DOD News Briefing on Better Buying Power 2.0 with Deputy Secretary Carter and Under Secretary Kendall from the Pentagon

DOD News Briefing on Better Buying Power 2.0 with Deputy Secretary Carter and Under Secretary Kendall from the Pentagon

            DEPUTY SECRETARY OF DEFENSE ASHTON B. CARTER:  Good afternoon. 

            I'm happy to be here this afternoon to help our acquisition leadership -- our superb acquisition leadership -- Frank Kendall, Sean Stackley, Heidi Shyu, C.R. Davis, Katrina McFarland and Jim Thomsen, who were part of this initiative from the very beginning and remain -- to roll out what we're calling "Better Buying Power" -- or really Frank is calling "Better Buying Power 2.0," the next generation of our Better Buying Power initiative. 

            It was two-and-a-half years ago that then-Secretary Bob Gates foresaw correctly that the days of ever-increasing defense budgets were coming to an end as the nation confronted a looming fiscal crisis.  As he famously put it in a speech at the Eisenhower Library, "The gusher has been turned off and will stay off for a good period of time." 

            In acknowledgement of that new fiscal reality, Secretary Gates launched a department-wide efficiency initiative to ensure that the department wasn't forced to sacrifice an ounce more force structure than was absolutely necessary.  Better Buying Power, introduced in September 2010, was the acquisition systems contribution to the efficiency initiative and it was directed at the approximately $400 billion that the department spends annually on goods and services. 

            Better Buying Power's goal was, as we said, to do more without more. That is, to get more capability for the warfighter and more value for the taxpayer by obtaining greater efficiency and productivity in defense spending -- what economists call productivity growth. 

            Now, acquisition -- rather, improving acquisition would be important in any budget environment, but since Better Buying Power 1.0 it's gotten even more important, as the department was required in the Budget Control Act to cut $487 billion from our spending plan over 10 years. 

            Under Secretary Panetta we did this, first devising a new strategy that highlighted the challenges of the era to come -- like the Asia-Pacific region, cyber and others. And it's still true today as it was then that every dollar not wasted is a dollar that can be invested in new capability. 

            To achieve the goal of better buying power, back in 2010 I directed 23 principle actions in five major areas.  First, to target affordability and control cost growth; second, to incentivize productivity and innovation in our industry through profit and partnerships; third, to promote real competition; fourth, to improve tradecraft in the acquisition of services; and fifth, to reduce non- productive processes and bureaucracy in the government as well as an industry. 

            I won't go over each area in detail, but it's worth noting that over the past two years we've enjoyed some early and notable successes in implementing these principles. 

            For example, by targeting affordability in the Ohio-class replacement program and scrubbing its requirements, the Navy cut over $2 billion from the projected cost of this submarine. 

            The Air Force is taking the same approach to the long range strike family of systems. It is prioritizing affordability targets that have eluded past bomber efforts by maximizing the utilization of existing components and subsystems. 

            The Army -- the Army recently received a Packard Award for using increased competition and increased participation from small business to lower costs and reduce production time for the purchase of $2.7 billion in ammunition, such as artillery and mortar shells. 

            By constructing a well designed competition on the littoral combat ship program, the Navy was able to award contracts for 20 ships at dramatically lower cost, which generated big per-ship savings now, but also sustained competition going forward posturing us to save even more money in the future. More recently, a Navy team received a Packard Award for using competitive pressures to save almost $300 million in the DDG-51 program. 

            These are just some of hundreds examples -- examples of our acquisition executives putting the better buying principles into practice since 2010.  Each of these examples show what we can achieve if we rededicated ourselves to acquisition best practices. 

            But we stressed back in September 2010 that we hadn't devised every good idea for improving the acquisition system.  There would be things that we would leave out, new data that we didn't have at the time Better Buying Power was conceived.  And we would need to meet course corrections that we would discover based on our experience implementing the initiative. 

            We also knew that industry would continue to come to the table with good ideas, as they had the first time.  And we knew that the world and our industry would continue to change.  And I suppose the only thing we didn't know is what a chaotic budget environment we would enter. 

            So we have been -- we have had built up substantial experience.  We've conferred among our own executives.  We've conferred with our partners in industry.  We've accumulated our experience.  We've accumulated data.  We've tried things that have worked; we've tried things that haven't worked.  We've learned. 

            And Better Buying Power 2.0, which will be presented today, is a natural recognition of the fact that we can and must do more each and every year to get even better buying power and better value for the taxpayer and the warfighter. 

            And I really salute Frank Kendall and his team for this excellent work. 

            Frank, of course, was my partner in devising Better Buying Power in the first place.  And he's done a tremendous job of implementing the practices -- I mean, rather, the principles of Better Buying Power 1.0 -- and a fantastic job, as he'll explain, in formulating this next better version of Better Buying Power, which he'll outline today. 

            So Frank, I want to extend my congratulations to you and the entire acquisition team that has worked so hard on this important effort.  You've made a world of difference.  And at this point I'll turn things over to Frank, who'll explain further.

            Frank, over to you, brother. 

            UNDER SECRETARY OF DEFENSE FRANK KENDALL:   I may begin by thanking the deputy secretary for his support -- leadership and his support.  He and I kicked this all off together two years ago, and he left about a year ago to assume his current position.  And we continued with the implementation but also recognize that there are a lot of other ideas that have kind of come on to the table over the last year or two, and that some of the things we've set out to do hadn't worked out as well as we'd intended, some of them still needed work, some of them needed to be modified slightly.

            So basically the idea of 2.0 grew out of all of that.

            And also the need to continue to keep the emphasis for the department on finding ways to reduce cost and control costs and get more value for -- for our warfighters and the taxpayer. 

            So we can go through -- I'll go through the charts pretty quickly, I think.  I want to hit a few highlights from the specific initiatives that are particularly important, I think.  But I'll give you as much time for questions as -- as possible here.

            Ash has covered the background pretty much already, and I don't think I need to say much more about that. 

            We have had a business senior integration group that I've been chairing for the last year and that Ash and I chaired together before that that has been the way we've implemented these initiatives and the way we've identified additional best practices and so on, and we'll continue that as essentially the core group to oversee all of this as we go forward. 

            Okay, so Better Buying Power 2.0 is slight reordering or renaming of some of the various categories that Dr. Carter mentioned.  We've added one new one, as you'll see up there, improving the professionalism of the acquisition workforce. 

            My view is that at the end of the day, the professionalism and the capability of the workforce and how it's supported, more than anything else, affects acquisition outcomes.  The people that actually administer our programs, that plan them, that execute them to work with industry are really central to our success.  Everything else aside -- and strengthening that workforce needs to be on the list. 

            If you go to the list -- the next chart -- okay, I'm going to walk through some of the highlights here, and then we'll take questions. 

            But, basically it's a longer list.  It turns out that defense acquisition is a pretty complicated subject, and there aren't easy solutions that are going to, quote, "reform" acquisition and make everything infinitely better overnight with one or two policy changes. 

            And we had 23 initiatives two years ago.  I think there are 36 on this chart, many of them are repeated.  This is taking a lot of work over a long period of time and a constancy of purpose to actually make a difference.  So going forward that's what we're going to continue to apply.  And I expect in a couple of years you may see another iteration of Better Buying Power as we learn from these initiatives and develop other ideas. 

            Okay, let me walk through them real quickly.  Achieving affordable programs.  I'll just say a word about that set of initiatives.  The idea here is a little different than cost control.  The idea here is that the products we try to build, the things we set out to buy are inherently affordable when we start to buy them, start to develop them. 

            And we do years of research and development before we start production.  We do a few years of low rate production and then we get into full rate production.  We've had a history of the department starting a lot of programs that never got through that process and into full rate production. 

            A lot of cancellations.  The latest one was the Marine Corps Expeditionary Fighting Vehicle, okay, where we set out with a set of requirements, we spent billions on research and development, spent a lot of time, maybe got to initial production, but then couldn't afford to field  the product. 

            So the idea here is that we will -- we will assess early on whether we'll really going to be able to afford the program or not, and set caps on the cost of that program, both the production cost on a unit cost basis and the sustainment cost. 

            Now, we've been doing this for some time now.  We've been doing this since Better Buying Power started.  In fact, we have begun to do it even before the first issue of Better Buying Power. 

            The thing that's new on the chart here is enforce those caps.  We've been putting caps on for quite awhile now, and I'm just beginning to see some programs come back around for the next decision phase where the services had to make the requirements trade-offs -- to stay within the caps we've imposed.  And now we have to have -- to discipline ourselves to actually enforce those caps and make people reduce their costs to stay within the numbers that are affordable.  So that's the essence on that one. 

            The next one in terms of the actual controlling cost during execution.  Okay, there are a number of things there.  And one of the things we started in Better Buying Power 1.0 was the idea of [should] cost, which has been around for a long time in a slightly different formulation. 

            The idea of should cost is that people should set targets for costs, and not accept the independent estimates that we use as a budget -- as a basis for the budget, but set targets to reduce costs below that level.  And you have to examine your cost structure carefully.  You have to go in and find the things that are possible places to reduce cost, and then you have to attack them and try to execute against them.

            So it's a new thing for our managers to start having targets they were trying to realize as they execute their programs, and then manage to those targets.  Doing this has raised the cost consciousness of our workforce tremendously and it's been paying dividends.  Even if we don't get to the levels that we put out as targets, we're certainly achieving better results as a result of this. 

            So to continue the emphasis on the -- that's becoming, I think, well established in the department, but we still have a lot of work to do there. Yet it's so important, we want to highlight it and continue to highlight it. 

            The next one is a repeat of an earlier issue essentially -- an earlier initiative, removing redundancy.  There are lots of opportunities across the services, not just at the product level, but the subsystem and component level, to remove redundancy. 

            And there are various things we can do there.  We have not made as much progress on this one as I would like to have made since Better Buying Power 1.0 came out, but we're going to continue the emphasis on that. 

            The next one is about measuring the cost performance for programs and institutions.  And we've been urged to do this by the Congress.  I think it's a fundamentally important thing for us to  do.  And we're starting to put in place a system by which we can start to measure our own performance. 

            I've been in this business for about 40-odd years now.  And what I have found is that we tend to operate on intuition -- people's experience and intuition and their judgments.  And we tried things as policy and if for a few years, things don't seem to be going better, leadership changes so we try something else. 

            It's been cyclical in many cases.  We tried the same policy multiple times because it's been -- fixed-price contracting, for example, and there were others like that -- the degree of concurrency that the programs have, perhaps. 

            So the idea here is we'll start to measure our own performance.  Now, this takes a few years.  The policies we put in place two years ago are just beginning to take effect.  So it takes a few years to actually get data.  But I'm a big believer in the use of data to drive management practices and policies, and this will put in place our ability to do that. 

            And there's performance on a program level.  There's performance at an institution level within the DOD.  And there's institutions within industry that are doing things for us.  And we start to understand relative performance, benchmark people against each other, and then start to understand root causes.  Why are some institutions doing better?  Why are some types of programs doing worse than others?  And then we can learn from those.  But without the database to do that, we can't. 

            Cost chart with requirements.  Okay, the next item on there is about partnerships with the requirements community.  Now, this has been a long-standing issue.  There have been some things like configuration steering boards that have been done to try to improve performance here, but we still have a long ways to go.  This needs to be a continuing partnership as you work your way through the life of a product. 

            So starting in the very early days with concept formulation and earlier requirements definition, all the way through the final design and going into production sustainment -- closer partnership will pay big dividends, will allow us to do tradeoffs early before we waste a lot of money and allow us to do those things that we need to make our programs affordable in the long term and to control costs. 

            The next one is a new item.  It's defense exportability features.  The idea here is that we should at the beginning of a program, not after we've already developed and built it, but at the beginning of a program design for exportability.  And that involves things like anti-tamper characteristics.  It involves some things that we want to protect certain technologies.  We might want to have a slightly different variation of the product that we sell. 

            Start out by thinking about that, instead of waiting until the end. Now, we got some assistance here from the Congress also.  We've got a pilot program going in this direction, but there's a lot more that can be done here. 

            In the current climate, with budgets kind of around the world coming down, frankly, for defense spending, industry is looking to do foreign sales more than ever to help keep their base healthy.  And this is a way to help them do that.  It's going to be a long-term journey to implement this and get it in place as you go through development and finally get into production and sales, but it's going to pay dividends in the long term. 

            Okay, the next category is incentivizing productivity and innovation in industry and government.  I'm a big believer in effective incentives, and I'm also a believer that we haven't been as effective with incentives as we could be in the department.  There's going to be a number of things that try to make -- motivate industry to perform more in line with what the government wants. 

            So the first bullet gets at that in kind of a general way.  I mean, -- (inaudible) -- about Better Buying Power 1.0, there was some concern expressed by industry that we were trying to cut profits.  That was not our intent.  It's never been our intent to cut profits.  And what is our intent is to pay profits for better performance and higher profits for better performance. 

            So the idea here is to do a more effective job of aligning the incentives that we provide to industry with the performance that we really want on the government side.  And it's not as easy as it sounds to do that.  So we've got a fair amount of work to do there, thinking our way through that, and providing it -- making sure we provide effective incentives. 

            We do use incentives, of course.  The question is, are they effective at getting what we want as a result. 

            The next two kind of come together:  contract types and fixed-price contracting.  One of the things that Dr. Carter and I put out in Better Buying Power 1.0 was the idea of increasing the use of fixed-price incentive contracts. 

            We were right about that, but there was -- I -- in my view at least, there was an overreaction of that.  People thought that that had become the right kind of contract to use for almost everything.  And that wasn't what we wanted.  We wanted people to use FPI [fixed price incentives] more in certain situations, and in particular for low rate production. 

            You know, it turns out that if you look at the numbers, the department is not terribly good at estimating the cost of development.  We overrun on average for our larger programs almost 30 percent for development.  We overrun closer to 10 percent, in fact less than 10 percent for initial production lots.  So we've got a -- we're much better at calculating and measuring what's reasonable cost for initial production, but there's still a certain amount uncertainty there. 

            Now, incentives can -- can motivate -- (inaudible) -- to do better job, that's clear. But that kind of uncertainty can be handled with a fixed-price incentive fee contract pretty well.  So for low rate production, we think we should still go more in that direction.  But for other activities, you've got to look carefully at the type of contract that's really appropriate for what you're doing. 

            One of the things that -- a personal observation is that our workforce have tended to look for school solutions, you know, what's the right answer, I'll do that, that's what leadership wants.  And that was the kind of reaction we got to some extent to Better Buying Power 1.0.  So the message here is, you've got to think about what the right kind of contract is to use for the thing you want to do. 

            You know, what the degree of risk in it -- is in it, how you want to show that risk of industry or not, and what the right approach is for a given activity, whether it's a product development or production or support or another service site.  We have a range of contract types for good reasons. 

            The next one on the list is the idea of best value competitions.  One of the things that I've discovered, which I think will be increasingly true, is we will be going out and asking people to -- to bid to us from non-developmental items, maybe with some modifications to meet some of our requirements.  It's a way to save costs in general as opposed to a brand new development. 

            And when we do that, we tend to get a variety of products to meet the same basic need with different capabilities.  And the question is, how do we value those different products?  We also routinely go out and put out requirements that have an objective level and a threshold level for performance.  And what we usually get in return is somebody who -- people who've visited the threshold level, because that's acceptable to us and it's usually the lowest cost. 

            We'd like to give people a chance to be innovative and bid to a higher level of performance as long as they have some belief that we're going to actually pay more for a higher level of performance.  So the idea here is that we define the value to us -- how much are we willing to pay on the government side for enhanced performance or increased performance. 

            I had some personal experience with industry that was somewhat frustrating, frankly, in this perspective.  So I understand this from both sides.  So it's incumbent on us to define what value really is, what increased performance really is worth to us; how much we're willing to pay for it, in other words -- which is taking the requirements community kind of a step further than it's used to going, okay. 

            It's used to defining what those numbers are, what the requirements are, but not at the same time putting a price on that enhanced performance. So the price we're willing to pay.  So that's the idea of that one. 

            The next one is in response in part to industry, lowest price technically acceptable, is what the acronym stands for.  This is a -- formal contracting that's used when we pretty much know that we want a certain level of performance and no better, and that we'll pay, you know, basically the lowest price that's bid to us to get that level of performance. 

            You know, there's been a reaction to some of the movement in this direction by the -- by the department from industry, and the concern I think has some merit.  We haven't done a good enough job of defining "technically acceptable."  So we need to do some work on that.  We need to make sure we're not simply going for lowest price, period, but that we're actually getting the quality that we need for whatever it is we're contracting for.  It shows up most often in service contracting. 

            Okay, the next one is superior -- superior supplier program.  We set out to do this two years ago and we didn't get there.  We -- we tried to do a DOD-wide program.  We struggled with exactly how to define it and how to reward people who were identified as superior suppliers -- how to actually identify them and what those criteria will be. 

            We haven't given up on that.  So we're going to take another shot at that.  The Navy's got the lead to do that.  There's a pilot force right now and that's a work in progress.  But our better-performing contractors should get at least some recognition and perhaps some tangible benefits for being better-performing contractors as well. 

            The next one is performance-based logistics.  This is an idea that's been around for a while.  It's been tried quite a few times.  We took a hard look at the data.  We studied several cases where it had been implemented, about a dozen cases.  And what we found was that in almost every case, you could -- you could quantify significant savings to the government.  In the cases where you could not, we had not done a good job of managing the effort. 

            So, the idea here is to make sure people are trained on this so we do a good job from our side, from the government's side, of ensuring that we have effective execution of performance-based logistics, but it does pay dividends.  So we're going to look at expanding the use of that. The word "effective" gets to do with how we manage it so that we actually get where we want, and we motivate industry to give us the savings, and they in return get a better reward for that.

            There's been a problem for some time now, and this is about productivity.  Today, it takes almost a year-and-a-half to award a contract -- a competitive contract.  When I was starting out in this business, we could do it routinely in about nine months.  And one of the reasons for those delays is the auditing that's required. 

            Now, DCAA, the contract audit administration -- agency has a long backlog of both closeout audits at the end of contracts, which our industry doesn't get paid fully until they close out the contract; and also pre-award audits.  So, we're working closely with the DCAA to put a number of techniques in place to try to reduce that backlog and improve our efficiency and productivity there.  It's taking far too long to get people on contract today. 

            And the last one is an expansion of something we started two years ago.  It's -- it's getting more leverage out of industry's internal research and development.  Industry spends about $4 billion of money that is, you know, costs are recoverable from us, on internal research and development per year.  That's a pretty big amount of money and the government should be getting as much return as possible from that.  Industry is certainly trying to get a return. 

            So, the idea here is to continue what we started two years ago and add to -- and strengthen some of the relationships we've built up there. Industry now has a place where they report IRAD [independent research and development] to us so we have better visibility into what industry is doing.  They have better visibility into what we're doing in the government labs and so on.  And we get better decision-making on both sides as a result of this, so we're going to continue that process. 

            Okay, the next one is a category that everybody loves – it's on productive processes -- removing them, eliminating them, and reducing bureaucracy.  This is a never-ending battle.  The bureaucracy tends to be self-perpetuating, frankly, and it likes to grow.  So, pushing back on some aspects of that.  Some of these things -- many of these things were in Better Buying Power 1.0.  We're just continuing to focus on them. 

            One that I think I've added which is new is the emphasis on the chain of command.  You know, one way to trim away bureaucracy is to focus on the actual decision-makers in the chain of command. So, it's myself as the defense acquisition executive, the service acquisition executives, the program executive officers and the program managers.  This is Goldwater-Nickles.  This is 1986. 

            But we've drifted away from that, I think, to a certain degree.  We're trying to reassert the primacy of that chain of command in making acquisition decisions and in management. 

            There's a general one next.  We're reaching out to industry and asking industry to give us feedback on places where we can cut costs that are not productive and don't have value-added.  And we had some inputs like that the first cycle of Better Buying Power, so we're looking for more things along those lines. 

            The last one is about cycle times.  We had one like this on Better Buying Power 1.0 also, but I'm very unhappy, I'll put it that way, with how long it takes us to get products to the field.  It's taking much too long, as far as I'm concerned.  And I'm -- I'm having several efforts underway to try to understand what the root cause of that is.

            You know, is it -- part of it is the acquisition process takes too long with the requirements process, getting requirements pinned down?  Are we putting too much testing into our programs?  Are we stretching out things and being too risk-averse in general how we approach programs?  Is industry not as agile as it once was? 

            There are a number of possible causes there, and it's probably some combination of them all together.  Is it too hard for us to change requirements once we start, you know, simplify things?  So there are a number of things there we're going to go after, but I would definitely like to reduce cycle times. 

            So, that's true at the macro level of major programs.  It's also true at the micro level of some of our bureaucratic processes, where we approve documents and make decisions internally.  So there's a range of things covered there. 

            Competition -- effective competition is the single best way to reduce costs, and we'll continue the emphasis on that.  I'd like to talk about a competitive environment when we were doing Better Buying Power 1.0.  The idea here is that even if you don't have direct head-to-head competition, we can still have a competitive environment where the incumbent is worried about losing the business, or at least sub-tier people are worried about losing the business.  And maybe you can get real competition, you know, head-to-head competition below the top tier. 

            Open systems is on this list as a way to do that -- open architectures, modular designs.  And if you do that, if you go that route, you have to be very careful how you manage intellectual property, so that you have the rights to the interfaces and so on and the performance, but you can go out and ask somebody else to bid and they can actually get integrated into the design if you go that way.  And we have not been as good at that as we might have been in the past, although there are areas where we've been successful. 

            A couple of places on here where small business is emphasized.  This is one of them. Small businesses can introduce competition in a number of areas. 

            The last one is a new one -- the technology development phase.  We have a -- kind of a requirement, it's not a firm requirement.  There are exceptions.  We're allowed to waiver it.  But the idea is that we're supposed to have competitive prototypes for our major programs.  And John Young was a sponsor of this, Dr. Carter's predecessor.  I think it's a great idea, but it has to be done effectively, just like everything else. 

            And what I've observed and had a small study done on, it confirmed my observation, was that we weren't being as effective as we should be at getting the rights things done in the technology development phase.  Now, this is the phase before you commit to engineering, manufacturing and development.  So, it's the early, relatively low-cost phase where you try to reduce risk from a program, from a product, before you commit to getting ready for production. So the idea, then, is to get risk out of that EMD [Engineering and Manufacturing Development] program that you're going to do next, that engineering, manufacturing and development program. 

            And I made an observation on one program that despite what I was told, that had not happened.  Okay?  Industry had come in and done a demonstration competitively.  They'd done competitive prototypes, but they hadn't actually taken the risk out of the product that they were going to build in EMD.  They had done a proof-of-principle, if you like, but they had not removed the risk in the designthey intended to build. 

            And I thought about it, and having been in industry for a long time, it became obvious to me what was going on.  Industry wasn't trying to reduce risk.  Industry was trying to win the EMD phase and get into a sole-source position for production.  That was their motivation.  It was obvious that that is not unreasonable for that to be their motivation.

            It wasn't our motivation.  Our motivation was to get risk out so we'd have the right bidder come in and win the EMD phase -- (inaudible).  Shame on us, okay?  I looked at about a dozen programs, about 10 programs, and discovered that this was happening fairly often.  So we've got to take a better look at how we're structuring our technology demonstration phases, and how we're actually getting real risk out for the product that we intend to build, not just putting on a nice show so you can win the next contract, if you're looking at it from the industry's point of view. 

            Okay, services.  I've only got one major bullet on services, but I think Ashton mentioned that services are half of what we spend money on with contractors.  That's a lot of money.  And we started down the path of managing that more aggressively and effectively, but there's still a long way to go there. 

            We have assigned senior managers in each of the military departments. We have adopted a uniform market segmentation.  We've got a lot more work to do with some of these other bullets.  So they're out here to continue the emphasis on service contracting. 

            Requirements definition is key.  Having well-defined requirements helps you do an effective evaluation and give an effective supplier.  Controlling those requirements, once you get somebody on board, can prevent sole source creep, essentially.  Effective market research, obviously an area where small businesses can contribute enormously.  So those things are important there.

            One of the places we're going to be looking when this is a new item, is outside of the traditional acquisition chains.  You know, we all tend to live in stovepipes to a certain extent, but insulations for example do an enormous amount of contracting for support. There's a lot of maintenance contracting out there, there's a lot of I.T. contracting that's not outside the normal program chain that you think about for acquisition programs.  We want to focus on those areas as places to save money. 

            Requirements review boards and trip wires are techniques that some of the major buying commands are using to control costs to make sure they're monitoring what's actually happening in service contracts and to react to things are getting a little bit out of control.  So they're going to expand areas. 

            Okay, the last one is the new one that I've talked about.  It's the idea of improving the professionalism of the workforce.  Frankly, I think that there's no more important legacy that any of us as managers can have than to leave behind a stronger workforce than the one we inherited.  And that's what this is all about. 

            We have a lot of very capable people in the workforce. We have a lot of very professional people, but we can be better, and we can have a deeper bench.  And it occurred to me a couple of years ago that the Department of Defense is a little different than industry.  If I was in industry, and I had a shortage in my workforce of a certain kind of skill-set, I could just go out and hire that skill-set from somebody else. 

            We grow our own people.  We grow our program managers.  We grow our chief engineers.  We grow our logistics specialists, our private support people.  We grow our contracting people.  And if we have a shortfall on that, than we have a very long recovery time to correct it. 

            And we went through a period where we basically downsized the acquisition work force quite a bit.  We have been recovering that under the defense acquisition workforce development fund.  We've increased the numbers to a certain extent.  That's pretty much stopped now.  We've got to focus more on quality. 

            And so there are a number of things I'm going to -- we'll be focused on key leadership positions.  First, program managers, deputy program managers, chief engineers, contracting officers, (inaudible) support managers -- the people who basically have -- a lot of responsibility for the successful execution of all or part of the major execution of  programs. 

            We have the acquisition workforce career levels under "W" that had one -- that's the way we're probably going to approach this.  It's become sort of a check-the-box thing within the department to get to level-three -- acquisition level -- qualified to level three.  We want it to really mean something.  When somebody gets to a level where they're ready to take on a senior management role in a major program, that should be something that really demonstrates a high level of professional capability.  So, we're going to make sure that we have that. 

            And we want to recognize our people.  You know, it's this -- you know, running a major program is like having a major command.  It's -- it's a big deal.  It's a lot of responsibility.  And people who get to that level and get to do that deserve a lot of recognition for what they do. 

            Just handed out the Packard Awards.  Ash mentioned one of them.  The secretary of defense handed them out, I think, for the first time this year.  That's the sort of thing we're going to be doing there. 

            And the last one and I'll close with this, is the idea that we need to enhance the cost-consciousness of the workforce.  I think we've made a lot of progress in that regard, but we do have some cultural changes that we're in the midst of implementing here. 

            Cultural change takes a long time -- could take years, multiple years. In the industry, the two requirements for cultural change in case studies that I've seen are four-and-a-half years or a crisis.  And, well, I think we may have -- I think now I may have four-and-a-half years and I think we do have a crisis in terms of the budget levels that we can expect for the future. 

            And all of us are going to have to work a lot harder to equip and support our forces in -- in the environment that we're going to be living if we're going to have the size force and the modernized capable force that we -- that we need to have to implement our strategy. 

            So that's pretty much it.  The next step, we're going to give people a chance to comment on the draft, essentially the preliminary version of this that we put out.  And that includes both the acquisition workforce itself, industry, other elements of DOD and the Congress, of course.  And we'll be drafting guidance. 

            So in January, we'll do a similar exercise for what we did for Better Buying Power 1.0.  We'll put out amplifying guidance.  We'll finalize these.  And we'll get them to implementation – of the next round here. 

            So with that I'll take a few questions. 

            Q: -- (inaudible) -- ask you about the S-35 program, simply because it's the biggest one you have -- 

            UNDER SEC. KENDALL:  I thought you might -- (Laughter.) 

            Q:  And, you know, Chris Bogdan described the state of relations as the worst he's ever seen.  There's been a management change -- (inaudible) -- with Lockheed Martin.  I wanted to see if you wanted to comment on that, as well. 

            But what -- how do you anticipate that these new outlines and initiatives will help you change that relationship with the S-35 -- 

            UNDER SEC. KENDALL:  Well, first of all, Chris was talking about -- I've talked to him several times since he made those comments.  The -- the -- his concern is about the communications between the program office and Lockheed Martin and the focus of those two groups of people. 

            Lockheed has seemed to them to be focused on short-term business goals and we'd like to see them focused more on execution of program and successful delivery of the product.  So that's what's at the root, I think, of his comments there.  And we had that conversation actually this morning because I thought -- (inaudible) -- going to ask me the question.  But that -- that was what was behind that, okay? 

            We want to know that when they come to us with an initiative or a proposed solution to a problem that it's motivated by the welfare of the program -- that it really is, and not focused on a short-term business goal that you're trying to accomplish.  So that's what we're after there. 

            With regard to the leadership change, Bob Stevens called me just before they announced it.  We had a very cordial conversation.  He -- you know, I was surprised, obviously, as everyone has been.  I think Lockheed has dealt with the situation appropriately. It's an internal Lockheed matter.  Marilyn Hewson-- will be taking over and has a reputation as a capable professional.  I'm looking forward to working with her. 

            Q:  Just to follow up -- 

            UNDER SEC. KENDALL:  Let someone else. -- (inaudible) -- 

            Q:  Sir, on the first topic of achieving affordable programs, you mentioned the Expeditionary fighting Vehicle. 

            UNDER SEC. KENDALL:  Yes. 

            Q:  What sort of cross-cap have you set for its successor, the ACB [Air Contingency Battalion] program?  And what steps are you specifically taking to make sure (inaudible)? 

            UNDER SEC. KENDALL:  --  (inaudible) -- that one.  Sean, have we set a cross-cap on ACB yet?  I don't recall if we have or not. 

            STAFF:  (OFF-MIC) 

            UNDER SEC. KENDALL:  Yeah. 

            STAFF:  -- very much a part of that requirement -- 

            UNDER SEC. KENDALL:  Basically, the way this works is we set a cap, preliminary cap at Milestone A – when we enter technology demonstration and we set a final cap at Milestone B when we hit our engineering manufacturing development. 

            And the way these are set is the services asked to look long term at its -- (inaudible) -- for the products and other products that were in the same portfolio.  So in the case -- this case – the Marine Corps will be looking at its combat vehicle portfolio, which has, you know, several products, and what kind of budgets they can expect to have out 30 and 40 years.  And then based on that, it will derive a unit cost it thinks it can afford from that analytical framework. 

            Now, we can't predict exactly what future budgets will be like, but we can come within -- you know, it's better to make an estimate and use that to drive, you know, an affordability cap than to just assume you can meet whatever requirements you might happen to write down. 

            So, that's the idea, and we're -- we're starting into that process.  As the AOA [analysis of alternatives]  is finished and we get into Milestone A then we'll put a cap on.  And the caps, by the way, go into the acquisition decision memorandum that I put out on at Milestone A. 

            Q:  We reported recently the Marines are still debating internally whether to require the same kind of high-water speed that is associated with the canceled program.  Would that be a non-starter, in your opinion? 

            UNDER SEC. KENDALL:  It will be a non-starter if it's an unaffordable program.  And I don't know what the definition of that is at this point in time. 

            Q:  -- what about aligning profitability better?  Is that -- is there going to be a review of the weighted profit guidelines or what? 

            UNDER SEC. KENDALL:  No, the weighted profit guidelines generally give you an assessment, if you will, of what's a reasonable profit, okay? -- given various factors.  The idea of incentives here is, you know, when would we pay more -- (inaudible) -- for better performance than we might expect routinely. 

            The basic contract type usually sets up a -- (inaudible) -- incentive one way or the other.  Fixed-price carries with it its own incentive structure.  Cost-plus, you then have to put the incentive structure and how you structure the fees based on a cost-plus.  And there are a whole range of ways to do that. 

            We have a history of doing things like spreading out incentive fees on a schedule basis, for example, over a program.  I've been in industry a lot and industry likes front-load incentives to make them easy to get.  What we need to do is put the incentives more on what we actually really want from the government's perspective and use them effectively to motivate. 

            And the trick here is that if you make it too easy to get the incentive, then you really haven't done much for yourself.  If you make it too hard, you haven't done much for yourself either.  So the incentives need to be meaningful, and that means they need to be achievable by industry with some additional effort.  But they also need to give us back something that we wouldn't get anyway or otherwise in the contract. 

            So, it's -- it takes a fair amount of thought to structure these appropriately and to put them in that range where they're really going to pay a benefit to the government and to industry, which is the way it has to work. 

            Q:  -- On that Kubasik changeover the other day.  There's a lot of speculation in the industry that this is going to have some kind of impact on the relationship between DOD and Lockheed.  Can you address that?  Will this have some kind of negative impact? 

            UNDER SEC. KENDALL:  No, I don't think so.  I've gotten to know Chris Kubasik over the last couple of years.  I've worked with him and Bob Stevens.  I've met Marilyn.  I've worked with her.  And this is -- we're adult professionals, okay?  We come to things with our own business perspectives and -- and we can meet and work out deals.  I mean, this stuff isn't personal.  I mean, it is helpful to get to know somebody and build up a basis of trust over time, but I -- I don't have any concerns coming forward working with Marilyn or any other members of Lockheed leadership. 

            A lot of hands here.  I'm going to just work my way across. 

            Q:  You spoke earlier about designing in exportability from the beginning in programs and said you had a pilot program going.  Could you tell us a little bit about that and you hope to acheive? 

            UNDER SEC. KENDALL:  Yeah, the pilot's -- actually, legislation authorized the pilot program.  We have two or three programs we're looking at as candidates to be in that pilot and some were pretty far down the road. 

            STAFF:  -- (inaudible) -- that we're looking at -- (inaudible) -- 

            UNDER SEC. KENDALL:  Things that we would expect at some point to be good candidates for foreign sales or for export, and so the idea is -- (inaudible) -- design to take that into account. 

            STAFF:  And for all -- (inaudible) -- to understand how to do that before we're embedded in a design. 

            Q:  Colin Clark, AOL Defense. 

            You cited a couple of examples where you've come up with new ways to save some money, but when you look at the GAO reports across the enterprise, not much has changed since the Packard Commission.  Costs go up, schedule falls apart. 

            UNDER SEC. KENDALL:  Well, one of the things I'm motivated by, is the remarkable constancy of our poor performance.  That's probably a quotable thing I just said.  If you look back 20 or 30 years, those overrun figures that I gave you, close to 30 percent, it's like 27 percent, 28 percent I think, for major development programs in the development phase, and six percent, eight percent, nine percent in that range for the early lots of production for a lot of our products.  It's remarkably constant. 

            And there has been a slight improvement in the last few years, since we started budgeting to the independent cost system.  Which may tell you that you know we may not have improved, but if we put more money on it, we inherently do a little better. 

            I think we've got to do a much better job of understanding the impact of the things that we're doing.  You know, I have lived through a number of attempts to improve acquisition that as I said have been cyclical.  And I -- whenever I -- I often give speeches where I talk about concurrency which has been a topic recently because of the 35's very high concurrency.  The very first Congressional hearing I ever went to was in 1980, and a half-staffer some of you may remember named Tony Batista waved a schedule of a program around at the hearing and talked about the degree of concurrency on it.  And this is quite true, I do not remember whether he thought there was too much or too little, but he felt strongly about one or the other and that we should be doing more of whatever wasn't working.  And when we've had different -- that -- that pendulum has sung a few times 

            There is a reasonable degree of concurrency for a given program, based on you know the urgency of the requirement, the amount of risk in the program, the nature of the product and so on.  And there's no one perfect solution there. 

            The same is true of fixed-price development.  I lived through the fixed-price development recovery era, I guess.  I was in the Pentagon from '86 to '94, and there in the last half of that period, we had to go deal with -- I'll say -- a number of programs that had been fixed- price development programs that were just unmitigated disasters.  And we got no flexibility under the contract vehicle to go in and -- and make adjustments.  A-12 is the biggest example of that. 

            Well, A-12 is not a success.  We threw away a fair amount of money, we didn't get anything.  That can't be regarded as a success.  So I'm weary of fixed-price development, but that's been a fad.  It's been up and down in terms of. 

            So, it -- it -- the reason I come back to the professionalism of our work force, is that this is such a complicated business.  This is not a simple business.  There aren't easy answers.  The reason there are 36 items on this years list, and two years ago there were 23 is that as you get in to the complexity of our list, you realize that there are so many different areas that you have to attack and get right to be successful. 

            So that's kind of wandering around to answer to your questions, but that's -- the other piece -- the only thing I'll say is, that the cycle time of our policies is only five or six years.  And the cycle time of our leadership is much shorter than that.  So nobody stays around long enough to see if what they put in place is really working or not. 

            Also, because there are so many factors that impact on programs, it's very hard to correlate what caused what, okay?  We do have some examples where we do quite well.  We have quite a few examples where we don't do as well.  You know, the question is, "Why?" You know, what is it that's making those programs successful and those other programs fail. 

            The scattergram has actually improved a little bit, but it's still very wide.  And I think there -- you know, as we go through and understand root causes more affectively, as we start to measure our own performance I think we'll learn a lot and be able to do a lot more, but I think at the root of it, more than anything else is the quality of the management and the ability of people to execute effectively, both plan and execute effectively.  That's true both in industry and adulthood. 

            You know, our side of it, we do the planning, and then we oversee the contractors as they trying to execute.  Industry's actually got to do the work and build the products.  And I think there's more to be done there on both sides.  That's why I'm so strong on incentives. 

            Q:  You talked about recognizing acquisition officials who do well.  If the opposite is true, do the stakes have to be much higher if you mismanage and program and more people get fired? 

            UNDER SEC. KENDALL:  I think there should be consequences for poor management.  And I've seen a few instances where we do that.  We often do it somewhat quietly, without a lot of fanfare.  There are a couple of cases I can think of that have happened in the last few years that are more or less visible. 

            The -- the main thing is to develop high-quality people and get them into those jobs so they do a good job.  There needs to be some tolerance to people's mistakes -- mistake-making, okay?  Morale -- (inaudible) -- probably -- (inaudible) -- right things.  You know, I talked a little bit about -- no, I don't think it came up in here.  It came up --  I didn't talk about this, but obligation rates as a disincentive to people. 

            You know, more of the things we've been working on -- Katrina's been working this for the -- through the financial management people.  -- (inaudible) -- when people are -- (inaudible) -- obligation, their -- (inaudible) --, we have a tendency to take it away from them or to punish them for that.  But what they may be trying to do is negotiate a better business deal first and need more time to do that.  So we need to support our people as they do these sorts of things, and understand that that's part of what we have to do. 

            Q:  You mentioned technology development stage, how they contract.  And you're looking at programs in which that -- the risk wasn't taken out.  Can you give us some of the examples of the programs you've looked at in which the risk wasn't taken out? 

            UNDER SEC. KENDALL:  The one that started me down the path was JAGM -- joint air-ground missile.  – I know we looked at several others that have already gone through that phase and – toward EMD.  And that report has not been published yet.  We could get you some other examples if you want, but that was the one that started me down that path. 

            Q:  You talked repeatedly about the professionalism of the workforce.  Now, we took the heavy cut.  You know, Congress -- (inaudible) -- you know, the decimation of the -- of your workforce.  You started to rebuild.  Now, we're into a contracting freeze, a hiring freeze and salary freeze.  How are you going to get good people in? 

            The other side, as you mentioned, the leadership turnover -- military PEOs come and go relatively rapidly.  Are you thinking at all of trying to change that to keep those people in the program longer? 

            UNDER SEC. KENDALL:  The standard is roughly four years between milestones for PMs, for example.  We don't quite meet that.  We're closer to about three-and-a-half right now.  Part of that is the realities of being at war for the last decade-plus.  And the fact that people are rotating into theater in some cases and the services have to support that rotation base.  It varies by service. 

            You know, I think it does matter how long people stay.  You need to be there long enough to be able to actually see the program through and understand that there's a learning curve associated with managing a program. 

            We're bringing in a lot of young people.  We brought in a lot of young people under DAWDF [Defense Acquisition Workforce Development Fund].  And we're going to have to develop them.  I'm concerned about the demographic bathtub that we have, where we have people who are nearing retirement, quite a few people that are about my age, roughly.  And then we have kind of a bathtub in the workforce, and then we have younger people who have come in. 

            And I'm working with the SAEs [senior acquisition executives] on ways to creatively transfer some of the expertise to the new generation and to give people the kind of experience they need so they can grow in their jobs. 

            We're also doing a lot under that item on the list of trying to make sure that people get the right kind of experience; that they get an opportunity to participate in source selections, do design reviews, work on contracts of different types, get out of their -- their command and into other environments so they can see how other people do things. 

            UNDER SEC. KENDALL:  So, there are a whole range of things that we'll be looking at, many of which we're doing to some degree already -- just kind of give people more development. 

            I can't do anything about the salary issues or the freezes.  We're in the environment we're in. 

            You know, this is still a rewarding thing for people to do.  You know, you get a chance to work on cutting edge technology in support of the nation and in support of national security.  That's still a motivator for people, and I think it'll stay that way going forward. 

            Q:  Thank you.  We've been told by many acquisition officials that because of all the instability that we've seen in the last couple years, the continuing resolutions and the sequestration instability, that costs in ever program is going to be going up, not down. 

            How do you see that affecting these initiatives to try and save money when the trend right now looks like the cost is going up? 

            UNDER SEC. KENDALL:  Well, thank you for giving me an opportunity to talk about sequestration.  Absolute, devastating impact.  It will be counter to everything we've been trying to do for the last two or three years.  It is such a blunt instrument to reduce money -- take money out of the department. 

            You know, we've been quite -- the secretary of defense has obviously been very vocal about this.  Dr.  Carter's been vocal.  I've been vocal.  Service leadership, I think, has been vocal also.  It's -- it's a horrible way to take money out. 

            And, you know, it -- it really flies in the face of everything we're trying to accomplish here.  We're trying to make our workforce more cost-conscious and then we're imposing on them in a very inefficient way to take money out. 

            Cuts in general tend to drive you to inefficiencies.  You try to plan a program in a way which is, you know, efficient to execute.  Where we're seeing it is production rates coming down below.  Obviously, that raises unit costs, stretching out development programs for longer than is optimal.  And time is money, and in particularly development. 

            And I think we're taking -- I mentioned earlier -- too long to get things through development nowadays.  Variety of reasons for that, but one of the things that does that is people tend to want to hang on to all their programs when cuts come in, so basically you reduce the level of everything and you stretch it out.  That could be a very inefficient thing.  You sometimes need to make harder choices and decide what not to do. 

            Now, we've canceled quite a few programs from the last few years, and, frankly, I don't see a lot of potential for additional steps to do that to take money out of the budget.  So it's going to be -- you know, we will work our way through whatever number we get.  We -- we did a very in-depth exercise to both build a strategy and then build a budget last year, which we think is all very sound.  If we have additional cuts which are too significant then we're going to have to go back and reconsider all that. 

            And fundamentally we consider the capabilities we can provide to the nation.  There's a level at which you just -- you know, you stretch things out to the point where you just can't deliver what's needed.  You know, there is a requirement to equip our forces with a certain number of items when the forces are a certain size and replace those items over a certain period of time. 

            You know, that's kind of -- and the right way to formulate a budget is to have a balance between the force structure and the other things that contribute to sustaining and equipping that force structure.  And if we get too out of balance we'll end up with a hollow force.  It can be hollow the way it was during the Cold War.  I experienced this in Germany as an Army officer.  We had no parts.  We had no radios.  We were hollowed from the point of view of readiness. 

            You can be hollowed from the point of view of training.  You can be hollowed from the point of view of modernization.  If your equipment's obsolete -- (inaudible) -- potential problems. 

            So we want to avoid all of those things and it requires us -- (inaudible). 

            STAFF:  We have time for one more question. 

            UNDER SEC. KENDALL:  Anybody I didn't get? 

            Tony? 

            -- (inaudible) -- ask me another 35 Lockheed question --

            Q:  Twenty-three was two years ago and 36 this year.  Roughly how many overlapped so we don't say 36 -- (inaudible) -- 

            UNDER SEC. KENDALL:  I think you may have a page to -- does the traceability of the old ones to the new.  Did we give you that?  You should have that in there. 

            There's a backup in this presentation I gave that tells you what happened to 1.0.  So it'll tell that most of them are continuing. 

            Some of them are not on the list, but they're still continuing.  So roughly maybe half are new.

            Yes? 

            Q:  You're going to get some criticism for apparently taking -- seem to be taking a dive on watering down the fixed price incentive fee contracts. 

            UNDER SEC. KENDALL:  Yes, I expect that. 

            Q:  Walk through the rationale again.  And you're going to apply it to -- (inaudible) -- contracts, but not as wide a universe as originally. 

            UNDER SEC. KENDALL:  The place where I'm nervous about fixed price is in development and because of my prior experience.  Now, we were doing firm fixed price -- fixed firm price -- fixed price development in those days. 

            And I mentioned how much we overrun.  Once you enter into a fixed price contract, even if it's the same contract, you kind of lock yourself in, you know, and basically it's hard to make an adjustment. 

            The industry's contractually required to bring you that product within that price.  And if they overrun, they're just supposed to keep putting money in until they can deliver that product. 

            That's one thing that industry can do.  The other things they can do are file claims against the government or just stop and tell you that, you know, we cover what you can. 

            Q:  Right. 

            UNDER SEC. KENDALL:  So the other thing is, in development, you want to work with industry.  You also -- you often want to adjust your requirements as you go so the cost plus environment leads itself more to working with an industry as you go through development maybe the changing the nature of the products as you have to absorb costs and so on. 

            I think, in general, it's a better vehicle.  Now, there are exceptions, okay?  And the case I use most often is the tanker.  Okay, the tanker had the five things I liked to see for a fixed price development. 

            Very firm requirements, we were not going to change the requirements.  The technology was mature.  The technology was essentially in hand.  Okay, we had people bidding who know how to do the job. 

            Okay, so you have the right expertise that's already there.  We have people bidding who have the financial resources that if they do get in trouble, they're going to continue.  They can put money in and finish the job if they need to. 

            Okay, and, finally, they have a business case to do that, okay.  That's the future production that they're going to make profit on, right? 

            If you have all those things, then I'm pretty comfortable with fixed price allotment.  If you don't, then you have to think about it very carefully.  So that's why I'm pulling back a little bit. 

            And I've been very clear with the people on the Hill who are enthusiasts for fixed price.  I don't think it's a panancea.   It certainly shifts risks to industry, but there's inherent risk in most development programs and I think we need to balance that. 

            You can do a lot of the same sorts of things.  You can motivate industry with a fee structure too.  It's not quite the open-ended, you know, commitments that they would have in a fixed price vehicle, but there's still a lot at stake for industry. 

            Nobody's out there trying to fail in development.  The industry is not trying to fail, okay.  if they're not succeeding, it's for a variety of reasons. 

            What you can do with incentives is you can, you know, give them a little bit more motivation and put their best people on the project, you know, to bring in more people, to do some other things in response.  But there's a limit as to what you can accomplish with that. 

            Okay, all right.  Thanks, everybody.