Roadblock

hile Pentagon watchers in Congress and the media regularly debate the merits of new jets, submarines, aircraft carriers and a host of other new weapons that pack the services' annual budget requests, relatively little attention is paid to the much larger cost of maintaining the department's current arsenal. And although Defense proponents claim modernization accounts pushing $50 billion this year are starved for funding, the services are in fact choking on the cost of operating and supporting weapons already in the inventory.

The Defense Department devotes hundreds of thousands of employees and spends $60 billion a year to sustain its weapons systems, accounting for more than 70 percent of annual spending on logistics. The huge cost is crushing the services' efforts to restructure for the future. Despite hundreds of initiatives to streamline support operations-the Defense Department estimates it is pursuing more than 400 separate plans to reduce logistics and maintenance expenses-costs have continued to rise. Last year, Congress had to appropriate an additional $1 billion for readiness and spare parts procurement to shore up flagging weapons systems.

Reforming the military's unwieldy logistics operations-the means of providing warfighters everything they need, from food and fuel to spare parts and ammunition-has for years been a top priority at the Defense Department. But reforms have long been stymied by the sheer complexity of maintaining aging weapons. Among the factors contributing to the overwhelming cost of sustaining weapons are the politics of depot maintenance and the laws governing what work can be performed by private contractors, huge inventories of spare parts, the services' antiquated accounting systems, and the lack of funding for upgrading equipment.

Defense acquisition chief Jacques Gansler, who oversees logistics, has presided over significant improvements in the military's maintenance and supply systems, yet the military doesn't begin to provide the kind of timely support to combat troops that the private sector routinely provides to customers, he concedes. One of his top priorities is improving service and whittling down the $60 billion annual bill for weapons support, so those funds might be redirected to other programs.

"Our equipment is aging, and it's aging rapidly," a frustrated Gansler told members of the House Armed Services Committee panel on readiness in June. Increased wear on equipment, due to the unprecedented high pace of deployments in recent years, has hurt readiness and raised maintenance costs. For several years running, the services have covered the increased costs by shifting funds from their modernization accounts, delaying new procurement and thereby further increasing the burden on existing equipment. "It's a vicious cycle," Gansler said.

'Art of the Possible'

Last the year the Defense Department unveiled a logistics strategic plan aimed at dramatically improving support to combat troops by 2005. A key measure of the plan's viability will be its success in streamlining support for weapons systems. To reduce operations and maintenance costs, the services have launched 30 pilot programs to function as test beds for reforming the way weapons are maintained.

"What I find very frustrating is that we are dealing here with something that is clearly within the art of the possible. What we're trying to bring about in the Department of Defense is a logistics system that has basically already been demonstrated in the commercial world," Gansler told the readiness panel.

"You can log on to the Internet, click on a commercial resource, choose what you want, place an order, check its availability, purchase it, track its progress from the warehouse to your door, and have greater than 99 percent confidence that it will arrive at the right place at the right time," Gansler added.

But the advances in information technology that have so revolutionized consumer purchasing have largely eluded the Defense Department. "Institutional resistance, outdated systems and numbing bureaucratic delays" have thwarted such advances at Defense, Gansler said.

The pilot programs are designed to apply commercial business practices to weapons maintenance. They vary in their approach, but they all reflect the growing impetus at Defense to turn over more responsibility to private contractors.

The Defense Department has outlined five general concepts that the pilots will test:

• Restructuring product support (DoD's term for logistics support for individual weapons systems) by adopting the best practices used in industry.
• Competitively awarding contracts, to either government entities or contractors, to provide long-term product support.
• Inserting new technologies in existing weapons to improve reliability and therefore reduce maintenance costs.
• Expanding the use of prime-vendor contracting, where industry provides long-term support on an as-needed basis.
• Transferring responsibility for overseeing life-cycle support to program managers, away from combat commanders.

The overall goal is to reduce by 20 percent the total cost of operating and supporting weapons from development through disposal.

Shifting Responsibilities

The theory behind many of the pilot programs is that by assuming maintenance responsibility, industry will be motivated to invest in upgrading equipment to make it more reliable and cheaper to maintain, as long as the contractor has a stake in the savings. In several cases, the services are transferring not just discrete maintenance tasks to contractors but responsibility for overall system performance. In those cases, success is measured not by the number of widgets maintained or spare parts produced, but by the degree to which an entire weapons system-an aircraft, for instance-is ready for combat.

One of the most mature and successful pilots is the Air Force's F-117 tactical aircraft support program. Officials say they have saved nearly $30 million by shifting responsibility for system performance to contractor Lockheed Martin. Most of the savings has been achieved through personnel cuts, says the Air Force's Jerry Cothran, chief of acquisition logistics, office of the deputy chief of staff for installations and logistics.

Over time, the Air Force expects to reduce the system program office for the F-117 from about 250 people to 50, a savings of about $80 million over the life of the aircraft. The contractor is rated on its ability to meet established performance criteria-so far, Lockheed has met all performance metrics, Cothran says-and shares in the savings achieved through upgrades to aircraft components.

"Basically, you want to structure contracts that will be win-win for both the contractor and the Air Force: We'll be guaranteed a level of performance, and the contractor will be motivated to improve reliability and maintainability" through profit incentives, Cothran says.

Along the same lines, by the end of this month, the Air Force expects to award what it calls a "total system performance responsibility" contract at Cheyenne Mountain Complex, a major center in the Air Force Space Command in Colorado. The Integrated Space Command and Control contract is aimed at reducing total ownership costs for the complex.

The scope and complexity of the subsystems at Cheyenne Mountain Complex require a level of expertise found in the private sector, but not necessarily in the Air Force, Cothran says. Holding the contractor responsible for total system performance-as opposed to the government trying to integrate numerous contracts for goods and services-makes sense, he says, because most of the hardware and a large percentage of the software will be commercial, off-the-shelf-products.

Air Force officials say they have not incorporated estimated savings from the pilot programs into their budgets, except in cases where that savings has already accrued, as in the F-117 pilot. In recent years, the Air Force has found itself strapped for cash because it programmed savings from other reform initiatives, most notably outsourcing, into its budget before the money actually materialized.

"Historically, we've taken [estimated] savings up front," says Ronald Orr, Air Force assistant deputy chief of staff for logistics. But with regard to the pilots, "we won't program those savings until we actually see them."

Multiple Hurdles

One of the most vexing issues for service officials is determining what work can be contracted out and whether or not Defense employees should be allowed to compete to retain the work in-house.

By law, the Defense Department is restricted in both the amount and type of work it can turn over to the private sector. Work that is defined as "core" logistics support generally must be performed in facilities owned and operated by the government; and no more than 50 percent of funds appropriated for depot-level maintenance in a given fiscal year may be spent on private contractors (10 U.S.C. 2464 and 10 U.S.C. 2466, respectively). In addition, Defense must follow guidelines established by the Office of Management and Budget Circular A-76 before outsourcing non-logistics work that is commercial in nature. Outsourcing frequently is time consuming and expensive to administer, and decisions often are appealed, further dragging out the process.

Transferring work to the private sector is also a political hot potato and raises philosophical questions about the role of contractors in national security. Lawmakers, especially those whose districts include military depots where much of the maintenance and repair work on weapons is performed by civil servants, and federal employees unions have accused the services of jeopardizing national security by attempting to move too much work to the private sector. Their concerns center on two issues: the role of contractors on future battlefields, and the ability of contractors to meet surge requirements during an emergency.

Although the government can compel employees to perform during conflict, it's not clear to what extent it could compel private contractors. In the Balkans, where hundreds of contractors are providing logistics support to warfighters, combat commanders have expressed concern about their own responsibility and that of contractors should the situation heat up.

The Air Force's Orr says the military must be more cautious than the private sector in assuming risk. For instance, where the private sector can rely exclusively on just-in-time delivery arrangements, the military must maintain inventory levels that would be deemed inefficient in the private sector. Likewise, "None of our pilot programs rely on contractors for maintenance on the battlefield," says Orr.

Accounting Issues

A fundamental problem for the services as they restructure weapons support operations is that peacetime support requirements are often very different from what's needed in war. And combat commanders are naturally suspicious of any peacetime "efficiencies" that would render their jobs more difficult on the battlefield.

"Communication is the key here," says Col. James Stevens, action officer for the Army's product support pilot programs. Reforms must be tested in the field, "not just at the company level, but all the way up the chain of command to the [commander in chief]," Stevens says.

Even in cases where turning over work to the private sector seems logical, the legal and administrative issues can be complicated, especially where large inventories of spare parts are involved, which is often the case with older weapons systems. By law, the services cannot sell items from their inventories for less than what they paid. Contractors often balk at the prices, since over time, many parts have become overvalued, contractors and service officials say.

For more than a year now, the Army has been trying to implement a prime-vendor program to maintain its Apache helicopter fleet. Originally, the Army planned to replace the various maintenance contracts supporting the helicopter with a single contract that would guarantee flying hours at a flat rate.

But the Army ran into trouble when it discovered it couldn't afford to transfer Apache spare parts from the Army Working Capital Fund to the contractor. The fund, with which the Army Materiel Command buys spare parts it will later sell to the Army for maintenance, is financed by the markup that AMC charges when it sells the parts. By transferring Apache parts to the contractor, the fund would have lost as much as $60 million annually, driving up spare-part costs for other programs.

"The Apache pilot was one of our most ambitious," Stevens says. "The question was whether we could afford to have the contractor buy back the inventory. That's a major challenge with legacy systems." The Army is working to restructure the program, but it's not clear how it will do so, he says. "There definitely are a lot of interests that need to be considered, especially whenever you start shifting workloads around," says Stevens.

Another issue faced by all three services is the difficulty of measuring savings. None of the services' accounting systems are adequately developed to accurately reflect the true cost of doing business before or after pilot implementation.

"The metrics are challenging," says Navy acquisition executive Eileen Roberson. "One of the things we've learned is we need to continue to work on our cost-collection systems."

A Long Road

The General Accounting Office has criticized the Defense Department for lacking an overall management plan for the pilot programs. Many pilots remain poorly defined, lack funding and will not show results before crucial decisions are made regarding the departmentwide logistics strategic plan. Also, the services have not mapped out good strategies for measuring savings, GAO says.

The criticism has merit, but overall, "it misses the point," says Paul Taibl, an analyst at Business Executives for National Security, based in Alexandria, Va. "We're very supportive of what the Defense Department is trying to do here. Giving each of the services carte blanche to apply [solutions] as they see fit is appropriate. A one-size-fits-all approach would not work." And waiting until all the administrative, legal and political issues were resolved would mean forfeiting valuable time, he says.

Logistics reform will be a never-ending quest for the Defense Department, says Orr. "The most important thing is to continually reassess where we're going."