Defense Acquisitions: DOD's Revised Policy Emphasizes Best Practices, but More Controls Are Needed
Released: 2003-11-10T00:00:00

Letter

Background

Traditionally, DOD’s strategy for acquiring major weapon systems has been to plan programs that would achieve a big leap forward in capability. However, because the needed technologies often are not yet mature, programs stay in development for years until the technologies are demonstrated. As a result, weapon systems have frequently been characterized by poor cost, schedule, and performance outcomes. This has slowed modernization efforts, reduced the buying power of the defense dollar, delayed capabilities for the warfighter, and forced unplanned—and possibly unnecessary—trade-offs among programs.

Our extensive body of work shows that leading companies use a product development model that helps reduce risks and increase knowledge when developing new products. This best practices model enables decision makers to be reasonably certain about their products at critical junctures during development and helps them make informed investment decisions. This knowledge-based process can be broken down into three cumulative knowledge points.

Knowledge point 1: A match must be made between the customer’s needs and the developer’s available resources—technology, engineering knowledge, time, and funding—before a program starts.

Knowledge point 2: The product’s design must be stable and must meet performance requirements before initial manufacturing begins.

Knowledge point 3: The product must be producible within cost, schedule, and quality targets and demonstrated to be reliable before production begins.

To bolster the knowledge-based process, leading companies use evolutionary product development, an incremental approach that enables developers to rely more on available resources rather than making promises about unproven technologies. While the user may not initially receive the ultimate capability under this approach, the initial product is available sooner and at a lower, more predictable cost. Also, leading companies know that invention cannot be scheduled and its cost is difficult to estimate. They do not bring technology into new product development unless that technology has been demonstrated to meet the user’s requirements. Allowing technology development to spill over into product development puts an extra burden on decision makers and provides a weak foundation for making product development estimates.

DOD understands that it must improve acquisition process outcomes if it is to modernize its forces within currently projected resources. To help achieve this goal, DOD has revised its acquisition policy, called the 5000 series, to reflect best practices from successful commercial and DOD programs. The policy covers most—but not all—major acquisitions. The Secretary of Defense has delegated authority to the Missile Defense Agency and to the National Security Space Team to develop separate guidance for missile defense and space systems, respectively.Approximately 35 percent of DOD’s development funds in 2003 went to these systems. (Figure 1 shows how $43.1 billion in development funds were distributed across space, missile defense, and systems covered by the 5000 series.) This report addresses policy for the defense programs covered exclusively under the 5000 series.

DOD’s Revised Policy Provides a Framework for Knowledge-Based, Evolutionary Acquisitions

DOD’s leaders have made significant improvements to DOD’s acquisition policy by adopting the knowledge-based, evolutionary approach used by leading commercial companies. The revised policy has the potential to transform DOD’s acquisition process by reducing risks and increasing the chances for successful outcomes. The policy provides a framework for developers to ask themselves at key decision points whether they have the knowledge they need to move to the next phase of acquisition. If rigorously applied, this knowledge-based framework can help managers gain the confidence they need to make significant and sound investment decisions for major weapon systems. In placing greater emphasis on evolutionary product development, the policy sets up a more manageable environment for achieving knowledge. Another best practice reflected in the policy’s framework is separating technology development from product development, which reduces technological risk at the start of a program.

As shown in table 1, DOD’s policy emphasizes best practices used by leading companies.

Similar to the best practices model, DOD’s policy divides its acquisition process into phases, as shown in figure 2. Key decisions are aligned with the three critical junctures of a product’s development, or knowledge points.

In other similarities, DOD’s framework pinpoints program start at milestone B, about the same point as program start on the best practices model. At the midway point on both approaches, a stable product design should be demonstrated. With DOD’s framework, managers are required to know—by the time full-rate production decision review occurs—whether the product can be produced within cost, schedule, and quality targets. This requirement occurs earlier in the best practices model, before production begins, or at knowledge point 3. Leading companies have used this approach to reduce risks and to make costs and delivery dates more predictable.

Controls Are Needed to Ensure Knowledge-Based Approach Is Followed

While DOD has strengthened its acquisition policy with a knowledge- based, evolutionary framework, the policy does not include many of the same controls that leading companies rely on to attain a high level of knowledge before making additional significant investments. Controls are considered effective if they are backed by measurable criteria and if decision makers are required to consider them before deciding to advance a program to the next level. Controls used by leading companies help decision makers gauge progress in meeting cost, schedule, and performance goals and ensure that managers will (1) conduct activities to capture relevant product development knowledge, (2) provide evidence that knowledge was captured, and (3) hold decision reviews to determine that appropriate knowledge was captured to move to the next phase.

To determine if DOD has the necessary controls, we compared controls in DOD’s policy with those used in the best practices model at three critical junctures. Table 2 shows the presence or absence of controls for various versions of DOD policy since 1996, including the May 2003 revision.

At all three knowledge points, DOD’s policy does not provide all the necessary controls used by commercial companies. For example, at program launch (milestone B) or when knowledge point 1 should be reached, the policy requires decision makers to identify and validate a weapon system’s key performance requirements and to have a technical solution for the system before program start. This information is then used to form cost and schedule estimates for the product’s development. However, the policy does not emphasize the use of a disciplined systems engineering process for balancing a customer’s needs with resources to deliver a preliminary design. The lack of effective controls at knowledge point 1 could result in gaps between requirements and resources being discovered later in development.

At the design readiness review or when knowledge point 2 should be reached, DOD’s policy does not require specific controls to document that a product is ready for initial manufacturing and demonstration. DOD’s policy suggests appropriate criteria, such as number of subsystem and system design reviews completed, percentage of drawings completed, planned corrective actions to hardware and software deficiencies, adequate development testing, completed failure modes and effects analysis, identification of key system characteristics and critical manufacturing processes, and availability of reliability targets and growth plans. However, these criteria are not required. For example, we found that a key indicator of a product’s design stability is the completion of 90 percent of the engineering drawings supported by design reviews. DOD’s policy does not require that a certain percentage of drawings or design reviews be completed to ensure the design is mature enough to enter the system demonstration phase. As a result, a decision maker has no benchmark to consider when deciding to advance a program to the next level of development.

Finally, at production commitment or when knowledge point 3 should be reached, DOD’s policy does not require specific controls to document that a product can be manufactured to meet cost, schedule, and quality targets before moving into production. For example, the policy states there should be “no significant manufacturing risks” at the start of low-rate production but does not define what this means or how it is to be measured. DOD’s policy does not require the demonstrated control of manufacturing processes and the collection of statistical process control data until full-rate production begins but even then fails to specify a measurable control. Given that low-rate production can last several years, a significant number of products can be manufactured before processes are brought under control, creating a higher probability of poor cost and schedule outcomes.

DOD Is Responsive to Congressional Requirements about New Acquisition Process

While supporting efforts to build more flexibility into the DOD acquisition process and to develop weapon systems using an evolutionary approach, Congress asked DOD to be more disciplined in its approach. The Defense Authorization Act for Fiscal Year 2003 required DOD to address (1) the way it plans to meet certain statutory and regulatory requirements for managing its major acquisition programs, (2) needed guidance for implementing spiral developments, and (3) technology readiness (at acquisition program initiation). DOD was responsive to all three requirements. With regard to the second requirement, a description of the process that would be used to independently validate that measurable exit criteria for applying a spiral development process have been met was unclear. DOD stated that the milestone decision authority provides that independent validation as part of DOD’s milestone approval process. DOD’s responses to the relevant sections of the act are summarized below. More detailed comparisons are provided in appendixes I, II, and III.

Section 802: Evolutionary Acquisition

Requirements: This section directed DOD to report on its plan to meet certain statutory and regulatory requirements for managing its major acquisition programs applying an evolutionary acquisition process. These include establishing and approving operational requirements and cost and schedule goals for each increment, meeting requirements for operational and live fire testing for each increment, and optimizing total system performance and minimizing total ownership costs.

DOD response: In April 2003, DOD submitted its report reflecting how these requirements are addressed in its acquisition policy. According to the report, the policy addresses the statutory and other requirements applicable to all major defense acquisition programs, including each increment of evolutionary acquisition programs. For example, the policy requires that each program or increment of an evolutionary acquisition have a milestone B decision to approve program initiation and to permit entry into system development and demonstration. The policy specifies the statutory and regulatory information necessary to support the decision.

Section 803: Spiral Development

Requirements: This section authorizes DOD to conduct a research and development program for a major defense acquisition program using spiral development only if approved by the Secretary of Defense or authorized high-level designee. A program cannot be conducted as a spiral development unless the Secretary of Defense or designee approves a plan that describes such things as the program strategy, test plans, performance parameters, and measurable exit criteria. The section also requires the Secretary of Defense to issue guidance addressing the appropriate processes for an independent validation that exit criteria have been met, the operational assessment of fieldable prototypes, and the management of these types of programs. It further requires the Secretary to report to Congress on the status of each program applying spiral development by September 30 of each year from 2003 to 2008.

DOD response: DOD established a technology development strategy in the new policy to address this requirement. The strategy must be completed before a program can enter the technology development phase. The strategy also documents the cost and schedule goals, the test plans, the number of prototypes, and a program strategy for the total research and development program. The strategy requires a test plan to ensure the goals and exit criteria for the first technology spiral demonstration are met, and the policy requires an independent operational assessment for the release of each product increment to the user. What is unclear in DOD’s guidance is the process that will be used for independently validating whether measurable cost, schedule, and performance exit criteria have been met. However, DOD stated that the milestone decision authority provides independent validation that exit criteria have been met as part of DOD’s milestone approval process. As of October 23, 2003, DOD’s report on the status of each program applying spiral development was still in draft and not yet submitted. DOD’s current draft report states that there are no research and development programs that have been approved as spiral development programs as of September 30, 2003. Section 803 requirements were implemented in DOD Instruction 5000.2, which was effective in May 2003. DOD anticipates that there will be approved spiral development programs to report in 2004.

Section 822: Independent Technology Readiness Assessments

Requirements: This section added a requirement to section 804 of the National Defense Authorization Act for Fiscal Year 2002 (Public Law 107-107) that directed DOD to report by March of each year between 2003 and 2006 on the maturity of technology at the initiation of major defense acquisition programs. Each report is required to (1) identify any major acquisition program that entered system development and demonstration during the preceding calendar year with immature key technology that was not demonstrated in, at minimum, a relevant environment, as required by the new policy; (2) justify the incorporation of any key technology on an acquisition program that does not meet that requirement; (3) identify any instances that the Deputy Under Secretary of Defense for Science and Technology did not concur with the technology assessment and explain how the issue has been or will be resolved; (4) identify each case in which a decision was made not to conduct an independent technology readiness assessment for a critical technology on a major defense acquisition; and (5) explain the reasons for the decision each year through 2006.

DOD response: In March 2003, DOD reported that two programs entered system development and demonstration in 2002 with critical technologies that did not meet demonstration requirements and provided justification for them. DOD did not identify or report any cases where an independent technology readiness assessment was not conducted or where the Under Secretary disagreed with assessment findings.

Conclusions

DOD can maximize its $1 trillion investment in new weapons over the next 6 years by ensuring effective implementation of the new acquisition policy. DOD’s leaders have taken noteworthy steps by incorporating into the policy a framework that supports a knowledge-based, evolutionary acquisition process, similar to one used by leading commercial companies to get successful outcomes. A framework is an important and significant step. DOD must now turn its attention to establishing controls. As leading companies have found, having clearly established controls to capture and use appropriate knowledge to make decisions at critical junctures is crucial for delivering affordable products as planned. DOD’s policy addresses specific congressional requirements and includes some controls that leading companies use to capture knowledge at the start of a program. However, additional controls are needed to ensure that decisions made throughout product development are informed by demonstrated knowledge.

Recommendations for Executive Action

DOD must design and implement necessary controls to ensure that appropriate knowledge is captured and used at critical junctures to make decisions about moving a program forward and investing more money. We recommend that the Secretary of Defense require additional controls for capturing knowledge at three key points—program launch, design readiness review for transitioning from system integration to system demonstration, and production commitment. The additional controls for program launch (milestone B) should ensure the capture of knowledge about the following:

Cost and schedule estimates based on knowledge from a preliminary design using systems engineering tools.

The additional controls for transitioning from system integration to system demonstration (design readiness review) should ensure the capture of knowledge about the following:

Completion of 90 percent of engineering drawings.

Completion of subsystem and system design reviews.

Agreement from all stakeholders that drawings are complete and the design is producible.

Completion of failure modes and effects analysis.

Reliability targets and a reliability growth plan based on demonstrated Identification of key system characteristics. Identification of critical manufacturing processes. reliability rates of components and subsystems.

The additional controls for the production commitment (milestone C) should ensure the capture of knowledge about the following:

Completion of production representative prototypes.

Availability of production representative prototypes to achieve reliability goal and demonstrate the product in an operational environment.

Collection of statistical process control data.

Demonstration that critical manufacturing processes are capable and in statistical control.

Because knowledge about technology, design, and manufacturing at critical junctures can lower DOD’s investment risk, decisions that do not satisfy knowledge-based criteria should be visible and justified. Therefore, we also recommend that the Secretary of Defense document the rationale for any decision to move a program to the next stage of development without meeting the knowledge-based criteria, including those listed in the first recommendation. The responsible milestone decision authority should justify the decision in the program’s acquisition decision memorandum and in a report to Congress.

Agency Comments and Our Evaluation

DOD provided us with written comments on a draft of this report. The comments appear in appendix IV.

DOD partially concurred with our recommendation that the Secretary require additional controls for capturing knowledge at three key points: program launch, design readiness review for transitioning from system integration to system demonstration, and production. DOD stated that it agrees in principle with the advantages of using knowledge-based controls at key points in the acquisition process to assess risk and ensure readiness to proceed into the next phase of the acquisition process. DOD believes the current acquisition framework includes the controls necessary to achieve effective results, but it will continue to monitor the process to determine whether others are necessary to achieve the best possible outcomes.

While we believe DOD’s effort to establish a solid framework for evolutionary acquisitions is a giant step forward, our work has shown that a disciplined application of controls in the process is needed to implement the framework if better acquisition outcomes are to be achieved. DOD’s policy does not include all the necessary controls to ensure a high level of product knowledge is attained and used for making decisions to move a program forward in the product development process. Leading product developers use additional controls, as listed in our first recommendation, to achieve the knowledge necessary to reduce risk to reasonable levels at critical junctures before making additional significant investments in product development. Simply monitoring the process may not be enough for DOD to achieve the best outcomes. Therefore, we are retaining our recommendation that the Secretary require additional controls at three critical points in the acquisition process.

DOD also partially concurred with our recommendation that the Secretary document in each program’s acquisition decision memorandum and in a report to Congress the rationale for any decision to move a program to the next stage of development without meeting the knowledge-based criteria, including those described in the first recommendation. DOD agreed that it should record and be accountable for program decisions. Decision makers will continue to use the acquisition decision memorandum to document program decisions and the rationale for them. DOD did not concur with the need for a report outside the department. Because we believe strongly that knowledge-based criteria used to gauge a product’s development progress at critical junctures can lower DOD’s investment risks, we think it is important that decisions made without satisfying knowledge-based criteria be justified in a visible and transparent way to hold managers accountable for moving a program forward absent this knowledge. Therefore, we are retaining our recommendation for reporting the basis for decisions to move forward in a report to Congress.

Scope and Methodology

We reviewed DOD’s revised and past acquisition policies, DOD Directive 5000.1, DOD Instruction 5000.2, and DOD 5000.2-R, which provide management principles and mandatory policies and procedures for managing acquisitions programs. We contacted an official in the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics who is responsible for the development of the policy to better understand its content. We also reviewed information from the Defense Acquisition University that provided educational material on the policies.

We reviewed the relevant sections of the Bob Stump National Defense Authorization Act for Fiscal Year 2003 and the accompanying Senate Armed Services Committee report to identify the requirements applicable to DOD’s acquisition policy. We compared these requirements with DOD’s responses to determine whether they have been addressed.

Finally, we used information from more than 10 GAO products that examine how commercial best practices can improve outcomes for various DOD programs. During the past 6 years, we have gathered information based on discussions and visits with the following companies:

Chrysler

Ford Motor

Motorola

Hewlett-Packard

Cummins

Toyota

Honda

Boeing Commercial Airplane Group

Bombardier Aerospace

Hughes Space and Communication

Xerox

Caterpillar

General Electric Aircraft Engines

Harris Semiconductor

Texas Instruments

Varian Oncology Systems

Ethicon-Endo Surgery (division of Johnson & Johnson)

Although the approaches varied, these companies consistently applied the basic processes and standards in use. We compared this information with the acquisition framework and controls established by DOD’s policy. We concentrated on whether the policy provides a framework for a knowledge-based, evolutionary process and the controls necessary to carry out this intent.

We conducted our review from April 2003 to September 2003 in accordance with generally accepted government auditing standards.

We are sending copies of this report to the Secretary of Defense; the Secretaries of the Air Force, Army, and Navy; and the Director of the Office of Management and Budget. We will also provide copies to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov.

Please contact me at (202) 512-4841 if you have any questions concerning this report. Other key contributors to this report were Lily Chin, Chris DePerro, Matt Lea, Mike Sullivan, and Adam Vodraska.

Appendix I: Section 802, Evolutionary Acquisition

Section 802 of the Defense Authorization Act for Fiscal Year 2003 required the Secretary of Defense to submit a report to Congress explaining how the Department of Defense (DOD) plans to meet certain statutory and regulatory requirements for acquisition programs following an evolutionary approach. In April 2003, the Secretary reported how these requirements were addressed in DOD’s policy (such as in tables of statutory and regulatory information requirements contained in enclosure 3 of Instruction 5000.2). According to the report, DOD’s policy requires that each program—including an increment of an evolutionary acquisition—have a milestone B decision to approve program initiation and to permit entry into systems development and demonstration. DOD’s policy specifies the statutory and regulatory information necessary to support the decision. We examined the policy to ensure the statutes and regulations identified in section 802 were addressed. Table 3 provides a list of the statutory and regulatory requirements identified in section 802, a corresponding document and page number where the requirement appears in DOD’s policy, and a description of the requirement from the policy.

Section 802 also required DOD to report on its plans for addressing certain acquisition process issues regarding each increment of an evolutionary process. DOD reported on how it plans to establish and approve operational requirements and cost and schedule goals; meet requirements for operational and live fire testing; monitor cost and schedule performance; achieve interoperability; and consider total system performance and total ownership costs. We compared DOD’s response with section 802’s reporting requirements. As shown in table 4, DOD was responsive to the 802 requirements.

Appendix II: Section 803, Spiral Development

Section 803 of the Defense Authorization Act for Fiscal Year 2003 authorized the Secretary of Defense to conduct major defense acquisition programs as spiral development programs. However, the section placed a limitation on these programs. It stated that a research and development program for a major acquisition may not be conducted as a spiral development program unless the Secretary of Defense or authorized high-level designee gives approval. The section requires the Secretary of Defense to issue guidance for the implementation of such programs to address appropriate processes for ensuring the independent validation of exit criteria being met, the operational assessment of fieldable prototypes, and the management of these types of programs.

DOD responded to these requirements principally by incorporating into the acquisition policy the requirement for a technology development strategy. This strategy is a prerequisite for a project to enter the technology development phase of the acquisition process, or milestone A. Table 5 compares the spiral development plan requirements in the act with the technology development strategy requirements in DOD’s May 2003 acquisition policy.

As shown in the table, DOD’s policy generally responded to the requirements in the act concerning guidance for implementation of spiral development programs. While the policy includes a technology development strategy that requires a test plan to ensure the goals and exit criteria for the first technology spiral demonstration are met and an independent operational assessment for the release of each product increment to the user, it is unclear what the process is for independently validating that cost, schedule, and performance exit criteria have been. However, DOD stated that the milestone decision authority provides independent validation that exit criteria have been met as part of DOD’s milestone approval process. Section 803 also requires that a spiral development plan include “pecific cost, schedule, and performance parameters, including measurable exit criteria, for the first spiral to be conducted.” DOD’s policy substituted “parameters” for “goals” and did not use the term “measurable” in describing the required exit criteria.

Finally, section 803 requires the Secretary of Defense to submit to Congress by September 30 yearly from 2003 through 2008 a status report on each spiral development program. The report is to include information on unit costs for the projected prototypes. As of October 23, 2003, DOD’s report on the status of each program applying spiral development was still in draft and not yet submitted. DOD’s current draft report states that there are no research and development programs that have been approved as spiral development programs as of September 30, 2003. Section 803 requirements were implemented in DOD Instruction 5000.2, which was effective in May 2003. DOD anticipates that there will be approved spiral development programs to report in 2004.

Appendix III: Section 804, Technology Maturity, and Section 822, Independent Technology Readiness Assessments

Section 804 of the Defense Authorization Act for Fiscal Year 2002 required DOD to report on the maturity of technology at the initiation of major defense acquisition programs. The act directed DOD to report by March 1 of each year between 2003 and 2006 on a requirement in DOD’s policy that technology must have been demonstrated in a relevant environment (or, preferably, in an operational environment) to be considered mature enough to use for product development in systems integration. Each report is required to (1) identify any major acquisition program that entered system development and demonstration during the preceding calendar year with immature key technology that was not demonstrated in, at minimum, a relevant environment, as required by the new policy; (2) justify the incorporation of any key technology on an acquisition program that does not meet that requirement; (3) and identify any instances that the Deputy Under Secretary of Defense for Science and Technology did not concur and explain how the issue has been or will be resolved, including information on the use of independent readiness assessments. Section 822 of the Defense Authorization Act for Fiscal Year 2003 amended section 804 by adding a requirement that the Secretary of Defense identify each case in which an authoritative decision has been made within DOD not to conduct an independent technology readiness assessment for a critical technology on a major defense acquisition program and explain the reasons for the decision. On March 18, 2003, DOD submitted its first report. Table 6 shows the specific requirements for the report and DOD’s response.

Related GAO Products

Best Practices: Setting Requirements Differently Could Reduce Weapon Systems’ Total Ownership Costs. GAO-03-57. Washington, D.C.: February 11, 2003.

Best Practices: Capturing Design and Manufacturing Knowledge Early Improves Acquisition Outcomes. GAO-02-701. Washington, D.C.: July 15, 2002.

Defense Acquisitions: DOD Faces Challenges in Implementing Best Practices. GAO-02-469T. Washington, D.C.: February 27, 2002.

Best Practices: Better Matching of Needs and Resources Will Lead to Better Weapon System Outcomes. GAO-01-288. Washington, D.C.: March 8, 2001.

Best Practices: A More Constructive Test Approach Is Key to Better Weapon System Outcomes. GAO/NSIAD-00-199. Washington, D.C.: July 31, 2000.

Defense Acquisition: Employing Best Practices Can Shape Better Weapon System Decisions. GAO/T-NSIAD-00-137. Washington, D.C.: April 26, 2000.

Best Practices: DOD Training Can Do More to Help Weapon System Program Implement Best Practices. GAO/NSIAD-99-206. Washington, D.C.: August 16, 1999.

Best Practices: Better Management of Technology Development Can Improve Weapon System Outcomes. GAO/NSIAD-99-162. Washington, D.C.: July 30, 1999.

Defense Acquisitions: Best Commercial Practices Can Improve Program Outcomes. GAO/T-NSIAD-99-116. Washington, D.C.: March 17, 1999.

Defense Acquisition: Improved Program Outcomes Are Possible. GAO/T-NSIAD-98-123. Washington, D.C.: March 17, 1998.

Best Practices: DOD Can Help Suppliers Contribute More to Weapon System Programs. GAO/NSIAD-98-87. Washington, D.C.: March 17, 1998.

Best Practices: Successful Application to Weapon Acquisition Requires Changes in DOD’s Environment. GAO/NSIAD-98-56. Washington, D.C.: February 24, 1998.

Best Practices: Commercial Quality Assurance Practices Offer Improvements for DOD. GAO/NSIAD-96-162. Washington, D.C.: August 26, 1996.