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Effective (“Smart”) and Ineffective (“Dumb”) Competition in Defense Acquisition

By The Honorable Jacques S. Gansler, PhD

With the defense budget declining, affordability for goods and services becomes critical; and the cry for more competition is heard from both the Pentagon and Capitol Hill. But “competition for its own sake” can be highly counterproductive. There are good forms (as, for example, “the great engine war” clearly demonstrated; as have numerous cases of “competitive prototyping;” and as has “public/private competition” on non-inherently governmental work). But, particularly lately, these have been numerous examples of ineffective (counterproductive) uses of competition (often creating disincentives for achieving the objectives of higher performance at lower costs). For example: 1) awarding contracts for hi-tech goods or services on the basis of “lowest price/technically acceptable;” 2) creating barriers against the use of A-76 public/private competitions (even though the data overwhelmingly show savings of over 30 percent, with improved performance—no matter who wins); 3) putting unsolicited proposals (with new, creative ideas) up for open competition; 4) automatic recompleting for services every three years (vs. rewarding the current firm with a follow-on if costs are continuously reduced while performance continuously improves—and competing, if not); 5) demand for proprietary data packages, so they can be automatically released for open competition; 6) not utilizing “competitive dual-sourcing” (to save “this year’s money,” even when the historic data overwhelmingly favor dramatic savings, with improved performance—such as was not done for the second engine on the F-35). This paper (and the supporting research) gathers the relevant data and identifies specific current barriers and adverse policies and practices to achieving “smart competition.”

The Message

Competition, for its own sake, or of the wrong form, is expensive and ineffective—so arbitrarily mandating it is wrong; but “smart competition” (where properly applied—including even the “credible threat” of applying it) will have huge payoffs (from the incentives created) in higher quality, better performance, and reduced costs—so it must be fully utilized.


The Current Environment

There is little question that, without some unexpected, major event (e.g., another Pearl Harbor or a September 11, 2001, attack) the defense budget will decline in the coming years—as the U.S. economic situation continues to deteriorate. Yet the world is facing significant security issues:  violent religious extremism; social unrest (e.g. “Arab Spring”); terrorism; nuclear weapons and ballistic missile proliferation; biochemical and cyber “warfare”; etc.  So, the challenge for the U.S. will be to cover this broad spectrum of security concerns within declining defense budgets (i.e. to figure out how to “get more for less”).

The Keys to “Doing More for Less” are Innovation and Incentives

  • “Innovation” is a driver of significant change, for gains in effectiveness and/or efficiency—could be in technology, or in process, but (most important) in thinking (i.e. a “culture change”)
  • For a “culture change” two things are required:
    • Widespread recognition of the need for change
    • Leadership—with a vision, a strategy, and a set of actions
  • For DoD acquisition, the recognition of the need for change is coming from: the declining budget; and the realization that superior performance at lower cost is being demonstrated every day in the competitive commercial world.
  • Incentives are required to get Government and Industry to Utilize New Technology to Simultaneously Improve Performance and Lower Costs

The solution is to recognize:

  • It’s a design and “culture” Challenge (not an accounting issue)
  • Must use technology (in both the product area and the process area) to get higher performance at lower costs
  • This is a significant R&D challenge (often requiring “disruptive” technology)
  • The most effective, and proven technique is continuous competition (for achieving higher and higher performance at lower and lower costs)

Realities existing today (that must be accepted):

  • Holding an initial competition for an award is not sufficient; even if it is a fixed-priced contract
  • Program changes are inevitable:  With time, technology will change; the mission will change; the budget may change; etc. In fact, a typical program has many changes. So, the initial bid is likely to be illusory. And, with a subsequent sole-source award, the prime has a monopoly on all change orders; and an incentive to create them (as illustrated in the actual photo below).

Various Forms of Competition for both Goods and Services

For Differentiated Goods or Services

  • For an R&D award
  • Between Prototypes
  • During Production
  • During Support

For Undifferentiated Goods or Services

  • “Low Price, Technically Acceptable”
  • Build to Print

But even in the “undifferentiated” cases, quality still matters (“cheap” is unacceptable—both for mission achievement and life-cycle cost reductions)

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It is Important to Recognize that the Defense Market is “Different”

  • One large buyer (monopsony); usually, differentiated products being offered; a few large, high-tech awards for goods or services (a “lumpy” business); large, expensive proposals required; and “barriers to entry” are high.
  • In this unique market, a few, highly-qualified firms bidding against each other creates far more effective competition than large numbers of bidders1  (i.e. the “second best” solution is “limited competition” among highly qualified firms—which was the original intent of the IDIQ contracts)

The contrast here is to a “commodity market” (undifferentiated, simple goods or services; or to a “rug auction,” where “the more bidders the better competition”—the “first best” solution

Some Observations

  • In many cases, the subsystems (subcontracts) make up a very large share of the costs (e.g. on A/C and Missiles, approximately 70 to 80%); and these are often the high risk areas – – so competition here is critical.
  • Unfortunately, Legislative and regulatory barriers exist, and are growing to limit DoD access to commercial and international competitive suppliers (thus greatly reducing competition).
  • “Past Performance” is critical for evaluating risk (of quality, delivery, and performance); but the DoD data tracking system here is poor.

Many in the government’s acquisition workforce do not understand industry operations and incentives—and this problem has gotten worse with the growing acquisition workforce problems (e.g. fewer experienced personnel)

As a result, current trends have been clearly demonstrating misuse of effective competition (see below).

Some Empirical Results of Effective Use of Competition2

Joint Direct Attack Munitions (JDAM) Program [see below for competition strategy]

  • The JDAM System is a tail kit for converting gravity guided munitions to GPS or computer-guided munitions (i.e. converting “dumb” bombs to “smart” bombs)
  • A key “pilot program” in DoD’s push for using commercial competition acquisition strategies. (The program was granted expedited waiver status 25 in times.)
  • Program cost figures:
    • Historical system price estimate: $68,000 (i.e. the “ICA”)
    • Price requirement:  $ 40,000
    • Realized system price:  $18,000

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Joint Direct Attack Munitions (JDAM) Program

  • Cost requirement derived from a cost goal (to allow the purchase of adequate quantities). At the insistence of the Air Force Chief of Staff, it was made a “firm requirement”
  • The following strategies were key to the program’s success:
    • Government/Contractor Integrated Product Teams (IPTs)
    • Performance-based, head-to-head, continuing competition
    • Rolling down-select, during competition
    • Allowing the contractor control over the technical data package
    • Requiring a contractor-supplied warranty
    • Minimal paperwork and limited, streamlined oversight
    • Negotiations based on supplier price, not cost
    • Primary award criteria based on “past performance” and “best value”
    • Allowing trade-offs of price and  performance
    • Use of commercial products
    • Firm, fixed price production contracts to both suppliers

Competition in Production

  • Learning curve theory predicts that as a firm becomes more experienced, and increases volume, it becomes more efficient.
  • However, most learning curve data has been gathered in a competitive environment (based largely on commercial data).
  • Empirically, competitive pressure increases the steepness of the learning curve; but, in the absence of competition, learning curves are, at best, relatively flat.
  • Allocation (to a split buy) or teaming does not provide competitive pressure.

Competition produces counterintuitive result3 —second source demonstrates steeper learning curve than initial producer (as shown in following tables) then first source becomes competitive, and both have steeper learning curves (See next figure).

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CAIG called these “Mistakes”; and Defined them as:

  • Production quantity assumptions and estimation changes
  • Engineering, test, and development changes
  • ILS changes, and spares and support changes not attributable to post-milestone II discretionary decisions
  • Schedule slips attributable to technical problems
  • Other changes not attributable to discretionary changes

Some “Example Cases” of Continuing Competition:

  • “Great Engine War”
  • Tomahawk missile
  • Commercial Aircraft

The Great Engine War—Realized Benefits (pitted P&W against G.E to supply different engines for F-15s and F-16s)

  • Improved Reliability
    • Shop visit rate per 1000 engine flight hours is half the pre-competition engines
    • Scheduled depot return increased from 900 cycle to 4000 cycles
  • Improved contractor responsiveness, as well as investments to improve efficiency, upgrade manufacturing capability, and other capital investments and engineering investments to reduce costs, improve quality, and improve performance
  • Lower-cost warranties–significant savings gained from the original, sole-source P&W warranty cost
  • Dual lower-tier suppliers utilized; and, hence, operational flexibility and an enlarged industrial base
  • Considerable protection from production disruption
  • Estimated $2–3 billion in net savings (then-year dollars) over the 20 year lifecycle of the aircraft
  • Both new engines proved to be more capable, durable, and supportable, and at lower costs than the current engine

Competition During Production– GAO Analysis :  JSF Engines6

  • “The cost analysis we [the GAO] performed suggests that a savings of 10.3 to 12.3 percent would recoup that investment, and actual experience from past engine competitions suggests that it is reasonable to assume that competition on the JSF engine program could yield savings of at least that much.”
  • “In addition, DoD-commissioned reports and other officials have said that nonfinancial benefits in terms of better engine performance and reliability, improved industrial base stability, and more responsive contractors are more likely outcomes under a competitive environment than under a sole-source strategy.”
  • “DoD experience with other aircraft engine programs, including the F-16 fighter in the 1980s, has shown competitive pressures can generate financial benefits of up to 20 percent during the life cycle of an engine program and/or improved quality and other benefits.”

The GAO concluded that with a 70/30 award, and a 20 percent savings, the competitive engine program would have produced at least $2.6 billion in net savings.

The Tomahawk Experience — Realized Benefits7

G.D. would not assume responsibility for missile reliability, so Gov. introduced second a source

  • System Reliability improved from approx. 80 to 97 percent
  • This increase attributed to P.M. initiated corrective action as well as competitive pressure
  • P.M, GD, and PA&E studies all concluded that dual-sourcing saved the government money, while improving performance

Summary of Commercial Aircraft Produced in a Competitive Environment8

  • Of these programs, all showed a decrease in actual cost incurred, between 2 and 27 percent
  • Overall simple average was 16 percent decrease over program life.

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DoD Aircraft Programs Cost Growth Factors with no Production Competition9

  • Of these programs most showed an increase between 25 and 104 percent (of actual cast incurred no program baseline).
  • Two programs showed a very modest decrease
  • Overall simple average was a 46 percent increase
  • Non-Competitive Programs:
    • Increase development times
    • Decrease production efficiency
    • Remove learning curve incentive
    • Discourage innovation
    • Damage industrial base

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Production Efficiency

  • The theoretical argument usually given against competitive dual- sourcing is that the two firms cannot achieve “economically efficient production rates.”
  • The counter to this is a “shifting of the total production curve” to lower efficient rates.
  • Lockheed-Martin reduced their Trident D5 missile production rate from 60/year to 12/year and lowered the unit cost by changing their production curve.

loc-1-figure-3Yet, in two recent cases (the second engine for the F-35, and the Tanker acquisition of a commercial aircraft) the Air Force has chosen a sole-source (down-select) vs. dual-source (continuous competition)—thus giving up higher performance at net lower cost, for sole-source “promises.”

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Competitive Sourcing/(public/private  competition via A-76)

  • Allows for public sector to compete with private sector for work
  • Work is not inherently governmental
  • Work can be performed  by the private sector
  • Benefits:
    • Government very often wins (but benefits realized no matter who wins)
    • Better performance at lower cost
    • Forcing factor (incentive) for “learning” with the existing process
    • Creates competition in cases  not normally exposed to market forces

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Weighted Averages

  • Expected Savings (as bid by winner – government or private)    35%
  • Observed Savings (realized results, including scope & quantity changes)    24%
  • Effective Savings (realized results on same scope & quantity)    34%

Competition for Services—NASA Desktop Services

  • NASA’s approach had been to use NASA employees to maintain desktop assets
  • No way to track costs, no standardization, not tracking service quality
  • NASA’s Outsourcing Desktop Initiative (ODIN) transferred the responsibility for providing and managing the vast majority of NASA’s desktop, server, and intra-Center communication assets to the private sector.
  • ODIN Goals
    • Cut desktop computing costs
    • Increase service quality
    • Achieve interoperability and standardization
    • Focus NASA IT employees on core mission
  • Performance (by winning contractor)
    • Exceeded required service levels
      • Service Delivery    98%
      • Availability    98%
      • Customer Satisfaction – ranges from    90-95%
    • Hardware/software were standardized at each center
    • Interoperability and security were much improved
  • Cost— from no adequate way to allocate IT costs to firm fixed price

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Public vs. Private Competition for Services:

  • Performance Improvements 1st – Then Cost Savings

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Conclusions

  • The available evidence supports that effective competition will:
    • Encourage innovation and higher quality
    • Reduce production cost significantly
    • Reduce life cycle costs significantly
    • Reduce cost growth throughout the program
    • Strengthen the industrial base
    • Improve the quality of services

Competition is the stated law, and is common in most speeches; it should be the common practice (but applied effectively). Unfortunately, current trends do not follow this conclusion!

Current Trends are in the Wrong Direction

  • Greatly increased use of “Low Price, Technically Acceptable (LPTA)” awards (even on “mission critical” goods and higher-knowledge content services —is actually more expensive and higher risk, in the long run (vs. “best value” buying), especially when used for acquiring professional services
  • Large numbers of “winners” on IDIQ contracts, to take part in bidding on tasks (vs. 2 or 3 firms) is very expensive and ineffective; as is requiring all winners to bid on every task.
  • Requirement (in “Better Buying Power”) to “compete all services after three years” – – regardless of performance and cost trends—is a big disincentive to industry (vs. a follow-on reward for higher performance and lower costs)
  • And, where big savings are possible (like 2nd engine on F-35) government refuses to have competition [in spite of “lessons learned” on “the Great Engine War”]
  • Recent proposals for government to be the integrator, and split out subsystems for them to compete and manage, is a very high risk (vs. assuring the prime competes the critical subsystems)
  • Taking unsolicited proposals and putting them up for competition – greatly discourages, innovation
  • Demand for data packages (so they can be put out for “build to print” competition) [not a commercial practice—for good reasons]
  • Shift to “open architectures” sometimes results in effective lower-tier competition; but often locks-in old, sub-optimized architectures (vs. a more integrated, lower-cost, more effective, new functional architecture)
  • Poor Data on “Past Performance” of firms on similar (“relevant”) work (goods or services)—a factor which should be an important consideration in most awards (especially the larger ones)
  • Due to “vertical integration” by large prime contractors, there is more “make” than “competitive buy” of subsystems (which are high risk areas and a large share of the costs)
  • DoD is rewarding primes (with higher profit) if they “make” more of the lower tier parts (vs. competitively “buying” them)—a perverse incentive to efficiency

Some Examples of Multiple-Award, IDIQ Contracts

  • Seaport E—$5.6 Billion in FY10; 2200  “winners”—some (e.g. Aegis Tech Group) won a seat in 2008, but no $ yet
  • Army STOC II—has 136 “winners”; 23 received awards in either 2009 or 2010
  • DoD is rewarding primes (with higher profit) is they “make” more of the lower-trier parts (no. competitively “buying” them—a perverse incentive to efficiency

Many IDIQ contracts require all “holders” to bid on every task (with “Bid and Proposal Costs” charged to the government—so higher overhead)

Summary

  • Declining Defense Appropriations (Budgets plus Supplementals)
  • Costs are rising (equip., services, labor, health, energy, etc.)
  • Declining force structures (after Iraq & Afghanistan), but much equipment is worn out
  • Trends in U.S. demographics and debt payments are adverse
  • Broad Spectrum of Security Concerns; and Much Uncertainty
  • Pirates; terrorists; cyber attacks; bio./chem./nuclear; IEDs; widespread proliferation; regional instabilities (that draw us in); nuclear Armageddon; etc.
  • “war among the people” different from tank-on-tank
  • Over 50 percent of acquisition dollars go to buying services, but all the rules, policies, and practices are based on buying goods
  • Rapid Changes occuring (in technology, geopolitics, economics, globalization, and security)

To Successfully respond to this 21st Century Environment

  • 20th Century policies, assumptions, laws, structures, acquisition practices, must change!
  • Requires a focus on:
    • Affordability (in “requirements;” equipment, and services selection; design; force structure, etc.)
    • Changes to resource allocations and structures (dollars; people; organizations; industry; globalization; education and training; etc.)
    • Flexibility and responsiveness
    • Staying ahead

“Smart Competition”—effectively applied—can provide the required higher performance, lower costs, higher quality, flexibility, and responsiveness for 21st Century Security needs

The Keys to “Doing More for Less” are Innovation and Incentives

  • “Innovation” is a driver of significant change, for gains in effectiveness and/or efficiency—could be in technology, or in process, but (most important) in thinking (i.e. a “culture change”)
  • For a “culture change” two things are required:
    • Widespread recognition of the need for change
    • Leadership—with a vision, a strategy, and a set of actions
  • For DoD acquisition, the recognition of the need for change is coming from:  the declining budget; and the realization that superior performance at lower cost is being demonstrated every day in the competitive commercial world.

The Message

Competition, for its own sake, or of the wrong form, is expensive and ineffective—so arbitrarily mandating it is wrong; but “smart competition” (where properly applied—including even the “credible threat of applying it) will have huge payoffs (from the incentives created) in higher quality, better performance, and reduced costs—so it must be fully utilized.


Endnotes

1 ref. Scherer “Weapons Acquisition Process” Harvard Press, 1964, Pg. 48; also, “Report of the Commission on Government Procurement:, G.P.O., Dec. 72

2 “Competition in Defense Acquisitions”; J.S. Gansler, W. Lucyshyn, M. Arendt, Center for Public Policy and Private Enterprise, School of Public Policy, University of Maryland, Feb, 2004

3 International Armaments Cooperation in a Era of Coalition Security, Report of the Defense Science Board, August 1996

4 International Armaments Cooperation in a Era of Coalition Security, Report of the Defense Science Board, August 1996

5 Source: OSD CAIG Cost Growth Study, May 2001

6 GAO-07-656T, Analysis of Costs for the Joint Strike Fighter Engine Program, March 22, 2007

7 Birkler and Large, Dual-Source Procurement in the Tomahawk Program, RAND, 1990; John Birkler et al, Assessing Competitive Strategies for the Joint Strike Fighter, RAND Corp., 2001

8 “Historical Lease Rates/Values 1971-2000”  http://www.aircraft-values.co.uk

9 John Birkler et al, Assessing Competitive Strategies for the Joint Strike Fighter, RAND Corp., 2001

10 Defense Reform Initiative Report, Nov. 1997

11 Competitive Sourcing:  What Happens to Federal Employees?  Jacques S. Gansler and William Lucyshyn, October 2004

12 Emanual S. Savan  “Privatization and Public – Private Partnership”, New York; Chatham House, 2000

13“Long run costs and Performance Effects of Competitive Sourcing” CAN, February 2001

14  Nick Taborek, Wash. Post, Dec. 18, 2011 “Multi-award contracts soar as U.S. lines up pools of suppliers”


 

Author Biography

The Honorable Jacques S. Gansler, former Under Secretary of Defense for Acquisition, Technology, and Logistics, is a Professor and holds the Roger C. Lipitz Chair in Public Policy and Private Enterprise, and is also the Director of the Center for Public Policy and Private Enterprise at the University of Maryland, College Park. As the third-ranking civilian at the Pentagon from 1997–2001, Dr. Gansler was responsible for all research and development, acquisition reform, logistics, advanced technology, environmental security, defense industries, and numerous other security programs. Before joining the Clinton administration, he held a variety of senior positions in the government and private sectors. He is a member of the Defense Science Board, the National Academy of Engineering, the Government Accountability Office Advisory Board, and is a Fellow of the National Academy of Public Administration. From 2003–2004, Dr. Gansler served as Interim Dean of the School of Public Policy. From 2004–2006, he served as the Vice President for Research at the University of Maryland. Dr. Gansler also authored 5 books entitled: The Defense Industry (1982); Affording Defense (1991); Defense Conversion (1996); Democracy’s Arsenal: Creating a Twenty-First-Century Defense Industry (2011) (all published by the Military Institute of Technology Press); and Ballistic Missile Defense: Past and Future (2010) [published by the National Defense University Press]), a contributing author of 25 other book chapters, author of over 100 papers, and a frequent speaker and Congressional witness.

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