Why Major Acquisition Programs Fail

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jurrien visser (JuVi op Twitter)

Why Major Acquisition Programs Fail

Mar 1, 2012

By Bill Sweetman, Paul McLeary, Francis Tusa
Washington, Washington, London

Major acquisition programs fail more often than not.

In the new climate of fiscal austerity, including for defense and security, this fact is now accepted in the mainstream of policymaking in the U.S. and elsewhere rather than being the theme of marginalized critics. Speaking in Washington just before the release of the Pentagon budget request last month, acting Pentagon acquisition chief Frank Kendall described early production-phase approval of the largest-ever project, the Lockheed Martin Joint Strike Fighter, as "procurement malpractice." Days later the Obama administration's budget request for fiscal 2013 outlined the third program slip in three years.

Kendall—a veteran of procurement politics and management—remarked than none of the problems he had seen during the Reagan administration have been solved, and he joked that acquisition has two main problems: "planning and execution."

Program failure has also been highlighted like never before by today's deficit-driven spending reductions, as the Pentagon struggles to explain how the last decade of record annual budgets, including for research and acquisition, left it with aging fleets and modernization programs nonetheless in disarray. It was not just the JSF—the U.S. Navy has no sound plan for its next surface combatant, the U.S. Army is reworking its network for soldiers and the U.S. Air Force has announced plans to mothball young C-27 transports and Global Hawk Block 30 UAVs, among other program kills.

The Center for Strategic and Budgetary Assessments has estimated that over the last decade, aborted programs have cost $46 billion, but that only accounts for outright terminations. There are other ways in which programs can and do fail, so any consideration of the issue should start with taxonomy.

Failure is a negative, the absence of success. Success, as opposed to good news or good luck, can be defined as reaching or exceeding a pre-defined objective, or level of performance, and defense projects, like any major effort, usually start with a set of clearly defined goals, the most important being:

•Effectiveness, defined in the U.S. by key performance parameters (KPP) that can include speed, range, survivability and reliability and other characteristics.

•Time and money required to deliver a KPP-compliant system to the customer.

•Procurement and operating cost, so the user can afford the desired force size without shorting other operational needs.

A fourth necessary criterion for success is unwritten: The KPPs must be matched to the threat and to national security strategy and remain so over the system's lifetime, or the system needs to be adaptable to changes.

Individually, these are all necessary but not sufficient, for success. Also, they do not gain the same amount of general attention, and customer focus tends to decrease from top to bottom. The Lockheed Martin F-22 is considered by many proponents to have been successful, but has failed in the last category—cost—with the result that only 140 combat-capable aircraft were delivered, 60 of which do not have the latest radar.

The RAH-66 Comanche failed on two of the first three measures—it was late and over-budget and expected to be too expensive overall—but what finally nailed it was a lack of enduring, compelling need for a low radar-cross-section scout helicopter. Conversely, the Lockheed U-2 and Boeing B-52 owe their long lives to supreme adaptability.

Programs do not get launched if planners do not expect them to meet all criteria. Rather, the pathway to failure is gradual, and the timescales differ for each criterion. Development delays and overruns can manifest themselves early in the program, but non-relevance may not be obvious until after initial operational capability (IOC).

There is also a cascade effect in that measures to avert failure in one area may cause problems in another. In the case of the JSF, it became apparent around 2003 that the F-35B was on track to miss its KPPs due to weight gain. A rapid weight-reduction effort followed but it increased development time and cost, while also leading to more complex and less common designs that cost more to build.

Nevertheless, while the "how" of failure is one concern, what military planners the world over would like to know is "why?" Here we find that seldom is it a matter of unexpected technical problems—indeed, often the reverse is true.

The Pentagon's director of operational test and evaluation, Michael Gilmore, made this clear at a conference last year: "Most of the time, when unrealistic requirements are promulgated, there are numerous people who know that they are unrealistic, so it's not a case of their being not fully understood." The problem, Gilmore continued, is that there are "incentives to promise to deliver revolutionary capabilities quickly at low cost."

Take the erstwhile Boeing-led Future Combat Systems program for the U.S. Army. The mixture of gee-whiz communications, everything-in-one ground vehicles, robots, UAVS, and modern surveillance equipment all tied together by a network of networks promised big things at a time when the Pentagon was casting about for a foe in the 1990s. Uninterested in the Somali warlords, Serb militiamen and Haitian crooks that it was actually fighting during that decade, the program promised total domination over the kinds of enemies that the Pentagon wanted to fight—columns of well-equipped Chinese or Russian soldiers.

Its failure was a classic of the form. Since the Army was unsure of exactly what threats it would face—and was unwilling to step off of the procurement treadmill long enough to articulate a real strategy—it tried to develop of suite of systems that would work anywhere. In the end, the service was too vague in its requests, Boeing and its partners too ambitious in their promises, and, ultimately, $18 billion was spent with no lasting hardware to show for it by the time of its cancellation in 2009.

Yet, most military procurement systems reward companies that underestimate the cost of new programs. The first reward is winning the program, and the second is higher revenue as a result of overruns under development contracts that are cost-plus. (Development costs do overrun in the non-defense world—the Boeing 777 and 787 and Airbus A380 being good examples—but they are still small relative to the companies' production revenue, so that even the 787 debacle has not threatened Boeing's survival or independence.)

Higher acquisition costs also drive company growth, as do higher-than-predicted operating costs, particularly this century as more maintenance work was outsourced to contractors. The failure of the Global Hawk Block 30, whose operating costs were higher than the aging, manned U-2, is the exception rather than the rule: Most operators accept the overruns and reduce capability in other areas.

Some of the same reasons for failure were defined by the U.K. National Audit Office (NAO) close to a decade ago. The NAO called it "the conspiracy of optimism."

Military planners—and it is overwhelmingly military planners—want to obtain a capability they cannot afford, or which is at the risky end of the spectrum. To avoid scaring those assessing or paying the bills, they either under-estimate how much it will cost, or they fudge the risk of the project, or both.

If a program is "on budget," it is more difficult to cancel. If the paperwork looks good, then officials have to look elsewhere to find more funding to actually get the program up to the implied status. In turn, other projects are salami-sliced as billpayers, which then starts to imperil those programs. Alternatively, the original, badly estimated, badly specified program is stretched out yet further, a move that always costs more in the longer term.

The U.K. can "proudly" point to many dozens of examples of the "conspiracy of optimism" over the past two or more decades—which is why the NAO was able to characterize the problem.

The most recent poster child for the problem is the British aircraft carrier program. To make it acceptable to London, it was originally budgeted at £2.8 billion ($4.4 billion) for two complete vessels in 2003-04. At the time, prime contractor BAE Systems opined that it was practically impossible to deliver for this cost. Then the official price rose to £3.5 billion in 2007, £5.2 billion in July 2010, and £6.2 billion in October 2010. At each stage, the ever-rising cost difference had to be accounted for inside the Defense Ministry.

As for the reasons behind the increases, few were ever offered. The key price rise came in 2009 upon delaying the program by two years due to budget "troubles." This "saved" £400 million in the near years, but cost £1.6 billion more across the program as a whole.

Even with all of this cost escalation, some KPP-like capabilities—airborne early warning, fuel-replenishment ships needed for sustained carrier operations —are not yet budgeted for and will face a serious fight over increasingly scarcer funds after 2015, meaning there could still be more sticker shock in the future.

As far as it is known, no Western defense ministry or other government auditing body has adopted the term "conspiracy of optimism." But the Pentagon's Kendall referred to it just last month.

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