Cost Growth - Perception and Reality
I commend for your reading an excellent article in the current July 2010 edition of the Defense Acquisition Review Journal entitled “Cost Growth: Perception and Reality.” In the article, the author contends that “everyone agrees that rising weapon (system) costs are evidence of acquisition system failure….Misconceptions (about cost growth often) lead acquisition executives to implement an endless cycle of reforms that begin with high hopes, yet prove disappointing in execution. This article analyzes the nature of cost growth, assesses its practical effects, surveys the recent literature, and offers insights about which actions are most effective.”
He contends, rightfully, I would argue, that “if the true costs of a weapon systems program were known from the beginning, then decision makers might make different choices.” In fact, he goes on to state a fact that most of you have heard many times before, namely that “most of the cost of a system is locked in when the key capabilities are determined but before much money is spent. Starting ambitious programs is easy because early funding demands are low, uncertainty is great, and optimism reigns. Only later, once programs are well established and the magnitude of the challenge is understood, do the true costs become apparent.”
The author advocates for six areas of reform:
- Exhorting contractors to do better
- Improved reporting
- Focusing on acquisition strategies to better manage programs
- Early, accurate, cost estimates
- Judiciousness in starting new programs
- A focus on requirements
Early, accurate cost estimates are vitally important, but I would also contend we must also fully embrace Life Cycle Management (LCM) practices and principles. As I shared in a blog post several weeks ago entitled “Impediments to Achieving Life Cycle Management (LCM)?”, “Life Cycle Management is the implementation, management, and oversight, by the designated Program Manager (PM), of all activities associated with the acquisition, development, production, fielding, sustainment, and disposal of a DOD system across its life cycle.” (Manual for the Operation of the Joint Capabilities Integration and Development System (JCIDS). DoD policy clearly states, “the program manager shall be the single point of accountability for accomplishment of program objectives for total life cycle systems management, including sustainment” (DoDD 5000.01, Para E1.29.). Paragraph 11.7 of the Defense Acquisition Guidebook (DAG) (appropriately entitled Total Life-Cycle Systems Management) succinctly provides detailed information on this vitally important strategy which “emphasizes early and continuing emphasis on translating performance objectives into an operationally available and affordable capability over the program life cycle.”
Ensconced in this policy is the foundational tenet of focus on life cycle cost (LCC) or total ownership cost (TOC) of a system rather than merely up-front research, development or acquisition costs. The author of Cost Growth: Perception and Reality highlights this point in a figure in the article labeled “Costs Determined verses Funds Expended”. Because a system’s lifetime, long-term operations and maintenance (O&M) costs generally dwarf up-front acquisition costs, we risk missing the most significant portion of weapon system’s costs if we do not address them early in system requirements identification, and system design and development. We risk making short-sighted decisions to contain rising near-term research, development and acquisition costs (regardless of the cause) if we fail to understand the long-term, life cycle cost implications of these decisions. In fact, we risk cutting the very investments in long-term life cycle cost containment to meet short-term acquisition cost requirements.
Successful individuals and organizations have long-recognized that proactive up-front investments must be made in order to obtain long-term returns. Whether it is personal commitment to near-term exercise and good eating habits which lead to long-term health benefits, or proactively exhibiting personal financial responsibility by saving for long-term goals such as buying a home, putting our kids through college, or planning for retirement, as individuals we know intuitively this to be true. It is the same in the corporate world – up-front commitment to research and development (R&D) is inevitably a key component of technological breakthroughs and new product lines. In this logistics arena, this has been proven time and again over the last decade through the successful implementation of Performance Based Life Cycle Product Support (PBL) strategies – incentivizing up-front investment in long term weapon system reliability and maintainability (R&M) and obsolescence and DMSMS (Diminishing Manufacturing Sources & Material Shortages) proactively provides long-term increases in system availability, readiness, and if performance-based agreements (PBA) are negotiated and structured properly, life cycle cost reductions as well.
Beware of overly focusing on near-term acquisition costs. If we are to truly contain cost growth for the good of our nation and our warfighters, we must be resolute in our commitment to LCM and LCC/TOC reductions, along with fighting to ensure up-front and very often continuing investments are made in order to deliver the long-term benefits these vital tools can and do deliver. We must also ensure our government and defense industry reward, recognition, promotion, and/or compensation systems are aligned to desired readiness and availability outcomes and which don’t inadvertently incentivize short-term vice long-term performance and behaviors.