to critical

commercially developed technology if reforms

dealing with rights in technical data have not been

achieved. Indeed, retention of any acquisition

rules that make the defense divisions of firms operate differently than the commercial division is

likely to increase costs and reduce the benefits of

firm-level integration.

1 Process Integration at the Facility Level

Almost all previous studies on CMI have focused

on integration at the facility level .48 Facility-level

process integration is a special case of firm-level

integration, in which the integration occurs within

a single facility (e.g., on the same factory floor, on

a single assembly line). Such integration involves

the sharing of personnel, equipment, facilities,

and material to research, design, produce, and

maintain defense and commercial goods, or to

provide defense and commercial services. While

-$1 David ~ech puttern.Y ofD1\,erYificu!ion:” An Anne,~ (o the Report of the Defense Con\’er.sion Commi.niorr, February 1993. SCC al~~ Al i~ et

al., Be?wnd Spinofx op. cit., fbotnote 23, pp. 174-186.

~X The RcPfl of tie DSB Task Force on A~,qU~~/~~on Re@-m IS an exception in including the potential impact Of ratlOna] iZatiOn of the private

and public sectors.
Chapter 5 Integrating Processes for Goods and Services 131

the greatest benefits of process integration, in

terms of savings and potential for technology

transfer, may be found at the facility level, the acquisition changes required to achieve such integration may be among the most difficult to

achieve. There are technical barriers to facility

level integration (unique products and processes,

classified technologies), but the principal barriers

appear to be the acquisition laws and regulations

that have been constructed to protect public funds.

It is at the facility level that military operations

and standards, government cost-accounting rules,

rights in technical data, and other roles have had

their full effect.49

Process integration at the facility level is expected to eliminate redundancies in equipment

and personnel. Machinery, tools, personnel, management resources, buildings, etc., can all be used

more efficiently if they can be employed for both

commercial and defense ends.

The fungibility of a firm’s assets and the similarity of its defense and commercial products and/

or services affect the company ability to conduct

defense and commercial work side-by-side. The

case studies examined for this assessment, as well

as OTA’s industry interviews, confirm that the

flexibility to work in both the commercial and the

defense sectors is currently more prevalent among

firms at lower tiers, among firms producing components and materials, and where the process and

product technologies are largely common and

government regulations are often felt only indirectly. 50

OTA found that many facilities manufacturing

military parts, subcomponents, and materials, for

example, operate within more or less integrated

manufacturing facilities. Such facilities include

those that supply metal sealing material, silicone,

dopants and wiring for defense electronics, glass

Atlas Headware has completely integrated its production of

military and commercial caps

for optical systems, chemicals for explosives, and

certain resins for plastics.

“Higher order” defense-related components

and systems, such as hydraulic systems, various

valve assemblies, hoist systems, certain aircraft

engines, computers, fiber optics components, and

gyros and other navigation devices, may be

manufactured in integrated facilities. That they

are not, however, appears to be due at least in part

to the imposition of the special accounting requirements, unique contract requirements, demands for technical data rights, etc., that have

been so often identified as barriers to integration.

As a result, the firms interviewed reported that

there are often substantial inefficiencies. due to

the need to maintain additional workers and

resources in order to comply with these requirements.

1 Current Facility-Level

Integration Efforts

Many of the ongoing efforts to increase facilitylevel process integration have been discussed ear-

.t~~ ~c ~onclu~ion fiat ~cquijition bamlers ra~er ~an technical barriers are the problem has been a consis~en~ conc~u~ion of s~udleS ‘Uch as

the 199 I CSIS Study on Ci\ il-M]l itary Integration, the subsequent CSIS survey of 206 firms, and a study by the Electronic Industries A\mciation, “Dual-Use in Government Electronics: Outlook for Commercial/Military Integration,” which surveyed 33 firms in 1993.

5(1 ~e data base for his conclusion includes the assessmen( case studies, inte~iews wl~ fi~s in ] o different industrial \cctor\, discussions

at the manufacturing workshop, and analysis of the findings of previous CMI studies.
132 I Assessing the Potential for Civil-Military Integration

lier in this chapter. Changes in the law that allow

companies to use IR&D funds to conduct R&D

with commercial (as well as defense) potential, for

example, have enhanced the ability of defense

firms to perform dual-use R&D. Several of the

firms visited by OTA were actively pursuing commercial possibilities using technologies originally

developed for military application. Some of the

firms visited by OTA combined their R&D operations, even though they maintained separate

manufacturing processes. The Honeywell Corp.,

for example, maintains an integrated R&D Center

of Excellence for its avionics work, but separates

the defense and commercial manufacturing activities of these items. The changes in the use of military specifications and standards announced by

Secretary of Defense Perry will surely affect facility-level process integration as well as increase the

purchase of commercial items.51

Several firms interviewed were also involved

in TRP projects. Some of the work is being done in

integrated facilities, but in some cases the firms

were planning to separate future commercial and

defense operations.

Despite the changes being implemented, concerns over government oversight, the possible

loss of proprietary data, and cost-accounting requirements continue to pose real barriers to integrating defense and commercial activities in a

single facility. According to industry, the most important changes are eliminating the unique

government cost-accounting requirements that result in separate cost accounting systems and layers

of oversight, and the supporting certification

process.

Concern over the rights in technical data remains very important not only in R&D but in

manufacturing, where there is particular concern

about the potential for loss of process technology

should the government ask for that technology.

The changes in military specifications and

standards recently proposed by DOD are critical,

because they will promote the ability to design for

dual use. It has repeatedly been argued that taking

better advantage of commercial specifications and

standards could save money and result in better

products. The 60 percent savings that Westinghouse Corp. reported for its dual-use Modular

Avionics Radar, compared to the militarily unique

version is said to have come partly from waivers

on military specifications and partly from initially

designing for dual-use.

I Future Efforts

Acquisition reform that addresses government accounting rules for integrated facilities may be difficult to implement. Executives attending the

OTA manufacturing workshop stated that accounting procedures explain 90 percent of the reason for separation within their firms. The

respondents to the CSIS industry survey also

placed government cost accounting high on the

list of reasons for segregating their defense operations. Many firms in the CSIS survey, principally

aerospace and electronics manufacturing firms,

had integrated portions of their operations but

maintained two administrative systems for accounting purposes. The costs of such partial integration cannot be inconsequential.

One possible alternative would be facility exemptions from special government cost accounting requirements. Otherwise, firms producing

both militarily unique and commercial products

will have to retain an accounting system for its

militarily unique items and spread the cost of that

system over its commercial products, and thus become noncompetitive. Some firms believe that activity-based accounting holds the promise of

providing a solution to this seeming impasse.

Secretary of Defense Perry has begun the

changes on military specifications and standards,

but these changes must be implemented by a

sometimes reluctant acquisition workforce. To

s I Secretwy of ~fense William peW, Memorandum for the Secretaries of Ihe Mi/i(ary Departments, OP. cit., footnote 16.
Chapter 5 Integrating Processes for Goods and Services I 133

promote integrated facilities, DOD must ensure

that the three Services reconcile their own individual standards so that industry does not continue to

be faced with special, and often conflicting, Service requirements for similar items.

Revision of the acquisition laws and regulations is necessary but insufficient to implementing acquisition reform that will allow integrated

facilities. There must also be changes in the procurement culture—for example, eliminating outmoded government quality control procedures in

favor of those used in the commercial world; eliminating the adversarial relationship that has characterized some contract and plant oversight; and

retraining the government workforce so that they

are able to effectively operate in this new environment. Integrated circuits or advanced materials,

for example, may be differentiated by additional

quality control checks, rather than different materials. The Hughes satellite system, with its modular design, embodies another possible approach to

the problem, allowing different satellites, with

different capabilities, to be built on a single

“chassis.” (See box 5-8.)

The requirement that a facility be able to produce at a specified surge and mobilization level,

combined with the extreme variation of defense

contracts, has resulted in an overcapacity maintained by firms. This added overhead inhibits facility integration. Companies making private

investments in commercial facilities that have

payback periods of several years are unlikely to

put defense and commercial work in the same facility and risk transferring underfunded government overhead costs to commercial production.

Multiyear defense contracting can help reduce

the uncertainty of government funding, but the

greatest potential benefits might come from a recognition on the part of government that DOD must

pay to maintain surge capability for defense

manufacturing. This now occurs with government-owned and contractor-operated (GOCO)

ammunition facilities and is more of a problem at

the prime contract level than at the lower tiers.

Some small firms trying to integrate commercial and defense work have raised the issue of insufficient financial support for commercial work.

Many firms traditionally dependent on defense

progress payments have not developed sufficient

commercial lines-of-credit to finance investment

in commercial programs. Banks are reluctant to

loan money to small defense firms. One suggestion is that government funds be made available in

the form of loan guarantees to support the commercial operations of small firms. However, while

there is evidence that lack of funds is a problem

with some firms and possibly some locations

(e.g., Long Island, southern California), a recent

survey by the Logistics Management Institute

found that lack of capital is not a universal problem.52 More data need to be collected to inform

policy development here.

The opportunities for process integration in the

maintenance base parallel those found in

manufacturing, since items built on the same line

should lend themselves to common maintenance

procedures. But government procurement rules—

especially cost accounting requirements—are a

critical barrier. Facility exemptions would be

helpful. But even more important might be the rationalization of the public and private maintenance bases. This is discussed in chapter 6.

Finally, services other than R&D (e.g., engineering, telecommunications, construction, and

private security) may be the easiest segment to integrate if the defense and commercial work are related sufficiently and the problems of dealing with

DOD regulations (including security) do not prevent the workforce from working on both defense

and commercial projects. But chapter 4 noted that

services appear relatively easy to commercialize,

5Z ~eLM1 ~uwey went t. 1,217 r~domly se]ected smal] contractors (chosen from among businesses ha~ @ a prin~c DOD contract ~-

tween fiical years 1980 and 1992). LMI qualifies their refults by noting that the total number of firms doing only subcontri]ctirlg could be lwge

compared to those with a prime contract. Still, 72 percent reported that lack of capital had not hindered conk criion.
134 I Assessing the Potential for Civil-Military Integration

Advocates of greater CMI argue that the real “key to commercial-military integration IS designing for

dual-use.”1 Weapons and other DOD equipment would be designed from the outset to incorporate commercial rather than militarily unique technologies.2 Cost and manufacturability would be included in the

design process as critical considerations. Advocates have argued that a dual-use strategy would require

that “the DOD product will fit the parameters established by the supplier for flexible manufacturing, The

products must have similar processes, use standard parts, employ identical Information systems, and require consistent manufacturing administrative practices."3

 Thus, the concept of designing for process integration from the start is essential.

When establishing requirements, DOD should take into account commercial developments in the relevant technological sectors. This would exploit not only the latest technologies, but also technologies that

appear to be in the mainstream--rather than developing entirely new technologies.

Implementing such a strategy will require that DOD have trained personnel who keep abreast of technological developments, Moreover, DOD will need to consider the manufacturability of components in the

process of setting requirements. It will also require more dialogue with industry in developing industry

specifications and standards, as well as its own performance specifications.

Designing for dual-use may ease the integration of maintenance facilities significantly, since they will

essentially be supporting the same goods.

Hughes Aircraft has reportedly followed a successful dual-use, or multi-use, design strategy in its satellite

communications business using many common components on both its defense and commercial satellites.4

The Hughes strategy was facilitated by the fact that defense and commercial communications satellites have

many similar requirements. A critical aspect to the success of Hughes’ communications satellites revolved

not only the ability to design for dual use, but the ability to develop a “product line” of satellites that can accommodate several needs with minor modifications, rather than to focus on an individual program for each

satellite, as has characterized much of past DOD acquisition strategy.5 Advocates of a dual-use strategy

argue that a “product line” approach is mandatory. But pursuing this type of strategy will require changes in

the program specific way in which DOD organizes its funding and Congress oversees it.

1 Rl~hard Engwall, brleflng on Deslgnlng for Dual-Use Electronics, Westinghouse Electric Corp

Zlbld The Electronics industries Association dual-use technology study estimates that “85 PerCent of product ~~fe cYcle cost is

‘locked m In the ortginal systems engineering design approach “

30 fllce of the Under Secretav of Defense for ACqUls.ltlOn, Defense science Board Task Force Report, ~ngmeermgm (he Manu~acturmg Process, Aug 21, 1992, ch 3, p 7

JJohn A AI

IC et al , Beyond spinoff &l///&~and Commercial Techno/og\es in a Changing World (Boston, MA Ha~ard Buslne=

School Press, 1992), pp 179-180

sEngwall, Op clt , footnote 1

perhaps leading to a situation where services are There is considerable evidence that there are cost

bought from either commercial or segregated enti- savings to be derived from facility-level integraties, but not those in between. tion and that such integration will probably enhance technology transfer. But estimates of the

Benefits and Costs of Facility-Level Process

Integration Policies

amount of potential savings are largely based on

extrapolation from findings of individual case

There have been numerous attempts to quantify studies.

the potential benefits of facility-level integration.
Chapter 5 Integrating Processes for Goods and Services 135

Previous case studies reviewed for this assessment, for example, provided estimates of savings

on individual items of equipment resulting from

integrating R&D and manufacturing processes

ranging from 20 percent to as high as 60 percent .53

Case studies reported in the 1991 CSIS study on

CMI provided estimates of about 25 percent savings from integration of the production process.

The Process Action Team on Military Specifications and Standards estimated that some $550 million might be saved over a period of two years if

many of the military specifications and standards

were eliminated.

Most previous estimates are made on the basis

of examination of portions of the DTIB. The 1994

DSB Task Force on Defense Acquisition Reform

looked at the entire base and estimated that in general, savings from integrating the production

processes of defense systems might range from 10

to 25 percent. Further, the Task Force attempted to

estimate the amount of savings that would occur

after a five-year implementation period.54

Table 5-4 illustrates a range of potential cost

savings in the private portion of the DTIB derived

from implementing the process integration policy

options discussed in this chapter. These estimates

are based on data from OTA’s industry survey, and

include only facility-level integration, excluding

any savings from sector- or firm-level integration.

Because the policy options for increasing process integration affect a relatively small portion of

national defense spending—a 15-percent increase

estimated in our survey-the net savings from

process integration will be relatively small. Cost

savings derived from potential savings of O to 30

percent might range from O to 5 percent of total national defense spending in the private sector. Although smaller than sometimes considered. these

savings are still significant.

Additional savings might, of course, accrue

from industrial sector-level integration that involved reduction of any duplication between the

Estimated Impact on

average total private

savings DTIB budget

.

0% O%

5 % 1 %

10% 2%

15% 2 %

20% 3 %

2 5 % 4 %

3 0 % 5 %

a Based on OTA's industrial sector survey and a shift of 15 percent from

segregated to Integrated for a total of about 30 percent in the integrated

category

private and public sectors, and closing redundant

facilities. These savings have been estimated to be

several bill ion per year, depending on the amount

of estimated reduction.

While savings are important, in the longer

term, increased technology transfer between the

defense and commercial bases may be the greatest

benefit derived from integration of processes. The

increase in technology transfer may occur within a

single facility—but it will also come from the activities, such as consortium and TRP research activities, at the sector and firm level described in this

chapter. Developing a method to track projects

and their results is an important step necessary to

support government initiatives at these levels. The

metrics outlined in this chapter might be considered.

The benefits of these policy changes will not be

immediate. Actual savings from changes in military specifications and standards depend not on

changing the rules but on making new purchases

of commodities, components, or new systems.

Savings from changes in cost accounting requirements will come from oversight jobs eliminated.

sl ~e Modultir A\lonic\ Radar de~elo~d by Wey[inghC)u\e uses all conmlcrciol parts but u ai built in facilities prilllaril! u~cd to suPP~~~

DOD. The radar COJIJ 60 percent lci~ than a cornpartiblc defenie radar. arrd f+ as dc~elopd in 50 percent of the time.

54 [>efcn\c science Board T~~k Force, Defcrz,\c Acqu\.si?ion R@-m, 0p. cit.. footrmtc 7, p. c-~.
136 I Assessing the Potential for Civil-Military Integration

facilities consolidated, etc. Significant savings

might begin appearing in three to five years. Access to new technology is unlikely to be any

quicker. The possible time phasing of benefits is

considered in the discussion of alternative integration strategies in chapter 2.

Costs of increasing process integration include: training of government and private sector

personnel to operate in a new quality environment, training in examining alternative technologies, and costs of implementing different cost

accounting procedures. There would also be expenses associated with closing any government

facilities and eliminating jobs.

There are also risks involved in implementing

policies that enhance facility-level integration.

One of the most often mentioned is concern over

the possibility of increased waste, fraud, and

abuse, as a result of any change in cost accounting

requirements at a facility.55

Concerns include the possibility of unfair allocation of costs towards the government. The

R&D necessary for a dual-use product, for example, could be charged against the government’s accounts, rather than against a corporation’s

commercial activities (although fixed-price R&D

contracts may well resolve that issue). Similarly,

costs associated with the construction of production facilities, tooling, etc. might also be allocated

against DOD, rather than against the commercial

consumers. In particular, in the absence of current,

relatively strict accounting requirements, and

without a commercial market for the militarily

unique products produced in a facility, there are

questions raised about how actual costs would be

determined.

Government agencies report the overall

amount of questionable contractor billing, but the

OTA assessment team could find no good studies

on the costs of the current regulatory system, nor

comparative studies of alternative oversight structures. It has been suggested that the amounts saved

by the current U.S. system may well be less than

the costs generated in the system as a result of actions to prevent and prosecute identified abuses.

Critics do not advocate overlooking abuses, but

rather argue that most of these abuses can be identified in other, less intrusive ways.

Quality control is another concern. Critics note

that as a result of the elimination of military specifications and standards, knowingly or unknowingly, substandard parts and components may be

used, possibly due to lower quality control standards imposed by the commercial sector. There

have been several reports in recent years, for example, of the proliferation of counterfeit, substandard fasteners in various commercial processes,

including those within the aircraft industry. Process integration and the use of commercial items

might make DOD more susceptible to these

problems.

There is also the possibility of proliferation of

advanced weapons technologies to other nations.

To the extent that integration and commercialization are successful, American exports of manufacturing processes and technologies common to

both commercial and military products may

spread military technologies to other parties.

SUMMARY

There is potential for increased process integration with potential cost savings and increased

technology transfer. Savings resulting from integration in the private sector ranging from 1 to 5

percent of future DTIB spending do not appear unreasonable. The full impact of these savings will

not be realized for several years.

The greatest potential benefit of increased

process integration may not be cost savings, however, but rather the potential for technology transfer. Future defense design and engineering teams

will be more dependent on developments in fast

moving commercial sectors, such as software and

electronics. Integration at all three levels might

enhance defense access to technology,

55 For example, “congress TO Consider Acquisition Pilot Efforts Next Month,” Defense Dui&, Dec. 9, 1993, p. 353.
Chapter 5 Integrating Processes for Goods and Services 137

Congress has played a critical role in developing the current process integration policies aimed

at technology development and diffusion. These

policies may be extremely important in the long

term, but Congress may want to consider the development of measures to evaluate and compare

the returns on investments for efforts such as the

TRP, CRADAs, and other activities. Future metrics need to be output-oriented, rather than measuring input activities, as is often done today.

At the industrial sector level, process integration also requires rationalization of public and private capabilities, and increased defense access to

commercial technology. Rationalization of the

public and private R&D and maintenance facilities, discussed in more detail in chapter 6, might

provide the most significant near-term returns, but

is also likely to face the greatest opposition. Congress will need to consider the rationalization of

the DTIB and the closing of facilities, if significant savings are to be achieved.

Process integration at the firm-level is designed

to retain world class product development and

manufacturing firms in defense work. This is important, even if the defense operations in those

firms remain separated. Defense work will have to

be made sufficiently attractive, either by profitability or by research, development, and testing in

new technologies and ideas. Advanced Technology Demonstrators may provide a means to keep

firms technologically engaged. Congress will

need to be supportive of long-term technology

programs that may produce few immediate

results.

Process integration at the facility level depends

not only on actions directed at the sector and firm

that produce common technologies, but also on

substantial acquisition reform. Only by altering

the current government cost accounting requirements, modifying demands for rights in technical

data, and minimizing the use of military specifications and unique contracting requirements will the

full benefits

accrue.

 of designing for dual-use be likely to
T

Continued

Segregation

he future size and character of the segregated portion of

the defense technology and industrial base (DTIB) will

depend largely on the degree to which policy options discussed in chapters 4 and 5 are implemented. Even with

dramatic changes in defense acquisition laws and regulations,

however, a significant portion of the DTIB will continue to be

segregated from the Commercial Technology and Industrial Base

(CTIB). This segregated portion will include activities providing

goods and services that: 1 ) have no commercial counterpart, 2)

largely use noncommercial processes, and 3) involve highly classified and controlled technologies and weapon systems.

Secretary of Defense Perry has stated that the government must

plan to preserve certain militarily unique capabilities. The Secretary and others have suggested that this might include shipyards

that build nuclear submarines and aircraft carriers, production

plants for tanks and other armored vehicles, facilities that design

and produce high-performance fighter aircraft and bombers, ammunition plants, and nuclear weapons facilities.1

The future segregated portion of the DTIB will also likely include divisions of private firms or small vendors that develop and

manufacture militarily unique subsystems, components, and materials that go into larger systems.

The portion of the DTIB that resides in public facilities is segregated by definition. These public sector facilities include military

6

[ See, for example, Office of the Under Secretary of Defense for Acquisition, Defense

Smnce Boord repon on Defen.$eAcqu[.~ilton Reform, June 1993; and Anthony L. Velocci,

Jr.. “Perry Forges New Shape for Indu\try,’’Atiarion Week& Space Technology), Nov. 15,

1993, pp. 52-57.

I 139
140 I Assessing the Potential for Civil-Military Integration

Private Public

\

Tier 1

Combat ships ‘i’h’e” Ti$r=J

\

Tier 2- Chaff dispensers

Electronic jemmers

Composite

armor

\

/

Tier 3

co

Specialized valves

v

Tier 4

Speci

materi

SOURCE Off Ice of Technology Assessment, 1994.

depots, arsenals, Navy shipyards, and defense research, development, and testing facilities.

Although civil-military integration (CMI) is at

odds with the preservation of the critical military

technologies in the segregated portion of the

DTIB, it can still have a positive effect on management efficiency, and promote cost reduction and

technology transfer.

This chapter considers the size and nature of the

future segregated portion of the DTIB—analyzes

CMI policies that might increase management efficiency within the segregated DTIB, reduce

costs, and promote process and product technology transfer with the CTIB.

THE CURRENT AND FUTURE

DEGREE OF SEGREGATION

A substantial amount of the DTIB is currently segregated from the CTIB. Some of the segregation is

the result of acquisition laws and regulations developed during the Cold War. But substantial segregation results from decisions to establish a

public sector capability to fulfill some DTIB missions. The Services, for example, have an array of

government laboratories to develop military

technology, specialized plants to produce ammunition and military equipment, and a network

of depot-level facilities to conduct maintenance

and repair.

This section describes the segregated portion of

the DTIB. It provides an estimate of its current and

potential size, and briefly discusses trends affecting this portion of the base.

I Description of Segregated Portion

of the DTIB

Like the bulk of the DTIB, most of the segregated

DTIB is in the private sector. Much of the current

segregation in the private sector occurs at the

highest tiers of industry, including the major systems integrators who conduct the research and development on complex weapons systems,

perform the final assembly of those weapon systems, or produce other militarily unique items.

(See figure 6-1.)

For example, as a result of the almost total collapse of the U.S. commercial shipbuilding industry, large naval vessels are built for the most part in

segregated private-sector facilities. High-performance fighter aircraft and armored vehicles are

also assembled in segregated, private-sector facilities dedicated to the production of these specialized systems. The activities in these facilities may

account for 30 to 50 percent or more of the total

value added in a large weapon system. (See table

6-1 .)

A great deal of anecdotal evidence suggests

that some segregation exists at the lower industrial

tiers. OTA interviewed firms in the gear, electronics, aircraft parts, and power systems industrial

sectors. OTA found that as a result of defense acquisition laws and regulations, firms often produced military and commercial components in

separate facilities even though the components

were similar.

Segregation can take a variety of forms. Some

firms may concentrate their defense production on

a dedicated line, separated from their commercial

operations. These same firms may also maintain

special parts tracking (including maintaining sep-
Chapter 6 Continued Segregation 141

Naval ships 35- 40%

Fighter aircraft 40- 50%

Combat helicopters 40- 50%

Armored vehicles >50%

‘Estimates exclude the government-furnished equipment supplied to

the contractor

SOURCE Off Ice of Technology Assessment, 1994

arate capabilities for government parts even

though these are the same as the commercial parts)

to ensure cost accountability.2

Although most of the DTIB is in the private

sector, public sector activities in R&D, testing,

manufacturing, maintenance, and other services

are extensive and, by definition, segregated from

the CTIB. The total number of government employees involved in these activities is estimated to

be about 369,000 people. (See table 6-2.) In some

cases, these government facilities provide unique

capabilities. In other cases, they duplicate privatesector capabilities.

The degree of actual government involvement

in these activities varies. There are two types of

government ownership structures: governmentowned/government-operated (GOGO) and government-owned/contractor-operated (GOCO).

The government directly controls GOGO facilities. and the workforce is composed of government employees. GOGO facilities include Service

R&D laboratories, Service maintenance depots,

air logistics centers, shipyards, and manufacturing facilities, such as Watervliet Arsenal (which

makes large caliber gun tubes) and the Rock Island Arsenal (which makes portions of large caliber guns and repairs military equipment).

As a group, the current GOGO facilities are oriented toward the development, production, and

testing of specialized military systems or their repair and maintenance. The complex is inefficiently structured, large, and expensive to maintain.

The public sector depot-level maintenance system, for example, employs about 181,000 personnel, and billions of dollars are invested in physical

plants. On an annual basis, this complex may cost

in excess of $5.5 billion in government salaries

and several hundred million dollars in infrastructure upkeep costs.3

DOD RDT&E

Army 33,000

Navy 68,000

Air Force 20,000

DLA 17,000

Total 138,000

DOE Weapons RDT&E and Production**

DOE RDT&E 8,000

Production 42,000

Total 50,000

DOD Depot Level Maintenance

Army 18,000

Navy/USMC 86,000

Air Force 36,000

DLA/Depot 41,000

Total 181,000

Total 369,000

—

‘Rounded to nearest thousand

*

+ Personnel costs here are largely contained n the private sector DTIB

totals

SOURCE Off Ice of Technology Assessment, 1994 from Information furrwshed by OSD, DIA, DOE, and the Mllltary Serwces

2 In thi~ \ituation there is not only a cost for developing and using the accounting systems but also a cost for maintaining a larger inventory

becau~c parm cannot be transferred between programs as needed.

~ The D(f(’n,te Science Board Tusk Force on Depot Muinfenance Management, April 1994, repented that “an organic depot with several

thouwmd employ cm incuri tixed overhead COSIS in the range of $50 to $100 million annually,” p. 17; also see U.S. Congress, Office of Technol -

~~gj A~je\~n~cnt, [j141/(~[nK b utur-e .$e(urit}: Strulegie.~for Re.rtructurin,g (he Defense Technology ancilndustrial Base, OTA-l SC-520 @lash ingron, DC. U.S. [;o;emmcnt Printing Office, June 1992), pp. 131-132.
142 I Assessing the Potential for Civil-Military Integration

Commercial

Segregated

processes d

Segregated

processes

,.

1

Integrated “i,

processes . ,

\

. . . .

Commercial

I

buy

I

\

‘\

\,

\

Current Potential

SOURCE Industrial survey conducted by the Off Ice of Technology Assessment, 1994

GOCO facilities involve less government control. While the government owns and maintains

these facilities, private sector contractors operate

them. For example, private firms operating

GOCO facilities usually perform the final assembly of conventional artillery rounds. The Department of Energy (DOE) weapon laboratories are

operated and managed by the private sector or by a

nonfederal government entity. For example, the

Martin Marietta Corp. manages Sandia and Oak

Ridge National Laboratories, and the University

of California manages Los Alamos and Lawrence

Livermore National Laboratories. Many of the

DOE production facilities are also GOCOs.

~ OTA Estimates

OTA’s industrial sector survey suggested that

about 40 percent of the value added to defense

goods and services is accomplished in segregated

private sector facilities or operations. (See figure

6-2, left.) This estimate includes direct and indirect purchases of goods and services, thus reflecting activities in all industrial tiers.

The OTA industrial sector survey asked respondents to estimate the percentage of their sectors that are likely to remain segregated even after

significant procurement reform (i.e., implementation of policies like those discussed in chapters 4

and 5). Survey results indicated that about 25 percent of the private sector value added might still

come from segregated facilities (figure 6-2,

right)—about two-thirds of its present size.

This estimate does not include the value added

in the public sector DTIB. OTA estimates that

about $13 billion is spent on salaries for government employees in largely segregated publicsector facilities.4

The policies in this chapter address both the private portion of the DTIB that is likely to remain

segregated in the future and the public sector portion of the DTIB.

~ Relevant Trends

A number of trends will affect the segregated portion of the base. The most important is the ongoing reduction in defense budgets. This spending

4 Uses a $40,000/year average compensation level provided by the DOD comptroller.
Chapter 6 Continued Segregation 143

cut is driving a second trend—the consolidation

and rationalization occurring in both the private

and public sectors of the DTIB. A third trend encompasses the advances occurring in product and

process design and development. Increased centralization of planning in DTIB management is the

fourth and final trend.

Effects of Falling Budgets

In real terms. defense procurement fell 66 percent

between fiscal years 1985 and 1994, including a

51 percent drop between fiscal years 1990 and

1994 alone.5 R&D fell by 15 percent during that

latter period. Procurement of fewer major weapon

systems has been a factor in driving up unit costs

and driving down the number of vendors willing

or able to compete for fewer total defense dollars.

As the number of potential vendors for an item

decreases to the point where only one source exists, or the production volume becomes uneconomical, the prospect for using competition to

assist in establishing price information begins to

disappear. The Department of Defense (DOD) is

then faced with maintaining controls over that

portion of the DTIB, thus ensuring its segregation.

Consolidation and Rationalization

The extensive consolidation and rationalization

occurring in the private and public sectors of the

DTIB has had several adverse consequences.

DOD planners have been forced to eliminate some

of their surge and mobilization hedges, and to

make choices between a redundant capability in

one area and no capability in another.

There are numerous instances of consolidation

among first tier aerospace and defense electronics

companies. Loral Corp. has purchased LTV’s

Missile Division, Ford Aerospace, and IBM Federal Systems. Martin Marietta has purchased GE

Defense Systems. General Dynamics sold its aircraft capabilities to Lockheed, its tactical missile

capabilities to Hughes, and its space-launcher opThe joint partnership of FMC's defense division and

HARSCO's BMY Combat System Division provides an

opportunity for higher utilization rates of facilities and

personnel in the face of declining defense sales

erations to Martin Marietta. Northrop recently

won a bidding war for Grumman Aerospace Corp.

Lockheed and Martin Marietta have just announced plans to merge into Lockheed-Martin.

More aerospace consolidations are expected as the

industry slims down in anticipation of reduced

commercial and defense sales. (See figure 6-3.)

In the armored-vehicle sector, FMC Corp. and

HARSCO Corp. recently formed a joint partnership, United Defense. The partnership, which

consists of all FMC’s defense business and HarsCO’S BMY Combat System Division, is consolidating much of its armored-vehicle production at

a single site.

Consolidation among the large defense firms is

mirrored among the smaller subtier producers, as

prime contractors move to reduce the number of

their suppliers. Estimates of the aerospace supplier base, for example, indicate a reduction of 60 to
144 I Assessing the Potential for Civil-Military Integration

Small fixed-wing Aircraft

Large military aircraft

Military helicopters

Commercial transports

Regional transports

Missiles

Satellites

Space-launch vehicles

Sensing and imaging

Airborne EW

Airborne ASW

Commercial platform avionics

Gas turbine engines

o 10 20 30 40 50 60

Percent reduction in number of competitors

SOURCE Avlatlon Week& Space Technology, 1993

70 percent in the number of companies supplying

production parts and services.6

Some of these smaller firms are leaving the defense business. Others are being purchased by

larger firms that are vertically integrating their operations. One result of this consolidation is a reduction in potential competitors in the defense

marketplace.

Some observers have argued that necessary

consolidation in the private sector of the defense

base has been inhibited by the threat of antitrust

action on the part of the Justice Department and

the Federal Trade Commission (FTC). The August 1992 decision blocking a merger between Alliant TechSystems and Olin Corp. ’s Ordnance

Division has been cited as an example of inhibiting action by regulatory agencies. There have

been only a few cases in which the Justice Department or the FTC has blocked a defense industry

merger or charged a violation of antitrust laws.

Aerospace executives nevertheless have argued

that even though the government may not have actually blocked many proposed mergers, possible

consolidations have not proceeded due to concerns over the potential reaction of regulators.

Some commentators have argued that U.S. national security objectives may sometimes be diametrically opposed to the competition objectives that

underpin U.S. antitrust laws.7

Partly in response to these concerns, the DOD

formed a Task Force on Antitrust under the auspices of the Defense Science Board “to provide

the background that will enable [the DOD] to give

the Justice Department and the FTC informed advice on the specific issues that come up.”8 The

4 An~ony L. Velocci, Jr., “U.S. Shakeout Tests Suppliers’ Flexibility,” Atia/ion Week& Space Technology, Feb. 14, 1994, p. 48.

7 Anthony L. Velocci, Jr., “Industry Plight Driving Antitrust Policy Review, ’’Avia~ion Week& Space Technology, Aug. 30, 1993, pp. 45-47.

8 Ibid.
Chapter 6 Continued Segregation 145

Task Force issued a report on April 4, 1994. It concluded:

. . . that competition among firms in the defense

industry is significantly different from competition among firms in other sectors of the economy, but that the Antitrust Merger Guidelines are

flexible enough to take into consideration the

special circumstances of downsizing in the defense industry.9

The report concluded that DOD must take a

more active role in the consolidation process. The

Department should provide antitrust regulators

with the information required to make informed

decisions that will not adversely affect national security.

Consolidation is occurring in the public sector

too. Consolidation in DOD research, development, test, and evaluation (RDT&E) agencies has

been underway since at least 1989. This process

has been reinforced by congressional direction to

cut back the civilian acquisition workforce

(including RDT&E personnel) by 20 percent

between 1991 and 1995, and by the Base Realignment and Closure (BRAC) process.10 Congress

also created the Federal Advisory Commission on

Consolidation and Conversion of Defense Research and Development Laboratories to recommend ways to improve their operation. The

Commission recommended that: some or all DOD

laboratories be converted to GOCO laboratories;

the missions and functions of some or all the laboratories be modified; and some of the laboratories

be consolidated or closed.11

The Army has created a corporate Army Research Laboratory, consolidated several laboratories, and closed others. The Service has eliminated

4,000 to 6,000 positions, leaving a total of 32,579

personnel in its RDT&E activities for fiscal year

1992.12 The Army funds a federated network of

university laboratories and plans to make greater

use of civilian developments. Further, it and the

other Services have a growing list of cooperative

research and development agreements (CRADAs), as well as other activities, directed at increasing technology transfers between the public

and private sectors.

There were 67,552 personnel engaged in Navy

RDT&E activities in fiscal year 1992. The Navy

plans to close several R&D facilities and expects

several thousand positions to be eliminated. The

Service is examining which technologies might

be sourced from the private sector and which will

need to be fostered in the defense sector.

The Air Force has reorganized its 14 laboratories into four “super-laboratories,” and eliminated

more than 2,000 RDT&E positions since 1991.

There are now an estimated 20,188 personnel involved in RDT&E activities. The super-laboratories correspond to the Air Force Materiel

Command’s four product divisions: Aeronautical

Systems, Electronic Systems, Space Systems, and

Human Systems.

All three Services are pursuing inter-Service

consolidation activities through the Defense Science and Technology Reliance Program, which

seeks to leverage increasingly scarce science and

technology funds through formal agreements that

govern planning and research, and designate a

lead Service and agency in technology development.

9 p~Uj c, K~~l~Skl, ~fen~e Science Board, ,Memorandum for tie under Secretar-y of Defense (ACqUiS]tjOlr & Technology), Report of~he

Defen.\e Science Bourd (DSB) Task Force on Antitrust Aspects of Defense Industry Consolidation, Apr. 4, 1994.

10 me \ 989 DOD ~fen$e ,Mmagement Review directed (he se~ices [o increase efficiency and reduce unwamanted Over]ap in their

RDT&E activities. The congressional action came in U.S. Congress, National Defense Authorization Act for Fiscal Year 1991, conference report to accompany H.R. 4739, Oct. 23, 1990, p. 143.

I I Federa] Adll\ory Commjsslon on consolidation ~d conversion of Defense Resemch and Development Laboratories, repOlltO the sf2Cretary of Defense, September 1991.

I z U,S ~pannlent of Defense, Offlce of tie Secre(w of Defense, Director, Defense Research and Engineering, Dwarfment of Defense

in-House RDT&E Acri~[ties R~,nort, (able 1, pp. 1-2, 1993.
146 I Assessing the Potential for Civil-Military Integration

One of the Air Force’s four super Iaboratories, Phillips focuses on the transition of space research technologies into operational

systems

The Reliance Program has established six categories of inter-Service and interagency cooperation: coordination, joint efforts, collocation,

consolidation, competition, and Service-unique.

Thirty-one broad technology areas have been

identified as important to two or more participants. Program officials have reported a number

of successes in eliminating duplication of effort

and in coordinating research. The Services report

they have moved beyond coordination in many research areas to joint efforts and collocation, The

percentage of DOD science and technology funds

managed under the Reliance Program reportedly

grew from 34 percent in fiscal year 1993 to 46 percent in fiscal year 1994.13

Critics of the Reliance Program argue that the

program allows the Services to show cooperation

while avoiding real consolidation. The Aerospace

Industry Association, for example, has argued that

although the program has been billed as:

. . . one of the most comprehensive restructuring

efforts involving the technology base in over 40

years, few have crossed Service boundaries, and

virtually none of the Reliance Panels have coordinated their plans with relevant industry

R&D .

14

DOE laboratories involved in nuclear weapons

research and development are consolidating and

moving toward more interaction with the com13 Joint Directors of L~bor~[orieS, DC~fense Science und Technology, December 1993, p. 5. Reliance also inchIdes the Defense .Nu~lear

Agency, the Ballistic Missile Defense Office, and coordination with Advanced Research Projects Agency.

14 Aerospace Induslw Association, background paper, undated, Nationulizution of (he Aerospace lndustr.v “R&D Luhoratoriev. ‘
Chapter 6 Continued Segregation 147

mercial sector.

15 Although weapons research remains a high priority, other missions, such as

economic competitiveness and environmental

cleanup, are gaining in importance. Proposals recommend that as much as 20 percent of these laboratories’ R&D budgets be allocated to technology

transfer. 16 In addition, the laboratory directors

have indicated that as much as 20 percent of the

funding will be allocated to the pursuit of common

commercial and defense--dual-use--objectives.

Budget cuts are forcing changes in the DTIB

maintenance structure. The Services have begun

to reduce the size and number of government facilities and to focus similar technologies or systems

for all Services at a single site. To reduce and control costs, a greater emphasis is being placed on

competition.

Some of these changes may have a direct impact on CMI, The Navy’s announced Aviation Depot Policy, for example, has reduced inhouse work

and transferred it to private industry. The Navy anticipates closing excess depots as rapidly as possible, consistent with the 1993 BRAC guidelines.

It will retain a minimum core capability to maintain fleet readiness. 1 7

But other changes may not increase the use of

the commercial sector. For instance, Air Force

commanders believe that open competition for depot-level maintenance will result in the transfer of

much of the military aviation work to Air Force

Air Logistics Centers, which Air Force commanders have claimed are the most efficient providers

of such maintenance work.

There are a number of obstacles to increasing

private-sector maintenance. Fluctuations in the

size of workload and the need to retain a capability

to repair items long after they had ceased being

produced are two of these.

Depot consolidation also faces challenges in

Congress. The Services have argued that the legislatively mandated workload limit (no more than

40 percent of the workload can be accomplished

by nonfederal employees) has reduced DOD’s

ability to eliminate inhouse capabilities and to rationalize the private/public base. The DOD Task

Force on Maintenance Management, established

in the 1994 Defense Authorization Act, recommended retention of a required “core” capability

that is not tied to any mandated workload limit.

Congress, however, has continued to support a

mandated federal workload of 60 percent.

Advances in Product and

Process Technology

New product and process technologies with both

defense and civilian applications are being developed and perfected at a rapid pace. Commercial

companies are making large advances in many

product and process technologies, including rapid

design and prototyping, quality control, and flexible manufacturing. But current organization and

funding arrangements make it difficult to incorporate many of these technologies into the operations of the segregated DTIB. For example, the

general lack of available funds (the 1980s were an

exception) and the lengthy government acquisition cycle has often inhibited the public sector

from updating its process technology in a timely

fashion. It often takes at least two budget cycles to

justify a request, get the Service authorization, acquire congressional funding, let a competitive bid,

evaluate that bid, buy the equipment, and, finally,

install it. Incorporation of new manufacturing

technology in the private sector has been inhibited

partly by a cost-based accounting system that

linked profits with total costs and by short contracts that provided few incentives to make such

investments.

1 f ~c~c jnc]ude Lll\rence Ll~ ~rmore Na[jona] Labora[()~, Sandia National Laboratory, Los Alamos National Laboratow, Savann* ‘iver

Technical Center, and Savannah Ri\er Ecology Laboratory.

I(I .~ncrg} Lab\’ Fate,“Al iution Wkek & Space Technology, Apr. 25, 1994, p. 17,

17 /,l,$,(/t, th(> pen[u~(jrl, Mily ~. 1 ~~~
148 I Assessing the Potential for Civil-Military Integration

The private and public sectors have started to

remedy these problems. The Technology Reinvestment Project (TRP), for example, seeks to

promote the transfer of process and product

technology into the segregated DTIB. CRADAs

and consortia also aim to foster technology

transfer.

Both the Navy and the Air Force have expressed interest in dual-use programs, modeled on

the TRP program, that bring together industry,

universities, and Service laboratories for research

on selected topics. But, ultimately, widespread

adoption of new product and process technology

by the segregated portion of the DTIB will require

changes in acquisition approach and in the government incentive system.

Changes in Government Management

Government management of both private and

public sector DTIB resources continues to be criticized as too decentralized and uncoordinated. One

result is a DTIB filled with redundancies. Yet

here, too, change is occurring. For example, although the Reliance Program still only affects part

of R&D funds spent by the Services ($3.6 billion

of a total $7.9 billion DOD science and technology investment), there has been an increase in the

percentage of such funding in the last year. Service

planners now acknowledge that funds “to go it

alone” are simply not available and that they must

find ways to leverage funds in areas of common

interest.

It is unclear how much unwarranted redundancy of research exists among the Services. Because

DOD’s Director of Defense Research and Engineering (DDR&E) has had only limited involvement, the Reliance Program has been criticized as

a “rule of committee” effort in which Service interests, rather than overall DOD interests, are

served. 18 Further, even those who support the Reliance Program and believe that it has succeeded

in eliminating redundancies criticize its lack of a

mechanism for developing a longer range science

and technology strategy. They have called for better investment planning. To address this issue, the

DDR&E has established a number of boards to

identify future defense technology needs and

ways to meet them.

Similar inter-Service management problems

inhibit consolidation and rationalization in maintenance. Despite efforts to consolidate and provide cross-servicing, the amount of inter-Service

maintenance remains small. In 1989, less than 6

percent of the total work was conducted on an

inter-Service basis, while it is estimated that 60

percent of maintenance could be conducted across

Services. 19 The effort toward more centralized

management of depot-level maintenance inched

forward with the report of the Depot Maintenance

Management Task Force and the publication of a

DOD finding that “a DOD-wide core provides

greater flexibility to eliminate duplicate resources, increase cross-servicing, and implement

efficiency measures.”20 DOD said that it had decided to maintain a DOD-wide core maintenance

capability.

Government oversight of the private sector of

the DTIB also remains concentrated along Service

lines. This results in numerous inefficiencies and

redundancies, and leaves DOD without a coherent

view of the DTIB as a whole. What appears necessary is a government management structure with

good oversight not only across Services, but also

across the private and public sectors.

18 Michael E. DaVey, Libra~ of Congress, Congressional Research SeWiCe, memorandum “Current Status of Project Reliance,” !vIay 4,

1993.

19 OTA, Bu~Id;ng Furure ~ecuri~, op. cit., footnote 3, P. 128.

20 John ~utch, Deputy ~fense Secretw, letter to Congress, reported in Defense Daily, “Task Force Recommends Lifting Rule on wl~

Depot Split,” Apr. 11, 1994, p. 51.
Chapter 6 Continued Segregation 149

Previous discussions (boxes 4-1 and 5-1) noted that the manufacture of the AMRAAM IS largely segregated from commercial production and that segregation IS likely to continue at the system-assembly level

for the AMRAAM. At the next tier, segregation is likely to continue for militarily unique components such as

rocket motors, propulsion systems, and explosives, However other components, subcomponents, parts,

hardware, and materials may be produced on integrated production lines and some of these components

and subcomponents will probably be commercial.

While the expansion of the use of commercial items or Integrated processes in the AMRAAM may be

limited, future missiles may have greater potential for integration. A government-sponsored study group

examining the technology and Industrial base for missiles concluded that there were several commercial

product and process technologies available for missiles. But many of the necessary technologies are likely

to remain segregated.

TABLE 6-A: Commercial Availability of Critical Technologies and Manufacturing Processes

I I Critical I manufacturing I

I I

technology I process I

I IR / radar domes I ❑

I Warheads I ❑ El

• \ S&A devices I 1 I n I

I Fuzes I El I ❑ I

I Rocket motors I ❑ ❑

1- Mlcrowave devices/ assembles ❑ I D I

— —

l-wTs– o— 0 ——IR detector s El 3 I

VHSIC / ASIC ■ -’ ■ –6 ––————-—–—— ----

~Multlchlp modules ■ I ■

I --- ‘-- ------- ..:.,------: “-’ MMIC / MMIC modules ❑

+

o

Fiber o-ptics

Displays ~

Low observable ❑ - ‘3

L

Counter stealth technology ❑

-1-

❑

I

Image processing I

. — .- —— — — —

Homing guidance autopilots I o I

I ECCM I ❑

~ Ada software I ❑ &-—————- L-- —4

, Super computers I ■ I

L 1- . I

I ■ Available O Somewhat available Not available 1
150 I Assessing the Potential for Civil-Military Integration

● Militarily unique product or process.

● Insufficient demand.

● Highly classified product or process.

■ Specialization on core competencies.

● Public sector facility.

SOURCE Office of Technology Assessment, 1994

The need for a more centralized oversight and

planning for the use of available technology and

industrial resources, however, should not be mistaken for a general demand for greater centralization in the execution of decisions. As chapters 4

and 5 indicated, a key to further CMI includes the

willingness to decentralize contracting and oversight authority and to allow personnel in the field

more latitude in implementing policy.

WHY SOME DTIB SEGREGATION

WILL CONTINUE

No matter how successful commercialization and

integration of processes may prove to be, a portion

of the DTIB is likely to remain segregated. Key

reasons for continued segregation are listed in

table 6-3.

M Militarily Unique Product or Process

While commercialization or integration of military production may make economic sense for the

base as a whole, sound business practices may dictate, in at least some cases, segregated R&D, production, and maintenance regardless of changes in

acquisition laws and regulations. This is especially true where military needs are unique, and the

products required to meet them substantially differ from those necessary to fulfill commercial requirements.

The conventional ammunition industry, for example, is likely to remain segregated. Most military ammunition is significantly different from

what is sold commercially. The associated military tooling and processes are also dissimilar. The

manufacture of military ammunition, for example, requires working with exotic materials (e.g.,

boron alloy and depleted uranium); mixing,

blending, drying, and packaging energetic (e.g.,

TNT, RDX, HMX); and melting, pouring, and

pressing explosives.

21 Further, firms that deal

with explosives and propellants face very stiff

safety and environmental requirements. Large

real estate investments are needed to ensure adequate safety in case of accidental explosions, special buildings are required to mitigate the effects

of any accidents, and an increased investment in

environmental control equipment is necessary.

The combination of unique products and specialized processes makes it unlikely that either commercialization or process integration can succeed

in this sector.

Other systems and operations likely to remain

segregated because of their uniqueness are the

production and final assembly of major combat

systems such as submarines, aircraft carriers, and

other large naval combat vessels, and the assembly of high-performance fighter aircraft, combat

helicopters, and ground-combat vehicles (tanks,

armored personnel carriers, and their follow-on

systems). Although many of the components and

subcomponents of these systems can potentially

benefit from the use of commercial items and

commercial buying practices, the systems integration and final assembly of these expensive items

are sufficiently costly and unique to demand continued oversight. The adoption of Activity Based

Cost Accounting might reduce some of these

problems.

I Insufficient Demand

The tremendous reduction in defense items likely

to be developed and produced in the foreseeable

future lessens the opportunities for competition to

~’ James B]ackwell, Munifions industrial Base Forecusf, a study prepared for the Munitions Indus(rid Base Task Force, Science Applications International Corp., October 1993, p. 25.
Chapter 6 Continued Segregation 151

control costs in many areas. Even now, many military systems are procured in such low numbers

that multiple producers do not exist.

Once a system is fully developed, the government might buy it on a firm fixed-price contract,

and thus reduce the need for oversight. But the

combination of high cost, large technological risk,

and low demand make it likely that the government will continue to require the type of costaccounting and oversight for these systems that

interfere with commercial work and prompt continued segregation.

1 Highly Classified Product or Process

In some cases, segregation will continue because

the national interest would not be served by making certain products or processes openly available.

One of the most obvious examples is nuclear

weapons. Not only are nuclear weapons militarily

unique, but also their development, production,

and maintenance involve technologies over which

the government needs to retain tight control.

Other technologies likely to remain highly

classified and therefore segregated, include those

relating to the fabrication of stealth materials and

electronic warfare computer codes. Although

some of these technologies could be developed

and produced in a commercial firm, the classified

portions of the process would need to be segregated from nonclassified activities.

I Specialization on Core Competencies

Segregation may not always be due to the nature

of the products and processes. In some cases, segregation may result from a manufacturer’s choice

to concentrate on defense work, to the exclusion

of commercial, nondefense activities.

Studies indicate that the diversification patterns of successful businesses stress the exploitat ion of similar “core capabilities” for both new and

old products.

22 Accordingly, firms tend to focus

on developing a core of similar technical compeAlthough final assembly operations on systems such as

nuclear submarines are likely to remain segregated,

subsystems and components may come from integrated firms

and facilities

tencies, rather than on manufacturing disparate

products. These competencies might include a detailed knowledge of military threats and missions,

something a commercial firm is less likely to

have.

Even with increased use of flexible manufacturing and diversification into dual-use sectors,

this situation is likely to continue. From the perspective of some firms, there are advantages to

dealing mainly with government customers—the

DOD or others. These advantages include the ability to focus marketing efforts on a narrow range of

potential customers and to exploit customer contacts developed over years or decades. Loral

Corp., for example, appears to be successful in using a strategy of specialization.

I Public Sector Facility

Another reason for continued segregation of some

facilities is a deliberate government decision to

maintain separate government capabilities for activities that could otherwise be conducted in the

private sector. In particular, the military has argued that a core maintenance capability, sufficient

to support a crisis or conflict, should be retained

within the Services, rather than depend entirely on

22 David p. ~ech, “Conversion, Integration and Foreign Dependency: Prelude to a New Economic Security Strategy} ’,” Ge~ ~~~~rnd~, ~ 1.2

(Boston, MA: Kluwer Academic Publisher, October 1993), pp. 193-206.
152 I Assessing the Potential for Civil-Military Integration

private contractors. This core includes Service air

logistics centers, depots, and shipyards.

While industry has generally supported the

retention of a core Service capability, it has favored a smaller capability than that proposed by

the Services. The congressionally mandated Depot Maintenance Management Task Force’s April

1994 report recommends a general reduction in

the size of the retained core and a reduction in the

excess depot capacity that would result from this

smaller core.

DOD RDT&E centers provide a valuable service exploring militarily relevant technology.

They offer the expertise to make DOD a “smart

buyer” of technology. In the past, DOD laboratories have used about 30 to 40 percent of their funds

in-house, while the remainder has flowed to the

private sector. That split is unlikely to change radically. Although many of these facilities are likely

to be closed or reduced, and the rest will probably

conduct more business with the private sector, it

remains likely that a significant, segregated public

sector capability will remain.

CMI POLICY OPTIONS FOR THE

SEGREGATED BASE

CMI policies might help reduce costs within the

segregated portion of the DTIB and promote

technology transfer with the larger CTIB. Indeed,

because weapon systems are likely to be developed and assembled within the segregated portion

of the DTIB, CMI policies in this segment of the

base are critical in determining both the character

of future forces and the overall size of CMI cost

savings that can be realized.

Many of the acquisition reforms (discussed in

the preceding chapters) that allow for increased

commercial purchases (elimination of military

specifications) and integration of processes (elimination of military standards) could be applied to

the segregated DTIB. Moreover, an emphasis on

CMI could help guide DTIB rationalization and

consolidation, producing added benefits.

This section examines three broad CMI policy

areas. They are policies aimed at: eliminating redundancies and rationalizing capabilities within

the segregated DTIB, and between the segregated

and integrated portions of the DTIB; applying the

acquisition reforms discussed in chapters 4 and 5

to the segregated DTIB; and promoting technology transfer into and out of the segregated portion

of the DTIB.

I Eliminate Redundancies

As the defense budget declines, DOD may realize

some of the biggest cost savings in eliminating redundancies in the segregated portion of the DTIB.

The value added in the private and public portions

of the segregated DTIB may have totaled about

$56 billion in 1992.23 Cost savings could be

achieved if redundant operations were eliminated,

facilities closed, personnel reduced, and future infrastructure investments avoided. The 1993 Defense Science Board Task Force on Acquisition

Reform estimated that a 25-percent reduction in

DTIB government personnel might be possible.

This degree of reduction, if applied to the public

sector RDT&E, manufacturing, and maintenance

base, might eventually result in a savings of several billion dollars per year.24

The moves to consolidate and eliminate redundancies in the DTIB mirror changes in the national

economy. The broader CTIB is undergoing extensive restructuring. This involves eliminating

layers of management, closing redundant manufacturing facilities, and cutting overlapping R&D

programs. As a result of these changes, firms are

stronger and more globally competitive.

23 Based on ~pa~men[of Commerce data and a 1992level of$314 billion on all national security. OTA’S industry survey estimated that

about $43 billion of the approximately $180 billion spent for national security in the private sector in 1992 might remain segregated. In addition,

another $13 billion might be spent for the public sector workforce involved in R&D, production. and maintenance activities.

24 When such savings might appear is not clear since there is a significant up-front cost associated with personnel reductions and facilities

closures. Critics, for example, argue that the current BRAC is fiscally unexecutable.
Chapter 6 Continued Segregation 153

DOD can guide the DTIB consolidation process. The Reliance Program, for example, has allowed the Services to turn over research

responsibilities for selected topics to lead Services

or collocate personnel working on these topics.

Changes at the Services’ depot-level maintenance

facilities have increased cross-servicing of selected items, although this activity is still taking

place on a small scale in comparison to its projected potential. The Services also plan to increase

reliance on selected elements of the private sector

for production and maintenance.

But DOD efforts at consolidation are only beginning. They will have to increase significantly if

a viable capability is to be retained. Otherwise,

there will be too many facilities, with the bulk of

funding spent on infrastructure and salaries rather

than on R&D and maintenance.

Congress has given little support to most of

DOD’s consolidation efforts. DOD facilities represent high-paying jobs in many parts of the

United States, and the loss of employment is a

matter of congressional concern. Wartime readiness is another concern. The principal justification for a strong, redundant, in-house maintenance

base is the need for a quick-response capability.

This justification is explicitly stated in the fiscal

year 1994 Defense Authorization Act in a “Sense

of Congress” statement supporting in-house DOD

depot-level maintenance and repair activities as

“uniquely suited to responding to the increased

need for repair and maintenance of weapon systems and equipment which may arise in times of

national crisis.”25

The upcoming 1995 BRAC review appears to

be particularly important for the consolidation effort. The BRAC review helps raise the defense reduction effort from a local to a national effort. The

Services appear to be working hard to prepare for

it. Several officers predicted, however, that the

necessary base closures and realignments (expected to be far greater than in previous efforts)

would not be made in 1995.

These concerns appear warranted. Newspaper

accounts in May 1994 indicated a reluctance in

both the White House and Congress to make major closures. Deputy Defense Secretary John

Deutch announced that delay of some planned closures for two years is under study. Some in Congress have recommended delaying all 1995 base

closings until 1997. Reasons cited include the immediate costs associated with closings, such as

environmental cleanup and severance pay, and

concerns about the loss of jobs at a time when alternative employment appears unavailable. However, any delays would adversely affect projected

long-term cost savings.

Private sector mergers, acquisitions, and bankruptcies, especially in manufacturing, are eliminating redundancies more rapidly than activities

in the public sector. Here too, however, there is resistance to the rapid loss of jobs. One of the responses has been to fund the manufacturer of

weapon systems that no longer have military mission requirements. And, as mentioned earlier, antitrust action or the threat of such action, may have

slowed consolidation within the private sector.

The process of eliminating redundancies between the private and public sectors is just beginning. DOD and the Services are attempting to

identify private R&D capabilities that can be used

in lieu of government capabilities. Studies aimed

at identifying such capabilities must be accelerated.

Not all redundancies can or should be eliminated. Some overlap in R&D, manufacturing or

maintenance ensures that the government does not

become dependent on a single source for support,

has the capability to respond to crisis, and can promote innovation. Redundancy in research, for example, can promote innovative solutions to

technical problems. Scientists see the resulting

“competition of ideas” as key to arriving at the

best solution. Yet budgetary constraints are forcing a reevaluation of acceptable changes.

25 lo usc 2?466, Sec 345.
154 I Assessing the Potential for Civil-Military Integration

Direct Consolidation

During the Bush Administration, the stated DOD

consolidation policy was to allow market forces to

shape the private sector defense base. The Administration acknowledged, however, that some sectors—for example, nuclear submarines—might

require direct government intervention. The Clinton Administration has been more expansive in its

concerns about special sectors, including armored

vehicles and high-performance fighter aircraft. It

has favored taking action to ensure the viability of

important defense industrial sectors.

DOD influences the DTIB through the award of

contracts. DOD may wish to place greater weight

on DTIB preservation issues in contracting. To

foster maximum CMI, however, these efforts

should be selectively applied to the industry in

question. DOD must also be prepared for bid protests, particularly in those situations where one

bidder will be awarded an entire contract and the

other will be put out of that business. “Managed

competition” between two producers is an alternative. But this would require a coordinated policy

with several product lines. Split awards of varied

percentages might serve as an incentive for lowering costs. Congressional support for DOD decisions is essential.

DOD has yet to provide convincing arguments

for much of its spending on the technologies or industrial sectors it decides to support. Despite several years of requests and directives from

Congress to outline the Nation’s DTIB needs and

to develop an investment plan to serve those

needs, DOD has failed to respond. Not only are

key sectors only hazily identified, but there are

few metrics for determining how much should be

spent to retain a required capability.26 DOD has

several study groups assessing the problem, but

their progress may be too slow to affect the consolidation significantly.

As noted earlier, the Justice Department and the

FTC also have direct interest in private sector industrial consolidation, particularly in the area of

antitrust policy. Antitrust policy is particularly

important to the consolidation of the segregated

portion of the DTIB. Monopolies are more likely

to arise in cases where militarily unique systems

are procured in low numbers.

The Justice Department and the FTC have argued that current merger guidelines are adequate

to protect national security and the public’s financial interests. The Deputy Assistant Attorney

General in the Justice Department’s Antitrust Division, for example, has stated that “[c]urrent

guidelines are fully flexible enough to deal with

defense industry mergers.”27 This attitude is

echoed in the FTC, which argues that “[t]he flexible approach of the current Merger Guidelines is

adequate and appropriate for analyzing defense

industry mergers in a reasonable and informed

manner.” 28

The Defense Science Board Task Force on Antitrust Aspects of Defense Industry Consolidation

supported these conclusions. Although the report

argued that competition among firms in the defense industry is significantly different from competition in other sectors, it concluded that the

merger guidelines are flexible enough to take into

consideration the special circumstances of downsizing in the defense industry. The Task Force also

argued that the enforcement agencies are receptive

26 Some work has been done to assess the relative value of closing or mothballing a facility versus keeping a production I inc warm despite a

lack of a current requirement for the product.

27 Velocci, “Industry Plight Driving Antitrust Policy Review,” op. cit., footnote 7, p. 46.

2X Laura A. Wilkinson and Steven K. Bcmstein, “Mergers in the Defense Industry: Application of the 1992 Horizontal Merger Guidelines.”

draft paper provided OTA, p. 19.
Chapter 6 Continued Segregation 155

I

I

I

I

Many in Industry cite the FTC’s decision to block a merger between Alliant TechSystems and Olin

Corp.'s Ordnance Division as an example of the impediments facing defense industry acquisitions and

mergers The two contractors planned to merge before the DOD concluded a competitive multiyear contract for the procurement of 120mm tank ammunition The contract was designed to eliminate one of the

two as a supplier of that ammunition to the Army

The FTC attorneys argued that even though the tank ammunition in question could be purchased in

Germany, DOD policy made such purchases unlikely; therefore, in practice the market was limited to the

United States Because of declining DOD needs, a new producer was unlikely to enter the market and a

merger of the two firms would effectively eliminate competition, The attorneys also reported that there was

some evidence that the cost of the rounds might Increase as a result of the merger, Although some of DOD

witnesses testified in support of consolidation on the grounds of efficiency, DOD took no formal position on

the merger The FTC argued that, based on all the expert Information available, “[T]he overwhelming conclusion from all of these sources was that DOD would obtain the best quality and prices for ammunition

under a competitive scenario versus the proposed merger,’”

The court eventually decided not to allow the merger to proceed It found that the elimination of competition between Alliant and Olin could “raise the cost of the contract for the Army between 5 percent and

23 percent, or $25 million to $115 million.”2 Moreover, the court rejected the claim that national security

might be Impaired if the merger were stopped,

The potential increase in cost and the lack of solid DOD support appear to have been key reasons for

the decision.

‘ Defense Science Board Task Force on Antitrust Aspects of Defense Industry Consolldatlon, p 5

z FTC v Alllant TechSystems Inc 808F, Supp 9 (D D C 1992)

to information from DOD on national security and

other special concerns .29

The Task Force concluded that the DOD did not

have to take a position on every transaction, but it

recommended establishing an “institutional capacity to assemble and transmit information.”30

The Task Force argued that DOD could work with

enforcement agencies to ensure that its national

security views on proposed mergers or joint ventures are known. The consensus among DOD and

enforcement agencies appears to be that legislative changes on defense antitrust are not required.

Still, anecdotal evidence suggests that many industrialists have come to a different conclusion.

They see a significant risk that mergers will be

—

halted on the basis of antitrust concerns. This

could make corporate merger attempts less attractive. DOD will need to work more closely with industry to promote flexibility in this area.

Government vs. Private Ownership Issues

Eliminating redundancies between private and

public sectors will inevitably force decisions concerning the public sector’s role in defense. It is

here that an emphasis on CMI may have its greatest effect on consolidation of the segregated

DTIB. A consolidation strategy designed to maximize the benefits of CM I would tend to favor private over public ownership and operations. The

“) Office of the Under Secretary of Defense (Acquisition), Rc[xwt of I}w [>ef2n.\c .Yciencc Bcwrd Tusk [-orce on Anlttttd.\[A.$’[)(’<”1.\ of Deft’n.\c

Indu,i(r} Con}olldut](m, April 1994, p. 4.

‘() Ibid., p. 5,
156 I Assessing the Potential for Civil-Military Integration

Original manufacturers of equipment, such as Pratt & Whitney,

also have the ability to perform depot-level maintenance.

result is a preference for private companies over

GOCOs, and GOCOs over GOGOs, unless more

pressing factors override the desire for CMI.

U.S. government policy has stressed the use of

private firms whenever possible. Advantages of

private ownership include greater labor flexibility, more responsive capital investment capabilities, greater breadth of management, and the

potential for greater access to commercial

technology.

DOD has minimized private sector participation in maintenance. Even when private companies are supremely capable of providing

maintenance on a weapon system--often because

they produced it—DOD goes to great length to

transfer maintenance responsibility to the public

sector. While some argue that this transfer is vital

for crisis responsiveness, it can be expensive. For

example, in the case of some electronic equipment, developing the testing equipment and the

technical data packages to allow the Services to

perform maintenance reportedly adds 25 percent

to the total cost of a contracts] Again, this transfer

often means the replication of capabilities possessed by the original manufacturer. Commercial

support would appear to be preferable.

Still, in a period of reduced defense spending,

the private sector may be unable or unwilling to

maintain capabilities that the military deems essential. For example, firms will maintain surge

production capability only if the government is

willing to pay for it.32 In such cases, government

ownership may be required. Table 6-4 presents

several reasons for government ownership.

Industries that meet several of these criteria include: the large-caliber ammunition industry, submarine and shipbuilding, and the armored vehicle

and fighter aircraft industries. To date, the private

sector has been willing to retain a capability to develop and produce many of these items, albeit

with extensive government-supplied special

tools, facilities, and equipment. Given current

budget trends, however, it is uncertain whether

there will be sufficient business to provide financial incentives for private sector work in these

areas. Should demand fall sharply, government

ownership might prove less expensive than creating an artificial demand.33

Many government arsenals and maintenance

facilities were upgraded during the 1980s defense

buildup. To take advantage of the upgrades, some

officials suggest putting these facilities under

● High capitalization and replacement costs,

■ Long replacement time.

■ Uneven demand for product or service.

■ No commercial counterpart,

■ Need for responsiveness.

● Critical security controls,

● Extreme hazards (safety or environmental)

—

SOURCE Off Ice of Technology Assessment, 1994

~ I office of T~~hnO]Ogy ASSe\Smen[ discussions with industry.

32 I,ldustry argues hat DOD Cument]y has no plans for surging production and therefore no plan for funding the capability.

~~ u s congress, Office of Tc~lrno]og~ Assessment, BUI/din<q Furure Scc’ur/r]I, op. cit., footnote ~, WItiCipMed c~mbining all

.,

morcd \ chicle production into two \itcs.

types of ar-
Chapter 6 Continued Segregation 157

Other nations have taken a variety of approaches to defense ownership Two allies, France and Japan,

manufacture a relatively full range of defense items. They have taken very different tacks on ownership,

France

Nearly four-fifths of the French defense industry IS owned directly or Indirectly by the state, either in the

form of government-owned and -operated arsenals and nationalized companies (e.g., Aerospatiale, GIAT

Industries, and SNECMA), or as firms in which the government owns a large share of the stock (e.g., Dassault Aviation, Matra, and Thomson-Brandt Armaments). These nationalized defense firms do not face the

same pressures as private firms to provide a short-term return on Investment, but because they may be

only partially nationalized they have access to private capital market as well as to government subsidies.1

Japan

The Japanese, by contrast, rely almost totally on the private sector for defense R&D, production, and

maintenance Japanese firms are responsible for the development of new technologies and systems, as

well as providing subsequent depot-level maintenance for their products throughout their service Iife.

‘ U S Congress, Off Ice of Technology Assessment, Lessons m Restructuring Defense Industry The French Experience, OTA-BPISC-96 (Washington DC U S Government Printing Off Ice, June 1992) p 8

GOCO ownership. A GOCO structure might ensure that a facility is available when needed, while

providing more flexible personnel policies and

greater efficiency. GOCO facilities have become

commonplace in the ammunition manufacturing

industry, and should be equally acceptable in

maintenance.

When established, government ownership of

nuclear weapons-related facilities was considered

essential because of their critical role in national

security, the need for secrecy, the extensive facilities required, and the hazards involved. But DOE

weapons laboratories were specifically organized

as GOCOs to ensure the availability of the scientific and engineering talent needed to develop,

test, and monitor the U.S. nuclear weapons arsenal. A GOCO relationship provided a flexible personnel policy with more attractive wage scales

and more flexibility in organization and job categories than would have been the case in a GOGO

facility.

Although government ownership is touted as a

way to ensure the preservation of capabilities unlikely to be supported by the private sector, the

government has not always made the necessary investments. Faced with a choice between funding

force readiness and funding industrial mobilization

capabilities, the Services tend to favor the former.

For example, despite recommendations to ensure future ammunition capabilities in the DTIB.

at the start of U.S. involvement in Vietnam, defense ammunition plants were antiquated and in

poor condition. Nothing had been done to update

the facilities, let alone maintain them. Millions

had to be spent to bring all but two of 24 ammunition plants from the Korean War era back into production for the Vietnam War.34

1 Take Advantage of Acquisition Reforms

Although the segregated portion of the DTIB is

unlikely to take advantage of all the reforms pro-
158 I Assessing the Potential for Civil-Military Integration

posed in chapters 4 and 5, its operations can be improved and its costs lowered by adopting

commercial specifications, standards, and practices. Incentives to incorporate commercially

available components rather than those specified

by military description could increase the number

of available suppliers and reduce or control costs.

This would also reduce the need for flowdown of

cost and pricing data.

The increased use of commercial standards and

participation in commercial standards bodies will

narrow the difference between factory operations

in segregated facilities and those in the private

sector. Similarly, an emphasis on form, fit, and

function specifications will give suppliers an opportunity to apply their best practices to meeting a

contract.

Other practices that may be applicable to the

segregated DTIB include replacing government

quality inspection with statistical process control

or other modem quality control processes. But

there is some skepticism about alternative quality

control methods. Investigations periodically report instances of fraudulent and forged certifications of quality tests.35

Because of the lack of available pricing data,

elimination of cost accounting requirements appears highly unlikely. Longer term contracts with

commercial component suppliers that provide

better forecast or parts requirements and shorter

parts delivery times can reduce the need for parts

inventory and eliminate storage costs. The increased use of commercial parts might lower the

costs of individual items. The use of modern procurement practices, such as the use of Electronic

Commerce and Electronic Data Interchange, can

increase efficiency in purchasing all of these items

and have a positive impact on the segregated base.

But savings in this area are likely to come from the

lower tiers, not prime contractors.

I Regulated Industry

Periodically, suggestions are made that the defense industry be treated as a regulated industry,

like the electric power industry. Proponents argue

that such a change would allow defense companies to operate more efficiently, with less day-today oversight. But the potential for such use in the

defense industry appears limited. The regulation

of the electric utility industry, for example, is facilitated by the fact that it produces a common

product for which fair production costs can be calculated. The same applies to other utilities. The

defense DTIB, with its complex set of products

and processes, is far less amenable to regulation

using similar methods.

# Increase Technology Transfer

Ensuring technology transfer between the segregated portion of the DTIB and the CTIB is even

more important in a period of greater dependence

on commercial technology. The Services are developing programs to increase interaction between their R&D community and the commercial

sector. In some cases, however, mandates might

be necessary to promote the use of commercial

technology in component and system designs.

Secretary of Defense Perry’s recent directive on

military specifications and standards is a step in

this direction. Such a mandate would force government R&D activities and private sector firms

to assess commercial technological developments.

If the Nation is to rely on commercial specifications and standards, the government R&D community will need to be active in the organizations

that set standards. Such involvement will ensure

that defense stays current with developments in

critical sectors.

35 Andy Pasztor, “Unit of Lucas Says 1[ Falsified Weapons Data,” The Wall S(reet Journal, May 17, 1994.
Chapter 6 Continued Segregation 159

The TRP dual-use research projects and CRADAs might also improve access to commercial

technology. But the TRP appears to have little

relevance to important militarily unique items

such as ammunition.36 The CRADA process promotes technology transfer out of public sector defense organizations, but CRADAs have potential

problems. One concern is that as laboratorydeveloped technology is transferred out, there will

be insufficient investment dollars to assure that

defense-oriented laboratories remain on the leading edge of R&D. In the longer term, there may be

no more useful technology to transfer. Critics fear

that too much attention is being paid to the commercial market and that limited defense R&D

funds should be directed primarily to critical defense technologies. To preclude this possibility.

laboratories will have to carefully select CRADA

partners to ensure the two-way flow of useful

technology. The laboratories will have to develop

a sustainable, long-term science and technology

investment program.

SUMMARY

A significant portion of the future DTIB is likely

to remain segregated from the larger CTIB, despite changes in acquisition laws and regulations.

The OTA industry survey, for example, estimated

that about 25 percent of funding for private sector

DTIB activities might remain segregated.

The products likely to remain in the segregated

DTIB include a wide range of militarily unique

items such as conventional ammunition, fighter

aircraft, tanks, submarines, and nuclear weapons

and their delivery systems. Because of a lack of

commercial overlap or uneconomical production

rates, the development, production, and maintenance of these items will likely remain segregated.

Further. while many of the subsystems, components, parts, and services going into these products might be procured commercially or from

integrated firms, some of these will probably also

continue to be developed and produced in segregated facilities.

Despite continued segregation, however, implementation of some of the acquisition reforms

discussed in this report can have a positive effect

on this portion of the base. In both the private and

public sectors, costs may be reduced by the use of

more commercial buying practices, the increased

use of commercial products, and the reduced use

of military standards. The incorporation of commercial manufacturing technology (where possible) and modern quality control systems will

also have a positive impact on costs. In the private

sector, the challenge will be to devise incentives

for segregated contracts to adopt new manufacturing technology. In the public sector, the challenge

will be to convince the Services that industrial

modernization is critical to their defense mission.

CMI can also affect the segregated portion of

the DTIB by helping to guide consolidation and

rationalization. Where possible, policy makers

should emphasize private ownership and operations over public ones. This would maximize the

benefits associated with integration with the

CTIB.

The elimination of redundant R&D, manufacturing, maintenance, and testing capabilities, and

stronger reliance on private ownership and operation, can potentially produce cost savings. Savings on the order of several billion dollars per year

or more appear possible—but such savings require the closing of facilities and the elimination

of jobs. Neither of these steps is popular. Further,

any savings will take several years to appear.

But not all redundancies are bad—some serve

as hedges against future uncertainties. Further,

there is a consensus that a public sector role is essential to help maintain government expertise.

There is no consensus, however, on how large that

public sector portion of the base must be. In the

past, Congress has been reluctant to reduce public-sector capabilities and close facilities. A re1(’ The Nluni[lons lndu~trliil Baw Ta\h Force rcporw for c~;implc, (hat :inln)unition firm\ as~ocitituf w tth the Tii\h Force submitted 30 TRP

propowls md rueit d no uw ardi.
160 I Assessing the Potential for Civil-Military Integration

consideration of the role and size of the public

sector RDT&E, manufacturing and maintenance

base is increasingly important in the face of more

fiscal constraints.

As in the preceding chapters, OTA developed a

table for considering the cost-savings that might

be gained from implementing CMI in the private

sector element of the segregated base. Because the

segregated DTIB is less amenable to CMI policies, OTA limited its range of possible savings

from O to 10 percent. Table 6-5 shows how different savings assumptions could affect overall defense spending.

These savings, however, are additive to those

potentially gained in the public portion of the

DTIB through the acceptance of commercial practices, use of commercial products, and the elimination of redundancies between the private and

public sectors of the base.

Reforming the segregated portion of the DTIB

will present considerable challenges to policymakers. Many of these reforms are directly tied to

aBased on OTA’S estimate that 24 percent of prwate DTIB spending E

affected by these policy options These savings do not include those

obtained from consolldatton, ratlonahzatlon, and an increased rellance

on private ownership/operation

SOURCE Off Ice of Technology Assessment, 1994

jobs (closing facilities, reducing private or public

workforce). Policy makers need to recognize,

however, that CMI steps applied in this portion of

the base can help extend the buying power of increasingly limited defense dollars, as well as invigorate the national economy as a whole.
Acquisition and

Distribution of

Commercial Products

(ADCP)

Acquisition Law Advisory

Panel (ALAP)

ADCP

Advanced Medium-Range

Air-to-Air Missile

(AMRAAM)

Advanced Research

Projects Agency

Advanced Technology

Program (ATP)

Advisory Panel for

Acquisition Law Reform

Advisory Panel on

Streamlining Acquisition

Laws

Appendix A:

Abbreviations,

Acronyms, and

Terms A

DOD program launched in 1983, partly as a result of the Commercial

Commodity Acquisition Program.

Congressional panel established in 1993 to recommend procedures to

streamline procurement procedures for small purchases. Also known as

Advisory Panel for Acquisition Law Reform.

See Acquisition and Distribution of Commercial Products.

Advanced medium-range air-to-air missile; slated to replace the AIM-7

Sparrow in the U.S. Air Force and Navy; developed and manufactured

by Hughes; Raytheon is a designated second source.

An agency within the Office of the Secretary of Defense chartered in

1993 to support dual-use defense products and processes; formerly the

Defense Advanced Research Projects Agency.

A Department of Commerce program aimed at developing those

technologies likely to bring widespread economic benefits to the Nation.

See Acquisition Law Advisory Panel.

A joint government/industry panel established by the Defense Authorization Act of 1991, on whose recommendations Congress based many

of the changes embodied in the Federal Acquisition Streamlining Act of

1993. Also known as the Section 800 Panel.

1161
162 I Assessing the Potential for Civil-Military Integration

AIM-120A

ALAP

AMRAAM

ARPA

ATP

BEA

B&P

Bureau of Economic

Analysis (BEA)

Buy America Act

C-17

C

3

I

CAD

CAE

CALS

CAM

CCAP

Center for Strategic and

International Studies

(cm )

CICA

CID

civil

civilian

See Advanced Medium-Range Air-to-Air Missile.

See Acquisition Law Advisory Panel.

See Advanced Medium-Range Air-to-Air Missile.

See Advanced Research Projects Agency.

See Advanced Technology Program.

See Bureau of Economic Analysis.

Bid and Proposal. Private sector firms can be reimbursed by the government for B&P. This reimbursement is included with independent research and development funds.

One of four research divisions of the U.S. Department of Commerce.

41 US Code 10 requires DOD purchases to be oriented towards American suppliers, in order to protect, promote, or support elements of the

American industrial base. Other source selection legislation includes:

the Cargo Preference Act of 1904(33 Stat. 5 18), governing transport by

ocean vessels; the Burns-Tollefson Amendment (PL88-446), governing naval construction; and the Mattingly Amendment (PL99-591,

PL1OO-2O24, and PL1OO-463), governing DOD machine tools.

A four-engine military jet transport aircraft being developed and built

by McDonnell Douglas for the U.S. Air Force’s Strategic Airlift Command; the contract was awarded in 1980; initial production began in

1993.

Command, control, communications, and intelligence

Computer-aided design

Computer-aided engineering

See Computer-aided Acquisition and Logistic Support.

Computer-aided manufacturing

See Commercial Commodity Acquisition Program.

Washington, DC-based research organization.

See Competition in Contracting Act.

See Commercial Item Description.

See commercial.

See commercial.
Appendix A Abbreviations, Acronyms, and Terms 1163

civil-military integration

(CMI)

CMI

Command Utility Cargo

Vehicle (CUCV)

commercial

commercial buy

Commercial Commodity

Acquisition Program

(CCAP)

commercial item:

Commercial Item

Description (CID)

commercial off-the-shelf

(COTS)

commercial service

commercial technology

and industrial base

(CTIB)

The attempt to merge the technologies, processes, labor, equipment,

material, and/or facilities of the commercial technology and industrial base and the defense technology and industrial base into a

single national technology and industrial base. Under civil-military

integration, common technologies, processes, labor, equipment, material and/or facilities are used to meet both defense and commercial

needs.

See civil-military integration.

A commercially derived, light (1 l/4-ton-class), four-wheel-drive tactical vehicle built by General Motors in five configurations for the U.S.

Army to serve in a wide variety of roles. See also High-Mobility Multipurpose Wheeled Vehicle.

Of or pertaining to that portion of the national technology and industrial

base that sells on the open market on the basis of price. See also commercial item; Commercial Item Description.

Procured from private facilities on the basis of a commercial market

price.

A program established by DOD in 1976 in response to the report by the

Commission on Government Procurement. (See appendix B.)

An item that is sold or licensed to the general public for other-than-government use, or, if not yet sold to the public, is developed primarily for

other-than-government use, or is composed of some combination of

commercial items generally sold to the public. This definition is

derived from that developed by the Acquisition Law Advisory Panel.

A simplified federal specification that describes the key, salient physical or functional characteristics of an acceptable commercial (or modified commercial) product. CIDs were established by DOD in response

to recommendations by the Commission on Government Procurement (see appendix B).

A commercial item sold or configured “as is,” that requires no modification in order to be used by the government.

A service that has been or will be offered for sale to the general public

for other than government purposes.

The combination of people, facilities, institutions, and skills required to

design, develop, manufacture, test, and maintain commercial items,

chiefly for commercial markets. See also defense technology and industrial base, national technology and industrial base.
164 I Assessing the Potential for Civil-Military Integration

Competition in

Contracting Act (CICA)

Computer-aided

Acquisition and Logistic

Support (CALS)

Continuous Acquisition

and Life-cycle Support

(CALS)

Cooperative Research and

Development Agreement

(CRADA)

COTS

CPU

CRADA

CSIS

CTIB

CUCV

DARPA

Defense Advanced

Research Projects Agency

(DARPA)

Defense Federal

Acquisition Regulations

(DFARs)

Defense Logistics Agency

(DLA)

Defense Manufacturing

Office

Defense Personnel

Support Center (DPSC)

Public Law 98-369, Title VII, passed July 18, 1984. Requires “full and

open competition“ in federal acquisition programs and requires that

federal agencies “promote the use of commercial products wherever

practical.”

A DOD effort to develop and implement a series of information-management systems to streamline procurement of equipment and spare

parts and compress the acquisition cycle.

See Computer-aided Acquisition and Logistic Support.

A method of transferring technology from federal laboratories to the

private sector. CRADAs were established under the Stevenson-Wydler

Technology Innovation Act of 1980.

See commercial off-the-shelf.

Central processing unit

See Cooperative Research and Development Agreement.

See Center for Strategic and International Studies.

See Commercial Technology and Industrial Base.

See Command Utility Cargo Vehicle.

See Defense Advanced Research Projects Agency.

Agency chartered to support “high risk, high payoff defense research.

Became ARPA in 1993.

Those regulations governing or pertaining to the acquisition of items

for DOD.

DOD agency responsible for acquisition of many common purpose

items for all the Services.

A former DARPA-funded program established to improve manufacturing know-how, reduce the cost of end items, and create a production capacity for critical items where one did not exist. The program was eliminated in 1991.

One of five DLA centers, the DPSC buys and distributes nearly $4 billion worth of food, clothing, textiles, and medical supplies worldwide

each year.
Appendix A Abbreviations, Acronyms, and Terms 165

Defense Science Board

(DSB)

defense technology and

industrial base (DTIB)

Department of Defense

Index of Specifications

and Standards (DODISS)

DFARs

DLA

DOC

DOD

DODISS

DOE

DSB

DSMC

DSSP

DTIB

dual use

EC

EDI

facility

FACNET

FARs

FASA

Federal Acquisition

Computer Network

(FACNET)

A group of senior private sector advisors commissioned by the Office of

the Secretary of Defense to investigate technical aspects of DOD decisionmaking. (See also appendix B for some reports completed by the

DSB.)

The combination of people, facilities, institutions, and skills required to

design, develop, manufacture, test, and maintain weapons and supporting equipment for the U.S. armed forces. Functionally, it comprises

three domains: research, and development; production; and maintenance. See also Commercial Technology and Industrial Base, National Technology and Industrial Base.

A list of DOD specifications and standards.

See Defense Federal Acquisition Regulations.

See Defense Logistics Agency.

Department of Commerce

Department of Defense

See Department of Defense Index of Specifications and Standards.

Department of Energy

See Defense Science Board.

Defense Systems Management College

See Defense Standardization and Specification Program.

See Defense Technology and industrial Base.

Term applied to technologies, goods, services and processes that can be

used for both potential defense and commercial purposes.

electronic commerce

electronic data interchange

A single R&D, production or maintenance complex of a business or

government entity.

See Federal Acquisition Computer Network.

See Federal Acquisition Regulations.

See Federal Acquisition Streamlining Act of 1994.

A computer network established under the Federal Acquisition

Streamlining Act to facilitate electronic commerce within the federal

government.
1661 Assessing the Potential for Civil-Military Integration

Federal Acquisition

Streamlining Act (FASA)

Federal Acquisition

Regulations (FARs)

federal specification

federal standard

FED-STDfirm

Form, fit, and function

specifications

GDP

General Services

Administration (GSA)

Global Positioning System

(GPS)

GNP

GOCO

GOGO

GPS

GSA

Federal legislation aimed at improving the government’s acquisition

processes. At the time this report went to press, the Act had been passed

by both the Senate and the House of Representatives.

Federal regulations governing contracting procedures between private

industry and the federal government.

A specification developed when an acceptable commercially available

product or service exists, but specific design, performance, interface, or

other characteristics cannot be adequately described in a Commercial

Item Description. See also federal standard, military specification,

military standard.

A standard covering an engineering or management process, practice,

or technique having multiple agency interest. See also federal specification, military specification, military standard.

The prefix used before a number to denote a federal standard.

A single overall business entity. A firm may be comprised of subsidiaries.

Specifications describing the roles and requirements for a product, rather than denoting method of production. Most current military specifications go beyond form, fit, and function specifications.

Gross Domestic Product

The principal agency responsible for the procurement of goods and services for the federal government.

A constellation of 21 geosynchronous navigation satellites (plus

spares), deployed by the United States. The satellites can provide those

equipped with military-type receivers with highly accurate navigational information. Those equipped with commercial receivers receive degraded, and therefore less precise, information. Also known as Navstar. See also Small Lightweight GPS Receiver.

Gross National Product

Government-owned, contractor-operated entities. Although the government owns the facilities, it is operated, managed, and maintained by

private firms, and the employees are considered employees of the firm,

rather than of the government.

Government-owned, government-operated entities. The government

directly controls GOGO facilities, and the workforce is comprised of

government employees.

See Global Positioning System.

See General Services Administration.
Appendix A Abbreviations, Acronyms, and Terms 167

High-Mobility

Multipurpose Wheeled

Vehicle (HMMWV)

HMMWV

Hummer

Independent Research and

Development (IR&D,

IRAD)

Index of Specifications

and Standards

industrial sector

IR&D

integrated processes

International

Organization of Standards

(ISO)

ISO

ISO 9000

J-CALS

Joint Computer-aided

Acquisition and Logistic

Support (J-CALS)

Manufacturing

Technology Program

(MANTECH)

market investigation

The M-988 series of multipurpose vehicles, also known as the Hummer and the Humvee. A lightweight, diesel-powered, four-wheeldrive vehicle that is built by AM General on a common 1 l/4-ton chassis, designed specifically for military missions, and used by the three

Services in a variety of configurations. AM General also has a line of

commercial Hummers. See also Command Utility Cargo Vehicle

(CUCV).

See High-Mobility Multipurpose Wheeled Vehicle.

See High-Mobility Multipurpose Wheeled Vehicle.

Research and development conducted by government contractors that

may be charged to the government as an allowable expense. IR&D is

conducted under the supervision of DOD.

See Department of Defense Index of Specifications and Standards.

A portion of the economy involving related technologies, specialized

assets and processes. See also tier.

See Independent Research and Development.

Procured from private facilities that predominantly use common processes for both defense and commercial goods or services. This sharing

of processes might occur in R&D, production, maintenance, or administration. It might involve the use of common equipment, labor, management, or inventory.

A Geneva-based organization that has promulgated a set of quality assurance standards, utilized by many European states and now by DOD.

See International Organization of Standards.

A series of documents on quality assurance published by the International Organization of Standards.

See Computer-aided Acquisition and Logistics Support.

See Computer-aided Acquisition and Logistics Support.

A DOD and Service program to develop improved manufacturing processes and technologies, and to diffuse those efforts throughout the

DTIB.

The second of two phases of DOD market analysis, in which DOD determines how suitable an item is for a particular defense use once an initial need is identified. See also market surveillance.
168 I Assessing the Potential for Civil-Military Integration

market surveillance The first of two phases of DOD market analysis, in which all acquisition

and development activities inside and outside of government seek to remain technically current in their areas of expertise in order to provide,

on demand, initial information on the general availability of items to fill

a need. See also market investigation.

metric A unit or method of measurement.

MIL- The prefix used to denote a military specification or standard, e.g.,

MIL-Q-9858A.

military specification A complete description of a product that is intrinsically military in char-

(Mil-Spec) acter or a significantly modified commercial product requiring special

features, design, packaging, or quality assurance to satisfy military

needs. See also federal specification, federal standard, military

standard

military standard A standard describing an engineering or management process, practice,

(MIL-STD) design criterion, data-generating requirements, testing technique, or

definition. See also federal specification, federal standard, military

specification.

MIL-SPEC See military specification.

MIL-STD See military standard.

National Institute of The organization responsible for investigating technological issues and

Standards and Technology standards. Formerly National Bureau of Standards (NBS).

(NIST)

national technology and The domestic economy, including the DTIB and CTIB.

industrial base (NTIB)

NDI See nondevelopmental item.

NIST See National Institute of Standards and Technology.

nondevelopmental item An existing item, either defense or commercial.

(NDI)

NTIB See national technology and industrial base.

O&M See operations and maintenance.

operations and A DOD purchasing account used to procure most of the day-to-day supmaintenance plies needed by the military in peacetime, such as housing, food, clothing, fuel, office supplies, and general maintenance.

OSD Office of the Secretary of Defense

OTA Office of Technology Assessment
Appendix A Abbreviations, Acronyms, and Terms 169

prime contractor A contractor that sells or licenses a good or service directly to the government. Typically, the prime contractor adds value (e.g., assembly,

systems integration, or manufacturing) to goods and services it procures from subcontractors.

private Referring to a privately owned (as opposed to government-owned)

business or sector.

production base analysis Any of a series of analyses by which DOD manages defense-industrial

(PBA) responsiveness planning. PBAs support industrial-preparedness planning for force regeneration over a wide range of crises and emergency

situations. The process complements the strategic planning system

used by the U.S. Joint Chiefs of Staff, who develop requirements on the

basis of critical items lists, prepared by U.S. military commanders

throughout the world.

Program Executive Officer Officials responsible for administering a defined number of major and/

(PEO) or nonmajor acquisition programs who report to and receive direction

from a Service Acquisition Executive.

program manager A DOD manager overseeing an acquisition program. Each program

manager reports to a Program Executive Officer.

public Of or pertaining to those activities conducted by the government.

R&D Research and development. Conducted primarily in the private sector,

it is also a responsibility of government laboratories and test facilities

run by the DOD, DOC, DOE, and NASA, as well as university laboratories conducting research relevant to defense.

RDT&E

SDIO

Section 800 Panel

segregated processes

segregation

Service

Research, development, testing, and engineering; a term used primarily

by DOD.

Strategic Defense Initiative Organization

See Advisory Panel on Streamlining Acquisition Laws.

Procured from public or private facilities that have largely or completely segregated their defense work from any commercial work. Public facilities are by definition segregated, because they do not do commercial

work.

The act of separating the development, production, and/or maintenance

of commercial and military goods and services. Segregation maybe due

to a number of factors, including separate cost-accounting requirements, unique requirements, or uneconomical production volumes, and

may occur at the industrial sector, firm, or facility level.

Any of the three main branches of the U.S. Armed Services: Air Force,

Army, and Navy/Marines.
170 I Assessing the Potential for Civil-Military Integration

Service Acquisition

Executive

SLGR

Small Lightweight GPS

Receiver Program (SLGR)

smart buyer

spin-off

spin-on

subcontractor

technical data rights

Technology Reinvestment

Project (TRP)

tier

TINA

TRP

Truth in Negotiations Act

(TINA)

USD(A)

The senior acquisition executive with each military department, designated by the Component Head, responsible for administering acquisition programs in accordance with DOD policies and guidelines.

See Small Lightweight GPS Receiver.

An Army program begun in 1986 to determine whether a lightweight,

preferably handheld, low-cost, existing commercial GPS receiver

could be used by a wide variety of Army personnel with minimum training.

A procurement official who has the training, expertise, and authority to

buy goods and services using commercial buying practices, such as

market surveillance and market investigation.

The transfer of technology, processes, or capabilities from military programs or the DTIB to the CTIB.

The transfer of technology, processes, or capabilities from commercial

programs or the CTIB to the DTIB.

A contractor that sells or licenses a good or service to a prime contractor or another subcontractor. A subcontractor on one project may be a

prime contractor on another.

A contractual requirement to provide DOD with detailed information

about the manufacture, installation, operation, and maintenance of a

product.

An ARPA managed program aimed at developing and diffusing dualuse technology.

A link in the economic “food chain.” Prime contractors occupy the

first tier. Second-tier subcontractors supply the prime contractors.

Third tier subcontractors supply the second tier, and so on.

See Truth in Negotiations Act.

See Technology Reinvestment Project.

Public Law 87-653, as implemented by FAR 15.804. Requires vendors

to assure that the price quoted for a good or service sold to the federal

government is in fact the lowest price offered any customer. Applies to

subcontractors at any tier on contracts exceeding $100,000.

Under Secretary of Defense for Acquisition Now the Under Secretary

of Defense (Acquisition & Technology).
Appendix B:

Selected Commissions,

Studies,

Findings, and . ~

Recommendations B

Date Commission/study

-[949 Hoover Commission on the

955

organization of the Executive Branch of Government

Hoover Commission on

I Business Organization of

DOD

I 1970 “Fitzhugh” Blue

Defense Panel

I

1

Ribbon

Findings Recommendations

Substantial duplication ex- T

Standardize specifications

ists in cataloging and Continue use of civilian advisory boards

identifying material Have the NSRB develop economic warfare program aimed at supporting na-

“1

tional security in peace and war

Standardization of material Establish business-tested accounting

1 and improved accounting 1 systems

procedures would improve DOD acquisition

The government’s technical

data rights policy “tends

to discourage the bestqualified companies from

accepting or, in some

cases, competing, for

contracts”

Establish separate civilian-managed

agency to administer common supply

and service activities

Promote standardization

Save money by adopting commercial

practices

Improve the requirements process

Increase the Services’ analytical capability to evaluate alternatives early

Correct the use of specifications to

minimize obsolete specifications and

demands that exceed state-of-the-art

Address increasing industry reluctance

to commit resources to defense work

Develop analytical capabilities to improve requirements generation and

changes in the rights to technical data

policy

171
172 I Assessing the Potential for Civil-Military Integration

Date ‘ Commission/study Findings Recommendations

1972 Commission on Govern- Government specifications ! Take greater advantage of the efficienment Procurement tend to be overly detailed, cies of the commercial marketplace

or unique, and tend to du- Shift toward use of commercial product

plicate existing commer- procurement

cial distribution systems Establish oversight over agency policy

‘

- ----/-

and procedures in this area

Place greater reliance on off-the-shelf

products and use established commercial distribution channels to support

them

1977 ‘ DSB Shea Report on Speci-

—

Military specifications are Available flexibility in specifications

fications and Standards required and standards are under-utilized

Military specifications Address the eight general groups of

should incorporate les- “cost drivers,” including General Desons previously learned sign Requirements; Environmental

Misapplication & over ap- Requirements and Test Methods;

plication of military spec- Quality Control, Inspection, and Calcifications adds costs ibration; Reliability and MaintainIdentified 114 specifications ability Requirements; Human Engiand standards as “cost- neering and Safety Requirements;

drivers” Documentation and Standardization

Methods; Configuration Controls; and

Packing, Packaging, Preservation, and

Transport Measures

1983 Grace Commission, OSD Service autonomy and con- Consolidate acquisition functions

Task Force gressional restrictions im- Simplify regulatory constraints

pede efficient manage- Limit overly rigorous military specificament of DOD tions

Changes could save 13% on i Contract for demilitarization of amprocurement, 6% on

L

munition

O&M Improve POL bidding

1984, Toth Report on Standardiza- Defense Material Standard- Establish objectives & priorities

tion ization and Specification Involve users in standardization process

Board’s span of control is Develop management information systoo great tern

The emphasis is often on

creating standards, rather

than adhering to them
Appendix B Selected Commissions, Studies, Findings, and Recommendations 1173

Date Commission/study

- - .+ ---- -

1986 Packard Commission

1986 ~ OUSD(A), DSB “Use of

Commercial Components I Military Equipment"

.

in

Findings

There is little coordination

or reconciliation in the

budget process between

currently executed budgets, currently debated

budgets, and planning for

future budgets

The government frequently

has promulgated very rigid custom specifications,

despite the existence of

commercial alternatives

Cost allocation procedures

often produce very high

spare part prices

Laws correcting past problems with defense acquisition have often only

exacerbated problems, as

flexibility is further reduced

A user-pull acquisition

process is likely to produce excessive costs, as

cost-performance tradeoffs are ignored or downplayed

Change occurs more rapidly, in general, in commercial technology than in

defense technology

DOD procurement processes often differ greatly

from commercial ones

Even if DOD’s use of commercial items rose, there

would be little effect, unless the procurement and

acquisition processes

were to be changed

,

~ Recommendations —

Make greater use of “off-the-shelf

components, systems, and services

Develop new or custom items only after

determining the inadequacy of commercial items

Require Service Defense Acquisition

Executives to take the lead in increasing the use of commercial products

Streamline military specifications

.

Use commercial products (especially

microelectronics) and practices to

save money

Provide incentives for use of commercial products and practices

Participate in nongovernmental standards bodies, for use in lieu of military standards
174 I Assessing the Potential for Civil-Military Integration

Date Commission/study Findings ~ Recommendations

-—

‘-----‘:;;:g~=dmini,tration -

1988 OUSD(A), DOD “Bolster- Forge the right relations with industry

ing Defense Industrial Com- Establish strategic planning task force

petitiveness” Form a Defense Industrial Base Inage or above-average Develop information on foreign-source

profitability dependencies of critical systems

DOD procurement policies Emphasize quality control

emphasize low prices to Emphasize process technology

the exclusion of improve- ~ Enhance tech skill base

ments in quality and pro- Increase use of commercial process &

duction processes, and product specs

value performance much

more than productivity

and reliability

There is little risk-sharing

or other incentive for innovation on the part of

4

critical defense industries 1 ——

‘------ ‘::’c~:~:i-y -

1988 OUSD(A) “Enhancing De- Revise DOD 4120.3 to assign accountfense Standardization”

Review Lead Standardization Activities

Pursue nongovernmental standards

Review specs

Pilot development of “Living Specs”

+-

Adopt more NGSs ——

1989 OUSD(A), DSB “Use of Despite verbal support, Specifications should be set in terms of

Commercial Components in greater use of commercial “form, fit and function,” rather than

1 Military Equipment” products and practices production methods

has been slow There should be a standard form for all

Legislative and regulatory solicitations, which would include

reforms (oversight, au- technical data rights, software rights

dits, civil and criminal li- and pricing data requirements

ability) have further distanced DOD procurement

from commercial
Appendix B Selected Commissions, Studies, Findings, and Recommendations 175

Date ~ Commission/study Findings Recommendations —.

1991 ~ CSIS “Integrating Commer- Accounting requirements Exempt commercial products from re -

cial and Military Technolo- are a primary barrier to quirements for competitive bidding

gy for National Strength” integration Create incentives to use commercial

I Military specifications and products, practices and standards

standards discourage use Modify government demands for rights

I of commercial products, in technical data

I practices and standards Exempt commercial products and supQuestions of ownership of pliers from unique contract require1 technical data rights dis- ments

I

courage commercial sector cooperation

I Unique contracting require1

1 -- -

merits raise additional

‘-t “-‘— ‘pproblems

..~...

1993 Report of the Acquisition Existing law has not Formulate stronger policy language in

~ Advisory Law Panel to the achieved the benefits of support of use of commercial items

US Congress commercial-military in- and NDI

tegration Create a new definition of commercial

I Existing law has not re- items

suited in broad use of Execute changes in TINA

commercial items in Create new exemptions in technical data

DOD systems requirements;

1

Procurement statutes (and Restructure Buy American restrictions

implementing regula- Create a new rule structure that provides

tions) themselves are a , exemptions from statutes that create

‘- t---–

major barrier barriers to use of commercial items

1993 DSB Task Force on Defense The current system was in- Utilize commercial functional specificaAcquisition Reform tended to monitor costs ‘ tions where possible

and ensure fair pricing Emphasize competition as a means of

The current system actually price control, rather than the current

discourages efficient pro- cost-based accounting system

duction and exacerbates Involve users early in the program defi1

contention between gov- nition process

ernment and industry Take into account past performance of

I contractors

I Use the general regulatory environment

governing commercial business, espe1 cially in the area of accounting

I

SOURCE: Office of Technology Assessment, 1994.
Appendix C:

Selecting a

Representative

c Industrial Sample

c

uses, if selected randomly, can be expected

to be representative of the larger population of companies, contractors, or programs from which they were drawn. As a

result, statistical relationships found among characteristics of the individuals (e.g., the probability

that an establishment is segregated, as a function

of annual sales volume) maybe generalized to the

population from which the individuals were selected.

Selecting cases randomly requires randomly

identifying the establishments, contracts programs, dollars, or other entities about which information is desired, and then obtaining the

information desired e.g., by survey. A high response rate is required to assure representativeness of the sample.

The choice of population from which cases are

to be selected (e.g., establishments or contracts)

will depend in part on the type of information desired but will be limited by the availability of databases or the ability to obtain a high response rate in

a survey. For example, congressional researchers

may use the Award Contracts (AWCO) database

of the House Information System (HIS), which

contains data (provided by the Federal Procurement Data Center of the General Services Administration) on all federal contracts of $25,000 or

more in the last full year for which data are available. Once a population and database have been

found, individuals may be selected from the population by using the pseudorandom-number generation capabilities of common software products.

Pseudorandomly generated numbers may be

tested for acceptable independence, randomness,

and uniformity.1

For each DOD contract or prime contractor in

the sample, a random sample of subcontracts or

subcontractors may be selected. The sampling

may be uniform or weighted by contract value.

The former would be more efficient if one wished

to make inferences about the number of contractors that are integrated or would be affected by

some proposed change; the latter would be more

efficient if one wished to make inferences about

the fraction of the defense budget that would be affected (e.g., potential cost aversion). Sampling

could be restricted to particular sectors of interest.

1 D.A. Darling, ‘The Kolmogorov-Simimov, Cramer-von Mises Tests,” Annuls of Mathematical S~a[isrics, vol. 28, pp. 823-838, 1957.

176 I
Appendix C Selecting a Representative Industrial Sample 177

After the cases to be studied have been identified and the desired data obtained, statistical

analysis can identify the combination of characteristics that best distinguishes the integrated

cases from the segregated cases.2 It can estimate

the probability that a company, for example, in the

sample is integrated, based on other characteristics (e.g., annual sales) that are known about the

companies in the sample.3

A model obtained in such a manner describes

relationships e.g., between integration of a company and other variables within the sample to which

it was fitted. It may be used to predict integration

in a larger population, provided 1 ) the incidence

(i.e., unconditional probability) of integration in

the new population is known, and 2) there is no

reason to believe that the new population differs

significantly from the sample in any aspect that

may influence integration. Drawing the sample

randomly from the population ensures this and,

moreover, allows the incidence of integration in

the population to be estimated from that in the

sample.

z J A Anderson, “Logistic Discrimination,” pp. ] 69- ] g ] in Huru//x~O~ @.Sfar;.~r/c~, P.R. Krishnaiah and L.N. Kanal. eds.. vol. 2. No. 1, 19~~.

.

3 Gary G. Koch and Suzanne Edward\, “Logistic Regression,” pp. 128-133 in Enc)c)opediu of Stu?isticul Sctences, Samuel Kotz and Norman L. Johnson, eds., vol. 5 (New York, NY: John Wiley & Sons, 1985).
T

here are a number of possible alternatives

for collecting CMI data. One possibility is

for the Census Bureau to gather and report

statistics on the number of firms that sell to

both military and nonmilitary markets in selected

sectors and the values of such sales. For example,

Current Industry Report (CIR) MA37D----Aerospace Orders reports annually the number of companies in aerospace sectors, the number that sell to

military purchasers, and the number that sell to

nonmilitary purchasers, but not the number that

sell to both military and nonmilitary purchasers. 1

The number and percentage of integrated firms

may be deduced from the statistics that are published, but only within limits. The Census Bureau

could report the exact number-not only for aerospace sectors, but also for other sectors surveyed

in the M-3 Monthly Survey of Manufacturers’

Shipments, Inventories, and Orders.2

Unfortunately, these data would only reveal

those companies that produce both defense and

commercial goods and services. It would provide

no information on the degree of integration of research, development, production, and administration processes within these companies. These data

would not differentiate between a firm with separate defense and commercial divisions and one

that builds its commercial and defense products

on the same production line.

Measuring integration of processes and understanding reasons for segregation of processes

would require collection of more specific information, such as that collected in the private

] U.S. Department of Commerce, Bureau of Economic Analysis, Current Industrial Reports, MA37D-Aerospace Orders, 1992.

2 The Census Bureau conducts a monthly noncompulsory survey of the shipments, inventories, and orders of “nearly all manufacturing

companies with 1,000 or more manufacturing employees and a sample of smaller fhmm.” It solicits separate reports on defense and nondefense

activities for the following industry categories: ordnance and accessories; communication equipment; complete aircraft, missiles, and space

vehicles; ships, tanks, and tank components; and search and navigation equipment. [U.S. Bureau of the Census, ” 1993 Instruction Manual for

Reporting in Monthly Survey M-3.” M-3(I) (Washington, DC: U.S. Government Printing Office, 1993).] Summary statistics for most 2-digit

SIC codes and 75 combinations of 4-digit SIC codes from January 1958 through March 1993 are available on tape reel, tape cartridge, and

diskette. The Census Bureau also collects data from establishments on the value of shipments to federal government agencies as part of the

Census of Manufacturers. [Form MC-9675, 1 -22-93.] Data from the 1992 Census of Manufacturers are being tabulated as this report goes to

press.

178 I
Appendix D Data Collection 179

1992 CSIS survey.3 Integration (and reasons for

segregation) of firms or establishments in all sectors producing for national defense could be estimated within calculable confidence limits by

surveying only a fraction of the firms, if they were

selected randomly. and if a high response rate

were obtained. Surveying more firms would reduce the range of uncertainty.

Achieving a high response rate will probably

require making response mandatory under the

law. The necessary legislation already exists to allow the Census Bureau (Title 13, U.S. Code), the

Department of Commerce (section 705 of the Defense Product ion Act of 1950 and Executive Order

12656, section 401 ) or the Department of Defense

(section 705 of the Defense Production Act) to

collect the pertinent data. Any such mandatory

collection still must be approved by the Director

of the Office of Management and Budget (44 USC

3507 ) to ensure that it is not overly burdensome on

private industry.

A model for a collection of CM I data is the Census Bureau’s 1991 Survey of Manufacturing Technology, a joint effort by the Bureau of the Census

and the Defense Logistics Agency’s Manufacturing Engineering/Research Office. 4 It surveyed

10,088 establishments with 20 or more employees

selected to represent a population of manufacturing establishments classified in Standard Industrial Classification (SIC) Major Groups 34-38.

After adjustments to account for establishments

that had gone out of business, this population was

estimated as 42,250.

The 8-page, multiple-choice questionnaire was

designed to collect information for measuring the

degree to which manufacturing establishments

use technologically advanced equipment and software and the degree to which plant characteristics

influence usage. The survey achieved a 92.8-percent response rate, with a 5.5-percent refusal rate.

A similar effort, using a questionnaire such as that

developed by CSIS, could obtain reliable measures of prevalence of integration of research, development, production, and administration, plans

to integrate, reasons for segregation, and plant

characteristics. Any such collection effort, however, will require an allocation of government resources and may impose an even greater collective

burden on the respondents. The 1991 Survey of

Manufacturing Technology was estimated to cost

the government “in the low $400,000.”5 OTA estimates that the public reporting burden was about

$700,000.6

] Debra \ an Opftal, lnregrur~n.g CI\Y/un LJnd ,kf~l[far.y Technologies: An Industry Surtey (Washington, DC: The Center for Strategic and

lntemational Studie\, April 1993).

~ U,S Bureuu Of the Cen\uJ, T/le .$url e} ~/~’.WIJnl/~u[rl/rin<q Technology: Factors Aflecring Adop(ion, SMT19 1-2 (Washington, ~: U.S. GOVcmmcnt Printing Office, Ma) 1 993).

S Mr. .lohn Got oni, Chief. U.S. Bureau of the Census, Mustfy Division, personal communications, Dec. 13, 1993.

() me ~uc~tionntilre used in the ] 99 ] Surle} of Manufacturing Technology estimated the public repomng burden at 3~ minutes W ‘e-

$Ponse. About 9,()(M) cwbl lshnlents completed reports, JO the total burden was about 4,500 hours. If the form~ were completed by corporate

offiu Ial\ earning an at erage of $ 100,000” per year, with 2(K) percent overhead, working 48- W-hour week\ per j ear, the collective burden borne

by the rc~ponding firnl~ wouki have been about $700,000 ( 199 i ).
Appendix E:

Workshops and

E Reviewers

Workshop on Shipbuilding

June 23,1993

Jack Nunn, Chair

International Security and Space

Program

John Bissell

Director of Industrial Planning

Branch

Industrial Planning Division

Naval Sea Systems Command

John J. Carr

Executive Vice President

IMO Industries, Inc.

Robert Draim

Executive Officer

Naval Sea Systems Command

Ron McAlear

Vice President, Advanced

Programs

Avondale Shipyard

James A. Palmer

Vice President

Aircraft Carrier Construction

Newport News Shipbuilding

David Reece

Executive Director

Naval Surface Warfare Center

Crane Division

Paul M. Robinson, Captain, USN

Director, Supportability,

Maintenance and

Modernization Division

The Pentagon

George Sawyer

Executive Vice President

J.H. Lehman

Fred Seibold

R&D Program Manager

Maritime Administration

Peter Tarpgaard

Professor

Naval War College

Harvey Walpert

Senior Vice President,

Administration

Trinity Marine Group

John Welch

Vice President

Program Management

Development

General Dynamics Electric Boat

Division

Robert Schaffran William Wert

Program Manager General Manager

PRC/Maritime Systems G.E. Navy and Small Steam

Technology Office Turbine Department

180 I
Appendix E Workshops and Reviewers 181

Jack Nunn, Chair

International Security and Space

Program

Steven G. Buttner

Vice President Strategic Planning

Bath Iron Works

J. William Charrier

President and CEO

American Automar, Inc.

David P. Donohue, RADM, USN

(Ret.)

The Jonathan Corp.

Robert Draim

Executive Officer

Naval Sea Systems Command

Workshop on Shipbuilding

August 19,1993

Tom Ellis

Manager

Micro Electronics Department

Naval Surface Warfare Center

John H. Ferrara

President

Maersk Lines, Ltd.

George R. Fister

Vice President, Government

Programs

Shipbuilders Council of America

James B. Greene, RADM, USN

Deputy Chief of Naval

Operations Logistics

The Pentagon

Paul Hagstrom, Captain, USCG

Chief of Naval Engineering

Division

Gerry Lamb

Director of Washington

Operations

Bath h-on Works

Paul Martineau

Executive Director

Ingalls Shipbuilding—

Washington Office

Robert J. Scott

Vice President

Gibbs & Cox, Inc.

Gunter Woehling

Vice President & General

Manager

Henschel, Inc.

U.S. Coast Guard Headquarters

Workshop on

Civil-Military Integration of Manufacturing Processes

September 8,1993

Jack Nunn, Chair

International Security and Space

Program

Gene Allen

Director

National Center for

Manufacturing Sciences

Gary Cotten

Production Engineering Manager

Texas Instruments

Richard L. Engwall

Manager

Advanced Manufacturing

Initiatives

Westinghouse Electronics Corp.

Lorna B. Estep

Director

Joint Center Flexible ComputerIntegrated Manufacturing

Donald Fowler

F&F Associates, Inc.

Cary C. Gravatt, Jr.

Director, Technology Analysis

Group

Office of the Under Secretary for

Technology

U.S. Department of Commerce

Syed Karim

Manufacturing Engineer

Manufacturing and Quality

Assurance Division

U.S. Air Force

William E. Klenk

Director

O&M Accounts of Defense

Programs

Allison Transmission
182 I Assessing the Potential for Civil-Military Integration

Jim Logan Catherine Loucks Ernie Renner

Director of Washington Director of Strategic Planning Director of Best Manufacturing

Operations McDonnell Douglas Helicopters Production

Allison Transmission

Tom Purvin AI Skolnick

Michael J. Logan Marketing Manager Consultant

Marine Sales Manager Aircraft Gear Corp.

Limitorque Corp.

Outside Reviewers

This report has benefited from the advice of many individuals from the government and the private sector. OTA

especially would like to thank the following individuals for reviewing various drafts of the report. The views expressed in this report, however, are the sole responsibility of the Office of Technology Assessment.

Gene Allen

Director

National Center for Manufacturing Sciences

Mike Austin

Federal Emergency Management

Agency

Warren Balish

Aerospace Industries of America,

Inc.

Al Bottoms

Naval Post Graduate College

John Brinkerhoff

Consultant

John Coan

Program Manager

National Defense Executive

Reserve

Department of Commerce

Gary Cotten

Production Engineering Manager

Texas Instruments

Alex Cover

Ernst and Young

Tom Ellis

Department Manager

Electronics Development

Component Engineering

Crane Naval Surface Warfare

Center

Richard Engwall

Manager, Advanced

Manufacturing Initiatives

Westinghouse Corp.

Lorna B. Estep

Director

Joint Center Flexible Computer

Integrated Manufacturing

Robert Fabric

Defense Logistics Agency

Lucy Reilly Fitch

Hughes Corporation

J. Paul Goncz

Director, Washington Operations

AM General Corp.

Cary C. Gravatt, Jr.

Director, Technology Analysis

Group

Office of the Under Secretary

for Technology

U.S. Department of Commerce

William Gregory

Writer

Darold Griffin

Principal Deputy for Acquisition,

U.S. Army Materiel Command

Robert Hayes, Colonel, USAF

SAF/AQXM

Syed Karim

Manufacturing Engineer

Manufacturing and Quality

Assurance Division

U.S. Air Force

Benedict Kausel

Defense Systems Management

College
Appendix E Workshops and Reviewers 183

William E. Klenk

Director

O&M Accounts of Defense

Programs

Allison Transmission

Ray Kozen

Staff Vice President

General Dynamics Corp.

Jim Logan

Director of Washington

Operations

Allison Transmission

Michael J. Logan

Marine Sales Manager

Limitorque Corp.

Catherine Loucks

Director of Strategic Planning

McDonnell Douglas Helicopters

Robert Mason

Director of Maintenance

Office of the Secretary of

Defense

James Mattice

Deputy Assistant Secretary of

the Air Force (Research and

Engineering)

Fred Meyer, Captain USN

National Defense University

William Mogan

Director of Marketing

Talley Industries

Joseph Moreland

Consultant

Joseph Muckerman

Former Director Emergency

Planning

Office of the Secretary

of Defense

Robert Palaschak

Director of Operations

Munitions Industrial Base Task

Force

Marc Y.E. Pelaez, Rear Admiral

Chief of Naval Research

George Pickett, Jr.

Director Analysis Center

Northrop

Gene Porter

Director, API

Office of the Secretary of

Defense

Colleen Preston

Deputy Under Secretary

of Defense

Acquisition Reform

Tom Purvin

Marketing Manager

Aircraft Gear Corp.

Ernie Renner

Director of Best Manufacturing

Practices Program

U.S. Navy

Giles Smith

The Rand Corporation

Lee Tannehill

Director of International

Business

Valentec Corporation

James Thomason

Institute for Defense Analysis

Rod Vawter

Office of the Secretary

of Defense

Production Resources
I ndex

A

Acquisition and Distribution of Commercial Products Program, 29, 64

Acquisition Law Advisory Panel

commercial item definition, 71, 72

commercial service definition, 72-73

contract requirements, 93

establishment, 50

government cost-accounting requirements and,

73-74

purpose, 3

Acquisition workforce

elements of, 7, 107-108

retraining, 82-84, 85

savings from reduction of, 108

Acquisitions. See Procurement system

Activity costs, 17

ADCP. See Acquisition and Distribution of Commercial Products Program

Advanced Medium-Range Air-to-Air Missile

commercial purchases, 67

integrated processes, 103

segregation, 149

Advanced Research Projects Agency, 27, 103, 120

Advanced Technology Demonstrators, 137

Advanced Technology Program, 27, 125

Aerospace Industry Association, 146

Affirmative action, 92

AIM- 120A. See Advanced Medium-Range

Air-to-Air Missile

Air-to-Air Missile. See Advanced Medium-Range

Air-to-Air Missile

Alliant TechSystems, 144, 155

AM General Corporation, 88-89

Ammunition industry, 150

AMRAAM. See Advanced Medium-Range

Air-to-Air Missile

ANSI, 110

Antitrust Merger Guidelines, 145, 154

Antitrust policy, 154

ARPA. See Advanced Research Projects Agency

ATP. See Advanced Technology Program

Automotive sector, 121

Aviation Depot Policy, 147

B

Base Realignment and Closure process, 145, 153

Best value buying, 78,80

Bid and proposal process, 80-82

B&P. See Bid and proposal process

BRAC. See Base Realignment and Closure process

Budget cuts, 143

Bush administration, 50, 154

Buy America Act, 92-93,94

c

Carnegie Commission, 51

CASB. See Cost Accounting Standards Board

Case studies, 52-55

Census Bureau, 16

Center for Strategic and International Studies

CMI survey, 52

cost-accounting requirements survey, 75

process integration survey, 102

Centers of Excellence, 28

CICA. See Competition in Contracting Act of 1984

Civil-military integration

amenability of goods and services, 58-59

approaches, 61-62

benefits, 11-15

case study findings, 52-55

commissions and studies of importance, 44

congressional interest, 2-3

costs and risks, 17, 48-50

critical questions, 4

current level of integration, 8

definition, 4-5,43-44

at different industrial levels, 59-61

difficulties of implementing change, 15-17

disbursement flow of funds, 56-58

levels of, 113

options for Congress, 20-22

1185 ●
186 I Assessing the Potential for Civil-Military Integration

policy option groups for goods and services, 56,

62

potential for increasing integration, 8-11

rationale for, 47-48

Readjustment Strategy, 17-18,23-31

Reform Strategy, 18-19,31-37

Restructuring Strategy, 19-20,37-42

risks and costs, 48-50

sources of segregation, 44-47

state of the debate, 50-52

Classified products, 151

Classified technologies, 46-47

Clinton administration, 3,50-51,65, 154

CMI. See Civil-military integration

Command Utility Cargo Vehicle, 88-89

Commercial Acquisition Streamlining Team, USAF,

123

Commercial buying practices, 78-82

Commercial Commodity Acquisition Program, 64

Commercial goods and services

barriers to use,71, 73-94

benefits of policies, 94-96

congressional initiatives, 64

costs and risks of policies, 96-98

definitions of, 69-73

DOD programs, 64-66

estimates on use of, 66-70

government cost-accounting requirements, 73-77

military specifications and standards, 86-90

procurement process, culture, and skills, 77-86

summary, 98-99

technical data rights, 90-92

unique contract requirements, 92-94

Commercial items, 26-27,71-72

Commercial procurement facilitation

commercial items and services, 26-27

commercial specifications and standards, 24-26

cost accounting and pricing requirements, 26

in a reform strategy, 31-32

rights in technical data, 27

workforce training, 32

Commercial service, 26-27,72-73

Commercial specifications and standards, 24-26

Commercial standards consortia, 90

Commercial technology and industrial base, 2,5,32

definition of CMI and, 44

technology transfer with DTIB, 36

Commercially uneconomical orders, 46

Competition in Contracting Act of 1984,2,64

Consolidation in DTIB, 143-147, 154-155

Continuous Process Improvement Program, 108

Contract requirements

commercial purchases and, 92-94

integrated processes and, 112

Contractors, 10, 11,56-58

Cooperative Research and Development

Agreements, 27-28, 116-117, 120, 124, 145

Core capabilities, 151

Corporate Risk Assessment Guide, 108

Cost accounting requirements

benefits of current system, 6

commercial purchases and, 73-77

integrated processes and, 106-107

readjustment strategy and, 26

reform strategy and, 32

Cost Accounting Standards Board, 74

Cost-based contracting system, 74

CRADAs. See Cooperative Research and Development Agreements

CRAG. See Corporate Risk Assessment Guide

Critical technology plan, 118

CSIS. See Center for Strategic and International

Studies

CTIB. See Commercial technology and industrial

base

CUCV. See Command Utility Cargo Vehicle

D

Data collection

case studies, 52-55

summary of methodology, 55

Data item descriptions, 91

Data rights, 27,90-92

David Taylor Model Basin, 28, 118

DCAA. See Defense Contracts Auditing Agency

DDR&E. See Director of Defense Research and

Engineering

Defective pricing, 96-97

Defense acquisition systems

alternative approaches, 40-41

as source of segregation, 45

Defense Authorization Act of 1990,3,50

Defense Authorization Act of 1991,3,50

Defense Authorization Act of 1992,27

Defense Authorization Act of 1993,3,50

Defense Authorization Act of 1994, 147, 153

Defense budget, 1-2,56

Defense Contracts Auditing Agency, 107, 108

Defense goods and services

amenability to CMI, 10-11, 58-59, 60

disbursement flow of funds, 56-58

estimates of degree of integrated processes,

104-105

policy option groups, 56,62

Defense Logistics Agency, 29,64

Defense Personnel Support Center, 83-84

manufacturing flexibility developments, 114

programs for adopting commercial buying

practices, 80
Index 187

Defense Procurement Reform Act of 1984,2-3,64

Defense Production Act, 93

Defense Science and Technology Reliance Program,

145-146

Defense Science Board, 48,94-95, 111

Task Force on Antitrust Aspects of Defense Industry Consolidation, 144-145, 154-155

Task Force on Commercial Components, 51

Task Force on Defense Acquisition Reform, 29,

74, 106, 107, 108, 110, 135

Defense Systems Management College, 78,82

Defense technology and industrial base, 3,6-20. See

u/so Defense goods and services

applying CM I policies to segregated DTIB, 34

definition of CMI and, 5,44

technology transfer with CTIB, 36

Department of Commerce, 27

Department of Defense

Acquisition and Distribution of Commercial

Products Program, 29

amount of NDI and commercial item

procurement, 66

critical technology plan, 118

definition of commercial items, 71

implementation of readjustment strategy, 23-24

programs supporting the use of commercial products, 64-66

Science and Technology Strategy, 118, 121

Department of Energy, 38

Department of Justice, 144

Depot Maintenance Management Task Force, 148,

152

DGA. See General Delegation for Armaments

DIDs. See Data item descriptions

Digital Equipment Corporation, 115

Direct vendor delivery, 80

Directive 5000.1, 65

Director of Defense Research and Engineering, 121,

148

DLA. See Defense Logistics Agency

DOD. See Department of Defense

Domestic sourcing requirements, 92-93

DSMC. See Defense Systems Management College

DTIB. See Defense technology and industrial base

Dual-use design strategy, 134

Dual-use items, 9, 19,33, 115-116

E

Economic competitiveness, 48

Electronic commerce, 80, 158

Electronic Data Interchange, 84, 158

Electronic equipment reliability, 108

Employees. See Workforce

Escrow, 92

Exemplary Facility Program, 108

Exemptions, 91-92

F

Facility exemptions, 108

Facility level integration

benefits of process integration policies, 134-136

costs of process integration policies, 136

current efforts, 131-132

description, 10

levels of CMI, 113

process integration, 61, 130-131

FACNET. See Federal Acquisition Computer

Network

FAR. See Federal Acquisition Regulations

FASA. See Federal Acquisition Streamlining Act of

1994

Federal Acquisition Computer Network, 82

Federal Acquisition Improvement Act of 1994,64

Federal Acquisition Regulations, 74,93

Federal Acquisition Streamlining Act of 1994,3,5,

17, 18,21,23,27,31,64,78, 93

definition of commercial items, 71

purpose of, 51

Federal Advisory Commission on Consolidation and

Conversion of Defense Research and Development

Laboratories, 145

Federal Express, 80

Federal Trade Commission, 144

Firm level integration

benefits of process integration policies, 130

characteristics, 59

costs of process integration policies, 130

description, 10

levels of CMI, 113

process integration, 127-130

FMC Corporation, 143

Foreign suppliers, 97

France

alternative defense acquisition approaches, 40-41

defense industry ownership, 157-

FTC. See Federal Trade Commission

G

G/S. See Defense goods and services

General Accounting Office, 107

General Delegation for Armaments, 40

General Electric, 77, 107

General Motors Corporation, 89, 129

General Services Administration, 74

Global Positioning System, 65

purchase of, 75

use in Persian Gulf War, 25, 49

Global Positioning System receiver, 83
188 I Assessing the Potential for Civil-Military Integration

GOCOs. See Government-owned/contractor-operated facilities

GOGOs. See Government-owned/government-operated facilities

Goods and services. See Defense goods and services

Government contracts, 11, 13

Government cost accounting requirements. See Cost

accounting requirements

Government management, 148-150

Government-owned/contractor-operated facilities,

133, 141-142, 155-157

Government-owned/government-operated facilities,

141, 155-157

Government purpose license rights, 91, 111

GPS. See Global Positioning System

Grace Commission, 77,86,94

Great Lakes Composites Consortium, 28, 121

Great Lakes Industrial Technology Center, 121

GSA. See General Services Administration

H

HARSCO Corporation, 143

High Mobility Multipurpose Wheeled Vehicle,

88-89

Higher order components, 131

HMMWV. See High Mobility Multipurpose

Wheeled Vehicle

Honeywell Corporation, 132

Hughes Aerospace, 129

Hughes Aircraft Company, 67, 103, 134

Hummer. See High Mobility Multipurpose Wheeled

Vehicle

I

IDA. See Institute for Defense Analyses

Implementation costs, 49-50

Incentive structure, 84, 86

Independent research and development, 27, 124

Industrial sector

budgetary impact of increased commercial purchases, 95

description of integration, 10

estimates of degree of integrated processes,

104-105

increasing the level of knowledge, 118-121

levels of CMI, 113

overview of integration, 59

survey description, 68

Industry regulation, 158

Input-output model for DTIB spending, 56

Inspection System Requirements, 110

Institute for Defense Analyses, 67

Integrated processes, 8,32-34, 113

AMRAAM, 102-103

barriers to, 105-112

description, 101

estimate of use survey, 68-70, 104-105

facility level integration, 130-132, 135

firm level integration, 61, 127-130

future efforts, 132-136

impact of technology, 112-115

industrial sector level integration, 61, 115-123

maintenance base, 123-127

summary, 136-137

Intel Corporation, 107

International Organization of Standardization, 90

International Standards Organization, 25, 110

IR&D. See Independent research and development

ISO. See International Standards Organization

J

Japan

alternative defense acquisition approaches, 40-41

defense industry ownership, 157

purchase of Global Positioning System, 75

Japan Defense Agency, 40

Japanese Ministry of International Trade and

Industry, 121

JDA. See Japan Defense Agency

Job displacement, 50

Joint Direct Attack Munitions Program, 65

L

Leases, 79

Licensing arrangements, 92

Light tactical vehicles, 88-89

Limited rights, 91, 111

Logistics Management Institute, 133

Long-term business instruments, 80

Long-term contracting, 80

Los Alamos National Laboratory, 28, 120

M

Macroeconomic analyses, 55

Maintenance base

process integration, 123-127

segregation, 156

Managed competition, 154

MANTECH. See Manufacturing Technology program

Manufacturing Extension Partnership Program, 28

Manufacturing flexibility, 114

Manufacturing Operations Development and Integration Laboratories, 27, 122, 123

Manufacturing Technology Advisory Group on Materials Processing, 122

Manufacturing Technology program, 121-122
Index 189

Market investigation, 82,83

Market surveillance, 82

Mass customization, 114

Merger Guidelines, 145, 154

Militarily unique technologies, 45-46, 150

Military Airlift Command, 80

Military specifications and standards

citation of, 86-90

integrated processes and, 108-109

as source of segregation, 46

MILSPECs. See Military specifications and

standards

MITI. See Japanese Ministry of International Trade

and Industry

MMIC. See Monolithic microwave integrated circuit

MODAR. See Modular Avionics Radar

Modeling techniques, 114

MODILs. See Manufacturing Operations Development and Integration Laboratories

Modular Avionics Radar, 129

Monolithic microwave integrated circuit, 115

Most favored customer provision, 75

Multiple Award Schedule, 74

N

NAC. See National Automotive Center

National Automotive Center, 28, 121

National Critical Technologies Panel, 121

National Institute of Standards and Technology,

124-125

National Science and Technology Council, 119

National Science Foundation, 120

National Technology and Industrial Base, 5, 44

NDIs. See Nondevelopmental items

NIST. See National Institute of Standards and

Technology

Nondevelopmental items, 64

NSTC. See National Science and Technology

Council

NTIB. See National Technology and Industrial Base

Nuclear weapons facilities, 157

0

Oak Ridge National Laboratory, 120

Office of Federal Procurement Policy, 64

Office of the Secretary of Defense, 28

Olin Corporation Ordnance Division, 144, 155

O&M. See Operations and Maintenance

Operations and Maintenance, 15,66

OSD. See Office of the Secretary of Defense

Oversight personnel, 7

P

Packard Commission, 107

PAT. See Process Action Team for Specifications

and Standards

Patent License Agreements, 120

Performance specifications, 87

Persian Gulf War, 25-26,75

Personnel costs, 17

Pilot programs, 65

PLAs. See Patent License Agreements

Pratt & Whitney, 77, 107

Price negotiations, 79

Pricing requirements elimination, 26

Prime contractors, 10, 11,56-58,59

Privatization of the DTIB, 38

Process Action Team for Specifications and Standards, 87, 110, 135

Process integration. See Integrated processes

Procurement system

adopting commercial standards, 78-80, 157-158

benefits of current system, 6

bid and proposal process, 80-82

impetus for change, 6-8

incentives for using commercial goods and services, 84-86

increasing market analysis and investigation, 82

problems of, 77-78

process integration and, 107-108

retraining staff, 82-84

Product and process technologies, 147-148

Product performance, 47

Project Reliance, 120

Public sector facilities, 16-17, 151-152

Q

Qualified Manufacturing Lists, 123

Quality control, 89-90, 114

Quality Program Requirements, 110

R

Rapid prototyping technologies, 114

Rationalization in DTIB, 38, 143-147

Raytheon Company, 67, 103, 115

R&D. See Research and development

RDT&E. See Research, development, test, and

evaluation

Readjustment strategy

benefits of, 29-30

description, 17-18,23-24

developing and diffusing technology, 27-28

disadvantages of, 31

facilitating commercial procurement, 24-27
190 I Assessing the Potential for Civil-Military Integration

sharing resources, 28-29

Reform strategy

application of CMI policies to the segregated

DTIB, 34

benefits of, 34-36

commercial purchases, 31-32

description, 18-19

disadvantages of, 36-37

process integration, 32-34

Reliance Program, 145-146

Renting goods, 79

Research, development, test, and evaluation, 145

Research and development

consortia, 120

effect of government cost accounting, 107

government role in integrated R&D, 119-120

process integration and, 15, 116-118

Research funding, 27

Restructuring strategy

benefits of, 40

complete commercialization of the base, 39-40

description, 19-20

disadvantages of, 40-42

future military operations, 37-38

rationalization of the DTIB, 38

restructuring military forces and weapons, 39

Retraining staff, 82-84,85

Ruggedized products, 90

s

Science and Technology strategy, 118, 121

SDIO. See Strategic Defense Initiative Office

Section 807 committee, 27,33

Segregation of DTIB

applying CMI policies, 34

CMI policy options, 152-159

cost savings from CMI policies, 160

description of segregated DTIB, 140-142

estimate of segregation level, 68-70, 142

impetus for change, 6-8

insufficient demand, 150

overview, 139-140

reasons some segregation will continue, 150-152

relevant trends, 142-150

sources of, 5-6, 44-47

summary, 159-160

SEMATECH consortium, 28, 116

Service Contract Act, 73

Service sector, 58-59

Simulation techniques, 114

SLGR. See Global Positioning System receiver

Small Business Administration, 97

Socioeconomic contract provisions, 92

Source preferences policies, 92

Spin-off technologies, 112, 115

S&T strategy. See Science and Technology strategy

Strategic Defense Initiative Office, 27, 122, 123

Strategic partnerships, 79

Subcontractors, 58,59

Super-laboratories, 145

T

Tank-Automotive Command, 121

Task Force on Antitrust Aspects of Defense Industry

Consolidation, 144-145, 154-155

Task Force on Commercial Components, 51

Task Force on Defense Acquisition Reform, 29.74,

107, 108, 110, 135

Task Force on Maintenance Management, 147

Technical data rights

commercial purchases and, 90-92

integrated processes and, 110-112

readjustment strategy and, 27

Technology

development of, 27-28

diffusion of new technology, 121-123

increasing technology transfer, 158-159

product and process, 147-148

sharing resources, 28-29

trends facilitating process integration, 114

Technology for Affordability, 121

Technology Reinvestment Project, 27, 116-117, 120,

148

evaluation of, 126

Manufacturing Extension Partnership Program,

28

Technology sector integration, 59

Tier 1 systems, 10, 11, 13

TINA. See Truth-In-Negotiations Act

Trimble Navigation, 83

TRP. See Technology Reinvestment Project

Truth-In-Negotiations Act, 26,74

u

Uneconomical orders, 46

United Defense, 143

Unlimited rights, 91, 111

U.S. Congress

CMI options, 20-22

defense authorization bills, 50

definition of commercial items, 71

interest in CMI, 2-3

legislation for increasing commercialization, 64

v

Value added segment, 11, 13,56,68

Vendor preelection, 78
Index 1191

w

Westinghouse Corporation, 112, 129

Workforce

elements of, 107-108

number in segregated activities, 141

oversight personnel, 7

personnel costs, 17

retraining, 82-84, 85

savings from reduction of, 108, 152

Q US. GOVEXI.NME NT PRINTING OFFICE: 1994 - 301-804 - 814/27411