February 1, 2006  


Is private management of big defense programs out of control?

The U.S. military foresees a future where its enemies are watched by a network of sensors that feed targeting information to a multitude of shooters who attack from an array of platforms. Electronic sensing, communication and targeting knit individual battlefield components into a “system of systems.”

If it sounds complicated, it is. So much so that the military not only relies heavily on private defense companies to develop the systems, but also to manage the companies it hires to develop the components of the system of systems. The Army, the National Missile Defense program and the Coast Guard have all turned the management of major defense programs over to big defense companies called “lead systems integrators.” And that’s starting to worry Congress. It seems to many lawmakers that the Pentagon is surrendering too much of its responsibility and authority — and too much of its budget — to the “LSIs.”

Under LSIs, the Army’s Future Combat Systems (FCS) program has increased in price by 60 percent and fallen years behind schedule, despite $100 billion spent; National Missile Defense capability remains questionable; and the Coast Guard’s $24 billion Deepwater program is judged by government auditors to pose “substantial risk.” “There is bipartisan, bicameral concern that the LSI process may not be controllable,” said a House Armed Services Committee staffer.

But members of the House and Senate defense panels remain uncertain what they should do about the problem. So instead of cracking down immediately, they have ordered Defense Secretary Donald Rumsfeld to prepare a report. He has until Sept. 30, according to a provision in the 2006 Defense Authorization Act.

Alarm about LSIs bubbled up repeatedly during congressional hearings in 2005. The most troubling lead systems integrator was the Boeing-SAIC team selected to head the FCS program. The Army hired the team in 2002 to manage the dozens of companies involved in developing 18 separate air and ground systems that are part of FCS. Last fall the Defense Department reported to Congress that FCS costs had increased from $99 billion to $161 billion and the program was at least four years behind schedule. Boeing and SAIC blame Army restructuring of FCS for the cost increases.

But the news of vastly higher FCS costs, coming amid reports of major price increases for warships, satellites and fighter jets, jolted lawmakers. Weapon costs “are rising so quickly that we will not be able to afford enough of them to fulfill our requirements,” Rep. Duncan Hunter, R-Calif., chairman of the House Armed Services Committee, warned Pentagon arms buyers. The ballooning price tag was just the latest problem for FCS. Last spring Sen. John McCain, R-Ariz., challenged the Army’s use of contracting rules so lax that Boeing and SAIC did not have to provide cost and purchasing data to Army auditors. The Army was buying its most expensive weapons system ever under “other transaction authority,” a contracting procedure usually reserved for small contracts with high-tech companies unfamiliar with and unwilling to deal with the details of standard defense contracts. The deal virtually guaranteed Boeing a 15 percent profit on FCS. As the price increased, so would the LSI’s profit.

The Army argued that the unorthodox arrangement with Boeing and SAIC would hold down costs by eliminating paperwork and saving time. Less than a month after McCain’s challenge, however, Army Secretary Francis Harvey announced that the contract would be rewritten to include traditional oversight and safeguards.

In 2004, auditors from the Government Accountability Office hoisted storm flags over the Coast Guard’s Deepwater program, in which Lockheed Martin and Northrop Grumman were hired as LSIs. The Coast Guard had awarded the two companies up to $4.6 million in performance bonuses even though “the factors that formed the basis for the award fee determination were unsupported by quantifiable metrics,” the GAO said.

Deepwater began in 2002 as a $17 billion program, but by 2004 its price had increased to as high as $24 billion, the GAO reported. And costs seemed likely to go higher. “The Coast Guard has taken a hands-off approach to ‘make or buy’ decisions made at the subcontractor level. As a result, questions remain about whether the government will be able to control costs,” the GAO said.

For the military to be handing nearly all control over its most expensive projects to the companies that stand to profit most from them struck many lawmakers as wrong. The services “can’t simply hand over the keys” to lead systems integrators and assume that their problems have been solved, a Senate Armed Services Committee staffer said.

Growing congressional unease with LSIs showed up in the 2006 Defense Authorization Act, where lawmakers required the defense secretary to report to them on how the Defense Department is using LSIs. In particular, lawmakers say they want to know what the services are doing to prevent “pass-through charges” by LSIs. They also want to know how the services are minimizing the extent to which LSIs are taking over “inherently governmental functions.” Pass-throughs are fees LSIs add to products or services provided by program subcontractors. “There are cases where lead systems integrators are not providing value, but are adding substantially to overhead,” the Senate Armed Services Committee staffer said.

The concern over inherently governmental functions is simply that LSIs are allowed to do too much that should remain the responsibility of the government. Ultimately, the services and the Defense Department, not the lead systems integrator, should be accountable for how tax money is spent. House and Senate members want to “ensure that the government has adequate staffing and personnel to manage these programs,” the Senate staffer said. “The government is not doing its job by simply signing the checks.”

Whatever the defense secretary reports, it is likely that lead systems integrators are here to stay. During the 1990s, the Defense Department cut its acquisition workforce in half to about 150,000. Because of the cuts, “I think they’ve in many ways lost the organic competence to be good buyers,” said John Hamre, who as deputy defense secretary from 1997 to 1999, oversaw part of the acquisition workers drawdown. And as the Pentagon’s acquisition work force shrank, much of the weaponry the military buys got more complicated.

“Systems have moved from a platform basis to a system-of-systems basis,” said Jacques Gansler, who was the Pentagon’s acquisition chief from 1997 to 2001.

But between the increased complexity of systems and the Pentagon’s shrunken cadre of acquisition experts, “It’s hard for me to picture the government being a systems integrator,” Gansler said. The Pentagon will have to rely on defense companies for that, he said. For its part, “DoD needs to figure out how to manage the systems integrators.”

And that’s the real point of the report ordered in the 2006 Authorization Act, the congressional staffers said. “Congress wants to understand more clearly how the strategy [of using LSIs] is going,” said Stan Soloway, a former deputy undersecretary of defense for acquisition reform.

With that in hand, it will become clearer on how to crack down on abuses by LSIs.