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Half-trillion in defense budget cuts means targeting sustainment costs

Jan. 20, 2013 - 03:19PM   |  
By STEVEN HURT and ALAN HECKLER   |   Comments

Much as in the movie “Groundhog Day,” when the same day repeated over and over for the main character, the Defense Department closed out 2012 as it did 2011, staring down the barrel of another half-trillion dollars in budget cuts.

Even with the agreement to partially avert the fiscal cliff and delay cuts to planned Pentagon spending until March, the consensus is that defense budget cuts are coming. Reducing sustainment costs while maintaining performance is a national strategic priority to cushion these pending reductions and facilitate the shift to an Asian-centric strategy.

A.T. Kearney recently completed a research study of government, aerospace and defense, and industry executives to understand how defense spending reductions could affect sustainment. DoD’s policy to reduce sustainment costs and improve performance is called Performance-Based Logistics. As Project Proof Point, a recent DoD study, and Better Buying Power 2.0 have indicated, PBLs are often effective remedies. However, our research suggests PBLs are only a part of the solution.

The path to wellness requires holistic thinking on three fronts:

• Adopt a menu of principle-driven sustainment models across DoD to eliminate unnecessary variation in the public- and private-sector value chains.

We define principle-driven sustainment models as a limited, fixed menu that embodies a DoD enterprise-level product support and supply strategy based on first principles or program characteristics. For example, a limited-life weapon system with significant commercial content should likely be sustained by the contractor base, while a highly specialized, long-lifespan program is well-suited for an organic sustainment model.

In large commercial corporations with diverse product lines — think Siemens, Hewlett-Packard and General Electric — appropriate standardization has become key to reduce complexity, promote speed and maximize profits. Once these models are defined, the DoD enterprise can project sustainment requirements and align infrastructure requirements and investments in facilities, tooling, information technology, capability-building, etc., to deliver better product support with less budget.

Obviously, the challenge is to define the DoD enterprise strategies, and our research indicates there is growing support to do just this. When defined successfully based on first principles, these models should endure and not waver with the flavor-of-the-month program.

• Leverage resources in a manner that enables new cost and performance levels to be achieved. Today, most programs are designed, developed, structured and executed to be autonomous. This approach is often cited as a way to reduce risk. However, the fallacy is that decisions are most often made with cost as an independent variable, which is certainly not applicable in today’s environment.

The results are ever-growing standing armies of engineers, program managers and personnel in DoD financial management to manage a proliferation of unique supply chains, maintenance bays and engineering facilities. A better way is to look across products, systems and subsystems to identify points of commonality, economies of scale and leverage. The key is finding the sweet spot in the holy trinity of scope, management complexity and potential savings.

Just as the every-man-for-himself approach is unaffordable, the portfolio cannot be one-size-fits-all.

A shining example of the portfolio mindset at work is the F-35 program. While its $1.5 trillion price tag and developmental delays receive all of the headlines, consider the cost if each U.S. ally had to acquire those capabilities individually. As the Financial Times noted in an Oct. 15 article, “Europe risks giving up on defence,” Europe cannot fund its own force posture as it is; imagine if it had to pay the full burden of developing more than 15 fifth-generation fighter planes from scratch: Our guess is it wouldn’t. Imagine the security risk that would then fall to the U.S.

• Improve sustainment through better acquisition decisions. Further reducing sustainment costs requires asking the hard questions about capability and cost tradeoffs earlier in a program’s life. Our interviews confirmed that while total life-cycle costs are considered early in program development, too often, capability trumps cost.

Much has been done recently to correct this imbalance, such as life-cycle sustainment plans, milestone reviews and the Better Buying Power initiative. However, better training and education are needed to help the acquisition workforce more accurately complete trade-off analyses. Better insights are needed in three key areas: advanced analytics, to study trade-off requirements and the costs of being unique; acquisition strategies, including open systems architectures, dual sourcing or unlimited data rights to promote competition; and organizational upgrades to improve alignment and execution across the program’s life cycle and to drive accountability to all stakeholders.

Much like in “Groundhog Day,” something positive and meaningful needs to occur to break the cycle. Implementing these three findings will help DoD move forward and break the draconian targeting and budget reduction cycle.

Steven Hurt is a partner in A.T. Kearney’s Public Sector and Defense Practice, and Alan Heckler, a principal in the practice.

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