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Sack Weinberger, bankrupt General Dynamics, and other procurement reforms.

SACK WEINBERGER, BANKRUPT GENERAL DYNAMICS, AND OTHER PROCUREMENT REFORMS

Was that really former DefenseUndersecretary David Packard standing in the Rose Garden last July, handing Ronald Reagan a blue-ribbon report blasting the way the Pentagon procures weapons? Was that really Reagan grinning away as he accepted?

It was. With White House pomp RonaldReagan consecrated defense reform views his own administration was decrying as misinformed and irresponsible a few years ago. Given the ritual of presidential commission reports--their purpose usually to appear hard hitting but in fact celebrate the status quo, a Kabuki adhered to exquisitely by the recent Rogers Commission--people may have been tempted to write Packard off. But in this instance there may actually be significance to a presidential commission report.

First, Packard's work presents specific recommendationsrather than the standard windy exortations for "a new national debate,' and so on. Most of those recommendations were right on the beam. It also comes at a time when the number of books, reports, congressional studies, and of course real-life examples concerning military ineptitude is building to a critical mass. Even bureaucracies as vast as the Pentagon do eventually respond to the sheer weight of paper heaped on them, especially when a report like this, embossed with the seal of a president, is thrown on top of the pile.

The Packard report, and the grudging acceptanceof military reform ideas currently taking place, creates an ideal political opportunity to make crucial, fundamental changes in the American defense establishment--the kind of reform which, someday, will redound much to the credit of the party which backs it. If Reagan isn't willing to reach for history in his final two years and do for the Pentagon what he did for the tax code, then perhaps the Democrats, now holding the Senate again, will embrace defense reform as a party-wide goal. With that in mind it becomes useful to take a close look at just what Packard recommended--and what new avenues of reform thinking, unmentioned by Packard, should be considered.

Extra-strength spending

Packard proposed many perceptive reforms,some straight out of the cheap hawk's handbook, reorganizing the Joint Chiefs of Staff being one of them.

Previously, the JCS chairman has been strictlya figurehead. The JCS reorganization, enacted recently by Congress, gives the chairman, Admiral William Crowe, a degree of true authority over the military as a whole, creates a vice-chief who supposedly will concentrate on interservice harmony, and also grants some autonomy to U.S. regional commanders.

A key Packard Report recommendation is thatthe Pentagon buy more parts and supplies from commercial outfits instead of designing custom "mil-spec' hardware. This would save billions while speeding procurement. It is also expected to be resisted by the supplycrats with the full splendor of their collective inertial mass.

Time and again the military spends millionsdeveloping supplies only marginally different from commercial products which are already available and cheaper to boot. After the $7,600 coffee pot percolated into the news, General Lawrence Skantze, head of the Air Force Systems Command, issued a paper defending its selection over similar, cheaper systems sold commercially. The Air Force amphora, Skantze declared, was no mere Mr. Coffee, but an amazing, technologically advanced super-urn capable of withstanding 40 times the force of gravity. The Russians have nothing on this coffee pot! If the $7,600 pot ever endures 40 g's it will be useful mainly for brewing crash investigators a hot cup of java as they scrape the remains of the rest of the airplane off the ground.

Supposedly, the high cost of mil-spec hardwareis justified by added performance, but usually this is about as smart a buy as the "extra strength' painkllers which contain a 50 percent higher dose at twice the price. As is shown by the frequency with which small entrepreneurial companies beat global conglomerates to the market with new products, money is not the prime mover in product development. Competitive tensions-- and the knowledge that results will directly affect one's job security and earnings--can be worth more than money. Anyone who has compared a mil-spec flashlight to a Magna-Lite, the leading commercial heavy-duty flashlight, knows this.

Sam Nunn, the likely new Senate Armed ServicesCommittee Chairman, is thought to favor another Packard recommendation: enactment of two-year budget cycles. Under the present system, procurement strategy vacillates on an almost daily basis, as multiple subcommittees get several shots per year at fussing with the numbers. Two-year cycles will permit more efficient industrial planning while reducing the temptation for Congress to tinker with decisions it has "made.' Chronic procurement mood swings not only tie up the House and Senate with redundant debate, they embolden military leaders into thinking legislators can be taken lightly because Congress never means what it says anyway.

Almost everybody, including Nunn, agreeswith Packard that Congress has to stop "micromanaging' the Pentagon; let's see how well Nunn can set an example by restraining his own committee. In recent years Congress has barraged the services with the kind of paperwork which only hardens their committee mindset. In 1970, Congress requested 36 formal reports from the Department of Defense; in 1986 the figure exceeded 600. Anyone who has worked in a big organization knowns that while the content of a formal report is usually mush--compromise language frapped by department after department until it says as little as possible-- composition can be an enormous drain on time, crowding out productive endeavors. Congress in turn seldom does anything with formal Pentagon responses except pile them on the scrap heap of history. Most are requested so that a subcommittee chairman can declare that he has taken bold, decisive action on an issue he is actually trying to dodge. A handful of serious investigations per year--accompanied by testimony under oath, where military officials would get into real trouble if they didn't provide answers--would be far healthier for the system than thousands of pages of pro-forma fluff.

The report called for abolishing DSARCs (thePentagon's Defense Systems Acquisition Review Councils). This showed an admirable willingness to face the music, since Packard himself created DSARCs in the early 1970s when he was undersecretary of defense. DSARCs were designed to nip bad procurement ideas in the bud. But after Packard left the Defense Department, DSARCs were nimbly taken over by the supplycrats and rigged in such a way that no program was ever too expensive or impractical to be funded. Even the Divad gun wafted through its DSARC like a concerto on a spring breeze.

DSARCs worked like this. Early in the life ofa weapons concept, a big meeting would be held. Service secretaries, high ranking political-appointees and other luminaries would crowd into a conference room to be shown dazzling animations in which an awesome manifestation of technology slices and dices through the entire Red Army. Let's call it the Goldfinch wheat-seeking missile, designed to destroy subsidized Russian grain. One or two token squids from the Pentagon's internal self-criticism shops such as Planning, Analysis, and Evaluation would be given the floor to raise objections to the idea. Then the DSARC would be asked to vote on whether basic research into the Goldfinch concept should go ahead. Since no one is opposed to research, the vote would always be aye.

Another DSARC would not meet untilGoldfinch was well along in development and had acquired a constituency. Those assembled would be shown more astounding animations, then told that although in its only actual firing Goldfinch had inadvertently attacked its own maintenance crew, computer simulations indicated the system could be made utterly flawless at an unspecified later date. This time the DSARC would be asked to vote on whether Goldfinch "program milestones' were being met. Usually the milestones were written by the hierarchy building the weapon, and consisted of items like whether certain tests had been held, as opposed to successful. The vote would again always be aye. At this stage the DSARC often would endorse initial purchases of long-lead production items-- tantamount to approving full production.

A final DSARC would not be conducted untilGoldfinch ribbon-cutting ceremonies had been scheduled and contractor lobbyists had finished working all the relevant congressional subcommittees. This panel would be informed that, ahem, the Goldfinch has turned out to cost 17 times more than estimated, and will explode spontaneously if the relative humidity exceeds 10 percent. But Goldfinch is the sole thing standing between us and a Soviet invasion. Gentlemen, the choice is yours.

The evident flaw in this process is that at nopoint did DSARCs weigh alternatives to the proposals before them, or consider what mix of forces is best given needs, threats, and budget realities. Each finding was reached in a vacuum: each moment of judgment scripted to occur when resistance to interest-group pressure was low. This decision-making cycle, which has dominated U.S. procurement for the last decade, inspired a saying among defense contractors--"Too soon to tell, too late to change.' The DSARC sequence also helped the Pentagon sell weapons to Congress as all-or-nothing choices, with votes portrayed "for' or "against' defense.

The Packard-designed replacement, called aJoint Requirements and Management Board, will in theory weight alternatives and take overall military performance ("joint requirements') into account. Two new officials, the procurement "czar' and the JCS vice-chief, are slated to be this board's primary members. Though there is potential for bureaucratic hocus-pocus in any organizational scheme, at least now there are two officials high in the procurement "loop' whose assignment is to speak for national objectives: in the DSARC system, no one had that warrant.

Make Weinberger pay

The Packard report was wanting in severalareas. For one, wording was toned down before publication to avoid giving offense to Defense Secretary Caspar Weinberger. The final draft reads as though Pentagon management problems materialized out of hyperspace, no one in charge having the slightest warning. Now how can it be that procurement is seriously flawed, as the commission concluded, and yet the Secretary of Defense bears no responsibility? Weinberger's legacy is that he has presided over six years of the most crippling military waste in American history, waste so flagrant his own president appointed a commission to investigate. Many top NASA officials should have been fired in the wake of the Rogers report; as, logically, Weinberger should have been fired in the wake of Packard. Why was this obvious conclusion not stated? Because, had the report contained any language pressuring Reagan to sack Winberger, the Packard crew would not have gotten the Rose Garden treatment.

A bigger problem with the commission's workis the possibility that the procurement czar, its best publicized recommendation, may add to Pentagon paralysis.

The report noted that individual service acquisitionbranches (the Air Force Systems Command, Army Materiel Command and so on) have powerful stakes in self-enlargement; Packard recommended their staffs be cut by 10 percent. (Zero action on that so far.) Presently 165,000 people are directly employed by the Pentagon for research, development and logistics; many thousands more work for aerospace corporations at government expense. Honest contractors are driven crazy by layer after layer of review generated by these functionaries, none of which amounts to much but all of which requires perpetual meetings and paperwork. The more layers that exist, the more likely the final product will be goldplated. Solution: add yet another layer, an undersecretary for acquisition. If a procurement czar is to be added, several layers of Rasputins should be deleted.

Should weapons testing end up under the czar'ssuzerainty, an issue in dispute at this writing, the new undersecretary will have the same old built-in impetus to expand his empire, cover up test results, and stonewall. It's a menacing omen that the new czar post is the one Packard recommendation Weinberger was quick to embrace: since it was the only one which enlarges the defense bureaucracy. Weinberger nominated as czar yet another Bechtel executive, Richard Godwin, whose primary qualification is that he can be counted on never to rock the boat.

What recommendations might be added to thePackard list?

Let someone fail

U.S. military leaders frequently claim that theonly thing the Russians understand is strength. Yet they conduct their dealings with contractors from a kneeling position. There will never be true reform in defense procurement until a major contractor is allowed to fail. Detroit didn't wake up until it almost went under. Aerospace won't either.

Procurement officers complain that they are"captives' of industry--that ultimately it is contractors (the sellers), not the Pentagon (the customer), that hold the cards. Can anyone imagine General Motors pleading that it was the captive of Goodyear? This attitude prevails because the Pentagon brooks it to prevail. As long as business executives observe that every contractor that cheats is patted on the head and told "there there, don't cry,' they will continue to take advantage of the system. When they see a major contractor punished in a way which hurts, they will change.

That example should have been GeneralDynamics. From 1982 to 1985, G.D. was twice suspended from government business; saw several of its former executives, including former NASA Administrator James Beggs, indicted for fraud (can it be coincidence that during the period when omens forewarning of the Challenger tragedy were being ignored, the NASA chief was preoccupied with saving his own skin?); saw two other former top executives leave the country to escape prosecution; saw a top current executive, George Sawyer, tried for conflict of interest; saw the Defense Department Inspector General recommend that several G.D. executives, including CEO David Lewis, be debarred; saw it revealed that a member of the company's board of directors took part in a bribery of Illinois state legislators; was fined $676,000 for bribing Admiral Hyman Rickover; admitted to billing the government for kennel fees, an executive barbershop, $351-per-night hotel suites for Lewis and at least $105,000 for Lewis to take personal trips in a private jet. (In congressional testimony General Dynamics officials spoke of these billings as though they represented a sudden, inexplicable lapse of judgment on Lewis's part. In fact, David Lewis has made something of an avocation of pouring other people's money down the drain. As an executive at McDonnell Douglas, Lewis employed a company helicopter for commuting. Later, when General Dynamics offered him its top post, he insisted that the company relocate its headquarters from New York to his hometown of St. Louis. Anyone who thinks it makes financial sense for an entire company to come to him should be kept far, far away from the U.S. Treasury.)

But by 1986 General Dynamics and won a 12percent increase in total government business, recorded a third straight year of record profits, and led all contractors in new Pentagon awards. General Dynamics had thumbed its nose at the public and strolled away whistling a merry tune. One day after Weinberger's office announced the second suspension of General Dynamics, the Air Force postponed an important round of contract awards for the Advanced Tactical Fighter--this done so that G.D. might get its foot back in the door after the suspension expired. Any self-respecting cabinet secretary would have been outraged that his subordinates were so brazenly undercutting him. Unless, of course, he had no intention of punishing the contractor all along.

Meanwhile, Lockheed was recently accused of$281 million in inflated charges; McDonnell Douglas, of $130 million in overcharges, including billing to weapons contracts chairman Sanford McDonnell's travel expenses while making appearances as president of the Boy Scouts of America. Perhaps "Boy Scout,' which among Pentagon contractors was code for the occasional squares who actually obeyed procurement rules, will now acquire new meaning. Through the last five years Rockwell International, General Electric, Litton Industries, and even N. W. Ayer, the Army's advertising firm (whose internal slogan is apparently "Take All That You Can Take') have admitted to forms of false charges or kickbacks on Pentagon work. The fraud at Litton industries has been occurring on a regular basis since 1975. Just as he did against G.D., Weinberger took swift, decisive action: Litton was suspended from receiving new Pentagon business, precisely one day after being awarded $221 million in new Pentagon business.

Nine of the top ten defense contractors are atthis writing under federal investigation for billing fraud. Though a number of minor firms have been debarred from defense contracting in recent years, Rockwell, G.E., Litton, McDonnell Douglas, Ford, General Dynamics, Lockheed, TRW and other major corporations embroiled in serious procurement infractions continue to enjoy increases in government-guaranteed profits. Does this even resemble market discipline?

Apologists for the recurrent gelatinousresponse to contractor chiseling maintain the Pentagon cannot allow an aerospace company to go bankrupt because the defense industrial base would be reduced. This is nonsense. When companies go bankrupt their assets do not disappear. Had General Dynamics received the permanent disbarment it tried so valiantly to earn, the valuable parts of the company's capital base-- for example the Pomona, California, complex which builds small missiles--would have been sold off, for operation by new and, one hopes, better management. Only the inefficient parts of the company, and the managers responsible for the mess, would have suffered. This is how the market disciplines slackers, and it's an extremely effective sanction.

The Packard Commission went out of its wayto recommend that crooked contractors not be disbarred from further business, but instead simply given a stern tut-tutting, then more billions. This was the report's worst failing.

Put someone in jail

Just as frequent empty threats about billingcrackdowns only serve to assure contractors that they can get away with murder, the fact that the individuals responsible for procurement frauds don't go to jail--or even get drummed out of the defense industry--assures executives they will never personally pay the price.

An important step forward was taken lastmonth when one of the middle managers responsible for the Litton fraud was sentenced to hard time. Nobody at the top has been touched, however. People at the top of the procurement pyramid have the strangest ability to walk away unscathed.

Consider the case of George Sawyer, an assistantNavy secretary, who in 1983 went directly from supervising submarine contract awards to employment as a vice president of submarine contractor General Dynamics. "Former Navy Official Cleared in Conflict Case,' a Washington Post headline announced at the conclusion of Sawyer's trial last December. Whew!

As these things go in the American legalsystem, Sawyer was charged not with working both sides of the fence, but with failing to disclose that he was working both sides of the fence. Facts undisputed by Sawyer: in March 1983, he flew to General Dynamics headquarters in St. Louis to talk with senior company executives about employment. Later he flew to New York and Chicago for further meetings with G.D. officials. (Sawyer's lawyer called these visits "dating.') On May 5, 1983, Sawyer signed an order ending the lengthy Trident cost overrun dispute, which might have cost General Dynamics billions. On May 20, 1983, Sawyer declared he intended to jump to G.D.

Justice Department prosecutors chargedSawyer with one count of not reporting job discussions (required of senior-level federal managers) and one court of not reporting a gratuity to a government employee, the gratuity being his plane fare to St. Louis. To the first charge Sawyer's attorney argued there had been no job discussion under the letter of the law, because exact details like title were not discussed. (Nod nod, wink wink.) To the second charge he argued it was perfectly normal for companies to pay expenses of a "job interview.' Now you're thinking like a lawyer!

Prosecutors apparently erred by placing NavySecretary John Lehman on the stand to confirm a minor fact. Lehman had a strong self-interest in not having his former right hand convicted of being in a contractor's pocket. He used the opportunity to make a rousing speech about how Sawyer was fine public servant who had "revolutionized' procurement with a new gettough accounting system designed to crack down on contractors. "I don't think I ever met anyone with more integrity than George Sawyer,' Lehman declared, perhaps disclosing more than he intended.

The Lehman pitch is though to have swayedthe jury. Yet something about it ought to have struck listeners as peculiar. If Sawyer is, indeed, a straight arrow, why would a major contractor be so anxious to obtain the services of this tireless cost-cutting crusader? Because hiring Sawyer gets him out of the business of applying honest scrutiny to General Dynamics contracts. If on the other hand Sawyer is less than straight, he's the ideal person to advise G.D. on how to beat his own "revolutionary' system.

Inaction against executives who bilk taxpayersmirrors the current trend against accountability in the U.S. military itself. After the Marine barracks were bombed in Beirut, no senior Marine officer was disciplined; Marine Commandant P.X. Kelley, who had personally inspected the ineffectual fortifications, remains commandant today. No senior officer responsible for the 1980 Iran raid bungling was disciplined. There has been more accountability at the Kremlin over Chernobyl than at the top of the U.S. military.

Bust contractor monopolies

The Lockheed Corporation builds for theDepartment of Defense what is by all accounts the world's most cost-effective military transport plane, the C130. Lockheed also builds the world's most woefully wasteful transport, the C5. Ford Aerospace builds one of the world's most cost-effective antiaircraft weapons, the Sidewinder missile. It also built the silliest antiaircraft device ever, the Divad gun.

What's the secret here? The effective procurementtakes place in market environments. Several companies build planes similar to the C130, leaving Lockheed aware that the Pentagon could always switch; two separate contractors (Ford and Raytheon) build Sidewinder, competing against each other for job lots. The C5 and Divad, in contrast, were both acquired sole-source.

More than anything else, modern defense procurementneeds to find ways to simulate market forces.

Obviously true "market' tests for weapons--whether they perform in combat--are not desirable. The free market can be imitated, though, by increased use of split-source purchasing. No sole-source or "negotiated' price can ever be trusted, since even if the negotiators are totally honorable, what is there to compare the price to? Soviet economic planners have tremendous trouble setting prices without a market to guide them; anybody would.

In split-source arrangements like Sidewinder,two contractors make the same item. They bid against each other for each new contract lot. The winner gets 55 to 65 percent of the total; the loser receives the balance and stays in business, so that it will be around when the next bid comes up. This arrangement creates something at least similar to a market-set price. Split sourcing also gives contractors an incentive to look for innovations that will cut costs after they've won the business. Lack of incentives to cut costs once production has begun may be the single most profligate flaw in the current system.

Year after year real costs of weapons go up--even as manufacturing experience and the fabled "learning curve' ought to be driving costs down, as they almost always do, commodity prices being equal, in the commercial marketplace. During the Reagan Administration, production rates for the M1 Abrams and M2 Bradley have been accelerated, yet costs for both have increased rather than decreased. According to the Congressional Budget Office, the Reagan Pentagon has spent 150 percent more for armored vehicles than Carter did, but gotten only 30 percent more of them. Reagan has spent 90 percent more for missiles, but gotten only six percent more missiles; spent 75 percent more for aircraft, but gotten only nine percent more. Some of these price increases reflect improved quality. But manufacturers in the commercial marketplace commonly improve quality while decreasing price; and this is true of heavy-industrial products, not just electronics. The cost of automobiles, for example, has dropped slightly in real dollars over the last five years, though the base price now typically includes defrosters, radial tires, fuel injectors, FM radios, corrosion-resistant paint, and other refinements.

The legendary example of split sourcing comesfrom the 1970s. Pentagon supplycrats predicted that rounds for the cannon on the A10 antitank aircraft would cost about $200 each. The contract was split-sourced between Honeywell and Aerojet General; the shells came in costing about $14 each.

The Air Force, whose "fly before buy' was themost important procurement innovation of the last decade, has taken the lead in this new method for holding contractors' feet to the fire. Two years ago it revoked Pratt & Whitney's monopoly over the engine used on F15 and F16 fighters, giving slightly more than half of the business to General Electric. Since then, performance of the new engine version has improved, costs have been stable, and Pratt & Whitney, notorious for sluggish response to technical snafus, has become warranty conscious.

Recently split sourcing has been extended toor put in the works for the Amraam, Sparrow, Standard, and Tomahawk missiles; the F18 fighter's radar; the Navstar satellite network, and several other contracts. The F18 itself may be split-sourced. The specter of a privately developed Northrop F20 fighter effectively split-sourced the General Dynamics F16, to which the F20 is similar. After Northrop started offering F20s at a lower price than F16s, General Dynamics made the most amazing and astonishing discovery-- that it could sell F16s cheaper, too.

Ships represent the greatest split sourcingchallenge, being more like construction projects than manufacturing. The Navy has been trying to entice another contractor to bid against lovable General Dynamics on Trident submarines; currently G.D. owns the sole shipyard which solicits Trident contracts. Through the Reagan years the Navy has talked a great deal about market simulation, appointing a "competition advocate general' with two-star rank and his own theme music, the Navy Competition March. What it has accomplished is less clear. Lehman until recently boasted widely that "every naval aircraft today costs less than it did four years ago.' Then a report from the Pentagon's own Inspector General labeled this fiction.

Credit for progress toward split sourcingshould be divided equally between the Pentagon and Congress: the Competition in Contracts Act, passed in 1985, mandates annual increases in split sourcing, but Weinberger was moving in this direction anyway, before Congress acted. Can it work on a widespread basis? During World War II, nine companies built the Sherman tank. Most contractors object bitterly to split sourcing--a sure sign it is a good idea.

Simulating a free market in defense procurementwould allow us to:

Fire the auditors.

Is there any private business that audits its suppliers?No, and any one that did would be playing a losing game, as the Pentagon plays.

Federal auditors are bound to lose the battleof wits with defense contractors if only because they work after the fact--months or years after the money in question has been spent. The most they can achieve is an occasional recouping of past waste, not the far more important objective of preventing waste from happening. Meanwhile, responding to the featherbedded supplycrat hierarchy, contractors grind out paperwork much faster than auditors could possibly assay it. The Defense Contract Audits Agency currently has a $70 billion backlog of invoices awaiting review.

There are two reasons why audits are ineffective:one procedural, one conceptual. The procedural flaw is that they are conducted by civil servants, who have a vested interest in not blowing the whistle. As John Eisendrath has explained in these pages ["Watching the Watchdogs,' July /August, 1986], federal auditors can be fired only if their sponsoring agency's budget is reduced and "slots' are eliminated. Thus an auditor who averts his eyes from waste will ensure that money keeps flowing to his provider, while one who does his job well puts his career in jeopardy. Government auditing only works when carried out by an independent office like the GAO, whose security is not tied to the wealth of the agency being audited. This is one problem well understood by advocates of "public choice,' the school of political economics led by recent Nobel Prize winner James Buchanan. Rather than agency-sponsorded auditing shops like the DCAA, public choice thinkers have proposed that the federal government create a "predator agency' whose annual budget is calculated based on a percentage of the waste it uncovers in other government departments.

The conceptual and more telling objection toauditing is that it shouldn't exist in the first place. Its deterrent value is marginal, since contractors observe that even those caught rarely pay meaningful consequences. (Litton admitted to $6.3 million in false billings over ten years, and incurred a $15-million fine--discounting to present value, the company roughly broke even on its crime.) The bookkeeping value is illusionary. James Beggs was indicted on charges that he shifted overhead from one defense contract into another. What difference does it make under which account costs are billed? All that matters is how much we pay, and what we get--the same that matters in the market.

Under the present procurement system there'snothing wrong with building a weapon that is a dud, and could cause U.S. soldiers to die needlessly; or with charging too much, which in effect steals from the public. But better enter those figures on the proper invoice!

Whenever a new procurement scandal breaks,Congress responds by calling for more auditors--instead of changing the system that caused the scandal in the first place. Under the present system, hiring more auditors creates the lulling sense that something is "being done' about waste. It isn't; an added administrative expense is merely being tacked on. Market mechanisms offer less cumbersome and more reliable checks against contractor abuses. Ensuring that market mechanisms are being allowed to operate--checking, for instance, to see if two or more companies on a multi-source contract aren't secretly colluding to raise prices--is the kind of specialized auditing the government needs. For that, the DCAA should be replaced by an independent, predator-style agency suditing a small percentage of contracts at random. Meanwhile, to reduce the overall need for auditing, the Pentagon should begin to:

Buy weapons like consumers

The system of auditing exists because, in manycases, the Pentagon arrives at contractor payments by negotiating expenses and overhead in addition to direct manufacturing costs; the figure treated as the cost of the weapon is actually an agglutination of numerous negotiated billings.

Defense executives jumped up in arms whenan obscure provision slipped into a piece of 1985 legislation limiting them to billing the prevailing civil service per diem rate when they travel on Pentagon contracts. That rate ($112 per day in Washington) is not enough to wine and dine in the style to which they have become accustomed. But hold on here. Does Ricoh bill per diem to Raytheon when its salesmen come to sell copiers? Does Mobil bill United Airlines for fuel production overhead? The very notion of picking up a supplier's expenses runs counter to market logic, inviting abuse. In the free enterprise system companies pay their own expenses.

Weapons should simply be sold for a price, nobilling of anything but the bottom line. Contractors howl when this proposal is made, declaiming that procurement is nothing like the market--the customer is whimsical, product development takes many years, huge tooling costs are involved, and so on. Aren't customers whimsical in the real market too? Isn't the risk there greater? (As evidenced by the fact that commercial firms sometimes go out of business.) Haven't companies like Xerox and IBM been able to shepherd complex technology into the market without subsidies?

One reason weapons development takes eonscompared to development of consumer products (nearly 15 years current average for major systems) is that expense-billing system is structured to reward foot-dragging, whereas the market is structured to reward results.

The system of endless negotiations will be hardto eradicate in part because the military likes its very cumbersomeness. In peacetime there exists a need to "house' soldiers. Contract busywork, so deathly time-consuming, fits this bill nicely. The Air Force Systems Command has 34 generals, 10,524 other officers, and 16,000 enlisted personnel. What does it do? Sets requirements for purchasing. It doesn't design, test, train, or operate--just supervises. In fiscal 1987 the Air Force plans to purchase 298 aircraft. This works out to 89 supervisory procurement personnel per aircraft.

The related Air Force Logistics Commandoversees purchases of bulk items. Fred Hiatt of The Washington Post has reported that the Logistics Command on average takes 100 days to execute the paperwork needed to order a spare part. This is approximately 99 days longer than it takes the private sector. The Logistics Command buys only one-third of its supplies through price competition; the rest through the laborious sequence of negotiation, pass-along, and audit. Hiatt reported that when one typical item, a wing element for the F4 fighter, was competitively did for the first time, its price fell from $2,066 to $194.

Since maintenance of a large standing army entailsfinding something for thousands of enlisted personnel and officers to do in peacetime, inevitably, no matter how well managed the military is, some assignments will be make-work. But better to have the boys sitting around playing cards than dreaming up ways to inflate the cost of weapons.

Use real numbers

Many is the time that a hopeless gullible journalistor congressional staffer has looked at the amount the Pentagon requests for a particular weapon, divided it by the number to be obtained, and thought he had arrived at the price. Oh naif! Oh tyke! The Air Force, for example, says the F15 fighter costs $25 million. The fiscal 1987 defense budget requests $1.9 billion to acquire 48 F15s--$39.5 million per plane. Plus $378 million ($7.9 million per plane) for initial spares, training, research, and construction related to F15 operation.

Procurement officers nearly flip their wigswhen anyone suggests that the amount paid divided by the number obtained sounds an awful lot like the price. This is not the case, they will say, because every budget includes money for long-lead items which will not actually be used until future years; and for "one-time expenses' like development of new components for existing models. Then have expenditures for lead items from previous years been repaid? Well, not exactly. Aren't "one-time expenses' common in all forms of business, and generally thought of as part of the price? At this point the officer will summon one of his aides and say, "Why don't we take a look at computer simulations of the new space-based Goldfinch III in action . . ..'

In early 1985, when spare parts horror storiesdominated the news, word leaked that the Pentagon would start breaking down its budget by subcontracts, not weapons. Supposedly this would aid Congress in monitoring spare parts purchasing. In fact, since major weapons projects involve dozens or hundreds of subcontracts, the real objective was to render the procurement budget an incomprehensible maze of line items.

The maze gambit was quietly shelved whenCongress discerned its true purpose. Number fudging, however, went on to reach a new high in the spring of 1986. Confronted with repeated congressional demands for cost information on the Stealth bomber, whose price, like the price of the F19 stealth fighter, the Air Force had classified--after all, if the Soviets knew the price, they'd copy it!--Weinberger announced some numbers. Stealth bombers, he said, would cost $277 million each, in 1981 dollars. Tried to buy anything with 1981 dollars lately? Know any businesses that compute executive bonuses in 1981 dollars? Two-hundred seventy-seven million in 1981 works out to $333 million today, the real Stealth price.

Of course there are numerous ways to cost outthe purchase of a complex machine like a bomber. One might look strictly at the airplane itself; or add in replacements for parts which will wear out in normal use; or add in weapons to be carried and fuel to be used; or add in special repair and training equipment to be built. One might look only at the first year of operation, or at several years, and so on.

These methods go by names like "flyawaycost,' "program cost,' "life cycle cost,' "then-year cost,' and others. Every costing method is somewhat arbitrary, and none flawless. Most businesses face cost complexities too, and arrive at the best estimate by dividing what they get into what they spend. This method, though imperfect like all the others, is at least comprehensible. The Pentagon should use it.

Breed new carrots

A common analysis of the Pentagon quagmireholds that since peacetime officers cannot advance their careers by winning on the field of honor, they channel their energies into the battle of the budget--with victory based on who spends the most money, not who spends money most wisely. Instead of trying to counteract perverse bureaucratic carrots, why not replace them with sensible incentives? However intractable bureaucracies seem, they do eventually respond to direction.

In the present system procurement officersview the world as if their task were to acquire a car, and their choice were between a Ferrari and a Toyota. All would choose the Ferrari, because it offers the highest performance. When you protest to Air Force procurement officers that the F15 is too expensive to be practical, the canned response is, "The Soviet tactical air arm outnumbers ours three to one. If your son has to go up against three Soviet pilots, wouldn't you want him in the very best airplane money can buy?' As the question is phrased, the answer is obvious. But the logic is circular--the reason Soviet fighters outnumber ours is that we concentrate so much money on a handful of expensive planes. The actual choice is going up against Soviet fighters as a lone F15; or as one of two F16s; or as one of three F20s.

When you have the same conversation withfield officers below the full colonel rank--the ones whose lives would actually be on the line in a fight--most, though not all, say they would prefer more planes to more gizmos. Aerial combat experience, including experience with current front line fighters in the Middle East, suggests that while electronic superiority confers valuable advantages, your son would be better protected by wingmen than by additional increments of technology.

So suppose the bureaucratic tasking wereredefined as: Get yourself back and forth to work every day, paying the penalty if your car breaks down or if you are caught speeding. Then some (not all) would switch to the Toyota. Finally suppose the task were phrased: Take $100,000, buy a car that gets you back and forth to work, and use the remaining money for other priorities. The third assignment corresponds to what the U.S. military realistically faces, given that it must prepare for a wide range of uncertainties while spending a large but not unlimited sum of money.

A policy of promoting those officers who bringprojects in under budget would make a good starting point for changing career incentives. The "use it or lose it' mentality--the assumption that money saved by cost-cutting will only be funneled to one's rivals in another branch or service--could also be done away with by allowing each procurement branch to retain one-half of any appropriated money it saved.

But as long as the Army, Navy, and Air Forcehave separate procurement hierarchies wrestling each other for funds, it will never be possible to weigh U.S. defense needs with strategic objectivity. An important step toward breaking this bottleneck would be:

Purple procurement

In the Pentagon, "purple suit' means a positionwith no service affiliation. Why not reorganize procurement into a purple organization which answers to the new, theoretically more decisive Joint Chiefs?

The color of their uniforms, of course, isn't important;what's crucial is that those entering the purple career path receive future promotions from the joint chiefs, not their former services. Otherwise, they would only feign allegiance to overall goals while privately knowing their personal prospects still depend on how much money they funnel to the service branch whence they came. Obviously, a corp of non-service officers would gradually develop a new set of bureaucratic concerns. Yet at least if their formal assignment were to make the military strong overall--a opposed to making one service strong at the expense of another, which is the present motivational structure--there would be some systemic incentive to put aside parochial interests.

Allowing procurement branches to pursueprivate service agendas isn't always bad. Sometimes it spawns healthy competition. The Navy, for instance, abandoned its push for carrier-based supersonic nuclear bombers and embraced the less expensive, more effective ballistic missile submarine, only because the Air Force was about to get all the nuclear missile money. But when this competition is unchecked by leadership or reason, serious distortions result.

Currently, for example, there is a need for anew generation of close support aircraft. The Air Force is taking no chances that it gets stuck with another plane designed for supporting Army troops at the front like the low-cost, low-glamor, A10 the service was forced to swallow in the mid-1970s. Instead the Air Force is building a $50 million ground-attack version of the F15, and converting some F16s for ground attack by adding something called Lantirn, a sensor system which, at $5 million, costs the same as an entire A10 aircraft. These new mutant fighters will be useful mainly for "interdiction,' or attacks behind enemy lines--a mission the Air Force prefers to front-line support, mainly because it can be carried out without having to cooperate with the Army.

This is not only an example of the procurementsystem's tendency to solve problems by the most expensive means. There is a more troubling aspect. The F15 and F16, designed as fighters, have thin skins. In fighter planes shaving off pounds is essential, because the fighter survives by using speed and maneuverability to avoid hits. In contrast the A10 and the comparable Soviet Su25 have armor-plated skins, internal fire-control apparatus, and other combat survival features--the design assumption being that when operating just over the heads of enemy troops, minor hits are inevitable. Bringing very expensive thin-skinned aircraft down to the treetops where small arms fire can destroy them is almost as crazy as the Army's interservice-rivalry based fantasy that helicopters can defy Soviet antiaircraft batteries.

Here is an instance where a purple procurementsystem could both save money and improve military effectiveness. Rather than spend $50 million for F15Es or about $25 million for Lantirn-equipped F16s, more A10s could be built; or a new armored attack plane could be designed; or existing A7 attack planes, which are durable but have outdated engines, could be retrofitted with the new engines and electronics for about $8 million each. Purple procurement could also take on the AH64 Apache antitank helicopter. Rather than spend $9 million each for Apaches which have evolved into missile launching rails 50 feet off the ground, the Army could move the launch rails down 50 feet and fire the Apache's missile from jeeps. The money saved could be used to build more missiles than now planned (on the wild, wild, wild chance one may miss) and for utility helicopters, which have been vindicated in actual use.

Cool off Congress

Military leaders have a legitimate beef whenthey complain that Congress changes its mind too often. They also are right to say that defense must be a less partisan issue--although they contribute to the fractured-flickers atmosphere by jumping to condemn even constructive criticism as "against defense.' In the area of partisanship, congressmen must heal themselves.

Liberal Democrats, for example, deserve mostof the blame for the Stealth bomber. During the Carter Administration they spoke in hushed tones about Stealth as a deadly future alternative to the B1, which Democrats wanted to cancel. This was a political ruse, designed to make the party sound anti-Pentagon and ultra-macho simultaneously. Now Stealth has taken on a life of its onw, and we are close to being stuck with it. Not only do its performance characteristics sound like an aerospace engineer's practical joke, Stealth is scheduled to go directly into production without operational test flights--which guarantees a turkey.

Meanwhile the B1B has become, though notthe cost-effective bomber the country needs, a bargain compared to Stealth. One hundred B1Bs are being completed at a cost which works out to $280 million apiece; now that production start-up costs have been amortized, additional B1Bs could be built for about $195 million each, compared to at least $333 million for each Stealth. The B1B has already been modified to include many of Stealth's radar-absorbing features. (Although, in the process, the aircraft has gained 80,000 pounds--more than its original payload figure--and lost some aerodynamic cleanliness. As a result, it is believed the B1B cannot climb to cruising altitude when fully loaded with weapons and fuel.)

But in exchange for reviving the B1 project in1981, Democrats extracted from the Reagan Administration something close to a blood oath that only 100 B1Bs would be funded. Building 100 B1Bs, followed by the planned 132 Stealths, means both planes will be manufactured at hopelessly inefficient production rates. And where will the U.S. bomber force, badly in need of modernization, be after this huge expense? Stealths will only be practical for nuclear retaliatory strikes, something which can be accomplished much more cheaply by missiles. The B1B may make a reasonable conventional bomber, but 100 is such a small number by military standards as to be insignificant in anything beyond Grenada-class operations. Adjusted for payload, sortie rates, and other factors, the 100 B1Bs will be able to deliver approximately 2 percent of the conventional bomb tonnage U.S. forces could deliver during World War II.

Censor the press

Pentagon reporting has improved in recentyears, but in two areas journalists still fall flat. One is spending too much time, as it were, on toilet seats. In a $300 billion enterprise some bloopers are inevitable: considering the total amount being spent, occasional idiotic small purchases aren't all that scandalous. It's the procurement programs where all the paperwork is going smoothly but the result is wrong--programs like Lantirn--that are the real scandal.

Yet overpriced hammers and coffee pots consistentlydraw greater ink than far more significant institutional predicaments--because they seem indisputably wrong and require no further explanation, unlike flawed weapons or strategies, which may take many pages to lay out.

The second troublesome journalistic failing isthat when reporters do examine complex programs, they tend to flail at all flaws whether or not significant; and whether or not one claimed fault is consistent with another. Last year, for instance, wide press attention was given to a GAO report saying that neither F16s nor F20s (the Air Force's candidates) should be acquired for the new continental interceptor program, because neither has the radar range of F14s and F15s. Reading several major-paper stories on this subject and watching big-TV newscasts, I caught no mention of the fact that F14s and F15s also cost more than twice as much as the planes being considered, meaning at most half as many could be purchased; and in continental defense large numbers will be more important, since the U.S. has a huge border area. (Assuming any of these aircraft will be effective at intercepting cruise missiles, an open question.)

Another example: journalists have turnedsomersaults about the fact that the M2 Bradley Infantry Fighting Vehicle cannot withstand a direct hit from a modern anti-tank rocket. But the real hooter about the Bradley, rarely explained, is that it is a "tank supplement' which costs as much as a tank. Tactical experience using fighting vehicles is limited, but what there is suggests that on a modern battlefield, you're either a tank or you're not: only a main battle tank such as an M1 Abrams has sufficient armor to absorb a well-aimed kinetic projectile, and even main battle tanks can't survive hits from each other. The notion of sending $1.5-million Bradleys onto a battlefield to assist $1.7-million M1s, instead of sending more M1s, is curious indeed. But it can't be explained in a single sentence.

Follow the money

Caspar Weinberger spent the first term of theReagan Administration denying that there was anything, even the slightest little thing, wrong with procurement. Had Weinberger admitted the obvious up front--that the system was in trouble, and he needed help fixing it--he would have won respect and sympathy. Instead he has spent well over a trillion dollars for . . . what?

Spending is up, way up. Adjusted for inflation,Reagan has spent 50 percent more per year on defense than Carter did. In fiscal 1985 the military budget was larger in real dollars than in the peak years of the Vietnam and Korean wars. But actual amounts of hardware acquired have scarcely increased, and in some cases fallen. Some new weapons acquired under Reagan are better than their antecedents, but few are improved to the degree that their costs have increased.

And on the critical subject of readiness, littlehas changed. James Fallows has written in The Atlantic, "In 1980, after the "decade of neglect,' the Marines averaged 24.2 flying hours per crew per month. In 1984 they averaged 23.7 hours. For Army aviators the average was 18.8 hours in 1980 and 16.4 hours in 1984. The average mission capable rating for Army, Air Force, and Marine equipment was 79 percent in 1980 and 81 percent in 1984. The most the Pentagon can claim is that mission capable rates are "steady or slightly increasing' after years of re-arming America.'

There's a simple answer to where the moneywent. In 1984, major aerospace contractors earned an average 27-percent return on sales to the military, more than double the national average of 11-percent return on assets for mercial manufacturing. FMC Corporation, which builds the Bradley, earned a 54 percent return. McDonnell Douglas, the leading defense contractor, drew 98 percent of its profit from military sales, which constituted only 69 percent of its business. Boeing got 94 percent of its profit from the military, though defense is less than half its business. Many (not all) contractor figures are comparable.

And these are income figures, referring towhat's left after the contractors themselves have lived like kings. Defense contractors pay mid-level managers more than Weinberger makes; plus millions to top management and perks, perks, perks. Further millions go to recently retired procurement officers for stressless "conculting's work; to congressmen, via PAC contributions and honoraria; to the press, via corporate image advertising; even, indirectly, to some active Pentagon officials. When five Boeing executives left to join Weinberger's Defense Department, the company issued $485,000 in special severance payments for them--never dreaming in its wildest imagination that this could in any way be viewed as improper, of course. All this money keeps the skids greased and makes sure as many people as possible are willing to overlook the meager end result.

The military procurement system was notdesigned to behave the way it does. That's why the situation is so resistant to reform. In government affairs, predicaments which come about through institutional self-interest or self-deceit can be far trickier to cure than mistakes based on simple error of judgment. Self-deceptions aren't discovered until they have taken root throughout the system, with various actors having acquired a stake in preservation of the status quo. Adding on new actors whose job it is to combat the existing mentality may or may not help. A better idea is to change the existing mentality, through true revolutionary reform.
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Title Annotation:Caspar Weinberger, Packard Commission investigation
Author:Easterbrook, Gregg
Publication:Washington Monthly
Date:Jan 1, 1987
Words:8522
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