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Conversation with Authors Series with Profs. Jack Gansler and Bill Lucyshyn on Eight Actions to Improve Defense Acquisition

Thursday, June 26th, 2014 - 10:12
In an era of fiscal austerity, DoD must continue to maintain operations and modernize forces in order to support national security. What acquisition challenges are facing the U.S. Department of Defense? What actions can be taken to improve defense acquisition and the Defense Industrial Base? Join host Michael Keegan as he explore these questions and more with Profs. Jack Gansler and Bill Lucyshyn, authors of the IBM Center report, Eight Actions to Improve Defense Acquisition. That's next week on The Business of Government Hour.
Radio show date: 
Mon, 06/06/2016
Intro text: 
What acquisition challenges are facing the U.S. Department of Defense? What actions can be taken to improve defense acquisition and the Defense Industrial Base? Join host Michael Keegan as he explore these questions and more with Profs. Jack Gansler and Bill Lucyshyn, authors of the IBM Center report, Eight Actions to Improve Defense Acquisition.
Complete transcript: 








Interviewer: Michael Keegan


Segment A


Michael Keegan: Welcome to a special edition of The Business of Government Hour, a conversation with authors. I'm Michael Keegan, your host and managing editor of The Business of Government Magazine. For almost 15 years, the IBM Center for The Business of Government has sought to connect research to practice, sponsoring third-party research on a broad range of public management issues facing us today. 

As the U.S. economy continues along the path to recovery, lawmakers are searching for ways to cut spending and reduce the country's 17 trillion dollar debt. DOD, which consumes the second largest portion of government revenue after entitlements will likely see significant cuts in the coming years. Indeed, cuts are already being made and at the same time DOD must continue to support operations and modernize forces in order to support national security.  

In light of these budgetary constraints and evolving security challenges, DOD will need to gain every possible efficiency while reducing the temptation to buy defense on the cheap. To be successful, DOD must incentivize and partner with the private sector and find ways to emulate the private sector's overall accomplishment, improving performance while reducing costs.  

What acquisition challenges are facing the U.S. Department of Defense? What about prior attempts at DOD acquisition reform? And what actions can be taken to improve defense acquisition and the defense industrial base? Today we will explore these questions and much more with Dr. Jack Gansler and Bill Lucyshyn from the University of Maryland's School of Public Policy and authors of the IBM Center report, Eight Actions to Improve Defense Acquisition.  

Jack, welcome to the show.  

Jack Gansler: Thank you very much.

Michael Keegan: Bill, welcome. It’s good to have you both.  

Bill Lucyshyn: Thank you. It’s good to be here.

Michael Keegan: So, Jack and Bill, there've been various efforts to improve DOD's acquisition performance. Would you highlight the key aspects of these prior attempts at DOD acquisition reform, and more particularly, what lessons have been learned from these initiatives?  

Jack Gansler: Well, one that immediately occurs to me is the Packard Commission. This was at the time when we had these over-priced toilet seats, and hammers, and coffee pots and things like that. We approached it by looking at it from an organizational structure because we didn't really have a single person in the Pentagon or in the whole Department of Defense responsible for acquisition up to that point so we created an under secretary of defense. We also didn't have any one person responsible for all the requirements for the weapon systems, for the services and so forth so we created the vice chairman of the joint chiefs.

Those two positions then allowed us to make some structural changes, which I think is the right way to go about trying to do it as contrasted to Congress' solution. It’s often good to tell some stories about how did they react to it. Congress' solution to the over-priced toilet seats was to legislate a price not to exceed $220 each for a toilet seat and to add 5,000 auditors to make sure. Adding 5,000 auditors really increased the cost significantly and the delays and so forth. It didn't solve the problem of acquisition because it actually raised the cost and slowed down the process.

Michael Keegan: Jack, you used to be in that role, right?  

Jack Gansler: I was the under secretary at one point, yes.

Michael Keegan: Bill, did you have anything to add?  

Bill Lucyshyn: Yes, if you look at these initiatives, many of them cover and try to address the same problems. If you look at the Carlucci initiatives, you came out with a list of topics that were very much similar to what you might see in better buying power initiatives. And so, one of the key problems is the cost of systems continues to grow consistently at about a 40% rate and people don't necessarily implement the good ideas.

And so, one of the key issues I think is the organizational inertia and organizational culture and how difficult it is to change that, and so all of these initiatives had excellent ideas in general but they're not always well implemented. 

Michael Keegan: That's a good point. So, your report also points out that the DOD acquisition, basically the budget itself, the funding for DOD has been cyclical historically. I want to transition to what are some of the fiscal or global threat challenges facing DOD today that will influence how they procure?  

Jack Gansler: Well, one of the most obvious things is its uncertain and therefore, the preparation for a wide variety of future potential events has to increase your costs because how do you handle everything from terrorism to cyber security to tank on tank engagements and so forth. That uncertainty represents a challenge when the budgets are declining.

That's been a traditional problem and in fact the chairman of the joint chiefs when he was there, Mike Mullen, said the number one national security problem is the debt because if we can't handle it all how do we get prepared for it. Our strategy for the last 50 years has been technological superiority. That's been our national security strategy. Well, then that means you have to continue to invest in research.

One of the first things that always goes when the budget declines, the first three things actually, are travel, training and research. So, training and research are kind of foolish things to cut. On the other hand, because especially with the uncertainty you want to be able to respond rapidly and that's what training is for, readiness. Research is so you can stay ahead technologically and we're losing our lead in that and technology has now become globalized so that everybody has technology. It's hard to maintain technological leadership unless you invest in it. 

Michael Keegan:  Bill, did you have anything?

Bill Lucyshyn: Well, when you look at the budget, you can see that the average budget over the last seven years for DOD has been 480 billion dollars and so we're still well above that level. But at the same time you have increasing O&M costs and increasing healthcare costs, increasing support costs so there's a tremendous squeeze on what's left in the budget to allow for modernization, and that's I believe a significant threat.

Jack Gansler: One of the things that I could add to that is that people believe that this 18 year cycle that we see in the defense budget is somehow a law of nature. It's not. It’s exogenously driven. Every time there's an external event like 911 or Pearl Harbor or North Korea, any of those events, that's what drives the budget. It's not just a law of nature that follows every 18 years, you build it up and it comes down, and it goes up and it comes down.  I think it’s important to recognize that this uncertainty of the strategic environment is also affecting the uncertainty in the budget environment.

Michael Keegan: Absolutely. That's a very good point. I wanted to talk about transitioning a little bit to some of the initiatives the current administration has been pursuing around DOD acquisition reform of cutting costs. And one of the series is this term called insourcing. I was hoping you gentlemen would help me understand what is meant by this term insourcing and what are the implications of pursuing such an initiative visa via DOD?

Jack Gansler: Well, first of all, the most obvious thing is that it’s political. It’s politically driven and particularly by the Government union so that when you have a situation where you used to gain enormous benefit by competing public against private, now you don't because when you decide to insource it, its sole source.

The example that's easiest to point out there is maintenance. The Congressional Budget Office did a comparison of maintenance in-house, by Government workers in other words, versus competitively done in the private sector. They said it was 90% more expensive to do it sole source in the Government than to compete it.

Now, you could allow the Government of course to compete in public private competitions but Congress has outlawed that also and so right now the law says 50% of all maintenance work shall be done sole source by the Government, and that's been driven by primarily something called the Depot Caucus. It’s the largest caucus on Capitol Hill, 135 members for the maintenance work in the depots. It’s because many of them have 20,000 voters in their district and you can't find where you can put a maintenance depot that isn't in a congressional district, so it’s mandated by Congress that they will do in-house that much more work. There's no argument at least for sole sourcing, public or private, that says you eliminate a competition now. It’s certainly not an inherently governmental function, which we can come to later.

Michael Keegan: Yeah, that's an interesting part.

Jack Gansler: But wrench turning is clearly, I read the Constitution carefully, wrench turning is not in there as an inherently governmental function.

Michael Keegan: And the other thing about this is if you're going to insource, and I don't want to jump ahead but you're going to need that competency inside the Government. If you insource something and you can't do it, you don't have the capability, it becomes largely a political act really. Bill, did you have anything to add?

Bill Lucyshyn: Well, I think there was a belief that insourcing would save money and I think that came from comparing if you look at some of the articles and the advocates, they compared salaries of the Government employees with the full burden cost of contractors. So, you had stories like a guard costs the Government say $150,000 but a Marine private only cost $20,000 a year and that was the comparison and that's a false comparison because it’s just not the full burden cost to the government for that private.

So, you had this sense that insourcing would save money and that proved to be false. Really contractors and Government personnel when you look at the full burden costs come out to be about the same costs of the Government.

Jack Gansler: It depends on the function and as you pointed out whether or not they have the skills and knowledge but the example that Bill just used of guards, the Congressional Budget Office also did a comparison of public versus private there and again the accounting, the overhead difference because you had the retirement pay and the medical long-term coverage and the facilities and all that which private sector has to include in their costs and again it was 90% more expensive to do it in-house with the guards than to have it private.

Michael Keegan: You don't hear about this enough. That's what the problem is.

Jack Gansler: Well, that's an important point. Good news is no news and therefore, you don't hear about the positive side. What you see in the paper is waste, fraud and abuse. In fact a lot of the articles treat that as one word, so the fact is fraud is different than waste. One is illegal. One is just dumb. We found in the Packard Commission, we did a public survey, most of the public by reading those articles thinks the industry is overcharging and making excessive profits. What they again aren't aware of is the fact that the profit made by the defense industry is actually less than a regulated industry. 

Michael Keegan: It’s fascinating. Yeah, I mean that's important distinctions between those terms fraud, waste and abuse and what they mean.

There was another initiative in 2010 released by the Dep Sec at DOD and it was the Better Buying Power Initiative. Could you tell us a little bit about that initiative and how has it evolved since its inception?

Jack Gansler: Well, one of the things that is essentially wrong in it was it said all services will be re-competed every three years. That's a total disincentive to a service company. Instead what it should have said is you'll be rewarded with a follow-on if you reduce the cost and improve the performance. That's an incentive to get higher performance at lower costs, and that's been dropped in the follow-on Better Buying Power in the 2.0. But I think that's the kind of thing that you just don't want to incentivize backwards. 

Michael Keegan: That's very true.

Bill Lucyshyn: Well, I think that was a change in how the initiative evolved. The first one was more prescriptive. It said always do this or always use fixed price contracts. The second one tried to be a lot more nuanced and said use the appropriate contract structure. Use the appropriate kind of competition. 

Michael Keegan: Was that because folks complained? Was it because there were lessons learned?

Bill Lucyshyn: Well, I think there was a lot of push-back from industry particularly like with the lowest priced technically acceptable.

Michael Keegan: What are the unintended consequences of focusing on, and I think Jack you got to this a little bit with the disincentives, but when you focus on reducing costs, you gentlemen point out in your report that it leads to unintended consequences. What are they?

Jack Gansler: Well, if you end up focusing on low cost and forget about high performance and high reliability, you get cheap junk and that's not what we need. What we need is high performance at low cost and to get that you need incentives.

The way you can get incentives, one of them is of course through competition. Another is by rewarding if you have a sole source supplier that they can either get A) higher profit if they do lower cost, because profit is only a small percentage. Its only 5% of the total cost. If you can figure out how to reduce the total cost, you could give them 6% profit on a smaller number. Okay, so that's one way you could do it.

Another way you could do it is by incentivizing them through follow-on business. If they do a good job, they'll get the follow-on. If they don't get higher performance at lower cost, throw it open to competition. That's essentially the threat of competition, but it works.

Michael Keegan: And compliance is an issue. If everything becomes a compliance game, it’s a disincentive, correct?

Jack Gansler: That's telling you how to do it instead of telling you what we want. It’s how to do it and writing a rule that says you're going to follow those rules. It doesn't give you any incentive to do it differently. In fact, we've been writing more and more rules, and I have one chart that actually shows the number of pages of regulation, how they keep increasing. They've actually added on that chart over 100,000 pages of regulations since about mid-80s to today.

Bill Lucyshyn: Often the appearance of saving money in the short-term will increase your costs in the long-term. So, if you don't develop dual sources up front which may cost you more, the long-term program costs will be higher and that's the dilemma we face. We focus on the short-term and the long-term costs often increase.

Jack Gansler: A good example of that is when you have to up front pay for the second source. People say, “Why do we need a second one when we already have one?” In fact, the great engine war is an example. This was the engines for the F16, F15 and the Air Force decided because they were having trouble with one engine that they would introduce a second engine. Both engines ended up getting higher performance, higher reliability and lower costs. The Air Force said they saved over four billion dollars on that.

But now we come to the F35 and the Air Force and even the President of the United States and Congress, but the President of the United States said, “Why do we need a second engine when we already have one?” So, they have not allowed a second engine to be, even in this case the second engine supplier, General Electric in that case, said that they would do the development free. They'd do it under their own overhead, but they still choose not to have a competition in that program on the engine which is the highest maintenance cost of the system.

Bill Lucyshyn: The F35 is the largest program in history. Wouldn't you want to try to do something that makes sense?

Michael Keegan: What actions can be taken to improve defense acquisition and the defense industrial base? We will explore these questions and so much more when our special edition of The Business of Government Hour, a conversation with authors returns.

Segment B

Michael Keegan: Welcome back to a special edition of The Business of Government Hour, a conversation with authors, exploring ideas for improving government effectiveness with Dr. Jack Gansler and Bill Lucyshyn from the University of Maryland's School of Public Policy and authors of the IBM Center report Eight Actions to Improve Defense Acquisition.

So, in your report Jack and Bill you reference or outline eight actions that can be taken to improve the results of acquisition programs and at the same time strengthen the DOD industrial bases or the defense industrial base to be specific. I want to explore each one of these recommended actions.

In the first one, you counsel folks to use the appropriate form of competition during all phases of acquisition. What is the problem that the remedy or the action that you're kind of diagnosing? What's the issue there? Are folks not using the right thing?

Jack Gansler: How do you create continuous incentives? It’s the incentives part that people are missing. You want to do it for the right reasons so if you're one of the suppliers you want to figure out, how do I get a higher profit with the guaranteed follow-on? The way you do it is you get higher and higher performance at lower and lower cost with higher and higher reliability. And so we want to figure out how to compete in each phase of the program.

Start with the prototypes. That's where the technology is first demonstrated. Then you want to make sure you compete that, at least have two, maybe three. It depends on how expensive it is and who has the best ideas but that's where new technology comes in right away. And then when you get into the production phase there's always continuous change taking place, thousands of changes for one reason or another on most of these big programs. You want those to be offered in a competitive environment.

So you want to change something, oh I decided I'd like to have something else added. I mean people who build houses understand this. Oh, you forgot to add windows. Oh, we want windows in the back. And so, oh the cost of doing that on a sole source basis is going to be very high. In a competitive environment, what you find is, oh we can do it for the same price as we had originally given you and that's what happens in the real world in competition. That's what market forces do and we have to make sure that occurs not only in the prototype and the production but also in the support because that's the big cost as Bill mentioned earlier, the operating and maintenance costs and so we need to figure out ways to keep that competition going.

Bill Lucyshyn: Yeah, the other challenge is that people often want to have competition for competition sake and so when you have services, you want to make sure that the company that's providing the service will make investments to improve their provision of that service. And so, then they have to have some time to make that money back and so you want the contract to be long enough so they can make the appropriate investments and if they continually improve on the provision of that service, you'd like to reward them with a follow-on contract and not necessarily compete it.

If you mandate competition every two or three years, the inclination is going to be not to invest any money but to provide the service at the lowest cost profitable and increase your profits knowing there's an excellent chance that you may lose the contract in the next go around.

Michael Keegan: So, I want to actually understand, you kind of touched on the different types of competition Jack when you mentioned it and Bill you just mentioned the idea of competition for its own sake is not necessarily fruitful. So, what are the key steps in implementing the recommended action you folks outline in your report?

Jack Gansler: Well, one thing that is hard to do perhaps but necessary and that is past performance should matter whether you're a qualified source because if you have a good historic record, that will help a lot in simplifying the process.

The other thing you want to do is not drive the cost very high for the competition. So if you have a thousand people bidding on it, that may be fair but it’s also much more expensive and in fact people don't try very hard when they have a thousand people bidding against them because the probability you'll win is small, and so you want to shape the competition and that's why the prototype competition is usually just two or three that are funded.

In all cases, they will have gone through a qualification first or they qualified. Do they know what they're doing? Do they have a decent history? And then let them demonstrate. The demonstration is a key piece of this competition in that case.

Bill Lucyshyn: Well, I think you want to monitor the competition at the sub-tier levels also because often at the system level several competitors may be using the same provider for some subsystem and if you don't have competition at that level, for example the engine, you wind up with one source effectively for a high cost item, so you want to watch that competition at the sub-tier level also.

Jack Gansler: In fact, its important people don't recognize a typical airplane for example, 85% of the cost are in the subsystems. The electronics, the radar, the engines, all of the things that go into it. Just final assembly and test is maybe 20% of the cost and you don't need two lines to do that because it’s not going to really be that cost effective. But as Bill points out, if you had competition on the engines, competition on the radars, competition on the Avionics systems etc. that's where the big cost savings can come about because that's 85% of the cost.

Michael Keegan: And I know this is off book if you will but when you do stuff like that, when you compete the subsystems, do you think there's a need for a lead systems integrator in this kind of environment or is this something you touch on at all?

Jack Gansler: Yes, because you want someone who knows what they're doing. Again, one of the things that's been proposed recently by the Air Force is that the government be the lead systems integrator for ICBNs. Why wouldn't you use the two or three companies that have done it before? Again, you need a leads systems integrator but you also need to encourage them and you want to have some visibility in the Government side into the fact that they are or are not competing the lower tiers. Particularly the critical elements of the lower tiers.

Now, when you can use commodities, that's commercial stuff, the market is taking care of that in a certain sense because the market is competitive. But you need to know something about the quality of the stuff they're giving you. You keep testing it and it has to be reliable as well as lower costs and high performance.

Michael Keegan: Well, the other action you gentlemen outline in your report is to focus on the proper use of Alphabet City but its indefinite delivery, indefinite quantity, IDIQ contracts which I think has become its own word now. What are IDIQs and perhaps you could highlight some of the examples in action and would you outline the benefits to both government and contractors for using this type of contract?

Jack Gansler: Well, the concept behind it is indefinite delivery, indefinite quantity. You don't know how many you're going to buy or when you're going to need them, but on the other hand the concept behind it is also that you're going to have a couple of qualified people that can bid competitively. Now somehow to be fair, and there's always this question of fairness versus effective and efficient, but to be fair they say well let's have anybody who wants to be an accepted winner to bid on these. One of them I can think of is the Navy program has 2,200 winners so if every time they put out a request, and the Government is now even forcing people to say when you have an IDIQ that all of the people who are the winners on the first round, the qualification round, must therefore bid on each of the items that come out for bid, and that's very expensive in the proposal costs.

Michael Keegan: Why would I want to do that overhead wise?

Jack Gansler: See, that's the point. The reason you want to do it is to avoid protest and this is a major issue. If Joe's Garage says I want to bid on this. Well Joe, I'm sorry you're not qualified. Then Joe protests. It’s not fair and so they avoid the protest round which often delays programs significantly and many companies today are even using protests as a strategy.

Michael Keegan: It’s fascinating how many more you see nowadays.

Jack Gansler: Well, if you're the incumbent then by protesting you delay the shift to somebody else for six months or nine months or longer during the legal process.

Michael Keegan: Bill, do you have anything to add?

Bill Lucyshyn: Yeah, well I think one of the key benefits to the Government is to reduce administrative burden, so you get all these contractors to agree to terms and conditions and then you can put out a task order and quickly get the work accomplished or the product purchased. So, that's a key benefit to the Government so it’s a noble goal but often if they're misused, they wind up with a lot of unintended consequences.

Michael Keegan: Can you expand on that? What are some of the abuses of the IDIQs? I think Jack alluded to a couple.

Bill Lucyshyn: Well, you can bundle a lot of tasks into these big omnibus contracts and then try to get those awarded. You can have too many awardees for the amount of work that needs to be done so a lot of people wind up with very little or no work under these contracts. You can sometimes discourage people from submitting unsolicited proposals because you feel if they solicit it then the sponsor feels like they have to compete it out and they'll put it out for award under one of these contracts, and so there's a lot of things that happen with these contracts that wind up causing issues for both the providers and for the Government.

 Michael Keegan: So, what are some of the steps that you folks offer in your report for implementing the proper use of IDIQs? What are some recommendations that have?

Jack Gansler: Well, more limited use of it for one thing, as Bill pointed out. When you have thousands of people bidding, it just doesn't make sense so you do it by scope and prior performance of those companies that have experience and know what they're doing, and you don't drive it up to a thousand people putting in their proposals and so chance of winning are small. Again, all these things are done for incentive reasons. if you're bidding against two or three companies, your chance are much better especially if you have a good record and you can make an attractive bid so you're more attended to bid on them rather than abusing it. That's the way I think I would do it. Bill.

Bill Lucyshyn: Well, I think the key is to scale the contract to the work that you expect and so if you only expect x amount of dollars to be awarded you would scale it so you don't have so many awards that most people won't get any awards or won't get any work or get very little work under the contract. I think that's a complaint we hear from many companies and contractors. They put all this work together, put these proposals together, submit them, get awarded and then they don't get any awards under the contract.

Michael Keegan: We'll identify more actions to improve defense acquisition when this special edition of The Business of Government Hour, a conversation with authors returns.

Segment C

Michael Keegan: Welcome back to a special edition of The Business of Government Hour, a conversation with authors, exploring ideas for improving government effectiveness with Dr. Jack Gansler and Bill Lucyshyn from the University of Maryland's School of Public Policy and authors of the IBM Center report Eight Actions to Improve Defense Acquisition.

So Jack and Bill, in your report you outline the other area you focus in on is the use of best value trade-off source selection strategies for complex or high-knowledge content kind of work. And what I mean by that is the growing use of the lowest price technically acceptable, LPTA, as a source selection strategy. What's the problem with that and why is this happening? Why is this increasing around complex services?

Jack Gansler: Buying something on the basis of low priced, technically acceptable, LPTA, you wouldn't buy your car that way. You wouldn't get your heart surgeon that way. You wouldn't do it in the real world. You make your judgments on the basis of best value, the combination of performance and cost. But if it’s just a plain simple commodity, you might just say, “Well, that ketchup is as good as another ketchup so I'll buy that one that's lower cost.”

Michael Keegan: So why do you see a propensity of contract officers using LPTA?

Jack Gansler: I think there's several reasons. One, it makes the source selection a little easier if you qualify the bid as being technically acceptable you just have to look at the price. That's one reason. The second reason, it makes it easier to sort of immunize yourself against the protest. So, when you have a best value trade-off source selection, it’s a lot easier to find the problem in the source selection criteria or how it was implemented and so there's more likely to be a protest. So, when you use LPTA I think you can sort of immunize yourself against the protest.

And then finally, the intent is to save money and so what contractors often talk about is a race to the bottom. So, you have this constantly just cutting costs and cutting costs and in the end cutting the quality of the service that's provided to be able to win the award. And so, those are the kinds of things that create a problem for the government when they overuse LPTA and those are the reasons they try to use it.

Michael Keegan: So, what can they do to use it more properly? What are some of the suggestions you folks have?

Jack Gansler: Well, limit where you use it. Limit it to the commodities. Complex weapon systems or complex services, the value is important. But on the other hand if it’s the same thing that five different people are offering you as a commodity, then you can pick the lower cost and you get as Bill points out, you get rewarded in a sense because today affordability is one of the driving considerations and therefore the lower budget we're going to try and pay attention to the cost but we don't want to get a lot of junk. And that's what you are driven to with the low priced technically acceptable.

Bill Lucyshyn: I think one of the other things you can do Michael is to insure that you look at past performance which isn't always done with LPTA type source selections. And so, when you look at past performance you could at least eliminate the poor performers or the people that haven't performed well on previous efforts.

Michael Keegan: So, we talked about IDIQs. We talked about LPTA. I'd like to switch a little bit over to an effort to control growth. Periodically DOD embraces fixed priced contracts. Could you tell us a little bit more why are they often problematic and when are they best used, fixed prices?

Jack Gansler: Well the first thing is, if it’s a technological advancement, there's a high risk to using fixed price in the sense that you don't know if it'll work. It’s a simple idea there. But you also want to create some incentives again. Now a fixed price in a competition, how do you win it unless you bid low and then what they count on is so called buying in by bidding low and then counting on the thousands of changes that come along.

Bill Lucyshyn: Well, cost plus contracts reduce the transaction cost for making a lot of these changes when you have a lot of uncertainty in the program. We have a lot of history where the DOD has tried to use fixed price contracts for development and the programs have been generally unmitigated disasters. You had the C5, which almost drove Lockheed to bankruptcy. The F1-11 and the most recent case was the A12 which still hasn't been settled in the courts. Yeah, it’s still being litigated and so all of this is feeling that a fixed price contracts will constrain the costs. In the end, it really doesn't and it often places a lot of risk on the contracts, unacceptable risk and can really wind up costing the government a lot more than using the more appropriate cost plus contracts.

Michael Keegan: So, what ways can the cost free reimbursement contracts be used? What are some of the actions you prescribe?

Jack Gansler: The development programs are appropriate places for them, I think, but with still monitoring. You give a bid back on a cost based contract, you need the Government either themselves or with one of their advisory groups, maybe private sector telling you that's overpricing. Or if you could do it in a competitive environment, that's even better because you have two people on a cost base contact. They'll say, “Oh, it doesn't really add to my costs”, one of them will and that one will win.

Bill Lucyshyn: Well, the cost plus contracts also place an additional burden on the Government because there's potentially a tendency to go play to system or put in sort of unnecessary requirements because people feel like it can be covered in the contract so it really takes a lot more effort on the part of the Government to monitor those contracts to make sure the requirements don't change any more than is absolutely required so the cost doesn't grow obsessively. So, I think it does take a little bit of extra work but I think in the end it works out better.

Jack Gansler: There's almost a perverse incentive in the fixed price contract because I know companies might tend to is say, “I've got a better idea. Wouldn't you like to have this?” And they say, “Of course we'd like to have it.” Well, that means you're going to double the cost. In a cost based contract you may want to have a higher incentive to try to simply do a good job and get reimbursed for the costs. But in the fixed price contract, you want to figure out some way to create a change so that you can get paid more for that, especially if you're the only one producing it.

Michael Keegan: In certain ways this is sort of like you really need a Yugo but you're buying a Cadillac. I mean, is that a good metaphor in a sense?

Jack Gansler: I use that example frequently when people ask me about the low priced technically acceptable. Do you drive a Yugo? That's the point. We don't select on that basis but on the other hand if we can't afford a Cadillac, we might buy something in-between.

Bill Lucyshyn: I think the real key is on using the appropriate contract structure for the phase of the program you're in so eventually you want to move to a firm fixed price contract in the production phase of the program, but at least initially, often the cost plus contract is more appropriate. So, you don't want to prescribe which kinds of contracts the contracting officer should use. They should have all the tools they need for the breadth of the program.

Michael Keegan: And it really depends on the phase, right. You folks in your report mention or introduce a concept called dual use industrial operations. I'd like for you to maybe give our listeners some background on this concept.

Jack Gansler: Well, the idea would be the same factory does both commercial and military work, and not just in the research phase but in the production phase, and even in the maintenance phase because you're very familiar with the work and you can figure out in a market environment with the commercial side you learn how to do things more efficiently and effectively. And so, you want to combine the two partly for economies of scale. If you can put the two together in the same place. I'll give you an example.

Boeing was building commercial transports and military transports in the same plant in Wichita. They were basically forced by Government regulations and oversight to separate these two. As a result of separating and building the commercial plant in California and building the military ones in Wichita, both prices went up. The commercial went up because they lost economies of scale, but the forcing was done because of Government rules that discourage dual use, that discourage putting the two things together. It even discourages commercial firms from supplying some of the lower tier stuff that Bill was talking about to the primes.

For example, if you have a dual use plant, you have to use Government cost accounting for the commercial stuff and that's expensive. It’s a totally different form than the normal commercial cost accounting system. Also, if you have commercial stuff, it’s a discouragement to a commercial supplier to work on a defense program. I'll give you a simple example again because the stories I think make it a lot easier to understand it. Boeing had to pay 15 million dollars to export a 767. That's a commercial transport. Why was anyone worried about that? Because in the electronics, they had a single chip that was also in the Maverick missile and the Maverick missile subsystems were under export control.

By Boeing shipping a commercial transport, that chip was a commercial chip, and by shipping this big airplane they had to pay 15 million dollars to allow them to export it. It’s foolish but this discourages commercial firms from doing defense work and yet often these commercial firms are more advanced than the defense work.

Something people don't know about is that today when you compare the investment in research from private sector industry, commercial industry, against the Government's investment, the commercial is twice the Government's investment. And so why wouldn't we want to take full advantage of this? In order to maintain our technological superiority, we should use commercial stuff more.

The Government just wants to take your drawings and put them out for competition. That's really what they try to do.

Michael Keegan: So, how can DOD work to open competition to nontraditional commercial firms? You alluded to it but can you expand on it a little bit?

Jack Gansler: There is in the Federal Acquisition Regulations, in the FAR, there's an attempt, FAR part 12 is supposed to be for buying commercial stuff but a lot of the contracting people don't understand that. The intent was to really get the ability to buy commercial things and instead they still try to apply all these rules to the commercial stuff and some of the cost accounting, the export controls, things of that sort. The commercial firms just say, “No thank you”, because they have to be competitive in the commercial world.

Bill Lucyshyn: Well if they do participate, they'll set up a separate operation to deal specifically with the Government so they can maintain separate books, separate procedures and not mix the two operations and in the end we lose because we don't get the economies of scale. We don't get necessarily the cross-flow of technologies and information in a way we'd like.

Jack Gansler: There have been some separate studies done about what the cost of all of that regulation is. A long time ago Coopers and Lybrand did a study. It was 18% at that time. More expensive if you have to build a commercial item with Government regulations. Now the Air Force has given some speeches recently saying that now up to 25% and there's some independent studies done by Government agencies that said it’s up to 30% for the same item built to Government regulations in a Government regulated facility versus in the commercial operation, and so that's what Bill was talking about. Why do we want to do that? Well because it’s the law.

Michael Keegan: What does the future hold with the federal acquisition workforce? We'll find out when this special edition of The Business of Government Hour, a conversation with authors returns.

Segment D

Michael Keegan: Welcome back to a special edition of The Business of Government Hour, a conversation with authors, exploring ideas for improving government effectiveness with Dr. Jack Gansler and Bill Lucyshyn from the University of Maryland's School of Public Policy and authors of the IBM Center report Eight Actions to Improve Defense Acquisition.

Michael Keegan: Is there an imbalance in today's world between outsourcing and insourcing within the Government?

Jack Gansler: I think in some areas there is, like the Congress passing laws about prohibiting public private competitions when the data show that with over a thousand of them have taken place that in fact the average savings is over 38%. The interesting thing about it is when the Government wins almost 50% of them, they dramatically lower their costs in order to be competitive as contrasted to when they were doing it sole source. They can do it with fewer people and a better job if the competition is based on performance and cost is what you should do, but that's been outlawed in spite of the fact this was done by the Congressional Budget Office.

Bill Lucyshyn: Well, I think there are certain jobs that should be insourced. There was a period of time where a lot of acquisition functions, the acquisition workforce was so overwhelmed that they were contracting out some jobs that probably were legitimately inherently governmental, and so if you look at it from that narrow perspective, bringing those functions back into the Government is probably a good thing.

There are examples, the IRS had competitions where they competed some functions and the Government won and reduced the cost by 75% even though the Government won. So the question is why wouldn't the Government be able to do that without the competition? Well, there's no incentive. There's no incentive to cut your organization down. You don't get promoted by shrinking your organization.

Jack Gansler: In fact, the interesting thing that we found in looking at those cases where the Government won by lowering its cost significantly is Bill's example. What happened are those people found other jobs in the government or they went to work for the industry. Only 5% of them were rift, were actually laid off and that was surprising. When they were bidding up to 75%, to use his example, of reduced costs and yet still they found other jobs for them.

Michael Keegan: But it’s creating a competition that's not here now. So, switching gears a little bit, I want to talk about the aspect of your report that counsels the DOD or defense industry about the benefits of globalization. There are some skeptics that worry about the Trojan horse, the back door built into foreign supplied systems particularly in the case of software but you point out in your report gentlemen that there are huge benefits to globalization that could be provided to DOD acquisition. What are those benefits, A, and B, how do you mitigate the negatives that some folks have around them?

Bill Lucyshyn: Well, the one thing people are worried about is bad parts or Trojan Horses hidden in them and things like that. You can test but you can also look at reliable sources offshore from allies that you trust. And the main difference here is that in many areas, the foreign supplier is well ahead of the DOD in its quality. The reality is that every single U.S. weapon system, this was a DOD report, has foreign parts in it. The reason is because they're better, not because they're cheaper.

If we want to be state of the art technological superiority, we have to take the best stuff that's available and there are different places that you can find that. Part of that is because they're actually investing more offshore. If you take the OECD country's investment and compare those to the total U.S. private and public and you can see that they are spending much more than we are in total, and so why not take advantage of that.

For example, I'll give you another story, the number one killer and maimer of American soldiers and Marines is roadside bombs. So, when we said we're going to have to do something about that, we want to improve the armor on those vehicles that are carrying our soldiers, you look around the world and who has the most unfriendly neighbors? Israel. So, we now get the Israeli armor but it’s built in Vermont. And so we get the political as well as the security benefits of using foreign product. The design is a foreign product. The same thing when we're looking at that for these vehicles. It turns out that the best shock absorbers are coming from Germany and the best tires for protection were coming from France. I can give you lots of other examples of places where other countries are ahead of us in technology, so why not take advantage of that as long as they're trusted allies.

Michael Keegan: Well, I want to switch gears to combating the loss of acquisition knowledge as you watch, as I understand it, the acquisition workforce in the Federal Government specific to DOD will retire in the next couple of decades if not sooner. You point out by 2021 approximately 50% of the acquisition workforce will be eligible for retirement. How can we deal with this brain drain?

Jack Gansler: Right now 55% of the defense acquisition workforce has less than five years of experience. That's not an experienced workforce. It’s not being valued enough. I think we need to value it and acknowledge it. And by the way, that's not just the shoppers, the buyers if you will. Acquisition workforce includes people doing maintenance, it includes across the board work, everything to do with program management for example, across the board government acquisition workforce.

When I was Under Secretary, I was told I had 300,000 people working for me, all my close friends of course. I didn't get to know all of them but the reality is now that's been dramatically cut as the budget was going up after 911 but the workforce was not going up with it and its been cut even more as a result of a combination of aging and not replacement and the undervaluing of it.

I think what we need to recognize is the importance of the acquisition workforce. In order to get high quality at low cost you need smart people doing this. Trained, well-experienced people.

Michael Keegan: I think it’s interesting when you just focus on that comment about shoppers. That's the first phase. I mean we're not talking about the core. The people that are managing the program itself. I mean that's the most significant phase. I would argue that's one that nobody really talks about once you're awarded. They kind of go in that direction but you need a lot of skill set for that. Bill, do you have anything to add?

Bill Lucyshyn: Yeah, I think one of the key things that the Government needs to do is to sort of increase the number of people that are allowed to do rotational assignments and increase the cross-flow between the industry and the private sector. A lot of these problems we allude to are based on the fact that Government people don't understand how industry works, what incentivizes the businesses to operate, and conversely the private sector companies don't understand the constraints the government faces. So, if you can increase that cross-flow and get experienced people from the private sector to operate in the Government for a while and then maybe go back, I think that would benefit both the contractors and the Government to acquisition workforce.

Now, we have some programs that do that but they're generally fairly small and limited. There are often a lot of restrictions that inhibit that kind of cross-flow so we need to look at those and try to find ways to increase that and bring in more senior people from the private sector to help the Government do their programs more effectively and conversely allow the contractors to sort of better be able to sell to the Government.

Michael Keegan: So gentlemen, I want to talk about the future. If you could, could you tell us a little bit about what you think are your prescriptions for the future in this area? Dr. Gansler, would you try?

Jack Gansler: I think this idea the press are finding all the examples that they can use of waste, fraud and abuse as contrasted to what's good practices. What are the incentives for industry and how do you incentivize them, and even incentives for the Government, promote people who do a good job and reward them. What I would recommend as a real focus on lessons learned.

Bill Lucyshyn: I think one of the things that the Government can do is to increase its tolerance of failure. We're asking people to take a lot of risks. At the same time, if they fail we punish them so they're less inclined to take those risks. They want to comply with all the regulations and they are less inclined necessarily to put together an aggressive program that's going to be successful.

So, I think we have to look at how we train people, make sure they don't focus just on complying with all the regulations and rules but actively think about making the program successful, are willing to take some risks to do that and occasionally when they fail we have to be able to tolerate that and say that was just the cost of doing business. Maybe we can retrain them or do something else with them and not necessarily end their careers or punish them.

Jack Gansler: New geopolitical situations are coming along. New strategic situations are coming along and the rules may not cover those new things and so just treating it as only a compliance question doesn't match what's needed as the world is changing.

Michael Keegan: Well, this has been a wonderful conversation on a very important topic and I want to thank you for joining me today, but more importantly I want to thank you for the report you created for us at the IBM Center. It’s a wonderful report and folks can download it at Thanks.

Jack Gansler: Thanks.

Bill Lucyshyn: Thank you, Michael.

Michael Keegan: This has been a special edition of The Business of Government Hour, a conversation with authors, exploring ideas for improving government effectiveness with Dr. Jack Gansler and Bill Luchshyn from the University of Maryland's School of Public Policy and authors of the IBM Center report Eight Actions to Improve Defense Acquisition. You may download or order a free copy of this or any IBM Center report at

Be sure to join us next week for another informative, insightful and in-depth conversation on improving government effectiveness. For The Business of Government Hour, I'm Michael Keegan. Thanks for joining us.


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