Pentagon Acquisitions Chief Kendall Assesses Priorities Under Tight Budget

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Washington, DC – Noting that he’d returned to government service almost three years ago to the day, the Pentagon’s acquisitions chief today (March 12) reviewed the five priorities he set in 2010.

Speaking at the McAleese/Credit Suisse Defense Programs Conference at the Newseum, Frank Kendall, undersecretary of defense for acquisition, technology and logistics, said he’s added another priority since then, but they otherwise have remained relatively unchanged.

His original priorities — support to operations, having affordable programs, improving the acquisitions process, strengthening the industrial base, and strengthening the acquisitions workforce — now include the goal of protecting the future, something he said he added about a year ago when he was named to his current position.

Given the budget climate, he said, he believed it was a rising need to pay attention to the future of the department, its workforce and the industrial base. “We’re still at war. … Astonishingly to me, given what’s happening to us in the budget, we are still at war,” Kendall said. Funding for operational support is out of balance, he added, but efforts are under way to correct some of the greatest imbalances and some of the readiness problems created by the current budget environment.

Until those issues are fixed, Kendall said, there isn’t much left in the coffers for future operations. “We’re essentially in a position today where we can take care of the people in combat, we can do some things to get the people getting ready right now to go to combat — to prepare them — and then people after that are really in deep trouble.”

The department continues to support forces in Afghanistan, he said, “but, increasingly, we’re worried about getting out.” Withdrawal from Iraq was an “intense challenge,” Kendall said, “but it was nothing compared to the problem we’re going to have getting out of Afghanistan.”

Pakistan’s ground lines of communication are opening, he said, which has helped to speed the movement of material, but the International Security Assistance Force still relies heavily on the Northern Distribution Network. “We’ve got a lot to do in the next couple of years to get everything out,” Kendall said.

Sequestration is on the minds of acquisition, technology and logistics employees in the Defense Department, and he will continue to be outspoken about its impacts on the workforce, Kendall said.

During a recent trip to Afghanistan, he said, he spoke with civilian personnel deployed in logistical support roles. “I was asked a question by one of our DOD civilians,” he said. “The question was, ‘Will I be furloughed?’ This is a person who is working for the Department of Defense, serving in a war zone, supporting our combat troops. … That’s not the sort of [worry] you want to have in an operational context. That is not what that person should be worrying about.”

A report today by the Government Accountability Office called into question the affordability of the F-35 Lightning II joint strike fighter, Kendall said. “[The] F-35 is our No. 1 program. It is our highest priority,” he told the audience at the conference. While it does absorb a significant fraction of defense investment accounts, and going forward it will absorb a similar fraction of support accounts, he said, “it is a transforming aircraft.” “It will give us dominance in the air — probably our single most important conventional war fighting capability,” he added.

Even with the far-reaching effects of sequestration, the budget is adequate to support ongoing development and deployment of the F-35, Kendall said, particularly given its importance. For now, he added, the key to getting the cost down is to get the production rate up. To make the aircraft affordable in the future, he said, the department is working to reduce the sustainability costs — the costs of supporting the aircraft once it is in use.

Affordability is a theme throughout the acquisitions community, Kendall said. “When I talk about affordability, I’m really not talking about cost-control, per se. … I’m talking about not starting programs that we can’t afford.”

This means avoiding costly programs like the Army’s expeditionary fighting vehicle, he said, because the department can’t afford programs that will spend 10 to 15 years in development only to be cancelled. “That, to me, is … almost entirely waste, even if we get some technology out of the program,” he added.

The Defense Department is examining its long-term capital planning to determine whether programs are affordable and establishing cost caps by designing programs to meet fiscal requirements, rather than vice versa, he said.

The F-35 was inherited from a previous administration, Kendall said, and as such is so far along in its development that making it affordable is now about finding efficiencies to control production and support costs, rather than changing or eliminating requirements. “We’ve had great success there,” he said, “but I think we have a long way to go.”

Efficiencies are about getting greater productivity and streamlining the acquisitions process, he explained. Research and development costs get all the attention, Kendall said, but acquisition also includes all of the money spent outside the Defense Department. More than half of those dollars historically have gone to service and support contracts, he said. “If you want to manage efficiently, you have to look where the money is,” he noted.

Improving the acquisitions process also means changing the way contracting is done, Kendall said. The department arms itself with historical cost data when it conducts negotiations, he said, which means there’s a better understanding of what things should cost. In addition, the undersecretary said, more thought is going into performance incentives and into selecting the type of contract used on projects. Fixed-price contracts are being used where it makes sense, he said, to share risk with industry.

Kendall said he wants the acquisition community to take the time it needs to get the best business deals. “There’s a perverse incentive to obligate our money,” Kendall said. “We’re measured on how fast we obligate money, and if we don’t obligate it, there’s a risk that someone will take it away — either the Congress or the comptroller in DOD or the comptroller in the service. … You should not feel that it’s a failure if you have a good reason for not obligating your money.”

These moves toward better business practices will help the department’s industrial partners, he said. The Pentagon’s “Better Buying Power 2.0” initiative reflects a number of inputs from industry, Kendall noted, including better definitions of acceptable outcomes in contracting. In addition to more accurate applications of technically acceptable contracts, he said, the acquisitions community is trying to better define value. “We have to define value from our perspective as the customer,” he said.

Sometimes this will mean spending more for more capability, Kendall said, a win for both industry and the department, because it rewards innovation and gives DOD a higher-performing, perhaps much more effective product.

Meanwhile, Kendall said, the industrial base is waiting to see what happens with the budget. “[Industry] is nervous — there are a lot of people at risk out there,” he said. “The key to strengthening industry from the point of view of a leaner, more productive industry is the incentives that we provide.”

Defense Department officials want industry to be strong and profitable, he added, but they want to tie profit to performance. The department is reworking its incentive structure to reward good performance, he said. “One of the things we will be doing is providing a superior suppliers program, which identifies some of our better performers and rewards them for what they’re doing,” he explained. “We can’t do that directly financially, necessarily, but there are other ways we can do that.”

The department is concerned about the implications of the budget changes, Kendall said, particularly for small companies. “As we go through the downturn, … small companies are going to have the greatest difficulty absorbing some of the cuts,” he said. “We are looking at the structure. We are prepared to step in in certain cases. In the case of key technologies, Kendall said, the department should find ways to keep those companies alive in the marketplace, Kendall said.

“We don’t have a lot of resources to do this, so it’s going to be selective,” he added. “And we’re trying to find efficient ways to step in. … We shouldn’t be buying entire weapons systems to save small manufacturers who happen to be building components on those weapons systems.” Kendall noted he has seen several cycles of acquisitions reform. Through all of those changes, he said, the most important aspect of the process has been good leadership.

“We live in a very complicated, difficult world. It takes true professionals to do this well,” he said. “These aren’t easy jobs. They are very, very difficult, complex jobs that require decades of preparation before you can do them and be successful at them. So we’ve got to strengthen that, we’ve got to build that, we’ve got to manage our talent pool and grow our people so they’re as effective as they can be.”

This leads into Kendall’s final priority: protecting the future. “Every program we do has risk,” he said. The job of the acquisitions corps is to deliver programs and control costs. The careful decision-making that went into the defense strategy and the acquisitions planning that supports it is threatened by sequestration, Kendall said.

“I am nervous about our ability to the research and development that we really need to do to keep a healthy department long term in the climate that we’re in,” the undersecretary said. “There is risk now with sequestration levels — even levels that are not that deep — that we will get out of balance. If we have to take significant cuts, we’ve got to go back to the drawing board, rethink the strategy, rethink the force structure and try to get back in balance.”

Therefore, he said, he is thinking seriously about the idea of some prototyping programs designed to be a hedge against the risk of being out of balance. These programs might not get off the drawing board in the current budget environment, Kendall said, but they would keep technology moving forward and guarantee the technological superiority of the United States is intact once the budget crisis ends.

They also would foster critical design and technological skills and hedge against an uncertain future, he told the audience.

“If we go into another round of cuts, I think we’re going to have to balance and preserve [research and development],” Kendall said. “For the last three years, I’ve been in the mode of ‘Don’t start things we can’t afford.’ An increasing fraction of our R&D budgets is going into upgrading existing systems. We need to design things so we can keep them for a long period of time.”

Despite these challenges, Kendall said, the Defense Department will get through them. “The department will come out of this, hopefully at a reasonable level of funding,” he said. “But nobody should think that there’s not damage being done out there.”

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