18 July 2009

Wasteful Defense Spending Is a Clear and Present Danger

We could afford a stronger military if we implemented some contracting reforms.
By JOHN LEHMAN WSJ

When John McCain was shot down over Hanoi in 1967, he was flying an A4 Skyhawk. That jet cost $860,000.

Inflation has risen by 700% since then. So Mr. McCain's A4 cost $6.1 million in 2008 dollars. Applying a generous factor of three for technological improvements, the price for a 2008 Navy F18 fighter should be about $18 million. Instead, we are paying about $90 million for each new fighter. As a result, the Navy cannot buy sufficient numbers. This is disarmament without a treaty.

The situation is worse in the Air Force. In 1983, I was in the Pentagon meeting that launched the F-22 Raptor. The plan was to buy 648 jets beginning in 1996 for $60 million each (in 1983 dollars). Now they cost $350 million apiece and the Obama budget caps the program at 187 jets. At least they are safe from cyberattack since no one in China knows how to program the '83 vintage IBM software that runs them.

There are other problems. Navy shipbuilding fiascoes like the staggering overruns on new surface combatants, the near total failure of the Army's Future Combat System that was meant to re-equip the entire army, the 400% cost overrun of the new Air Force weather satellite -- to name but a few -- all prove that we are currently unable to design, develop and deliver major weapons systems in anything approaching a cost-effective and timely manner. The Government Accountability Office recently reported that the cost overruns for the top 75% procurement programs were over $295 billion. We are rapidly disarming ourselves, even as defense spending grows.

On May 22, President Obama signed the Weapons System Acquisition Reform Act. Despite the grandiloquent name, it is in fact just an addition of 20,000 more bureaucrats who will only make matters worse.

Why is this happening? Where did things go wrong?

First, let's look at the customer.

Within the Pentagon, there has been an obliteration of clear lines of authority for managing procurement programs. What there has been is a steady growth in the size and layers of civilian offices, agencies and military staffs, resulting in severe bureaucratic bloat. In the private sector, a specific person is always responsible for the success or failure of a program. When it comes to the Pentagon, no one person is held accountable for good performance or punished for failure.

As a direct result of this lack of accountability, there has been a loss of discipline and control over equipment requirements and a surge in gold-plating in all Pentagon programs. New requirements and design changes -- originating in more than 30 different bureaus in the Pentagon -- are constantly being added, wreaking havoc with costs. On the Navy's new small warship building program (the LCS), for instance, change-orders have at times averaged 75 per week. Because of these constant changes, cost-plus-contracts have become the norm far into production, instead of fixed-price contracting when development is complete.

In addition, the Pentagon has surrendered control of many programs to large contractors. During the 1980s, the Pentagon employed thousands of experienced project managers and engineering professionals. Today most of this talent has gone to work for the contractors, and their duties have been contracted out to those same contractors. It's a classic case of the fox running the chicken coop. To make matters worse, the bureaucracies did not shrink because of this exodus, but actually grew as experienced engineering professionals were replaced by administrators and bookkeepers.

Next, let's look at the suppliers.

After the Cold War, there was a 70% reduction in procurement funding. The Pentagon encouraged consolidation and actually paid contractors to merge. That process went much too far, with some 50 prime contractors merging into only six -- far too few to support a competitive base for our current and future requirements. Because of lack of competition early in programs, there has been a serious decline in technological and engineering innovation. And costs have gone up steadily in mature production programs because of the absence of competition.

There is also the revolving door problem. While a number of experienced Pentagon procurement officials working for defense contractors and vice-versa is healthy, the current lack of any meaningful controls on this revolving door is creating an unhealthy tolerance of conflict of interest. All too frequently, procurement offices have become de facto out-placement offices for retiring officers seeking employment in the defense industry.

What must be done to reform the current mess?

First, Secretary of Defense Robert Gates must establish a culture that restores hierarchical decision-making authority and personal accountability to procurement. The backbone of such management should be the military departments, which have cultures of accountability. Each military department already has a service secretary and service chief who have the essential levers of control. Title 10 of the U.S. Code gives them power over assignments, promotions, retirements and expenditures. And it is they who should be held accountable. The staff of the secretary of defense should perform only those interservice functions that are essential to integrate and reconcile cross-service issues.

Second, the culture of unbridled design and engineering changes that has become entrenched in the Pentagon must be ended. Service secretaries alone should have the power to be the gatekeepers.

Third, the policy of ceding control to contractors should be abandoned and control should be taken back by the military services. That will require rebuilding cadres of procurement engineers, technologists and managers in the civilian and military ranks through special incentives, training programs and lateral recruiting from the private sector. No one should be assigned to any procurement executive job for less than a four-year tour.

Fourth, it should be general policy to maintain two or more providers competing throughout production. Programs such as aircraft carriers, where numbers may be insufficient to support annual competition, should be treated as exceptions, not the rule.

Fifth, there should be at least a 20% overall reduction in civilian and military staff bureaucracies. This can be done through normal attrition and early retirements, as has successfully been done in the past.

Sixth, for the more senior procurement positions, including the chief executives of the Defense agencies, there should be a major initiative to recruit outstanding leaders with proven records of accomplishment in private and public service. Like career procurement officials, they must commit to a minimum of four years in the job. So far the Obama/Gates picks are very promising.

It is wishful thinking, of course, to believe these changes can be accomplished rapidly or easily. But a new administration can provide a new vision and new discipline. To use an analogy from the old sailing Navy, we are being driven rapidly toward a lee shore set with the jagged rocks of nuclear terrorism and hostile powers. If we don't reverse course, we face future catastrophe.

Mr. Lehman was secretary of the Navy in the Reagan administration and a member of the 9-11 Commission.