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DoD Cuts Require Navy Adopt New Buying Strategies

Posted by Michael W. Jones on

The economic challenges faced today by the Navy related to fleet maintenance pose a striking example of the realities imposed by cuts in defense spending.

Although all U.S. service branches face this challenge, the Navy is feeling it the most acutely. In short, the Navy can’t afford the fleet assets it has today, and the cost to maintain them going forward is growing much more rapidly than the rate of inflation.

A recent Navy Integration and Analysis study indicates that, currently, total ownership costs for the fleet are 44 percent, leaving 56 percent for other expenses. By 2038, the same study projects that total ownership costs for the fleet will total 97 percent, leaving almost nothing for other expenses. Those years will be here quicker than we know. If you’re looking for a real-world example of the definition of “unsustainable,” this makes for a good one.

Simultaneously, top-down pressure from the senior-most levels of the Department of Defense to control spending makes the situation still tougher. In light of the fact that one of the biggest challenges facing the Department of Defense is having to operate under capabilities decisions made 20 years ago or more, the budgeting moves made by Secretary Gates are necessary and understandable. However, their apparent focus on across-the-board spending cuts might be better served by an approach that goes more fundamentally to the root of the challenge.

That is, if you don’t like the current end state, and want to get to a new one, you need to examine how you got there in the first place and make the relevant changes.

A Proven Path Forward
Fortunately, there is a proven path forward for reducing ownership costs – while maintaining, if not expanding, overall effectiveness – but it’s one that requires a willingness to challenge well-entrenched assumptions about acquisitions.

It’s called design for affordability – and while its value has been proven, most notably in delivering multi-billion dollar savings to the Navy’s Virginia-class submarine program – it doesn’t always square with what many would term traditional budgeting and acquisition theory.

The “traditional” budgeting and acquisitions approach – and one that continues to play out, reflexively, today – might be summed up as: when required to cut spending, reduce or delay production units to fit within budget. When budgets are increased, and new acquisitions made possible, add back those cut or delayed units.

By contrast, design for affordability identifies savings from the program without cutting production units, and then reinvests those savings to further lower the total ownership cost of the platform. This in turn reduces the growing operational cost burden facing the armed services.

At its heart, design for affordability stimulates objective-driven change by enabling organizations to make critical, cost-based judgments that deliver new efficiencies without compromising performance. Results are visible in the near term, by targeting programs which are already in or nearing production.

As opposed to a program that is in early development and costs won’t be seen for decades, catching programs about to enter production allows savings to be realized sooner in acquisition cost reductions. Benefits continue to accrue for decades through lower lifecycle costs, while the most promising design and process improvements can be applied to any in-service units – through retrofits and modernization. In fact, a deployed asset which has a design still open to production changes is able to take advantage of direct input from operators and maintainers in the field. Beneficial ideas increase as more hands-on observations can be collected.

Many Moving Parts Require Honest Broker
Design for affordability recognizes multiple players can positively contribute to the acquisition process – but it is a challenging and management-intensive process to organize all parties’ input constructively. Whereas other approaches may require the establishment of cost and budget “baselines” as parameters for moving forward, design for affordability recognizes such baselines either don’t exist – or aren’t integrated in common categorizations.

Prime contractors and their suppliers don’t account for their construction costs in the same system-based breakdowns as their government buyers. Maintenance providers, inventory managers and modernization programs organize their costs along a different set of cost nouns and categories. A true understanding of the trade-offs between initial design choices and their future operating costs requires common definitions and costs aligned in a standard structure. In a traditional acquisition program, it is challenging to get all of the involved parties together around the table and to establish the trust needed to share these true costs willingly.

For this reason, an impartial third party is required to achieve real progress. However, such a third party must have the requisite knowledge of both the service branch’s mission requirements and, on the private sector side, the realities of the contractor’s operations. With an integrated cost and schedule picture, the program is now able to identify and focus upon the largest drivers. This focused effort allows the designers, builders, operators, and maintainers to hone in on making the critical design and process changes. Perhaps most importantly, an impartial third party helps keep all sides focused on the overarching improvement goals: an “honest broker” with no ties to either the manufacture or operation of platforms.

As the saying goes, change is never easy – but, once achieved, its benefits can be game changing.

Currently, our service branches are effectively running on borrowed time. The cost of maintaining their current assets is not sustainable and becomes still more problematic when expanded needs – unpredictable but inevitable – arise. Design for affordability represents a workable path forward for recapitalizing, across platforms, at lower costs in a way that addresses current needs while anticipating future ones.

Michael W. Jones is a senior vice president at Booz Allen Hamilton where he leads the firm’s International business.

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