Defense Acquisitions: Addressing Incentives is Key to Further Reform Efforts
Published: 2014-04-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: DOD's acquisition of major weapon systems has been on GAO's high risk list since 1990. Over the past 50 years, Congress and DOD have continually explored ways to improve acquisition outcomes, including reforms that have championed sound management practices, such as realistic cost estimating, prototyping, and systems engineering. While some progress has been made, too often GAO reports on the same kinds of problems with acquisition programs today that it did over 20 years ago.
The topic of today's hearing is: “Reform of the Defense Acquisition System.” To address the topic, this testimony discusses (1) the performance of DOD's major defense acquisition program portfolio; (2) the management policies and processes currently in place to guide those acquisitions; (3) the incentives to deviate from otherwise sound acquisition practices; and (4) suggestions to temper these incentives. This statement draws from GAO's extensive body of work on DOD's acquisition of weapon systems.
section_title: What GAO Found
paragraphs: The Department of Defense (DOD) must get better outcomes from its major weapon system investments, which in recent years have totaled around $1.5 trillion or more. Recently, there have been some improvements, owing in part to recent reforms. For example, 50 of the 80 weapon system programs in the portfolio reduced their total acquisition costs over the past year, and a number of them also improved their buying power by finding efficiencies. Still, cost and schedule growth remain significant; 42 percent of programs have had unit cost growth of 25 percent or more.
DOD's acquisition policy provides a structured framework for developers to gather knowledge at appropriate stages that confirms that their technologies are mature, their designs stable, and their production processes are in control. The Weapon Systems Acquisition Reform Act of 2009 and DOD's recent “Better Buying Power” initiatives introduced significant changes that, when fully implemented, should further strengthen practices that can lead to successful acquisitions. While recent reforms have benefited individual programs, it is premature to say there is a trend or a corner has been turned. The reforms still face implementation challenges and have not yet been institutionalized within the services.
Reforms that focus mainly on the mechanisms of the acquisition process are only partial remedies because they do not address incentives to deviate from sound practices. Weapons acquisition is a complex system, complete with incentives to pursue programs that are not always feasible and affordable. These incentives stem from several factors. For example, the fragmented decision making paradigm in DOD and different participants involved in the acquisition process impose conflicting demands on weapon programs so that their purpose transcends filling voids in military capability. Also, the budget process forces funding decisions to be made well in advance of program decisions, encouraging undue optimism. Finally, DOD program managers' short tenures and limitations in experience and training can foster a short-term focus and put them at a disadvantage with their industry counterparts.
Drawing on its extensive body of work in weapon systems acquisition, GAO sees several areas of focus regarding where to go from here: 1) examining best practices to integrate critical requirements, resources, and acquisition decision making processes; 2) attracting, training, and retaining acquisition staff and managers so that they are both empowered and accountable for program outcomes; 3) at the start of new programs, using funding decisions to reinforce desirable principles such as well-informed acquisition strategies; 4) identifying significant risks up front and resourcing them; 5) exploring ways to align budget decisions and program decisions more closely; and 6) investigating tools, such as limits on system development time to improve program outcomes.
These are not intended to be all-encompassing, but rather, practical places to start the hard work of holding decision makers more accountable and realigning incentives with desired results.

section_title: Letter
paragraphs: I am pleased to be here today to discuss weapon system acquisitions and  where reform should focus next. Weapon systems acquisition has been  on GAO’s high risk list since 1990. Over the past 50 years, Congress  and DOD have explored ways to improve acquisition outcomes, including  actions like the Weapon Systems Acquisition Reform Act of 2009 and the  Department of Defense’s (DOD’S) own recent “Better Buying Power”  initiatives. These and other reforms have championed sound  management practices, such as realistic cost estimating, prototyping, and  systems engineering. DOD’s declining budgets and the impact of  sequestration have lent additional impetus to reduce the costs of  weapons. While some progress has been made on this front, too often we  report on the same kinds of problems today that we did over 20 years  ago. The cost growth of DOD’s 2013 portfolio of weapon systems is about  $448 billion and schedule delays average more than 2 years. To get  better results the focus should not be on adding to or discarding  acquisition policies, but instead on the incentives that work against them.
Today, I will (1) provide summary cost and schedule information on  DOD’s portfolio of major weapon systems; (2) describe the policies and  processes in place to guide those acquisitions; (3) discuss incentives to  deviate from otherwise sound acquisition practices; and (4) suggest ways  to temper these incentives. This statement draws from our extensive body  of work on DOD’s acquisition of weapon systems and the numerous  recommendations we have made both on individual weapons and  systemic improvements to the acquisition process. The work on which  this testimony is based was conducted in accordance with generally  accepted government auditing standards. Those standards require that  we plan and perform the audit to obtain sufficient, appropriate evidence to  provide a reasonable basis for our findings and conclusions based on our  audit objectives. We believe the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives.
subsections: section_title: Trends in DOD’s Portfolio of Major Acquisitions
paragraphs: There can be little doubt that we can—and must—get better outcomes  from our weapon system investments. As seen in table 1, the value of  these investments in recent years has been on the order of $1.5 trillion or  more, making them a significant part of the Federal discretionary budget.
As one can see, cost and schedule growth for DOD’s aggregate portfolio  remain significant. For example, when measured against programs’ first  full estimates, the total cost of the portfolio has increased by nearly $448  billion with an average delay of 28 months in initial operating capability.  Also, as indicated in table 1, 42 percent of programs have had unit cost  growth of 25 percent or more. On the other hand, we have recently seen  some modest improvements in a large number of programs. For example,  50 of the 80 programs in the portfolio reduced their total acquisition costs  over the past year. A number of these programs have improved their  buying power by finding efficiencies.
While these modest improvements are encouraging, the enormity of the  investment in acquisitions of weapon systems and its role in making U.S.  fighting forces capable, warrant continued attention and reform. The  potential for savings and for better serving the warfighter argue against  complacency.
section_title: One Side of Acquisitions: Stated Policy and Process
paragraphs: When one thinks of the weapon system acquisition process, the image  that comes to mind is that of the methodological procedure depicted on  paper and in flow charts. It is the “how to” side of acquisitions. DOD’s  acquisition policy takes the perspective that the goal of acquisition is to  obtain quality products that satisfy user needs in a timely manner at a fair  and reasonable price. The sequence of events that comprise the process  defined in policy reflects principles from disciplines such as systems  engineering, as well as lessons learned and past reforms. The body of  work we have done on benchmarking best practices has also been  reflected in acquisition policy. Recent, significant changes to the policy  include those introduced by the Weapon Systems Acquisition Reform Act  of 2009 and the Department’s own “Better Buying Power” initiatives  which, when fully implemented, should further strengthen practices that  can lead to successful acquisitions. The policy provides a framework for  developers of new weapons to gather knowledge at appropriate stages  that confirms that their technologies are mature, their designs are stable,  and their production processes are in control. These steps are intended  to ensure that a program will deliver the capabilities required utilizing the  resources—cost, schedule, technology, and personnel—available.  Successful product developers ensure a high level of knowledge is  achieved at key junctures in development. We characterize these  junctures as knowledge points. While there can be differences of opinion  over some of the specifics of the process, I do not believe there is much  debate about the soundness of the basic steps. It is a clear picture of  “what to do.”
Table 2 summarizes these steps and best practices, organized around  three key knowledge points in a weapon system acquisition.
Our work over the last few years shows that, to the extent reforms like the  Weapon Systems Acquisition Reform Act and DOD’s Better Buying  Power initiatives are being implemented, they are having a positive effect  on individual programs. For example, we found that over 80 percent of  the 38 programs included in our annual assessment of weapon programs  this year had conducted a “should-cost” analysis—one of DOD’s Better  Buying Power initiatives—and reported an anticipated savings of  approximately $24 billion, with more than half of this amount to be  reallocated to meet other DOD priorities. In addition, we recently reviewed  several programs to determine the impact of the Weapon Systems  Acquisition Reform Act and found that the programs are: making early tradeoffs among cost, schedule, and technical developing more realistic cost and schedule estimates, increasing the amount of testing during development, and placing greater emphasis on reliability.
These improvements do not yet signify a trend or suggest that a corner  has been turned and, in fact, we found in our annual assessment of  programs that most are not yet fully following a knowledge-based  acquisition approach. The reforms themselves still face implementation  challenges, such as staffing and clarity of guidance and will doubtless  need refining as experience is gained. We have made a number of  recommendations on how DOD can improve implementation of the  Weapon Systems Acquisition Reform Act.
To a large extent, the improvements we have seen tend to result from  external pressure exerted by higher level offices within DOD on individual  programs. In other words, the reforms have not yet been institutionalized  within the services. We still see employment of other practices—not  prescribed in policy—such as concurrent testing and production,  optimistic assumptions, and delayed testing. These are the same kinds of  practices that perpetuate the significant cost growth and schedule delays  that have persisted in acquisitions through the decades. They share a  common dynamic: moving forward with programs before the knowledge  needed to reduce risk and make those decisions is sufficient.
We have found that programs proceed through the critical design review  without having a stable design, although we have made  recommendations on the importance of this review and how to prepare for  it. Programs also proceed with testing and production before they are  ready. The F-35 Joint Strike Fighter program is a classic example of how  concurrency can erode the cost and schedule of an acquisition. Further,  some programs are significantly at odds with the acquisition process.  Among these I would number the Ballistic Missile Defense System,  Littoral Combat Ship, and airships. We also recently reported on the  Unmanned Carrier-Launched Airborne Surveillance and Strike program  which proposes to complete the main acquisition steps of design,  development, testing, manufacturing, and initial fielding before it formally  enters the acquisition process.
The fact that programs adopt practices that run counter to what policy and  reform call for is evidence of the other pressures and incentives that  significantly influence program practices and outcomes. I will turn to these  next.
section_title: Another Side of Acquisitions: Incentives to Deviate from Sound Practices
paragraphs: An oft-cited quote of David Packard, former Deputy Secretary of Defense,  is: “We all know what needs to be done. The question is why aren’t we  doing it?” To that point, reforms have been aimed mainly at the “what”  versus the “why.” They have championed sound management practices,  such as realistic estimating, thorough testing, and accurate reporting.  Reforms have also added program decision points, reviews, and reporting  requirements to help ensure these practices are used. We need to  consider that these reforms mainly address the mechanisms of weapon  acquisitions. Seen this way, the practices prescribed in policy are only  partial remedies. The acquisition of weapons is much more complex than  this and involves very basic and strongly reinforced incentives to pursue  weapons that are not always feasible and affordable. Accordingly, rival  practices, not normally viewed as good management techniques,  comprise an effective stratagem for fielding a weapon because they  reduce the risk that the program will be interrupted or called into question.
I will now discuss several factors that illustrate the pressures that create  incentives to deviate from sound acquisition management practices.
subsections: section_title: Mismatch between Requirements and Resources
paragraphs: A key cause of poor acquisition outcomes is the mismatch between the  validated capability requirements for a new weapon system and the  appropriate systems engineering knowledge, funding, and time that is  planned to develop that new system. DOD’s three key decision making  processes for acquiring weapon systems—requirements determination,  resource allocation, and the acquisition management system—are  fragmented, making it difficult for the department to achieve a balanced  mix of weapon systems that are achievable and affordable and provide  the best military value to the warfighter when the warfighter needs them.  In addition, these processes are led by different organizations, making it  difficult to hold any one person or organization accountable for saying  “no” to an unrealistic requirement or for tempering optimistic cost and  schedule estimates. While the department has worked hard to overcome  this fragmented decision making paradigm and policies have been written  to force more integrated decisions and more accountability, we continue  to see programs that have experienced cost and schedule growth. This is  because weapon system programs often begin with validated  requirements that have not been informed by solid systems engineering  practices, often do not represent true “needs” as much as “desires,” have  optimistic cost and schedule estimates, and, all too often, are  unachievable. Program managers are handed a business case that can  be fatally flawed, and usually have no recourse other than to execute it as  best they can and therefore cannot be held accountable.
section_title: Conflicting Demands
paragraphs: The process of planning and executing the program is (1) shaped by  many different participants and (2) far more complex than the seemingly  straightforward purchase of equipment to defeat an enemy threat.  Collectively, as participants’ needs are translated into actions on weapon  programs, the purpose of such programs transcends efficiently filling  voids in military capability. Weapons have become integral to policy  decisions, definitions of roles and functions, justifications of budget levels  and shares, service reputations, influence of oversight organizations,  defense spending in localities, the industrial base, and to individual  careers. Consequently, the reasons “why” a weapon acquisition program  is started are manifold and thus acquisitions do not merely provide  technical solutions.
While individual participants see their needs as rational and aligned with  the national interest, collectively, these needs create incentives for  pushing programs and encouraging undue optimism, parochialism, and  other compromises of good judgment. Under these circumstances,  persistent performance problems, cost growth, schedule slippage, and  difficulties with production and field support cannot all be attributed to  errors, lack of expertise, or unforeseeable events. Rather, a level of these  problems is embedded as the undesirable, but apparently acceptable,  consequence of the process. These problems persist not because they  are overlooked or under-regulated, but because they enable more  programs to survive and thus more needs to be met. The problems are  not the fault of any single participant; they are the collective responsibility  of all participants. Thus, the various pressures that accompany the  reasons why a program is started can also affect and compromise the  practices employed in its acquisition.
section_title: Funding Dynamics
paragraphs: There are several characteristics about the way programs are funded that  create incentives in decision-making that can run counter to sound  acquisition practices. First, there is an important difference between what  investments in new products represent for a private firm and for DOD. In  a private firm, a decision to invest in a new product, like a new car design,  represents an expense. Company funds must be expended that will not  provide a revenue return until the product is developed, produced, and  sold. Thus, leading companies have an incentive to follow a disciplined  approach and acquire requisite knowledge to facilitate successful product  development. To do otherwise could have serious economic  consequences. In DOD, there can be few consequences if funds are not  used efficiently. For example, as has often been the case in the past,  agency budgets generally do not fluctuate much year to year and,  programs that experience problems tend to eventually receive more  funding to get well. Also, in DOD, new products in the form of budget line  items can represent revenue. An agency may be able to justify a larger  budget if it can win approval for more programs. Thus, weapon system  programs can be viewed both as expenditures and revenue generators.
Second, budgets to support major program commitments must be  approved well ahead of when the information needed to support the  decision is available. Take, for example, a decision to start a new  program scheduled for August 2016. Funding for that decision would  have to be included in the Fiscal Year 2016 budget. This budget would be  submitted to Congress in February 2015—18 months before the program  decision review is actually held. DOD would have committed to the  funding before the budget request went to Congress. It is likely that the  requirements, technologies, and cost estimates for the new program— essential to successful execution—may not be very solid at the time of  funding approval. Once the hard-fought budget debates put money on the  table for a program, it is very hard to take it away later, when the actual  program decision point is reached.
Third, to the extent a program wins funding, the principles and practices it  embodies are thus endorsed. So, if a program is funded despite having  an unrealistic schedule or requirements, that decision reinforces those  characteristics instead of sound acquisition practices. Pressure to make  exceptions for programs that do not measure up are rationalized in a  number of ways: an urgent threat needs to be met; a production capability  needs to be preserved; despite shortfalls, the new system is more  capable than the one it is replacing; and the new system’s problems will  be fixed in the future. It is the funding approvals that ultimately define  acquisition policy.
section_title: Industry Relationship
paragraphs: DOD has a unique relationship with the Defense industry that differs from  the commercial marketplace. The combination of a single buyer (DOD), a  few very large prime contractors in each segment of the industry, and a  limited number of weapon programs constitute a structure for doing  business that is altogether different from a classic free market. For  instance, there is less competition, more regulation, and once a contract  is awarded, the contractor has considerable power. Moreover, in the  Defense marketplace, the firm and the customer have jointly developed  the product and, as we have reported previously, the closer the product  comes to production the more the customer becomes invested and the  less likely they are to walk away from that investment. While a Defense  firm and a military customer may share some of the same goals, certain  key goals are different. Defense firms are accountable to their  shareholders and can also build constituencies outside the direct  business relationship between them and their customers. This  relationship does not fit easily into a contract.
J. Ronald Fox, author of Defense Acquisition Reform 1960-2009: An  Elusive Goal, sums up the situation as follows. “Many defense acquisition  problems are rooted in the mistaken belief that the defense industry and  the government-industry relationship in defense acquisition fit naturally  into the free enterprise model. Most Americans believe that the defense  industry, as a part of private industry, is equipped to handle any kind of  development or production program. They also by and large distrust  government ‘interference’ in private enterprise. Government and industry  defense managers often go to great lengths to preserve the myth that  large defense programs are developed and produced through the free  enterprise system.” But neither the defense industry nor defense  programs are governed by the free market; “major defense acquisition  programs rarely offer incentives resembling those of the commercial  marketplace.”
section_title: The Right People
paragraphs: Dr. Fox also points out that in private industry, the program manager  concept works well because the managers have genuine decision-making  authority, years of training and experience, and understand the roles and  tactics within government and industry. In contrast, Dr. Fox concludes  that DOD program managers often lack the training, experience, and  stature of their private sector counterparts, and are influenced by others  in their service, DOD, and Congress. Other acquisition reform studies  over the past decade have highlighted this issue as well. The studies  highlight the need for a more professional program manager cadre within  each of the military services, and new incentives and improved career  opportunities for acquisition personnel. In 2006, we reported that program  managers indicated to us that the acquisition process does not enable  them to succeed because it does not empower them to make decisions  on whether the program is ready to proceed forward or even to make  relatively small trade-offs between resources and requirements as  unexpected problems are encountered. Program managers said that they  are also not able to make personnel shifts to respond to changes  affecting the program.
We have also reported on the lack of continuity in the tenure of key  acquisition leaders across the timeframe of individual programs. A major  acquisition can have multiple program managers during product  development. For example, the F-35 Joint Strike Fighter program has had  six different program managers since it was approved to start  development in 2001. Other key positions throughout the acquisition  chain of command also turn over frequently. For example, the average  tenure of the Under Secretary of Defense for Acquisition, Technology and  Logistics since the position was established in 1986 has been only about  22 months. Consequently, DOD acquisition executives do not necessarily  stay in their positions long enough to develop the needed long-term  perspective or to effectively change traditional incentives. Moreover, their  decisions can be overruled through the cooperative actions of other  acquisition participants. The effectiveness of reforms to the acquisition  process depends in large measure on a cadre of good people who may  be inadequately prepared for their position or forced into the near-term  perspective of their tenures. In this environment, the effectiveness of  management can rise and fall on the strength of individuals;  accountability for long term results is, at best, elusive.
section_title: Where Do We Go From Here?
paragraphs: I do not necessarily subscribe to the view that the acquisition process is  too rigid and cumbersome. Clearly, this could be the case if every  acquisition followed the same process and strategy without exception, but  they do not. We repeatedly report on programs where modifications of the  process are approved. DOD refers to this as tailoring, and we see plenty  of it.
While one should always be looking to improve the process and make it  more efficient, at this point, the focus should be to build on existing  reforms by holding decision makers more accountable, tackling existing  incentives, and providing new ones. To do this, we need to look differently  at the familiar outcomes of weapon system acquisitions—such as cost  growth, schedule delays, large support burdens, and reduced buying  power. Some of these undesirable outcomes are clearly due to honest  mistakes and unforeseen obstacles. However, they also occur not  because they are inadvertent but because they are encouraged by the  incentive structure. I do not think it is sufficient to define the problem as  an objective process that is broken. Rather, it is more accurate to view  the problem as a sophisticated process whose consistent results are  indicative of its being in equilibrium. The rules and policies are clear about  what to do, but other incentives force compromises. The persistence of  undesirable program outcomes suggests that these are consequences  that participants in the process have been willing to accept.
Drawing on our extensive body of work in weapon system acquisition,  there are six areas of focus regarding where to go from here. These are  not intended to be all-encompassing, but rather, practical places to start  the hard work of realigning incentives with desired results.
Hold decision makers accountable from top to bottom: Our work over the  years benchmarking best practices at leading commercial product  developers and manufacturers has yielded a wide range of best practices  for efficiently and quickly developing new products to meet market needs.  Firms we visited described an integrated process for establishing product  requirements, making tradeoffs among cost and product performance well  ahead of a decision to begin product development, and ensuring that all  decision makers—requirements setters, product developers, and  finance—agree to and are held accountable for the business case  presented to the program manager for execution of a new product’s  development. These firms had trained professionals as program  managers with backgrounds in technical fields such as engineering and  various aspects of project management. Once empowered with an  achievable, executable business case, they were in charge of product  development from beginning to end. Therefore, they could be held  accountable for meeting product development cost, schedule, and  performance targets.
Today, getting managers to make hard decisions, when necessary, and  say no to those that push unrealistic or unaffordable plans continues to be  a challenge because the critical processes to acquire a new weapon  system are segregated, independent, and have different goals. DOD must  be open to examining best practices and implementing new rules to really  integrate the processes into one and holding all communities accountable  for decisions. I do not pretend to have all the answers on how to change  the current environment, but it is clear that top decision makers cannot be  held accountable to work in concert on such large and critical investments  unless they begin with an executable business case. Congressional and  DOD leadership must be in concert on this.
Attract, train, and keep acquisition staff and management: Dr. Fox’s book  does an excellent job of laying out the flaws in the current way DOD  selects, trains, and provides a career path for program managers. I refer  you to this book, as it provides sound criticisms. We must also think about  supporting people below the program manager who are also instrumental  to program outcomes, including engineers, contracting officers, cost  analysts, testers, and logisticians. There have been initiatives aimed at  program managers and acquisition personnel, but they have not been  consistent over time. RAND, for example, recently analyzed program  manager tenure in DOD and found that the intent of policies designed to  lengthen tenure may not have been achieved and no enforcement  mechanism has been readily apparent over time. RAND indicates this  could be because of the fundamental conflict that exists between what  military officers need to do to be promoted and their tenure as program  managers. Unless these two things are aligned, such that experience and  tenure in an acquisition program can be advantageous for promotion,  then it appears unlikely that tenure policies will consistently yield positive  results. The tenure for acquisition executives is a more challenging  prospect in that they arguably are at the top of their profession and  already expert. What can be done to keep good people in these jobs  longer?
I am not sure of the answer, but I believe part of the problem is that the  contentious environment of acquisition grinds good people down at all  levels. In top commercial firms, a new product development is launched  with a strong team, corporate funding support, and a timeframe of 5 to 6  years or less. In DOD, new weapon system development can take twice  as long, have turnover in key positions, and every year must contend for  funding. This does not necessarily make for an attractive career. Several  years ago, the Defense Acquisition Performance Assessment Panel  recommended establishing the military department’s service acquisition  executives as a five-year, fixed-term position to add leadership continuity  and stability to the acquisition process. I believe something like this  recommendation is worth considering. And perhaps the military services  should examine the current career track for acquisition officers to ensure  it provides appropriate training, rewards, and opportunities for  advancement.
Reinforce desirable principles at the start of new programs: The principles  and practices programs embrace are determined not by policy, but by  decisions. These decisions involve more than the program at hand: they  send signals as to what is acceptable. If programs that do not abide by  sound acquisition principles win funding, then seeds of poor outcomes  are planted. The highest point of leverage is at the start of a new  program. Decision makers must ensure that new programs exhibit  desirable principles before they are approved and funded. Programs that  present well informed acquisition strategies with reasonable and  incremental requirements and reasonable assumptions about available  funding should be given credit for a good business case. As an example,  the Presidential Helicopter, Armored Multi Purpose Vehicle, and  Enhanced Polar System are all acquisitions slated to start in 2014, with  development estimates currently ranging from nearly $1 billion to over  $2.5 billion. These and other programs expected to begin system  development in 2014 could be viewed as a “freshman” class of  acquisitions. It would be beneficial for DOD and Congress to assess them  as a group to ensure that they embody the right principles and practices.  Recent action by DOD to terminate the Army’s Ground Combat Vehicle  program, which was slated to start this year, and instead focus efforts on  selected science and technology activities reinforces sound principles. On  the other hand, approving the Unmanned Carrier-Launched Airborne  Surveillance and Strike program despite its running counter to sound  principles sends a conflicting message.
Identify significant program risks upfront and resource them: Weapon  acquisition programs by their nature involve risks, some much more than  others. The desired state is not zero risk or elimination of all cost growth.  But we can do better than we do now. The primary consequences of risk  are often the need for additional time and money. Yet, when significant  risks are taken, they are often taken under the guise that they are  manageable and that risk mitigation plans are in place. In my experience,  such plans do not set aside time and money to account for the risks  taken. Yet in today’s climate, it is understandable—any sign of weakness  in a program can doom its funding. This needs to change. If programs are  to take significant risks, whether they be technical in nature or related to  an accelerated schedule, these risks should be declared and the resource  consequences acknowledged. Less risky options and potential off ramps  should be presented as alternatives. Decisions can then be made with full  information, including decisions to accept the risks identified. If the risks  are acknowledged and accepted by DOD and Congress, the program  should be supported.
A potential way to reduce the risks taken in acquisition programs is to  address the way in which DOD leverages its science and technology  enterprise. Leading commercial companies save time and money by  separating technology development from product development and fully  developing technologies before introducing them into the design of a  system. These companies develop technology to a high level of maturity  in a science and technology environment which is more conducive to the  ups and downs normally associated with the discovery process. This  affords the opportunity to gain significant knowledge before committing to  product development and has helped companies reduce costs and time  from product launch to fielding. Although DOD’s science and technology  enterprise is engaged in developing technology, there are organizational,  funding, and process impediments which make it difficult to bring  technologies into acquisition programs. For example, it is easier to move  immature technologies into weapon system programs because they tend  to attract bigger budgets than science and technology projects. Creating  stronger and more uniform incentives that encourage the development of  technologies in the right environment to reduce the cost of later changes,  and encourage the technology and acquisition communities to work more  closely together to deliver the right technologies at the right time would be  beneficial.
More closely align budget decisions and program decisions: Because  budget decisions are often made years ahead of program decisions, they  depend on the promises and projections of program sponsors.  Contentious budget battles create incentives for sponsors to be optimistic  and make it hard to change course as projections fade in the face of  information. This is not about bad actors; rather, optimism is a rational  response to the way money flows to programs. Aside from these  consequences, planning ahead to make sure money is available in the  future is a sound practice. I am not sure there is an obvious remedy for  this. But, I believe ways to have budget decisions follow program  decisions should be explored, without sacrificing the discipline of  establishing long-term affordability.
Investigate other tools to improve program outcomes: There are ways to  structure an acquisition program that would create opportunities for better  outcomes. Key among these are: limits on development time (time certain  development of 5 years), which limits the scope of the development task;  evolutionary or incremental product development, wherein the initial  increment of a new weapon system adds value for the warfighter, is  delivered to the field faster, and can be followed with block upgrades as  technologies and funding present themselves; and strategies that focus  more on incentivizing overall cost reduction over profit limitation. DOD  should investigate the potential of these concepts as it structures and  manages programs moving forward. Central to opening an environment  for these tools is the need to focus on requirements that are well  understood and manageable. This would allow the department to offer  contracts that place more cost risk on the contractor and less on the  government. A prime example of this is the KC-46 Tanker program that is  being developed under a fixed-price development contract with incentives  for holding cost down. The government and industry felt comfortable with  that arrangement specifically because it was an incremental program  based on a commercial airframe. The first development program is to  militarize a commercial aircraft to replace a portion of the existing KC-135  fleet. Future increments may be approved to replace the rest of the KC- 135 fleet and the KC-10 fleet and provides DOD an opportunity to include  the new technologies. Also, the contractor had significant systems  engineering knowledge about the design and the ability to meet the  requirements. A word of caution: if time certain development (e.g., 5  years), incremental acquisition strategies, and contracts that incentivize  cost reduction over profit limitations are to be explored, the government  will need to examine whether they have the contract management and  negotiation expertise to do this. DOD has begun to examine ways to  strengthen contract incentives and restructure profit regulations through  its Better Buying Power initiatives; however, it is too soon to tell whether  these efforts will lead to needed improvements.
Mr. Chairman, this concludes my statement and I would be happy to  answer any questions.
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