Cost savings crucial to acquisition reform, DOD official says

Defense Department should reward military services when they generate savings

One of the aspects of defense acquisition reform often overlooked is what it can do for the military.

Continuing  efforts to trim defense spending now allow the services to keep the money they save, Frank Kendall, principal deputy under secretary of defense for acquisition, logistics and technology, said Jan. 25 in a keynote address at the Institute for Defense and Government Advancement’s Network Enabled Operations conference in Crystal City, Va. 

Kendall outlined the though behind Defense Secretary Robert Gate’s efforts to streamline military spending. Kendall said that there is a need to sustain forces in the field, but there is also a competing requirement to acquire new equipment and replace worn out and damaged hardware. He added that Gates has demanded improvements in the efficiency of the acquisition process.

Kendall noted that the $100 billion in cost savings proposed by Gates are not achieved by cuts, but by moving money from unproductive programs to efforts that produce results.  An important part of the DOD’s new approach is that the services can keep the money they save, but they must move it into more profitable ventures.

One of the cost saving options the DOD is examining is imposing cost constraints on the services. Kendall noted that although the services are not used to this type of process, it will become standard practice. He added that this fiscal discipline has already been applied to the Army’s Ground Combat Vehicle program.

Many of the programs cut by Gates were not affordable, but the government had already spent considerable amounts of money on their development before realizing that they were not performing, Kendall said. In the future, cost caps on programs will be a major part of future defense programs, he said.

As a part of this cost saving effort, the DOD will develop new ways to estimate program costs. There are three ways to achieve such savings. They are:

  • Conduct an independent cost estimate as a basis and look at the competing cost elements as the program moves along.
  • Take a bottom-up estimate of costs.
  • Establish a cost ceiling through negotiations between all parties.

All parties in a program will have to perform at least one of these efforts to save costs, he said.

Kendall said that he wants to move the department away from the harmful incentives to spend money that currently exist in the acquisition process. He specifically wanted to move away from practices that penalize organizations that save money by cutting their budgets and taking their saved funds away. This policy has led the services to spending their remaining funds wastefully at the end of the fiscal year so as not to lose funding. “That’s not what the taxpayers want us to do,” he said.

The DOD also wants to apply the productivity and innovation found in industry to the defense sector. However, Kendall noted that the DOD does not wish to dictate fixed price contracts. Instead, he offered that the government is interested in pursuing more fixed price incentives in regards to production. Kendall noted that the government has a range of contract models for contracts. He told companies to do their homework and look at all of the contract options available to them and to understand the costs and risks associated with each one.

Programs of record were another area where the DOD is seeking to encourage competition. Kendall said that the traditionally long government development process resulted in many IT systems either being obsolete when they enter service, or with a viable private sector options available. He said that the government must encourage ways to add competition to these programs or to introduce a competitive environment into the process. One way to do this is through direct competition. He said that even programs of record must be open to the introduction of new ideas and technologies.

Kendall added that when a program is threatened, its costs drop dramatically. He added that this is almost always too late to save the program and that deep cost reductions must be included from the beginning. But he added that the government is not against firms making a profit, noting that high performing firms can be rewarded in a number of ways. But above all, he said that the government wants lean, healthy firms competing and providing services and technologies.


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