Proof Point Project - A Study to Determine the Impact of Performance Based Logistics PBL on Life Cycle Costs Report - DTD 30 Nov 11

According to the executive summary, "the Assistant Secretary of Defense (Logistics & Materiel Readiness) chartered this initiative to provide conclusive evidence regarding the impact of Performance Based Logistics (PBL) on the life cycle cost of sustaining Department of Defense (DoD) weapon systems, subsystems, and major components when compared to non-PBL sustainment arrangements." The report goes on to state, "in the late 1990s, equipment availability for mission tasking, reliability, and maintainability were generally considered to be weak to poor across DoD. Furthermore, the life cycle cost to sustain equipment was high and out of the Department’s control. To address these issues, in 2001 the DoD identified PBL as the preferred equipment sustainment strategy.1 The business theory supporting PBL suggested that acquiring “performance” (outcomes) rather than materiel, maintenance and/or repair services (inputs) would drive down overall program risk, more effectively manage risk across the defense industrial base, improve reliability and maintainability, and drive down life cycle costs.  Ten years later, there is widespread (but not universal) agreement that equipment maintained under PBL arrangements experience better availability for mission tasking, better reliability, and better maintainability than equipment repaired under transactional arrangements. However, disagreement exists regarding the affordability of the improved performance. PBL proponents assert that overall weapon system sustainment, including life cycle costs, has improved. Critics contend that PBL’s benefits and costs are limited or indeterminable, savings are not passed on to the government, that PBLs stifle competition, DoD flexibility is limited due to contract lengths, and that PBLs outsource logistics and, therefore, degrade organic DoD capabilities.  Neither critics nor proponents possessed the rigorous, fact-based analyses necessary to substantiate their position. The absence of conclusive evidence concerning the impact of PBLs on life cycle cost allowed this debate to continue without resolution. In turn, the ongoing debate fueled speculation and hesitancy regarding the future of sustainment practices among DoD activities responsible for equipment sustainment. As expected in this environment, the way forward for Departmental sustainment remained an unanswered question.  This report provides conclusive evidence regarding the impact of PBLs on life cycle cost, while also addressing critic’s non-cost concerns listed above. This report provides four tiers of evidence to support its conclusions: Empirical evidence Statistical point of proof with a defined level of confidence Compelling evidence Preponderance of evidence  The “team employed a robust, fact-based three tiered methodology to prove or disprove its hypothesis that:  Sustaining weapon systems, subsystems and major components via Performance Based Logistics arrangements delivers improved readiness at reduced life cycle costs when compared to traditional, transactional sustainment arrangements."    According to the report summary, “conventional wisdom suggests that improved sustainment performance can only be realized through higher maintenance and repair costs. As documented in this report, PBLs have the proven ability to deliver superior performance at reduced cost when compared to non-PBL arrangements. Both business theory and the actual results achieved in practice illustrate why this is true. Traditional transactional-based sustainment approaches fail to align the interests and incentives of those entities responsible for establishing and managing equipment sustainment strategies and those entities responsible for performing maintenance/repairs. In many instances, the incentives of the two sides are diametrically opposed. When sustainment providers are paid per maintenance action, their financial situations are enhanced by the need for additional maintenance. Furthermore, where the profit margin per maintenance action is a fixed percent of the total cost to repair, the provider’s financial situation is improved by holding the cost to repair at the highest possible level. Finally, in situations where sustainment providers are either monopolies or oligopolies, which is very often the case in the defense space, there are perverse, very few, or no incentives to improve product reliability, maintainability, or hold-down costs — again, because the provider’s financial situation is improved as the need for maintenance, parts, and the overall price-to-maintain increase.  In transactional sustainment arrangements, the incentives are neutral at best and more likely tilted against the military Services and Defense Logistics Agency. Compounding this problem is that essentially all financial and performance risks reside with the Services.  By contrast, PBLs are far more effective, but not perfect, in aligning the interests and incentives of those entities responsible for establishing and managing equipment sustainment strategies and those entities responsible for performing maintenance/repairs. When sustainment providers are paid a firm-fixed price for established levels of performance, they improve their financial situation by driving down additional maintenance. When this is coupled with an assured, long term income stream, which is often preferred over higher profit margins with less certainty, providers are further incentivized to invest in process and reliability improvements. The study team uncovered numerous examples of companies making investments in reliability improvements to drive down equipment MTBF that resulted in dramatically improved materiel performance.  Where the PBL provider’s profit margin per maintenance action is not a fixed percentage of the total cost to repair, the provider’s financial situation is improved by driving down the cost to repair. Here too, the study team uncovered numerous examples of companies making significant investments to lean processes that resulted in dramatically reduced MTTR and reduced demand for additional equipment populations necessary to support lengthy maintenance pipelines. PBLs incentivize out-of-pocket reliability and process improvement investments in Firm-Fixed-Price contract situations, which indicates the need for a paradigm shift, whereby competition is understood to include situations where companies compete aggressively against their own internal quality and inefficiency challenges in order to increase profits. A concomitant benefit of industry’s investment in innovation is that it enhances U.S. manufacturers’ state-of-the-art capability and the nation’s overall national security and economic posture.  Traditional, transactional sustainment contracts do not incentivize this behavior in either monopolistic or oligopolistic markets and do so only to a very small degree in more competitive spaces. It must be strongly emphasized that PBLs do not perfectly align the interests of the entities responsible for establishing equipment sustainment strategies and those entities responsible for performing maintenance. PBL providers are very often monopolies or oligopolies with legally binding mandates to maximize shareholder value and maximize long-term profits.  As a result, PBL contracts must be skillfully constructed, managed, and renegotiated/ re-competed. More specifically, it is essential that commercial providers retain the opportunity to realize profitability commensurate with the risks embedded in Firm-Fixed-Price contracts and their out-of-pocket investments to improve reliability, maintainability, and price to repair. It is equally essential that the government orchestrate the PBL arrangement throughout the equipment’s life cycle to confirm an equitable distribution of risks and rewards among the parties to the PBL contract. In PBL sustainment arrangements, the military Services and Defense Logistics Agency find themselves on a far more level and financially advantageous playing field with their PBL providers. Further enhancing this situation is the reduction of overall program risk and the transfer of these risks from those entities responsible for establishing and managing equipment sustainment strategies to those entities responsible for performing maintenance. The potential savings and performance improvements inherent in the widespread application of PBL sustainment arrangements are immense. PBL’s distinct advantage over transactional sustainment arrangements are not in doubt. It is time to press forward and broadly deploy PBLs to the military Service’s weapon systems, subsystems, and major components — employing either organic or commercial sustainment providers.”  Note: Where used above, emphasis added.