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he U.S. Department of Defense (DoD) spent $360 billion on contracts in Fiscal Year 2018, with half of the total going for products and half for services.
Some of the products were items to be used and disposed of, such as tires or fuel, but the majority of the money is for major items that will be used for decades: ships, aircraft, ground vehicles.
These major systems require work to sustain them. In fact, it has long been known that 70% of the total lifecycle cost of a major weapon system is the cost to keep it running and to modernize and upgrade it after the system is designed, developed, and fielded.
These sustainment costs are part of why DoD needs services contracts. Repairs, upgrades, software updates, spare parts, and labor costs make up that 70% lifecycle cost.
The First Problem
Despite this huge expenditure over the multi-decade life of a weapon system, DoD does not focus enough on ways to reduce lifecycle cost. During my last tour in the Pentagon, I searched to find the contracts for major systems that were awarded to the company that proposed big lifecycle savings. I found none; there appeared to be no such contracts. Therefore, the first problem in taming lifecycle costs is that DoD does not reward companies that—from the beginning—can design lower long-term costs into systems.
The first step in reducing lifecycle costs would be to design lower lifecycle cost into systems from the beginning.
This seems such an obvious step that we have to ask why DoD doesn’t do this all the time. The answer is that it takes upfront investment dollars to design and build a more reliable system that will lead to lower costs for sustainment. Given the global threats that America faces, programs think they need to invest more in higher performance rather than lower lifecycle costs. That’s a tradeoff that may make sense when considered one weapon system at a time, but in the aggregate, it adds tens of billions of dollars each year in increased DoD sustainment costs.
A better way would be for the Pentagon to require (and pay for) upfront investment that reduces lifecycle cost. In the aggregate, this would free up much-needed future funds to invest in technology and innovation, maintaining our edge over competitor nations’ armed forces.
There is more that can be done, however.
The Second Problem
Even if DoD started today to award new system development contracts to companies that can reduce lifetime sustainment costs, current systems will need support for many decades to come. What can be done to reduce operating and support costs for those existing systems? The second problem in taming lifecycle costs is reducing the long-term burden of current systems.
The next step in reducing lifecycle costs would be to find ways to reduce costs once a system is fielded and operating.
Addressing this problem is not as simple as the first problem seemed to be, in part because the structures for sustaining systems are embedded across DoD and are hard to change.
DoD could take better advantage of its services contractors and their capabilities in ways that could reduce support and operating costs. Companies understand opportunities for incorporating process changes, improvements in technology, and innovations in using information and data to increase readiness and reduce operating and support costs while speeding return to use.
In some cases, policy changes would be needed to expand ways to incorporate contractor ideas and concepts. In other cases, DoD could move out today. Contract vehicles are often already in place that would quickly support such actions.
The Third Problem
DoD could address the first two problems and still be a long way from reducing lifecycle costs enough. Why? Because the third problem is the difficulty DoD has in incorporating innovation into existing systems.
Typically, improvements are added through programs of modernization (often called “mods”) and upgrades of current platforms. Often, those improvements can lead to improved performance at less cost that building new systems.
Why doesn’t DoD do this better? There are at least four constraints:
DoD has its own internal industry, the maintenance depots, which helps schedule these upgrades. However, their planning cycle is often longer than the cycle of innovation.
If DoD does not ensure upfront sufficient access to intellectual property (IP) associated with existing systems, it can be it too expensive for upgrades later.
Too often, available funds are of the wrong type to use for incorporating innovations.
It is harder for DoD to find and access innovations from outside DoD that can be used in upgrades.
Each of these constraints require different steps to address. Here are two.
Congress can change how money is appropriated can be used to improve upgrades. Initial steps on this for software can be expanded more broadly.
DoD’s new IP policy may encourage better upfront decisions on IP, but an expanded policy will be needed to solve the problem of existing systems.
Overall, though, the most improvement can come if DoD solicits, encourages, and rewards innovations from contractors that should be brought into weapon systems during scheduled mods and upgrades.
Many of the solutions to the three problems come down to this: the services contractors who already support DoD systems are in a superior position to propose, organize, and execute steps to reduce lifecycle cost. The industry stands ready to support these actions. DoD needs to act.
This article was published October 30, 2019 in the
Fall 2019 edition
of PSC's Service Contractor Magazine.