DOD Acquisition Outcomes: A Case for Change (15-NOV-05, 	 
GAO-06-257T).							 
                                                                 
The Department of Defense (DOD) is shepherding a portfolio of	 
major weapon systems valued at about $1.3 trillion. How DOD is	 
managing this investment has been a matter of concern for some	 
time. Since 1990, GAO has designated DOD's weapon system	 
acquisitions as a high-risk area for fraud, waste, abuse, and	 
mismanagement. DOD has experienced cost overruns, missed	 
deadlines, performance shortfalls, and persistent management	 
problems. In light of the serious budget pressures facing the	 
nation, such problems are especially troubling. GAO has issued	 
hundreds of reports addressing broad-based issues, such as best  
practices, as well as reports focusing on individual		 
acquisitions. These reports have included many recommendations.  
Congress asked GAO to testify on possible problems with and	 
improvements to defense acquisition policy. In doing so, we	 
highlight the risks of conducting business as usual and identify 
some of the solutions we have found in successful acquisition	 
programs and organizations.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-257T					        
    ACCNO:   A41517						        
  TITLE:     DOD Acquisition Outcomes: A Case for Change	      
     DATE:   11/15/2005 
  SUBJECT:   Accountability					 
	     Budget controllability				 
	     Cost overruns					 
	     Defense budgets					 
	     Defense cost control				 
	     Defense procurement				 
	     Internal controls					 
	     Performance measures				 
	     Procurement planning				 
	     Procurement practices				 
	     Schedule slippages 				 
	     Weapons systems					 
	     Joint Strike Fighter				 
	     DD(X) Destroyer					 
	     F-22 Raptor Aircraft				 

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GAO-06-257T

Testimony

Before the Subcommittee on AirLand, Committee on Armed Services,

U.S. Senate

United States Government Accountability Office

GAO

For Release on Delivery Expected at 2:30 p.m. EST

Tuesday, November 15, 2005

DOD ACQUISITION OUTCOMES

A Case for Change

Statement of Katherine V. Schinasi, Managing Director

Acquisition and Sourcing Management

GAO-06-257T

Mr. Chairman and members of the subcommittee:

I am pleased to be here today to discuss why and how to get a better
return from the Department of Defense's (DOD) weapon system investments.
U.S. weapons are the best in the world, but the programs to acquire them
frequently take significantly longer and cost more money than promised and
often deliver fewer quantities and other capabilities than planned. It is
not unusual for estimates of time and money to be off by 20 to 50 percent.
When costs and schedules increase, quantities are cut, and the value for
the warfighter-as well as the value of the investment dollar-is reduced.

DOD's planned investment in research, development, and procurement of
major weapon systems is approximately $1.3 trillion for its current
portfolio, with over $800 billion of that investment yet to be made. The
planned annual investment is expected to rise from around $149 billion in
fiscal year 2005 to $178 billion in fiscal year 2011. Marquee programs
include the Army's Future Combat Systems; the Missile Defense Agency's
suite of land, sea, air, and space systems; the Navy's advanced ships,
such as the DD(X) Destroyer; the Air Force's Transformational Satellite
Communications System; and the Joint Strike Fighter. Programs like
these-and the Global Information Grid that is designed to interconnect
them-are likely to dominate the budget and doctrinal debate well into the
next decade. Not only do these programs represent huge technological leaps
over their predecessors, DOD is proposing to deliver them faster.

The persistent nature of acquisition problems has perhaps made decision
makers complacent about cost growth, schedule delays, and quantity
reductions in weapon system programs. But fiscal realities, coupled with
the larger scale of acquisitions, will not allow budgets to accommodate
the typical margins of error. Thus, we must either make tough decisions
now to increase the chances for programs to be executable within fiscal
realities or brace ourselves for more draconian decisions later driven by
those fiscal realities. The means to make the thoughtful decisions are
known.

My statement today highlights the risks of conducting business as usual
and identifies some of the solutions we have found in successful
acquisition programs and organizations.

                              The Case for Change

The way DOD develops and produces its major weapons systems has had
disappointing outcomes. There is a vast difference between DOD's budgeting
plans and the reality of the cost of its systems. Performance, if it is
defined as the capability that actually reaches the warfighter, often
falls short, as cost increases result in fewer quantities of produced
systems and schedule slips. Performance, if it is defined as an acceptable
return on investment, has not lived up to promises.

Table 1 illustrates seven programs with a significant reduction in buying
power; we have reported similar outcomes in many more programs. For
example, the Air Force initially planned to buy 648 F/A-22 Raptor tactical
aircraft at a program acquisition unit cost of about $125 million (fiscal
year 2006 dollars). Technology and design components matured late in the
development of the aircraft, which contributed to cost growth and schedule
delays. Now, the Air Force plans to buy 181 aircraft at a program
acquisition unit cost of about $361 million, an almost 189 percent
increase.

Table 1: Examples of DOD Programs with Reduced Buying Power

                                                                      Percent 
                                                                      of unit 
                            Initial    Initial     Latest     Latest     cost 
Program               investment   quantity investment   quantity increase 
Joint Strike             $189. 8      2,866     $206.3      2,458    26.8% 
Fighter                  billion   aircraft    billion   aircraft 
Future Combat              $82.6                $127.5               54.4% 
Systems                  billion 15 systems    billion 15 systems 
F/A-22 Raptor              $81.1        648      $65.4        181   188.7% 
                            billion   aircraft    billion   aircraft 
Virginia Class             $53.7         30      $80.4         30    49.7% 
Submarine                billion submarines    billion submarines 
Evolved Expendable         $15.4        181      $28.0        138   137.8% 
Launch Vehicle           billion   vehicles    billion   vehicles 
Space Based         $4.1 billion                                    160.2% 
Infrared System                           5      $10.6          5 
High                             satellites    billion satellites 
Expeditionary       $8.1 billion      1,025      $11.1      1,025    35.9% 
Fighting Vehicle                   vehicles    billion   vehicles 

Source: DOD (data); GAO (analysis and presentation).

Furthermore, the conventional acquisition process is not agile enough for
today's demands. Congress has expressed concern that urgent warfighting
requirements are not being met in the most expeditious manner and has put
in place several authorities for rapid acquisition to work around the
process. The U.S. Joint Forces Command's Limited Acquisition Authority and
the Secretary of Defense's Rapid Acquisition Authority seek the ability to
get warfighting capability to the field faster. According to U.S. Joint
Forces Command officials, it is only through Limited Acquisition Authority
that the command has the authority to satisfy the unanticipated,
unbudgeted, urgent mission needs of other combatant commands. With a
formal process that requires as many as 5, 10, or 15 years to get from
program start to production, such experiments are needed to meet the
warfighters' needs.

Today we are at a crossroad. Our nation is on an unsustainable fiscal
path. Long-term budget simulations by GAO, the Congressional Budget
Office, and others show that, over the long term, we face a large and
growing structural deficit due primarily to known demographic trends and
rising health care costs. Continuing on this unsustainable fiscal path
will gradually erode, if not suddenly damage, our economy, our standard of
living, and ultimately our national security. Federal discretionary
spending, along with other federal policies and programs, will face
serious budget pressures in the coming years stemming from new budgetary
demands and demographic trends. Defense spending falls within the
discretionary spending accounts. Further, current military operations,
such as those in Afghanistan and Iraq, consume a large share of DOD
resources and are causing faster wear on existing weapons. Refurbishment
or replacement sooner than planned is putting further pressure on DOD's
investment accounts.

At the same time DOD is facing these problems, programs are commanding
larger budgets. DOD is undertaking new efforts that are expected to be the
most expensive and complex ever and on which DOD is heavily relying to
fundamentally transform military operations. And it is giving contractors
increased program management responsibilities to develop requirements,
design products, and select major system and subsystem contractors. Table
2 shows that just 5 years ago, the top five weapon systems cost about $291
billion combined; today, the top five weapon systems cost about $550
billion.

Table 2: Total Cost of DOD's Top Five Programs in Fiscal Years 2001 and
2006 (in 2006 dollars)

                       2001                                 2006
Program                       Cost           Program        Cost           
F/A-22 Raptor aircraft                       Joint Strike   $206.3 billion 
                                 $65.0 billion  Fighter        
DDG-51 class destroyer ship                  Future Combat  $127.5 billion 
                                 $64.4 billion  Systems        
Virginia class submarine                     Virginia class $80.4 billion  
                                 $62.1 billion  submarine      
C-17 Globemaster airlift                     DDG-51 class   $70.4 billion  
aircraft                      $51.1 billion  destroyer ship 
F/A-18E/F Super Hornet                       F/A-22 Raptor  $65.4 billion  
fighter aircraft              $48.2 billion  aircraft       
Total                         $290.8 billion Total          $550.0 billion 

Source: DOD (data); GAO (analysis and presentation).

If these megasystems are managed with traditional margins of error, the
financial consequences can be dire, especially in light of a constrained
discretionary budget.

Success for acquisitions means making sound decisions to ensure that
program investments are getting promised returns. In the commercial world,
successful companies have no choice but to adopt processes and cultures
that emphasize basing decisions on knowledge, reducing risks prior to
undertaking new efforts, producing realistic cost and schedule estimates,
and building-in quality in order to deliver products to customers at the
right price, the right time, and the right cost. At first blush, it would
seem DOD's definition of success would be very similar: deliver capability
to the warfighter at the right price, the right time, and the right cost.
However, this is not happening within DOD. In an important sense, success
has come to mean starting and continuing programs even when cost,
schedule, and quantities must be sacrificed.

DOD knows what to do to improve acquisitions but finds it difficult to
apply the controls or assign the accountability necessary for successful
outcomes. To understand why these problems persist, we must look not just
at the product development process but at the underlying requirements and
budgeting processes to define problems and find solutions.

             A Knowledge-Based Process Can Lead to Better Outcomes

Over the last several years, we have undertaken a body of work that
examines weapon acquisition issues from a perspective that draws upon
lessons learned from best product development practices. Leading
commercial firms expect that their program managers will deliver
high-quality products on time and within budget. Doing otherwise could
result in the customer walking away. Thus, those firms have created an
environment and adopted practices that put their program managers in a
good position to succeed in meeting these expectations. Collectively,
these practices comprise a process that is anchored in knowledge. It is a
process in which technology development and product development are
treated differently and managed separately. The process of developing
technology culminates in discovery-the gathering of knowledge-and must, by
its nature, allow room for unexpected results and delays. Leading firms do
not ask their product managers to develop technology. Successful programs
give responsibility for maturing technologies to a science and technology
organizations, rather than the program or product development managers.
The process of developing a product culminates in delivery, and,
therefore, gives great weight to design and production. The firms
demand-and receive-specific knowledge about a new product before
production begins. A program does not go forward unless a strong business
case on which the program was originally justified continues to hold true.

Successful product developers ensure a high level of knowledge is achieved
at key junctures in development. We characterize these junctures as
knowledge points. These knowledge points and associated indicators are
defined as follows:

           o  Knowledge point 1: Resources and needs match. This point occurs
           when a sound business case is made for the product-that is, a
           match is made between the customer's requirements and the product
           developer's available resources in terms of knowledge, time,
           money, and capacity. Achieving a high level of technology maturity
           at the start of system development is an important indicator of
           whether this match has been made. This means that the technologies
           needed to meet essential product requirements have been
           demonstrated to work in their intended environment.

           o  Knowledge point 2: Product design is stable. This point occurs
           when a program determines that a product's design is stable- that
           is, it will meet customer requirements, as well as cost, schedule
           and reliability targets. A best practice is to achieve design
           stability at the system-level critical design review, usually held
           midway through development. Completion of at least 90 percent of
           engineering drawings at the system design review provides tangible
           evidence that the design is stable.

           o  Knowledge point 3: Production processes are mature. This point
           is achieved when it has been demonstrated that the company can
           manufacture the product within cost, schedule, and quality
           targets. A best practice is to ensure that all key manufacturing
           processes are in statistical control-that is, they are repeatable,
           sustainable, and capable of consistently producing parts within
           the product's quality tolerances and standards-at the start of
           production.

A result of this knowledge-based process is evolutionary product
development, an incremental approach that enables developers to rely more
on available resources rather than making promises about unproven
technologies. Predictability is a key to success as successful product
developers know that invention cannot be scheduled and its cost is
difficult to estimate. They do not bring technology into new product
development unless that technology has been demonstrated to meet the
user's requirements. Allowing technology development to spill over into
product development puts an extra burden on decision makers and provides a
weak foundation for making product development estimates. While the user
may not initially receive the ultimate capability under this approach, the
initial product is available sooner and at a lower, more predictable cost.

There is a synergy in this process, as the attainment of each successive
knowledge point builds on the preceding one. Metrics gauge when the
requisite level of knowledge has been attained. Controls are used to
attain a high level of knowledge before making additional significant
investments. Controls are considered effective if they are backed by
measurable criteria and if decision makers are required to consider them
before deciding to advance a program to the next level. Effective controls
help decision makers gauge progress in meeting cost, schedule, and
performance goals and ensure that managers will (1) conduct activities to
capture relevant product development knowledge, (2) provide evidence that
knowledge was captured, and (3) hold decision reviews to determine that
appropriate knowledge was captured to move to the next phase. The result
is a product development process that holds decision makers accountable
and delivers excellent results in a predictable manner.

A hallmark of an executable program is shorter development cycle times,
which allow more systems to enter production more quickly. DOD itself
suggests that product development should be limited to about 5 years. Time
constraints, such as this, are important because they serve to limit the
initial product's requirements. Limiting product development cycle times
to 5 years or less would allow for more frequent assimilation of new
technologies into weapon systems, speeding new technology to the
warfighter, hold program managers accountable, as well as make more
frequent and predictable work in production, where contractors and the
industrial base can profit by being efficient.

         Despite Policy, DOD Is Not Employing a Knowledge-Based Process

DOD's policy adopts the knowledge-based, evolutionary approach used by
leading commercial companies that enables developers to rely more on
available resources rather than making promises about unproven
technologies. The policy provides a framework for developers to ask
themselves at key decision points whether they have the knowledge they
need to move to the next phase of acquisition. For example, DOD Directive
5000.1 states that program managers "shall provide knowledge about key
aspects of a system at key points in the acquisition process," such as
demonstrating "technologies in a relevant environment ... prior to program
initiation." This knowledge-based framework can help managers gain the
confidence they need to make significant and sound investment decisions
for major weapon systems. In placing greater emphasis on evolutionary
product development, the policy sets up a more manageable environment for
achieving knowledge.

However, the longstanding problem of programs beginning development with
immature technologies is continuing to be seen on even the newest
programs. Several programs approved to begin product development within
only the last few years began with most of their technologies immature and
have already experienced significant development cost increases. In the
case of the Army's Future Combat Systems, nearly 2 years after program
launch and with $4.6 billion invested, only 1 out of more than 50 critical
technologies is considered mature and the research and development cost
estimate has grown by 48 percent.

In March 2005, we reported that very few programs-15 percent of the
programs we assessed-began development having demonstrated high levels of
technology maturity. Acquisition unit costs for programs leveraging mature
technologies increased by less than 1 percent, whereas programs that
started development with immature technologies experienced an average
acquisition unit cost increase of nearly 21 percent over the first full
estimate.

Establishing a Sound Business Case Depends on Disciplined Requirements and
                                Funding Process

The decision to start a new program is the most highly leveraged point in
the product development process. Establishing a sound business case for
individual programs depends on disciplined requirements and funding
processes. Our work has shown that DOD's requirements process generates
more demand for new programs than fiscal resources can support. DOD
compounds the problem by approving so many highly complex and
interdependent programs. Moreover, once a program is approved,
requirements can be added along the way that increases costs and risks.

Once too many programs are approved to start, the budgeting process
exacerbates problems. Because programs are funded annually and department
wide, cross-portfolio priorities have not been established, competition
for funding continues over time, forcing programs to view success as the
ability to secure the next funding increment rather than delivering
capabilities when and as promised. As a result, there is pressure to
suppress bad news about programs, which could endanger funding and
support, as well as to skip testing because of its high cost.
Concurrently, when faced with budget constraints, senior officials tend to
make across-the-board cuts to all programs rather than make the hard
decisions as to which ones to keep and which ones to cancel or cut back.
In many cases, the system delivers less performance than promised when
initial investment decisions were made.

So, the condition we encounter time after time describes a predictable
outcome. The acquisition environment encourages launching product
developments that embody more technical unknowns and less knowledge about
the performance and production risks they entail. A new weapon system is
encouraged to possess performance features that significantly distinguish
it from other systems and promises the best capability. A new program will
not be approved unless its costs fall within forecasts of available funds
and, therefore, looks affordable. Because cost and schedule estimates are
comparatively soft at the time, successfully competing for funds
encourages the program's estimates to be squeezed into the funds
available. Consequently, DOD program managers have incentives to promote
performance features and design characteristics that rely on immature
technologies and decision makers lack the knowledge they need to make good
decisions.

                          The Path to Better Decisions

A path can be laid out to make decisions that will lead to better program
choices and better outcomes. Much of this is known and has been
recommended by one study or another. GAO itself has issued hundreds of
reports. The key recommendations we have made have been focused on the
product development process:

           o  constraining individual program requirements by working within
           available resources and by leveraging systems engineering;
           o  establishing clear business cases for each individual
           investment;
           o  enabling science and technology organizations to shoulder the
           technology burden;
           o  ensuring that the workforce is capable of managing requirements
           trades, source selection, and knowledge-based acquisition
           strategies; and
           o  establishing and enforcing controls to ensure that appropriate
           knowledge is captured and used at critical junctures before moving
           programs forward and investing more money.

As I have outlined above, however, setting the right conditions for
successful acquisitions outcomes goes beyond product development. We are
currently examining how to bring discipline to the Department's
requirements and budgetary process and the role played by the program
manager.

As we conduct this work, we will be asking

           o  who is currently accountable for acquisition decisions;
           o  who should be held accountable;
           o  how much deviation from the original business case is allowed
           before the entire program investment is reconsidered; and
           o  what is the penalty when investments do not result in meeting
           promised warfighter needs?

We can make hard, but thoughtful, decisions now or postpone them, allowing
budgetary realities to force draconian decisions later.

Mr. Chairman, this concludes my prepared statement. I would be happy to
respond to any questions that you or other members of the subcommittee may
have.

                       Contacts and Staff Acknowledgments

For further information regarding this testimony, please contact Katherine
V. Schinasi at (202) 512-4841 or [email protected]. Individuals making key
contributions to this testimony included Paul L. Francis, David B. Best,
David J. Hand, Alan R. Frazier, Adam Vodraska, and Lily J. Chin.

Related GAO Products

Space Acquisitions: Stronger Development Practices and Investment Planning
Needed to Address Continuing Problems. GAO-05-891T.  Washington, D.C.:
July 12, 2005.

Air Force Procurement: Protests Challenging Role of Biased Official
Sustained. GAO-05-436T. Washington, D.C.: April 14, 2005.

Tactical Aircraft: F/A-22 and JSF Acquisition Plans and Implications for
Tactical Aircraft Modernization.  GAO-05-591T. Washington, D.C.: April 6,
2005.

Defense Acquisitions: Assessments of Selected Major Weapon Programs.
GAO-05-301. Washington, D.C.: March 31, 2005.

Defense Acquisitions: Future Combat Systems Challenges and Prospects for
Success. GAO-05-428T. Washington, D.C.: March 16, 2005.

Defense Acquisitions: Stronger Management Practices Are Needed to Improve
DOD's Software-Intensive Weapon Acquisitions. GAO-04-393. Washington,
D.C.: March 1, 2004.

Defense Acquisitions: DOD's Revised Policy Emphasizes Best Practices, but
More Controls Are Needed. GAO-04-53. Washington, D.C.: November 10, 2003.

Best Practices: Setting Requirements Differently Could Reduce Weapon
Systems' Total Ownership Costs. GAO-03-57. Washington, D.C.: February 11,
2003.

Best Practices: Capturing Design and Manufacturing Knowledge Early
Improves Acquisition Outcomes. GAO-02-701. Washington, D.C.: July 15,
2002.

Defense Acquisitions: DOD Faces Challenges in Implementing Best Practices.
GAO-02-469T. Washington, D.C.: February 27, 2002.

Best Practices: Better Matching of Needs and Resources Will Lead to Better
Weapon System Outcomes. GAO-01-288. Washington, D.C.: March 8, 2001.

Best Practices: A More Constructive Test Approach Is Key to Better Weapon
System Outcomes. GAO/NSIAD-00-199. Washington, D.C.: July 31, 2000.

Defense Acquisition: Employing Best Practices Can Shape Better Weapon
System Decisions. GAO/T-NSIAD-00-137. Washington, D.C.: April 26, 2000.

Best Practices: DOD Training Can Do More to Help Weapon System Program
Implement Best Practices. GAO/NSIAD-99-206. Washington, D.C.: August 16,
1999.

Best Practices: Better Management of Technology Development Can Improve
Weapon System Outcomes. GAO/NSIAD-99-162. Washington, D.C.: July 30, 1999.

Defense Acquisitions: Best Commercial Practices Can Improve Program
Outcomes. GAO/T-NSIAD-99-116. Washington, D.C.: March 17, 1999.

Defense Acquisition: Improved Program Outcomes Are Possible.
GAO/T-NSIAD-98-123. Washington, D.C.: March 18, 1998.

Best Practices: Successful Application to Weapon Acquisition Requires
Changes in DOD's Environment. GAO/NSIAD-98-56. Washington, D.C.: February
24, 1998.

Major Acquisitions: Significant Changes Underway in DOD's Earned Value
Management Process. GAO/NSIAD-97-108. Washington, D.C.: May 5, 1997.

Best Practices: Commercial Quality Assurance Practices Offer Improvements
for DOD. GAO/NSIAD-96-162. Washington, D.C.: August 26, 1996.

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Highlights of GAO-06-257T, a testimony before the Subcommittee on Airland,
Committee on Armed Services, U.S. Senate

November 15, 2005

DOD ACQUISITION OUTCOMES

A Case for Change

The Department of Defense (DOD) is shepherding a portfolio of major weapon
systems valued at about $1.3 trillion. How DOD is managing this investment
has been a matter of concern for some time. Since 1990, GAO has designated
DOD's weapon system acquisitions as a high-risk area for fraud, waste,
abuse, and mismanagement. DOD has experienced cost overruns, missed
deadlines, performance shortfalls, and persistent management problems. In
light of the serious budget pressures facing the nation, such problems are
especially troubling. GAO has issued hundreds of reports addressing
broad-based issues, such as best practices, as well as reports focusing on
individual acquisitions. These reports have included many recommendations.

The subcommittee asked GAO to testify on possible problems with and
improvements to defense acquisition policy. In doing so, we highlight the
risks of conducting business as usual and identify some of the solutions
we have found in successful acquisition programs and organizations.

DOD is facing a cascading number of problems in managing its acquisitions.
Cost increases incurred while developing new weapon systems mean DOD
cannot produce as many of those weapons as intended nor can it be relied
on to deliver to the warfighter when promised. Military operations in
Afghanistan and Iraq are consuming a large share of DOD resources and
causing the department to invest more money sooner than expected to
replace or fix existing weapons. Meanwhile, DOD is intent on transforming
military operations and has its eye on multiple megasystems that are
expected to be the most expensive and complex ever. These costly
conditions are running head-on into the nation's unsustainable fiscal
path.

DOD knows what to do to achieve more successful outcomes but finds it
difficult to apply the necessary discipline and controls or assign
much-needed accountability. DOD has written into policy an approach that
emphasizes attaining a certain level of knowledge at critical junctures
before managers agree to invest more money in the next phase of weapon
system development. This knowledge-based approach results in
evolutionary-that is, incremental, manageable, predictable-development and
inserts several controls to help managers gauge progress in meeting cost,
schedule, and performance goals. But DOD is not employing the
knowledge-based approach, discipline is lacking, and business cases are
weak.

Persistent practices show a decided lack of restraint. DOD's requirements
process generates more demand for new programs than fiscal resources can
support. DOD compounds the problem by approving so many highly complex and
interdependent programs. Once too many programs are approved to start, the
budgeting process exacerbates problems. Because programs are funded
annually and departmentwide, cross-portfolio priorities have not been
established, competition for funding continues over time, forcing programs
to view success as the ability to secure the next funding increment rather
than delivering capabilities when and as promised.

Improving this condition requires discipline in the requirements and
budgetary processes. Determining who should be held accountable for
deviations and what penalties are needed is crucial. If DOD cannot
discipline itself now to execute programs within fiscal realities, then
draconian, budget-driven decisions may have to be made later.
*** End of document. ***