A QUEST FOR EXCELLENCE FINAL REPORT TO THE PRESIDENT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90-00530R000400890003-3
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 130
• Document Creation Date: December 23, 2016
• Document Release Date: October 26, 2012
• Sequence Number: 3
• Publication Date: June 1, 1986
• Content Type: REPORT

STAT
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Chairman
Mr. David Packard
Members
Mr. Ernest C. Arbuckle
Gen. Robert H. Barrow
USMC (Ret)
Mr. Nicholas F. Brady
Mr. Louis W. Cabot
Mr. Frank C. Carlucci
Mr. William P. Clark
Mr. Barber B. Conable, Jr.
Gen. Paul F. Gorman
USA (Ret)
Mrs. Carla A. Hills
Adm. James L. Holloway
USN (Ret)
Dr. William J. Perry
Mr. Charles J. Pilliod, Jr.
Lt. Gen. Brent Scowcroft
USAF (Ret)
Dr. Herbert Stein
Mr. R. James Woolsey
Director
Mr. Rhett B. Dawson
PRESIDENT'S BLUE RIBBON COMMISSION
ON DEFENSE MANAGEMENT
June 30, 1986
The President
The White House
Washington, D. C. 20500
Dear Mr. President:
On behalf of your Blue Ribbon Commission on
Defense Management, I have the honor to present this
Final Report, which compiles the detailed findings,
conclusions, and recommendations produced by our year-
long study. They address, in addition to the areas on
which we have reported previously, several additional
aspects of defense management.
The Final Report is intended to assist the
Executive and Legislative Branches as well as industry
in implementing a broad range of needed improvements,
including the many Commission recommendations endorsed
by you in April 1986. Its title -- "A Quest for
Excellence" -- reflects a basic management philosophy,
as well as a standard to which those engaged in the work
of our nation's defense must always aspire.
Without exception, the recommendations of our
Final Report have the support of all members of the
Commission. All members have contributed invaluably to
this work, and I am deeply grateful for their unstinting
efforts. We are most fortunate to have had the assis-
tance of a talented and dedicated staff.
We have tried to conduct a study of the
important dimension you intended. We are gratified by
your confidence in us and your support of our
recommendations. We hope that, under your leadership,
they will help realize a new era in defense management
for the benefit of all Americans.
Sin rely
David Pac ard
736 Jackson Place, N.W. Washington, D.C. 20503 [phone]
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Chairman
Mr. David Packard
Members
Mr. Ernest C. Arbuckle
Gen. Robert H. Barrow
USMC (Ret)
Mr. Nicholas F. Brady
Mr. Louis W. Cabot
Mr. Frank C. Carlucci
Mr. William P. Clark
Mr. Barber B. Conable, Jr.
Gen. Paul F. Gorman
USA (Ret)
Mrs. Carla A. Hills
Adm. James L. Holloway
USN (Ret)
Dr. William J. Perry
Mr. Charles J. Pilliod, Jr.
It. Gen. Brent Scowcroft
USAF (Ret)
Dr. Herbert Stein
Mr. R. James Woolsey
Director
Mr. Rhett B. Dawson
PRESIDENT'S BLUE RIBBON COMMISSION
ON DEFENSE MANAGEMENT
June 30, 1986
Dear Mr. Secretary:
On behalf of the President's Blue Ribbon
Commission on Defense Management, I have the privilege
to present a copy of our Final Report, which was
submitted to the President today.
We hope this Final Report will assist the
Department of Defense to implement a range of manage-
ment improvements. Among these are the many Commission
recommendations which the President designated in
April 1986 for quick and decisive implementation. For
this purpose, I would be pleased to continue to work
with you in any way possible. I look forward to joining
you, as the President recently requested, in a progress
report in early 1987.
Please accept our sincere thanks for the
responsive manner in which your Office, and the
Department of Defense generally, assisted in the work of
the Commission.
The Honorable Caspar Weinberger
Secretary of Defense
Washington, D. C. 20301
7345.1acksoriPlace,NLW
David Packard
Washington, D.C. 20503 [phone]
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A Quest for Excellence
Final Report to the President
by the President's
Blue Ribbon Commission
on Defense Management
June 1986
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TABLE OF CONTENTS
Page
Foreword by David Packard xi
Summary xv
Introduction
Chapter One: National Security Planning and Budgeting 7
1
Chapter Two: Military Organization and Command 33
Chapter Three: Acquisition Organization and Procedures 39
Chapter Four: Government-Industry Accountability 73
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LIST OF APPENDED MATERIAL
Appendix*
A. Detailed Recommendations, President's Blue Ribbon Commission on
Defense Management
B. Executive Order 12526 (July 15, 1985)
C. National Security Decision Directive 219 (April 1, 1986), White Howe
Summary
D. President's Special Message to the Congress (April 24, 1986)
E. Recommended Process for National Security Planning and Defense
Budgeting
F. A Comparison of Cost Growth in Defense and Non-Defense Programs
G. An Illustrative Organization of the Acquisition Staff of the Secretary of
Defense
H. Wendy T. Kirby, Expanding the Use of Commercial Products and "Commercial-
Style" Acquisition Techniques in Defense Procurement: A Proposed Legal
Framework (1986)
I. Logistics Management Institute, The Department of Defense and Rights in
Technical Data (1986)
J. The Navy Demonstration Project: An Alternative Personnel Management
System
K. Survey of Department of Defense Acquisition Workforce (1986)
L. U.S. National Survey: Public Attitudes on Defense Management (1986)
M. Defense Industry Initiatives on Business Ethics and Conduct
N. Ethics Resource Center, Final Report and Recommendations on Voluntary
Corporate Policies, Practices, and Procedures Relating to Ethical Business
Conduct (1986)
0. Peat, Marwick, Mitchell & Co., Report on Survey of Defense Contractors' Internal
Audit Processes (1986)
P. Arthur Andersen & Co., Study of Government Audit and Other Oversight -
Activities Relating to Defense Contractors (1986)
*Appended material is contained in a separate Appendix to Final Report.
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FOREWORD
By David Packard, Chairman
Less than one year ago, President Reagan established his Blue Ribbon
Commission on Defense Management to "study the issues surrounding defense
management and organization, and report its findings and recommendations."
In February 1986, the Commission submitted an Interim Report to the President.
Intended as a blueprint for overall improvement in defense management, the
Interim Report provided initial recommendations concerning key aspects of na-
tional security planning and budgeting, military organization and command, ac-
quisition organization and procedures, and government-industry accountability.
This Final Report compiles the Commission's full findings and recommendations
in each of these areas. I wish to add a final personal word on the "Quest for Ex-
cellence"?a standard to which defense management must always aspire.
As the Commission concludes its efforts, the urgent need we have found for
reforms in defense management should not obscure accomplishments of recent
years. The American people justly continue to have high confidence in the
United States military as an institution, and in the ability of our men and women
in uniform to defend the nation. The morale and fighting ability of our Armed
Forces have achieved a level higher than at any time in my recent memory.
Despite many positive achievements, however, I believe the importance of
revitalizing defense management has become ever more apparent. The para-
mount purpose of the Commission's work has been to identify and develop so-
lutions for those structural problems?and to ease the stifling burdens of regu-
lation, reporting, and oversight?that have long limited the success of the many
people in government and industry on whose talents and dedication the na-
tion's defense depends. Innovations in American industrial management, yield-
ing products of ever higher quality and lower cost, have provided a key insight:
human effort must be channeled to good purpose through sound centralized
policies, but free expression of people's energy, enthusiasm, and creativity must
be encouraged in highly differentiated settings.
The Commission's recommendations are intended to help establish strong
centralized policies that are both sound in themselves and rigidly adhered to
throughout the Department of Defense (DoD). In any large organization, poli-
cies must be executed through discrete structures. In the large, complex enter-
prise of national defense, centers of management excellence dedicated to advancing
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DoD's overall goals and objectives. The Commission's recommendations, if fully
implemented, will help create an environment in which each DoD component
can achieve ever higher standards of performance by summoning forth the en-
thusiasm and dedication of every man and woman involved in accomplishing its
mission. Excellence can flourish, I believe, only where individuals identify with
a team, take personal pride in their work, concentrate their unique efforts, de-
velop specialized know-how, and above all constantly explore new and better
ways to get their job done. Freedom and incentives of just this sort, President
Reagan has observed, "unleash the drive and entrepreneurial genius that are
the core of human progress."
This technique?establishment of strong centralized policies implemented
through highly decentralized management structures?has its legacies at DoD.
On this model, for example, Navy-industry teams working together as one
brought the Polaris submarine-launched missile system from initiation to suc-
cessful operational test in one-third the time it would take now. In today's ad-
vance development work, centers of excellence should include select program
management and industry teams working more closely together on new proto-
type weapons. If DoD truly is to fly and know the cost before it buys, the early
phase of research and development must be one of surpassing quality, following
procedures and meeting timetables distinct from those of approved production
programs.
Despite formidable bureaucratic obstacles, I believe that a centers-of-excel-
lence approach can tangibly improve productivity and quality. If widely adopted
and steadfastly supported, it could achieve revolutionary progress throughout
defense management. The potential applications are almost without number. In
1984, for example, DoD began to apply this concept to managing its installations
as potential centers of excellence, by according installation commanders much
greater latitude to run things their own way, cut through red tape, and experi-
ment with new ways of accomplishing their missions. As a result, commanders
and their personnel have found more effective means to do their jobs, identified
wasteful regulations, and reduced costs while improving quality. The program
has shown the increased defense capability that comes by freeing talented peo-
ple from over-regulation and unlocking their native creativity and enthusiasm.
Excellence in defense management will not and can not emerge by legisla-
tion or directive. Excellence requires the opposite?responsibility and authority
placed firmly in the hands of those at the working level, who have knowledge
and enthusiasm for the tasks at hand. To accomplish this, ways must be found to
restore a sense of shared purpose and mutual confidence among Congress,
DoD, and industry. Each must forsake its current ways of doing business in
favor of a renewed quest for excellence.
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Congress must resist its inveterate tendency to legislate management prac-
tices and organizational details for DoD. Excellence in defense management will
not come from legislative efforts to control and arrange the minutest aspects of
DoD's operations. Congress can more usefully contribute by concentrating on
larger, often neglected issues of overall defense posture and military perform-
ance.
DoD must displace systems and structures that measure quality by regula-
tory compliance and solve problems by executive fiat. Excellence in defense
management can not be achieved by the numerous management layers, large
staffs, and countless regulations in place today. It depends, as the Commission
has observed, on reducing all of these by adhering closely to basic, common-
sense principles: giving a few capable people the authority and responsibility to
do their job, maintaining short lines of communication, holding people ac-
countable for results.
Defense contractors and DoD must each assume responsibility for improved
self-governance to assure the integrity of the contracting process. Excellence in
defense management will not be achieved through legions of government audi-
tors, inspectors, and investigators. It depends on the honest partnership of
thousands of responsible contractors and DoD, each equally committed to
proper control of its own operations.
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Summary
Final Report
to the President
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In July 1985, this Commission was charged by the President to conduct a
defense management study of important dimension. Our findings and
recommendations,* summarized below, concern major features of national se-
curity planning and budgeting, military organization and command, acquisition
organization and procedures, and government-industry accountability. This
summary represents, with certain important additions, the blueprint for overall
improvement in defense management presented as our Interim Report to the Pres-
ident on February 28, 1986.
National Security Planning and Budgeting
The Commission finds that there is a great need for improvement in the
way we think through and tie together our security objectives, what we spend to
achieve them, and what we decide to buy. The entire undertaking for our na-
tion's defense requires more and better long-range planning. This will involve
concerted action by our professional military, the civilian leadership of the
Department of Defense, the President, and the Congress.
Today, there is no rational system whereby the Executive Branch and the
Congress reach coherent and enduring agreement on national military strat-
egy, the forces to carry it out, and the funding that should be provided?in
light of the overall economy and competing claims on national resources. The
absence of such a system contributes substantially to the instability and uncer-
tainty that plague our defense program. These cause imbalances in our mili-
tary forces and capabilities, and increase the costs of procuring military
equipment.
Better long-range planning must be based on military advice of an order
not now always available?fiscally constrained, forward looking, and fully inte-
grated. This advice must incorporate the best possible assessment of our overall
military posture vis-a-vis potential opponents, and must candidly evaluate the
performance and readiness of the individual Services and the Unified and
Specified Commands.
To conduct such planning requires a sharpened focus on major defense
missions in the Department's presentation, and Congress' review, of the de-
fense budget. The present method of budget review, involving duplicative
*The Commission's recommendations are set forth in full and detailed form at Appendix A to
this Final Report. All appended material is collected in a separate Appendix to Final Report.
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effort by numerous congressional committees and subcommittees, centers on ei-
ther the minutiae of line items or the gross dollar allocation to defense, and
obscures important matters of strategy, operational concepts, and key defense
issues. As Senator Goldwater, Chairman of the Senate Armed Services Com-
mittee, recently observed, "The budget process distorts the nature of congres-
sional oversight by focusing primarily on the question of how much before we
answer the key questions of what for, why, and how well."
Of greater concern, congressional approval of the budget on a year-to-year
basis contributes to and reinforces the Department's own historical penchant
for defense management by fits and starts. Anticipated defense dollars are al-
ways in flux. Individual programs must be hastily and repeatedly accommo-
dated to shifting overall budgets, irrespective of military strategy and planning.
The net effect of this living day-to-day is less defense and more cost. Although
often hidden, this effect is significant?and it can be avoided.
Biennial budgeting, authorization and appropriation of major programs
not annually but only at key milestones, and a focus on strategy and opera-
tional concepts instead of line items are among the most important changes
that could be made to improve defense planning. They would enhance the
congressional role in framing good national security policy.
Budgeting based on strategy and operational concepts also would provide
a far greater improvement in the performance of the Office of the Secretary of
Defense than would any legislated reorganization of that Office. In general, we
believe, Congress should permit the Secretary to organize his Office as he
chooses to accomplish centralized policy formulation and decentralized imple-
mentation within the Department.
The Commission concludes that new procedures are required to help the
Administration and the Congress do the necessary long-range planning and
meaningfully assess what military forces are needed to meet our national secu-
rity objectives. Public and official debate must be brought to bear on these
larger defense policy questions. The Commission strongly urges adoption of a
process that emphasizes the element of sound, professional military advice pro-
vided within realistic confines of anticipated long-term funding.
Recommendations
To institutionalize, expand, and link a series of critical determinations
within the Executive Branch and Congress, we recommend a process that
would operate in substance as follows:
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Defense planning would start with a comprehensive statement of national
security objectives and priorities, based on recommendations of the National
Security Council (NSC).
Based on these objectives, the President would issue, at the outset of his
Administration and thereafter as required, provisional five-year budget lev-
els to the Department of Defense (DoD). These budget levels would reflect
competing demands on the federal budget and projected gross national prod-
uct and revenues and would come from recommendations of the NSC and the
Office of Management and Budget.
The Secretary of Defense would instruct the Chairman of the Joint
Chiefs of Staff (JCS) to prepare a military strategy for the national objectives,
and options on operational concepts and key defense issues for the budget
levels provided by the President.
The Chairman would prepare broad military options with advice from
the JCS and the Commanders-in-Chief of the Unified and Specified Com-
mands (CINCs). Addressing operational concepts and key defense issues
(e.g., modernization, force structure, readiness, sustainability, and strategic
versus general purpose forces), the Chairman would frame explicit trade-offs
among the Armed Forces and submit his recommendations to the Secretary
of Defense. The Secretary of Defense would make such modifications as he
thinks appropriate and present these to the President.
The Chairman, with the assistance of the JCS and the Director of Central
Intelligence, would prepare a net assessment of the effectiveness of United
States and Allied Forces as compared to those of possible adversaries. The
net assessment would be used to evaluate the risks of options and would ac-
company the recommendations of the Secretary of Defense to the President.
The President would select a particular military program and the associ-
ated budget level. This program and budget level would be binding on all ele-
ments of the Administration. DoD would then develop a five-year defense
plan and a two-year defense budget conforming to the President's
determination.
The President would submit to the Congress the two-year budget and the
five-year plan on which it is based. Congress would be asked to approve the
two-year budget based upon this plan. It would authorize and appropriate
funding for major weapon systems at the two key milestones of full-scale en-
gineering development and high-rate production.
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DoD would present the budget to Congress on the basis of national strat-
egy and operational concepts rather than line items. The details of such pres-
entation would be worked out by the Secretary of Defense and appropriate
committees of Congress.
Military Organization
and Command
In our Interim Report, the Commission recommended the changes in military
organization and command described below. These were designed to assure
unified action by our Armed Forces. On April 24, 1986, in a Special Message to
Congress, the President endorsed these recommendations and requested early
enactment of legislation required to implement them. As the culmination of a
major legislative effort begun in the House of Representatives in 1982 and
joined in the Senate by passage of the Barry Goldwater Department of Defense
Reorganization Act of 1986, we anticipate enactment of our basic
recommendations by the end of 1986.
Recommendations
Current law should be changed to designate the Chairman of the Joint
Chiefs of Staff (JCS) as the principal uniformed military advisor to the Presi-
dent, the National Security Council, and the Secretary of Defense, repre-
senting his own views as well as the corporate views of the JCS.
Current law should be changed to place the Joint Staff and the Organiza-
tion of the Joint Chiefs of Staff under the exclusive direction of the Chair-
man, to perform such duties as he prescribes to support the JCS and to re-
spond to the Secretary of Defense. The statutory limit on the number of
officers on the Joint Staff should be removed to permit the Chairman a staff
sufficient to discharge his responsibilities.
The Secretary of Defense should direct that the commands to and reports
by the Commanders-in-Chief of the Unified and Specified Commands
(CINCs) should be channeled through the Chairman so that the Chairman
may better incorporate the views of senior combatant commanders in his ad-
vice to the Secretary.
The Service Chiefs should serve as members of the JCS. The position of
a four-star Vice Chairman should be established by law as a sixth member of
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the JCS. The Vice Chairman should assist the Chairman by representing the
interests of the CINCs, co-chairing the Joint Requirements and Management
Board, and performing such other duties as the Chairman may
prescribe.
The Secretary of Defense, subject to the direction of the President,
should determine the procedures under which an Acting Chairman is desig-
nated to serve in the absence of the Chairman of the JCS. Such procedures
should remain flexible and responsive to changing circumstances.
Subject to the review and approval of the Secretary of Defense, Unified
Commanders should be given broader authority to structure subordinate
commands, joint task forces, and support activities in a way that best sup-
ports their missions and results in a significant reduction in the size and
numbers of military headquarters.
The Unified Command Plan should be revised to assure increased flexi-
bility to deal with situations that overlap the geographic boundaries of the
current combatant commands and with changing world conditions.
For contingencies short of general war, the Secretary of Defense, with
the advice of the Chairman and the JCS, should have the flexibility to estab-
lish the shortest possible chains of command for each force deployed, con-
sistent with proper supervision and support. This would help the CINCs and
the JCS perform better in situations ranging from peace to crisis to general
war.
The Secretary of Defense should establish a single unified command to
integrate global air, land, and sea transportation, and should have flexibility
to structure this organization as he sees fit. Legislation prohibiting such a
command should be repealed.
Acquisition Organization
and Procedures
Action within the Administration and in Congress to improve national
security planning and budgeting and military organization?as recommended
by the Commission?will provide the element of stability required for substantial
improvement of the acquisition system. This element is critical, and has been
missing. While significant savings can be and have been made through better
procurement techniques, more impressive savings will come from eliminating
the hidden costs that instability imposes.
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Our study of acquisition reveals, and our collective experience fully con-
firms, that there are certain common characteristics of successful commercial
and governmental projects. Short, unambiguous lines of communication
among levels of management, small staffs of highly competent professional
personnel, an emphasis on innovation and productivity, smart buying practices,
and, most importantly, a stable environment of planning and funding?all are
characteristic of efficient and successful management.
These characteristics should be hallmarks of defense acquisition. They are,
unfortunately, antithetical to the process the Congress and the Department of
Defense have created to conduct much of defense acquisition over the years.
With notable exceptions, weapon systems take too long and cost too much to
produce. Too often, they do not perform as promised or expected. The rea-
sons are numerous.
Over the long term, there has been chronic instability in top-line funding
and, even worse, in programs. This eliminates key economies of scale, stretches
out programs, and discourages contractors from making the long-term invest-
ments required to improve productivity.
Federal law governing procurement has become overwhelmingly complex.
Each new statute adopted by Congress has spawned more administrative regu-
lation. As law and regulation have proliferated, defense acquisition has become
ever more bureaucratic and encumbered by unproductive layers of manage-
ment and overstaffing.
Responsibility for acquisition policy has become fragmented. There is to-
day no single senior official in the Office of the Secretary of Defense (OSD)
working full-time to provide overall supervision of the acquisition system.
While otherwise convinced that the Secretary should be left free to organize his
Office as he sees fit, the Commission concludes that the demands of the acqui-
sition system have become so weighty as to require organizational change
within that Office.
In the absence of such a senior OSD official, policy responsibility has
tended to devolve to the Services, where at times it has been exercised without
the necessary coordination or uniformity.
Authority for acquisition execution, and accountability for its results, have
become vastly diluted. Program managers have in effect been deprived of con-
trol over programs. They are confronted instead by never-ending bureaucratic
obligations for making reports and gaining approvals that bear no relation to
program success.
Deficiencies in the senior-level appointment system have complicated the
recruitment of top executive personnel with industrial and acquisition experi-
ence. Recent steps to improve the professionalism of military acquisition per-
sonnel have been made within the Department of Defense and reinforced by
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legislation. The existing civilian personnel management system has not, how-
ever, allowed similar improvements in career paths and education for civilian
acquisition personnel. To attract and retain a good work force requires a more
flexible system for management of contracting officers and other senior acqui-
sition personnel?one comparable to the successful system for scientists and en-
gineers recently demonstrated in the Navy's so-called China Lake personnel
project. Major innovations in personnel management and regulations are
needed. The Commission's recommendations in this critical area can and should
be acted upon quickly and are of the highest priority.
A better job of determining requirements and estimating costs has been
needed at the outset of weapons development. More money and better engi-
neering invested at the front end will get more reliable and better performing
weapons into the field more quickly and cheaply. For example, recent improve-
ments in budgeting to most-likely cost have demonstrated that this approach
can result in a reduction in overruns.
All too often, requirements for new weapon systems have been overstated.
This has led to overstated specifications, which has led to higher cost equip-
ment. Such so-called goldplating has become deeply embedded in our system
today. The current streamlining effort in the Defense Department is directed
at this problem.
Developmental and operational testing have been too divorced, the latter
has been undertaken too late in the cycle, and prototypes have been used and
tested far too little.
In their advanced development projects, the Services too often have dupli-
cated each other's efforts and disfavored new ideas and systems. The Defense
Advanced Research Projects Agency has not had a sufficient role in hardware
experimentation and prototyping.
Common sense, the indispensable ingredient for a successful system, has
not always governed acquisition strategies. More competition, for example, is
beneficial, but the mechanistic pursuit of competition for its own sake would be
inefficient and sacrifice quality?with harmful results. Multi-year procurement,
baselining, and the use of non-developmental items all entail costs to manage-
ment flexibility, but would yield far greater benefits in program stability. The
Defense Department has initiated some baselining (the B-1 is an example) and
has made progress in gaining congressional acceptance of multi-year
contracting.
In sum, the Commission finds that there is legitimate cause for dissatisfac-
tion with the process by which the Department of Defense and Congress buy
military equipment and material. We strongly disagree, however, with the com-
monly held views of what is wrong and how it must be fixed. The nation's de-
fense programs lose far more to inefficient procedures than to fraud and
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dishonesty. The truly costly problems are those of overcomplicated organization
and rigid procedure, not avarice or connivance.
Chances for meaningful improvement will come not from more regulation
but only with major institutional change. Common sense must be made to pre-
vail alike in the enactments of Congress and the operations of the Department.
We must give acquisition personnel more authority to do their jobs. If we make
it possible for people to do the right thing the first time and allow them to use
their common sense, then we believe that the Department can get by with far
fewer people.
The well-publicized spare parts cases are only one relatively small aspect of
a far costlier structural problem. Each spare parts case has its own peculiarities,
but there are several major recurring causes that are systemic in nature. Many
of these causes have been identified by the Defense Department.
It is undoubtedly important to buy spare parts with care and at reasonable
cost. It is yet more important not to let the spare parts cases lead us to ignore
larger problems or, even worse, to aggravate them. Policy makers must address
the root causes of inefficiency, not dwell on marginal issues. The prescription
we offer for those larger problems will, we believe, result in savings on major
weapon systems and minor spare parts alike.
Recommendations
Notwithstanding our view that the Secretary of Defense should be free to
organize his Office as he sees fit, we strongly recommend creation by statute
of the new position of Under Secretary of Defense (Acquisition) and authori-
zation of an additional Level II appointment in the Office of the Secretary of
Defense. This Under Secretary, who should have a solid industrial back-
ground, would be a full-time Defense Acquisition Executive. He would set
overall policy for procurement and research and development (R&D), super-
vise the performance of the entire acquisition system, and establish policy for
administrative oversight and auditing of defense contractors.
The Army, Navy, and Air Force should each establish a comparable sen-
ior position filled by a top-level civilian Presidential appointee. The role of
the Services' Acquisition Executives would mirror that of the Defense Acqui-
sition Executive. They would appoint Program Executive Officers (PEO),
each of whom would be responsible for a reasonable and defined number of
acquisition programs. Program Managers for these programs would be re-
sponsible directly to their respective PEO and report only to him on program
matters. Each Service should retain flexibility to shorten this reporting chain
even further, as it sees fit.
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Establishing short, unambiguous lines of authority would streamline the
acquisition process and cut through bureaucratic red tape. By this means, the
Department of Defense (DoD) should substantially reduce the number of ac-
quisition personnel.
Congress should work with the Administration to recodify all federal
statutes governing procurement into a single government-wide procurement
statute. This recodification should aim not only at consolidation, but more
importantly at simplification and consistency.
DoD must be able to attract, retain, and motivate well qualified acquisi-
tion personnel. Significant improvements, along the lines of those recom-
mended in November 1985 by the National Academy of Public Administra-
tion, should be made in the senior-level appointment system. The Secretary
of Defense should have increased authority to establish flexible personnel
management policies necessary to improve defense acquisition. An alternate
personnel management system, modeled on the China Lake Laboratory dem-
onstration project, should be established to include senior acquisition per-
sonnel and contracting officers as well as scientists and engineers. Federal
regulations should establish business-related education and experience crite-
ria for civilian contracting personnel, which will provide a basis for the
professionalization of their career paths. Federal law should permit ex-
panded opportunities for the education and training of all civilian acquisi-
tion personnel. This is necessary if DoD is to attract and retain the caliber of
people necessary for a quality acquisition program.
The Joint Requirements and Management Board (JRMB) should be co-
chaired by the Under Secretary of Defense (Acquisition) and the Vice Chair-
man of the Joint Chiefs of Staff. The JRMB should play an active and impor-
tant role in all joint programs and in appropriate Service programs by
defining weapons requirements, selecting programs for development, and
providing thereby an early trade-off between cost and performance.
Rather than relying on excessively rigid military specifications, DoD
should make much greater use of components, systems, and services avail-
able "off the shelf." It should develop new or custom-made items only when
it has been established that those readily available are clearly inadequate to
meet military requirements.
A high priority should be given to building and testing prototype sys-
tems and subsystems before proceeding with full-scale development. This
early phase of R&D should employ extensive informal competition and use
streamlined procurement processes. It should demonstrate that the new
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technology under test can substantially improve military capability, and
should as well provide a basis for making realistic cost estimates prior to a
full-scale development decision. This increased emphasis on prototyping
should allow us to "fly and know how much it will cost before we buy."
The proper use of operational testing is critical to improving the opera-
tions performance of new weapons. We recommend that operational testing
begin early in advanced development and continue through full-scale devel-
opment, using prototype hardware. The first units that come off the limited-
rate production line should be subjected to intensive operational testing and
the systems should not enter high-rate production until the results from these
tests are evaluated.
To promote innovation, the role of the Defense Advanced Research Proj-
ects Agency should be expanded to include prototyping and other advanced
development work on joint programs and in areas not adequately emphasized
by the Services.
Federal law and DoD regulations should provide for substantially in-
creased use of commercial-style competition, relying on inherent market
forces instead of governmental intervention. To be truly effective, such com-
petition should emphasize quality and established performance as well as
price, particularly for R&D and for professional services.
DoD should fully institutionalize "baselining" for major weapon systems
at the initiation of full-scale engineering development. Establishment of a
firm internal agreement or baseline on the requirements, design, production,
and cost of weapon systems will enhance program stability.
DoD and Congress should expand the use of multi-year procurement for
high-priority systems. This would lead to greater program stability and lower
unit prices.
DoD must recognize the delicate and necessary balance between the gov-
ernment's requirement for data and the benefit to the nation that comes from
protecting the private sector's proprietary rights. That balance must exist to
foster technological innovation and private investment which is so important
in developing products vital to our defense. DoD should adopt a data rights
policy that reflects the following principles:
? If a product has been developed with private funds, the government
should not demand, as a precondition for buying that product, unlim-
ited data rights even if the government provides the only market. The
government should acquire only the data necessary for installation,
operation, and maintenance.
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? If a product is to be developed with joint private and government fund-
ing, the government's needs for data should be defined during contract
negotiations. Government contribution to development funding should
not automatically guarantee it rights to all data.
? If a product is developed entirely with government funds, the govern-
ment owns all the rights to it but may under certain circumstances make
those rights available to the private sector.
The President, through the National Security Council, should establish a
comprehensive and effective national industrial responsiveness policy to sup-
port the full spectrum of potential emergencies. The Secretary of Defense,
with advice from the Joint Chiefs of Staff, should respond with a general
statement of surge and mobilization requirements for basic wartime defense
industries, and logistic needs to support those industries and the essential
economy. The DoD and Service Acquisition Executives should consider this
mobilization guidance in formulating their acquisition policy, and program
managers should incorporate industrial surge and mobilization considera-
tions in program execution.
Government-Industry
Accountability
In recent years there has been increasing public mistrust of the perform-
ance of private contractors in the country's defense programs. Numerous re-
ports of questionable procurement practices have fostered a conviction, widely
shared by members of the public and by many in government, that defense con-
tractors place profits above legal and ethical responsibilities. Others argue that
contractors have been unfairly discredited through ill-conceived official actions,
exaggerated press, and mistaken public dialogue. The depth of public senti-
ment and prospect of continuing tensions and divisions between government
and industry are cause for concern.
Our nation relies heavily upon the private sector in executing defense pol-
icy. Cooperation between government and industry is essential if private enter-
prise is to fulfill its role in the defense acquisition process. Contractor or gov-
ernment actions that undermine public confidence in the integrity of the
contracting process jeopardize this needed partnership.
Aggressive and sustained enforcement of civil and criminal laws governing
procurement punishes and deters misconduct by the few, vindicates the vast
majority who deal with the government lawfully, and recoups losses to the
Treasury. As President Reagan emphasized in public remarks announcing the
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formation of this Commission, "Waste and fraud by corporate contractors are
more than a ripoff of the taxpayer?they're a blow to the security of our na-
tion. And this the American people cannot and should not tolerate." Specific
measures can and should be taken to make civil and criminal enforcement still
more effective.
Management and employees of companies that contract with the Defense
Department assume unique and compelling obligations to the people of our
Armed Forces, the American taxpayer, and our nation. They must apply (and
be perceived as applying) the highest standards of business ethics and conduct.
Significant improvements in contractor self-governance, addressing problems
unique to defense contracting, are required. Contractors have a legal and
moral obligation to disclose to government authorities misconduct discovered
as a result of self-review.
Improvements also should be made in the Department's administration of
current standards of conduct for military personnel and civilian employees. Ad-
ditional enforcement and compliance, and complementary efforts to address
the respective ethical concerns of government and industry, are required.
Despite an unquestioned need for broad administrative oversight of con-
tractor performance, defense programs have too often suffered from lack of
clear direction and cooperation among oversight agencies. Proliferation of
uncoordinated contractor oversight?both administrative and congres-
sional?has added unnecessary cost and inefficiency in the procurement
process.
Government action should not impede efforts by contractors to improve
their own performance. The Commission is concerned that, for example,
overzealous use of investigative subpoenas by Defense Department agencies
may result in less vigorous internal corporate auditing.
The Services and the Defense Logistics Agency are authorized to suspend
or debar contractors, prohibiting the award of new government contracts for a
particular period. Suspension and debarment are powerful administrative
tools. Existing regulations provide insufficient guidance, however, as to when
and how these sanctions should be used to protect legitimate government inter-
ests. If poorly administered, used for impermissible purposes, or applied too
broadly, the sanctions can foreclose important sources of supply and inflict
substantial harm on responsible contractors. A uniform policy and more pre-
cise administrative criteria are required to assure predictable and equitable ap-
plication of these sanctions throughout the Department of Defense.
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Recommendations
The Commission's recommendations address each of the above aspects of
the Defense Department's relations with industry?law enforcement, corporate
governance, official ethics, and contractor oversight.
We recommend continued, aggressive enforcement of federal civil and
criminal laws governing defense acquisition. Specific measures can be taken
to make enforcement still more effective, including the passage of Adminis-
tration proposals to amend the civil False Claims Act and to establish admin-
istrative adjudication of small, civil false claims cases.
To assure that their houses are in order, defense contractors must pro-
mulgate and vigilantly enforce codes of ethics that address the unique prob-
lems and procedures incident to defense procurement. They must also de-
velop and implement internal controls to monitor these codes of ethics and
sensitive aspects of contract compliance.
The Department of Defense (DoD) should vigorously administer current
ethics regulations for military and civilian personnel to assure that its em-
ployees comply with the same high standards expected of contractor person-
nel. This effort should include development of specific ethics guidance and
specialized training programs concerning matters of particular concern to
DoD acquisition personnel, including post-government relationships with de-
fense contractors.
Oversight of defense contractors must be better coordinated among the
various DoD agencies and Congress. Guidelines must be developed to re-
move undesirable duplication of official effort and, where appropriate, to en-
courage sharing of contractor data by audit agencies.
Government actions should foster contractor self-governance. DoD
should not, for example, use investigative subpoenas to compel such disclo-
sure of contractor internal auditing materials as would discourage aggressive
self-review. The new Under Secretary of Defense (Acquisition) should estab-
lish appropriate overall audit policy for DoD agencies and generally super-
vise the DoD's oversight of contractor performance.
Suspension and debarment should be applied only to protect the public
interest where a contractor is found to lack "present responsibility" to con-
tract with the federal government. Suspension and debarment should not be
imposed solely as a result of an indictment or conviction predicated upon
former (not ongoing) conduct, nor should they be used punitively. The Fed-
eral Acquisition Regulation should be amended to provide more precise
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criteria for applying these sanctions and, in particular, determining present
responsibility. Administration of suspension and debarment at DoD should be
controlled by a uniform policy promulgated by the Secretary of Defense.
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Final Report
to the President
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Introduction
I. Background
In July 1985, the Commission was charged by the President to conduct a
defense management study of important dimension, including:
the budget process, the procurement system, legislative oversight, and
the organizational and operational arrangements, both formal and
informal, among the Office of the Secretary of Defense, the
Organization of the Joint Chiefs of Staff, the Unified and Specified
Command systems, the Military Departments, and Congress.*
The Commission held its first organizational meeting on August 15-16,
1985, and received briefings from Secretary of Defense Weinberger and other
officials. Following this meeting, Commissioners were organized into six panels:
Strategy and Resource Planning; Military Organization and Command;
Acquisition; the Human Element?Personnel; Conduct and Accountability; and
Implementation.
In all, between August 1985 and June 1986 the Commission had some 30
day-long working sessions. Included among these were five days of public
hearings at which the Commission took testimony on a variety of defense
management issues. Witnesses at these and other meetings included members of
the Senate and House of Representatives, officials of the Office of the Secretary
of Defense (OSD) and Military Departments, industry leaders and associations,
public interest organizations, defense experts, and private citizens. In response
to its published requests, the Commission received and considered numerous
public comments on a wide range of acquisition-related issues. The Commission
also met with the three former Presidents, as well as former Secretaries of
Defense and Assistants to the President for National Security Affairs. We
received presentations from a broad range of current and former civilian
officials and military officers. Among these were Chairmen of the Joint Chiefs
of Staff, Service Secretaries and Service Chiefs, combatant and logistics
commanders, other military leaders, and high-ranking civilian officials of the
OSD and Military Departments. We also had the benefit of numerous briefings
by major defense research centers.
*See Executive Order 12526 (July 15, 1985), included as Appendix B to this Final Report.
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On February 28, 1986, the Commission presented its Interim Report to the
President, which contained our initial findings and recommendations. These
recommendations were offered as a single blueprint for overall improvement in
defense management. They have provided the framework for three subsequent
Reports to the President: Defense Acquisition, which we submitted on April 7,
1986; National Defense Planning and Budgeting, submitted June 12; and Conduct
and Accountability, submitted June 30. The present document, A Quest for
Excellence: Final Report to the President, compiles our detailed findings,
conclusions, and recommendations from each of these separate submissions.
II. Purpose
We have tried to take a broad and searching look at defense issues, and to
address the root causes of defense problems. Our overall blueprint for change
flows from certain enduring propositions of sound national security policy,
effective government, and basic management.
The Armed Forces of the United States are now and for the foreseeable
future an essential bulwark against the advance of tyranny. The purpose set
forth two centuries ago by the drafters of the Constitution?to "provide for the
common defense"?is one that we can meet today only with Armed Forces of the
utmost strength and readiness. Maintaining peace and freedom requires
nothing less.
To achieve this military capability, a sense of shared purpose must prevail in
relations between the Executive Branch and the Congress, and between
government and defense industry. Public and private institutions must
cooperate well, to serve the national good rather than mere partisanship or
special interest. The spirit of cooperation needed to promote the common
defense is today in jeopardy. This vital spirit must be preserved. Like the
effectiveness of our forces, it cannot simply be taken for granted.
The United States' defense effort is an enormous and complex enterprise.
It poses unique challenges?to plan sensibly for an uncertain future, to answer
new and unexpected threats to our security, to husband our technological and
industrial capacities and resources. Meeting these challenges will require, we
believe, a rededication by all concerned to some basic principles of management.
Capable people must be given the responsibility and authority to do their job.
Lines of communication must be kept as short as possible. People on the job
must be held accountable for the results. These are the principles that guide our
recommendations on defense organization and acquisition. They apply whether
one is fighting a war or managing a weapons program.
The present structure of the Department of Defense (DoD) was established
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by President Eisenhower in 1958. His proposed reforms, which sprang from
the hard lessons of command in World War II and from the rich experience of
his Presidency, were not fully accomplished. Intervening years have confirmed
the soundness of President Eisenhower's purposes. The Commission has sought
to advance on the objectives he set for DoD.
Together, our recommendations are designed to achieve the following
significant results:
Overall defense decision-making by the Executive Branch and the Congress
can be improved.
Our military leadership can be organized and chartered to provide the
necessary assistance for effective long-range planning.
Our combatant forces can be organized and commanded better for the
attainment of national objectives.
Control and supervision of the entire acquisition system?including
research, development, and procurement?can be strengthened and
streamlined.
Waste and delay in the development of new weapons can be minimized, and
there can be greater assurance that military equipment performs as expected.
DoD and defense industry can have a more honest, productive partnership
working in the national interest.
III. Implementation
Having called in our earlier Reports for a new spirit of cooperation among
the Executive Branch, Congress, and industry, we are especially gratified to note
that important actions have been and are being taken, by each of these
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institutions which share responsibility for the nation's defense, to implement the
Commission's recommendations.
? On April 1, 1986, the President issued National Security Decision
Directive (NSDD) Number 219, directing DoD and other responsible
Executive agencies to implement virtually all of those recommendations
contained in our Interim Report that do not require legislative action.* On
the same day, the Secretary of Defense issued detailed instructions to
DoD for this purpose.
? On April 24, 1986, the President sent to Congress a Special Message
requesting the early enactment of legislation in order to implement the
balance of the recommendations in the Commission's Interim Report. This
included statutory designation of the Chairman of the Joint Chiefs of
Staff as the principal military adviser to the President, the Secretary of
Defense, and the National Security Council; provision for the
Chairman's exclusive direction of the Joint Staff and the Organization of
the Joint Chiefs of Staff; and creation of the new position of Under
Secretary of Defense for Acquisition at Level II of the Executive
Schedule. The President also asked Congress to take recommended
action to simplify and consolidate procurement laws, develop procedures
for the authorization and appropriation of defense budgets on a biennial
basis, encourage the use of multiyear procurement, and support
milestone funding for major weapon systems.f
? Both the House and Senate have passed legislation, now awaiting
conference, which substantially achieves the objectives of our Interim
Report with respect to the role and authority of the Chairman of the Joint
Chiefs of Staff, the establishment of a Vice Chairman, and the authority
of Commanders-in-Chief of the Unified Commands. By late June 1986,
both the House and Senate had approved legislation establishing the
Under Secretary of Defense for Acquisition at Level II.
*The unclassified portions of NSDD 219, as announced in summary form by the White House,
are included as Appendix C to this Final Report.
tThe President's April 24 Special Message to Congress is included as Appendix D to this Final
Report.
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? A substantial number of leading defense contractors recently have
pledged to adopt and implement principles of business ethics and
conduct that acknowledge corporate responsibilities under federal
procurement laws. This important initiative, discussed more fully in our
report on Conduct and Accountability, is in keeping with the Commission's
recommendations on improvements in contractor self-governance.
It is only through a willingness to change by both public and private
institutions that our recommendations will achieve their ultimate purpose of
restoring stability to defense programs, saving money, and fielding better
military forces. These steps toward implementation are a promising beginning.
But much more remains to be accomplished. As an aid to the complete
implementation of our recommendations, we offer the succeeding portions of
our Final Report.
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Chapter One
National Security
Planning and Budgeting
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I. Introduction
mong the major tasks assigned to the Commission by the President in July
1985 was the study of resource allocation for defense, including the
legislative process. While national security planning is primarily the
responsibility of the Executive Branch, principally the President, the National
Security Council, the Secretary of Defense, and the Joint Chiefs of Staff, the
defense of the nation requires constructive collaboration between the President
and Congress. Although the planning process has improved in recent years, we
believe that further reforms are required. Reforms must deal with three major
problems in the current national security planning and budgeting process: the
need to relate military plans more adequately to available resources; the
instability of the defense budget process in both the Executive Branch and
Congress; and the inefficient role of Congress in the review of the defense
budget. Our work has addressed each of these problems in turn.
This Chapter sets forth our findings and recommendations* on the role of
the President in national security planning, a new process for planning national
military strategy, and an improved defense budget process in the Executive and
Legislative Branches. (A schematic representation of the process we propose is
provided in Appendix E to this Final Report.)
*Amplifying on our Interim Report, these were presented earlier in National Security Planning and
Budgeting: A Report to the President, submitted June 12, 1986.
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II. The Role of the President in National
Security Planning
T n our Interim Report, the Commission found that there is a need for more and
1 better long-range planning to bring together the nation's security objectives,
the forces needed to achieve them, and the resources available to support those
forces. It is critically important that this relationship be clearly established
through a national military strategy. At the same time, military strategy cannot
be carried out in isolation from the larger questions of the nation's overall
foreign policy and its domestic economic and fiscal objectives. Within the
Executive Branch, only the President can make the decisions necessary to
balance these elements of national policy. For this reason, the Commission sees
a need to streamline the present extensive process for defense planning and
budgeting within the Executive Branch by establishing a mechanism for early,
firm Presidential guidance.
Today, the President provides national security objectives to the Executive
Branch in the form of National Security Decision Directives (NSDDs) that are
issued through the National Security Council (NSC). Formulated by an
incoming President as policy guidance, these directives are updated periodically,
either as a result of a continuing review of major national security issues or as
additional guidance in response to crises.
Historically, this process has yielded unclear guidance for national security
planning because objectives have been stated in NSDDs without recognition of
the limits to fiscal resources that are finally made available. Because of the lack
of early Presidential guidance on fiscal limits, defense resource plans are subject
to debate and change within the Administration up to the moment the
President makes final decisions before sending his annual budget to Congress.
These changes can ripple throughout the entire five years of the planning
period, resulting in annual change?sometimes quite large?to each year of the
Five-Year Defense Program.
Based on Presidential guidance contained in NSDDs, the Secretary of
Defense currently issues his own Defense Guidance document, early in the
budget planning year, for development of detailed programs and budgets by
the Military Departments and agencies of the Department of Defense (DoD).
The Secretary's Defense Guidance incorporates fiscal guidance to the Military
Departments and Defense Agencies for a five-year period. His guidance is built
on a judgment of the threats to national interests and the adequacy of our
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military forces to meet those threats. But it also reflects such changeable near-
term factors as the previous year's congressional decisions, the current budget
debate in Congress, guidance from the Office of Management and Budget
(OMB) to DoD based on Presidential decisions during the previous year's
budget formulation, and recent international events with national security
implications.
Late in the year, two events can cause extensive changes to the Secretary's
budget plan. First, Congress makes decisions on the budget submitted to it at the
beginning of each calendar year. Typically, these decisions are postponed by
Congress as long as possible. Congress usually does not enact a defense budget
until after the fiscal year has begun on the first of October, with obvious
disruptive effects not only for execution of the budget, but also for planning a
defense program for subsequent years. Recently, moreover, congressional
decisions increasingly have diverged not only from the President's budget
proposal, but also from Congress' own pronouncements on future defense
budgets as projected in earlier concurrent budget resolutions.
Second, in November of each year before the President transmits his
budget to Congress in late January, OMB conducts an independent review of
the Secretary's budget plan, drawing upon updated economic projections,
recently enacted congressional budget decisions, and the President's budget
priorities. As late as December, based on issues raised by the OMB review, the
President often directs changes to the Secretary's budget plan that affect
thousands of line items and require major revisions to the Five-Year Defense
Program. Such Presidential decisions on the defense budget, so close in time to
presentation of the President's budget to Congress, do not allow the Secretary of
Defense sufficient time to review and advise the President of their effects on the
national defense program.
In the Commission's view, the instability induced by the present planning
and budgeting process can be substantially reduced, and its effects can be made
far less disruptive. As the Commission recommended in our Interim Report,
defense planning should start with a comprehensive Presidential statement of
national security objectives and priorities based on recommendations of the
NSC. On this basis, the President would issue provisional five-year budget levels
to the Secretary of Defense reflecting competing demands on the federal
budget as well as projections of gross national product and revenues. These
budget levels would be based on recommendations from the NSC with the
advice and assistance of the OMB.
Upon receipt of Presidential planning guidance, the Secretary of Defense
would instruct the Chairman of the Joint Chiefs of Staff (JCS) to prepare a
national military strategy that best achieves the national security objectives
within provisional budget levels. The Chairman would also be instructed to
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develop strategy options for each of the provisional budget levels, based on
consideration of major defense policies and operational concepts, to meet the
entire range of threats to these national security objectives. A recommended
national military strategy and options would be prepared by the Chairman with
the assistance of the other members of the JCS and the Commanders-in-Chief
(CINCs) of the Unified and Specified Commands. The military capabilities
provided by this strategy and options would be compared with the present and
projected capabilities of potential opponents in a military net assessment.
The Secretary of Defense would review the Chairman's recommendations
as described, and make such modifications as he deems appropriate. Upon
completing that phase of the new defense planning process, the Secretary, and
the Chairman as the principal military adviser, would present to the President a
recommended national military strategy, strategy options, and the net
assessment.
After review by the NSC, the President would select his preferred national
military strategy and its corresponding five-year defense budget level, based
upon his national security objectives and priorities, and an acceptable level of
risk. He would provide this decision to the NSC, the OMB, and the Secretary of
Defense. The Presidential decision, including the five-year fiscal guidance,
would be binding on the Executive Branch unless changed by further
Presidential decision.
Based on the President's decision, the Secretary of Defense would develop
a detailed Defense Guidance for the Military Departments and Defense
Agencies to launch the Planning, Programming, and Budgeting System (PPBS)
internal to the DoD. The final version of the Defense Guidance would contain
the Secretary's detailed guidance on defense objectives, policy, strategy, force
levels, and fiscal guidance, all based on the President's decisions. The detailed
fiscal guidance would be the basis for a new Five-Year Defense Program and for
detailed pricing and scheduling of the new defense budget.
The Commission strongly believes that an early Presidential decision on a
five-year defense budget level, clearly linked to a Presidentially approved
national military strategy, is necessary to achieve a more orderly and more stable
process for executive and congressional planning and budgeting for defense.
Early Presidential determination of an appropriate five-year budget level would
better integrate all elements of the Executive Branch in the resource allocation
process, result in more coherent and stable long-range planning for national
defense, and provide the Congress a proposed defense program more readily
explained and justified in terms of national security requirements.
Our recommended improvements in national security planning and
defense budgeting process (outlined in Appendix E to this Final Report) should
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be commenced immediately to assist the defense planning and budgeting
activities now underway in DoD and in Congress to construct the first biennial
defense budget. The budget to be submitted to Congress in January 1987 for
fiscal years 1988 and 1989 should be the transitional budget for the new
planning process. The new defense planning and budgeting process would
thereby be fully implemented for the fiscal year 1990-91 budget. To achieve
that end, the President should provide the strongest guidance possible to the
NSC, the OMB, the Secretary of Defense, the Chairman of the JCS, and the
Military Departments.
Recommendations
To institutionalize, expand, and link a series of critical Presidential
determinations, we recommend a process (Appendix E) that would operate in
substance as follows:
The National Security Council would develop and direct a national
security planning process for the President that revises current national
security decision directives as appropriate and that provides to the Secretary
of Defense Presidential guidance that includes:
? A statement of national security objectives;
? A statement of priorities among national security objectives;
? A statement of major defense policies;
? Provisional five-year defense budget levels, with the advice and
assistance of the Office of Management and Budget, to give focus to the
development of a fiscally constrained national military strategy. Such
budget levels would reflect competing demands on the federal budget
as well as projections of gross national product and revenues; and
? Direction to construct a proposed national military strategy and
strategy options for Presidential decision in time to guide development
of the first biennial defense budget for fiscal years 1988 and 1989.
Following receipt of the Secretary's recommended national military
strategy, accompanying options, and a military net assessment, the President,
with the advice of the NSC, would approve a particular national defense
program and its associated budget level. This budget level would then be
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provided to the Secretary of Defense as five-year fiscal guidance for the
development of biennial defense budgets such that:
? The five-year defense budget level would be binding on all elements of
the Administration.
? Presidential guidance, as defined above, would be issued in mid-1986
to guide development in this transitional year of the first biennial
defense budget for fiscal years 1988 and 1989 to the maximum possible
extent.
? The new national security planning process would be fully imple-
mented to determine the course of the defense budget for fiscal years
1990 to 1994.
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III. A New Process for Planning National
Military Strategy
o provide the President and the Secretary of Defense with military advice
that better integrates the views of the nation's combatant commands and
Military Services, the Commission in our Interim Report recommended legislation
creating new duties for the Chairman of the Joint Chiefs of Staff (JCS). In the
Commission's view, the Chairman should become the principal military adviser
to the President, the National Security Council, and the Secretary of Defense,
representing his own views as well as the corporate views of the JCS. The
Chairman should be given exclusive direction of the Joint Staff, and other
elements of the Organization of the Joint Chiefs of Staff, to perform such duties
as he prescribes to support the JCS and to respond to the Secretary of Defense.
To further assist the Chairman in performing his new duties, a new position of
Vice Chairman of the JCS should be created. We note that in a message to
Congress on April 24, 1986, the President endorsed these recommendations
and that the Senate and House have separately passed legislation along these
lines.
In making these recommendations, the Commission envisioned that the
new duties of the Chairman would include a major role in national security
planning. The Commission recommended that the Chairman, with the advice of
the other members of the JCS and the Commanders-in-Chief (CINCs) of the
combatant commands, be given responsibility for preparing and submitting to
the Secretary of Defense a fiscally constrained national military strategy, with
strategy options, based on the President's initial guidance on national security
objectives and priorities, and his provisional five-year budget levels. The
Chairman would also, with the assistance of the other members of the JCS, and
in consultation with the Director of Central Intelligence, prepare a military net
assessment of the capabilities of United States and Allied Forces as compared to
those of potential adversaries. The net assessment would be used to evaluate the
risks of the strategy and the strategy options.
On April 1, 1986, the President issued a directive to the Secretary of
Defense (see Appendix C to this Final Report) calling for a new process for
planning national military strategy. The following section of this report
elaborates the Commission's views on the new process to aid in implementing
our recommendations.
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Improved Defense Strategy Development
Just as the President's guidance on national security objectives and priorities
should provide a clear statement of what we must achieve, military strategy
should provide a clear statement of how we will achieve it. That strategy must
address how we plan to achieve particular national ends with available, or
reasonably anticipated, military means. Specifically, a strategy must relate
proposed military force levels to available resources.
It is incumbent upon our senior military leaders, as they chart a course for
the nation's military forces into the next century, to apply financial limits to
military force planning in a way not previously attempted. The questions that
such planning entails must be answered in that light. These include:
? What kind and what numbers of forces should we field in the future?
? What kind of equipment should they have?
? How rapidly should we modernize their equipment?
? How, and at what pace, can we best incorporate the benefits of
technological advances?
? How much should we spend on readiness and sustainability, on the one
hand, and modernization, on the other?
? What balance should we strike between strategic nuclear and general
purpose forces?
? How can we keep the overall cost of building and maintaining military
forces within limits while achieving performance objectives?
To develop a well-designed national military strategy, the Chairman should
first ensure that he has a full range of views from the Joint Chiefs, who as
individual Service Chiefs are charged with developing and providing the
nation's Armed Forces, and from the combatant commanders, who are charged
with employing them. Second, the Chairman should integrate the sometimes
conflicting perspectives arising from the different responsibilities held by these
officers into a coherent military strategy. This strategy thus would reflect the
best thinking of the nation's senior military leadership.
The product of such a strategy-development process would reflect the fiscal
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constraints directed by the President for the planning period and would include:
? an appraisal of threats to the achievement of our national objectives
across the full range of potential conflict during the five-year planning
period;
? a recommended strategy to meet our objectives and to respond to these
threats during the planning period; and
? the force requirements and capabilities to support the strategy.
In order to frame a wide range of decision alternatives for the President,
the Chairman would be directed to provide the Secretary with strategy options
resulting from the President's five-year budget levels and from variations within
a given budget level. These would reflect explicit trade-offs among the Services
and among competing requirements from the combatant commands. In
addressing options to the proposed national military strategy, the Chairman
would consider major defense policies and operational concepts (e.g.,
modernization, force structure, readiness, sustainability, security assistance
policy and funding levels, strategic nuclear forces versus general purpose forces,
etc.).
In order for the Chairman of the Joint Chiefs of Staff to provide sound
military advice on the various strategy options, a companion analysis should be
prepared that would identify:
? adjustments to current force levels in accordance with the President's
provisional budget levels and the associated costs or savings;
? problems that may preclude attainment of needed force levels or
capabilities without mobilization (e.g., personnel quality or quantity
unattainable without conscription, and the adequacy of the industrial
base to support force levels);
? unique regional considerations that may restrict our ability to employ
military force (e.g., political or other potential disadvantages to the use of
U.S. forces, maintainability of lines of supply, access to friendly ports of
entry, etc.); and
? limits on deployment or mobilization that may restrict our ability to
employ military forces in conflict (e.g., the availability of transport, the
adequacy of the training base, etc.).
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Our proposed process for strategy development does not diminish the value
of force planning as currently provided in the Joint Strategic Planning Docu-
ment (JSPD). The JSPD serves as the JCS contribution to the planning phase of
DoD's Planning, Programming, and Budgeting System, but it could be revised to
provide a more meaningful overarching framework for strategy and force
planning. The analytical value of the JSPD lies in its identification of force levels
for global general war that could guide the development of related peacetime,
resource-constrained forces. Specifically, the JSPD planning force could be
linked to a peacetime mobilization base for a "worst case" contingency of a global
general war. The mobilization base derived from the JSPD planning force could
be developed to achieve the shortest possible time to expand from mobilization
base levels to planning force levels?consistent with the President's fiscal
guidance. Such a peacetime posture should be a central consideration in
developing the recommended national military strategy and strategy options
provided to the President. In addition, forces for support of regional unified
commanders in pursuit of U.S. national security objectives in peacetime, as well
as the more probable, less intense forms of conflict, should also be identified in
the JSPD mobilization base planning force.
An Improved Net Assessment
As an element of the planning process we propose, it would be necessary to
make a more comprehensive effort to assess the capabilities of our forces to
accomplish their missions in the light of projected military threats posed by
potential adversaries. Where appropriate, Allied Forces should be included in
this analysis.
A net assessment of military capabilities, projected five years into the
future, can help identify the risks associated with alternative military strategies
and force postures. It would be of major assistance to the Chairman, the
Secretary of Defense, and the President in framing and selecting a defense
budget level and force posture better tied to national security objectives and
priorities. As an adjunct to the new strategy planning process, the net
assessment could help identify existing or emerging problems and opportunities
that need to be brought to the attention of the Secretary of Defense and the
Chairman for further study in the development of strategy options.
The expanded planning responsibilities to be assigned to the Chairman of
the Joint Chiefs of Staff would require that he prepare an independent,
comprehensive military net assessment in order to evaluate the recommended
national military strategy and any strategy options proposed. The Commission
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has recommended that the Chairman prepare this assessment for the Secretary
of Defense with the assistance of the other members of the JCS and in
consultation with the Director of Central Intelligence. He should also draw
upon the advice of the combatant commanders.
Recommendations
The Secretary of Defense, following receipt of the Presidential guidance
described previously, should direct the Chairman of the Joint Chiefs of Staff
(JCS), with the advice of the other members of the Joint Chiefs of Staff and the
Commanders-in-Chief (CINCs) of the Unified and Specified Commands, to:
? Appraise the complete range of military threats to U.S. interests and
objectives worldwide;
? Derive national military objectives and priorities from the national
security objectives, major defense policies, and priorities received from
the President; and
? Provide the Secretary of Defense a recommended national military
strategy that:
Best attains those national security objectives provided by the
President, in accordance with his policies and priorities;
Identifies the forces and capabilities necessary to execute the
strategy during the five-year planning period; and
Meets fiscal and other resource constraints directed by the
President during the five-year planning period.
At the direction of the Secretary of Defense, the Chairman also should
develop strategy options to achieve the national security objectives. Such
strategy options would:
? Frame explicit trade-offs among the Armed Forces;
? Reflect major defense policies and different operational concepts, in
terms of different mixes of forces or different degrees of emphasis on
modernization, readiness, or sustainability;
? Respond to each provisional budget level provided by the President;
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? Explore variations within a particular provisional budget level; and
? Highlight differences in capability between the recommended national
military strategy, on the one hand, and feasible alternatives, on the
other.
At the direction of the Secretary of Defense, the Chairman of the Joint
Chiefs of Staff, with the assistance of the other members of the JCS and the
CINCs, and in consultation with the Director of Central Intelligence, should
also prepare a military net assessment that would:
? Provide comparisons of the capabilities and effectiveness of U.S.
military forces with those of forces of potential adversaries for the
Chairman's recommended national military strategy and other strategy
options;
? Reflect the military contributions of Allied Forces where appropriate;
? Evaluate the risks of the Chairman's recommended national military
strategy and any strategy options that he develops for the Secretary of
Defense and the President; and
? Cover the entire five-year planning period.
The Secretary of Defense, following his review and analysis of the
Chairman's recommendations, should provide to the President:
? The Secretary's recommended national military strategy and its
corresponding five-year defense budget level, consistent with the
President's policy and fiscal guidance;
? Appropriate strategy options and corresponding five-year defense
budget levels sufficient to provide the President a wide range of
alternatives in choosing a national defense program; and
? A military net assessment of the recommended national military
strategy and strategy options.
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IV. The Congressional Defense Budget
Process ?A Need for Change
The recommendations discussed above, when implemented by the President
and the Secretary of Defense, will go a long way toward making defense
planning and budgeting within the Executive Branch more rational and stable.
But this effort will fail to achieve the desired results if Congress does not do its
part to improve its role in the process. Realism in long-range planning and
budgeting for defense within the Executive Branch must be met by a responsible
exercise of congressional power in budget review and oversight.
In defense budgeting, as in most other matters of national policy, the
President proposes but Congress disposes. The national defense program
depends upon steady, long-term vision if it is to meet our long-term security
needs effectively. Congressional focus, however, is myopic and misdirected.
Only the upcoming budget year gets real attention, and this attention is directed
at the budget's microscopic pieces, its line items.
Problems inherent in Congress' defense budget review manifest themselves
in budget resolutions that reflect little or no consistency from year to year; in
changes to thousands of line items within the defense budget that, taken
together on this kind of scale, verge on randomness; and in defense
appropriations that are invariably late in enactment.
It is true that changing political and economic circumstances may require
the' Congress to adjust its plans from time to time. But the Commission believes
that both the number and the magnitude of changes resulting from
congressional review of the defense budget are excessive and harmful to the
long-term defense of the country.
Where national defense is concerned, today's congressional authorization
and appropriation processes have become mired in jurisdictional? disputes,
leading to overlapping review of thousands of line items within the defense
budget. A growing rivalry between the Armed Services Committees and the
Defense Appropriations Subcommittees over the line-item makeup of the
defense budget has played a major role in moving congressional review of the
defense budget toward narrowly focused financial action on individual items
and away from oversight based on operational concepts and military
effectiveness. During the review of the 1985 defense budget, for example,
Congress made changes to over 1,800 separate defense programs and directed
DoD to conduct 458 studies ranging from the feasibility of selling lamb
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products in commissaries to the status of retirement benefits for Philippine
scouts.
This kind of tinkering and financial fine-tuning has heightened defense
program instability because of its wide reach and lack of broader operational
focus. Congressional action on the 1985 budget reduced the President's request
by $20.5 billion, but, of that amount, only $0.5 billion (or 2 percent) involved
outright program cancellations or procurement terminations. The other 98
percent of the reduction came from changes to procurement rates and mixes,
level-of-effort cuts, miscellaneous personnel trims, and financing adjustments.
In addition, DoD now finds itself involved in a new congressional budgeting
phenomenon in which the Appropriations Committees have funded programs
that the Armed Services Committees have not authorized. In fiscal year 1986,
the DoD Appropriation Act included over 150 line items, valued at $5.7 billion,
that were authorized at a lower level or were not authorized at all. As of this
date, the fiscal year is more than half over but DoD cannot obligate funds nor
conclude contract negotiations for almost $6 billion of programs while the
disagreement continues between congressional committees.
Under these circumstances, the Secretary of Defense and the Military
Departments find themselves in the position of making final decisions in
formulating a budget for the next fiscal year while Congress is still debating its
own wide-ranging differences on the budget for the ongoing fiscal year. When
Congress finally makes its appropriation decision, the Secretary and the Services
are forced to adjust the proposed budget for the upcoming fiscal year, late in the
budget-formulation process within the Executive Branch, in order to
incorporate the impact of congressional changes. The timing and scope of these
changes prevent the DoD from making coherent linkages among the three
defense budgets that it manages at any one time?the budget being executed,
the budget under review by Congress, and the budget that DoD is developing
for the upcoming fiscal year.
Meanwhile, defense managers and defense procurement personnel around
the world must implement late congressional decisions after the fiscal year has
started. They are confronted with numerous changes that alter and delay their
program plans, schedules, and contract decisions. This instability, in turn,
spreads outward to the defense industry, whose investment and production
plans must be hastily adjusted annually as a result of late congressional
appropriations.
Finally, instability in defense budget planning has been further exacerbated
as a result of the new Gramm-Rudman-Hollings legislation. In March 1986, the
sixth month of the fiscal year, DoD was forced to take a 4.9 percent reduction in
each of almost 4,000 programs, projects, and activities, for a total cut of $13.6
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billion in budget authority and $5.2 billion in outlays. These across-the-board,
automatic cuts allowed no analysis or management judgment to be exercised
about priorities or about their effect on defense programs and forces. The
essence of budgeting is setting priorities. Our recommendations depend upon a
rational choice of priorities by responsible defense managers, as opposed to a
mechanistic allocation of resources across all activities. We must assume that
government will remain a place of judgment.
Many of the problems described above affecting congressional action result
from major differences of opinion within Congress on the funds to be provided
for defense in any one year. However, as this debate continues from year to
year, congressional budget resolutions show very little consistency regarding
national defense funds, and, as a result, their projections of defense budgets for
future years have become unreliable measures of congressional intent.
Shortly after congressional budget resolution projections are made, the
budget-formulation process begins in the Executive Branch to build budgets for
the years covered by such projections. As the last guideposts of congressional
intent before Executive Branch budget formulation, budget resolution
projections play a central role in decisions on the levels for defense that are used
for planning within DoD and that the President ultimately will propose to
Congress. To the extent, then, that Congress has reflected unrealistic levels for
future defense budgets in its budget resolutions, lack of realism will also affect
the President's budget. This document to a large degree each year mirrors the
congressional budget resolution of the previous year. That is why congressional
budget resolution projections should be made with great care, with full
commitment to those projections from key committees that review the defense
budget.
The Commission urges the leaders of Congress to develop ways to relate
projections in budget resolutions to the five-year budget levels developed within
the Executive Branch (as described in the previous sections of this report) for
provision, in turn, to Congress. We believe that a much-improved linkage
between the new proposed process for defense planning and budgeting within
the Executive Branch, and the current budget resolution process within
Congress, is central to responsible decision-making on matters of national
security.
Another concern is the role budget resolutions play in later phases of the
overall congressional process. The practice has been for the authorizing and
appropriations committees to treat Budget Committee targets as ceilings from
which they could depart, rather than as congressional commitments. The
steadiness that should mark long-term planning for the nation's defense has
suffered as a result.
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The Commission is also concerned about the lack of cooperation in review
of the defense budget that marks authorization and appropriation actions today
in Congress.
The Armed Services Committees need to become less concerned with
attempting to control line items through authorization action and need to
concentrate more on the task for which they are best suited, allocation of funds
between and within major operational categories of the defense budget. In the
Commission's view, the Armed Services Committees also should have an
important role to play in ensuring that new weapon programs in fact contribute
to military effectiveness within major operational categories. They should be
the primary congressional agents for approval of acquisition programs entering
full-scale development and high-rate production as recommended by the
Commission in its report on Defense Acquisition and described later in this
Chapter.
The Armed Services Committees cannot, however, simply fake on such
roles unilaterally. The leadership of the authorizing and appropriations bodies
that deal with the defense budget must agree on a division of labor that lessens
considerably the overlap and consequent rivalry that marks the process today.
We agree completely with the observations made by the Senate Armed Services
Committee, in an April 1986 report, on the need for congressional reform in
providing for the nation's defense:
Congressional reform must extend beyond the confines of defense oversight.
Ultimately, fundamental patterns of congressional behavior must change.
Committee jurisdictions must be reasserted and tightened to minimize overlap
and duplication. Redundant legislative phases of budgeting, authorizing, and
appropriating must be consolidated.
Procedural Reforms
If leadership problems within Congress can be overcome, and stability of
the defense budget and a more appropriate division of labor among committees
can be achieved, procedural reforms can have further beneficial effect. The
most important reform, in the Commission's view, is adoption by Congress of
biennial defense budgets tied to a five-year plan.
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A. Biennial Budgeting and Five-Year Planning for
Defense
In our Interim Report, we recommended that the President submit to
Congress a two-year defense budget and the five-year plan on which it is based.
Congress would be asked to approve a two-year budget based upon this plan. It
would do so through a two-year authorization and appropriation for national
defense. We note that the 1986 Defense Authorization Act calls for the
submission to Congress by the President of a two-year defense budget for fiscal
years 1988 and 1989 in early 1987. DoD is now preparing such a budget. We
applaud this initiative by the House and Senate Armed Services Committees,
and we believe that, if Congress decides to adopt this new method of budgeting,
it can lead to the two-year defense authorization and appropriation that we
have recommended. We are mindful, however, that for some years the
President has, at congressional direction, provided requests for two-year
defense authorizations, but only the first year of each of these requests has ever
been acted upon.
The Commission believes that a biennial budget process for defense, tied to
a five-year defense plan, would promote stability by providing additional time
to do a better job?to think through military planning options, to evaluate
results of current and prior-year execution of the defense budget, and to ensure
that each phase of the cycle has the attention needed. A two-year cycle also
would, in particular, allow DoD to pay more attention to programming, the
second phase of the Planning, Programming, and Budgeting System (PPBS)
where individual defense programs are put together, refined, and compared to
each other to respond to defense needs.
A new biennial defense programming process would need to be fashioned
to precede the process through which biennial budgets are formulated. Stability
obtained from such two-year processes would provide many benefits
throughout DoD not the least of which would be found at the operational level
in the field, where installation and activity commanders and program managers
turn budget decisions into action.
A two-year defense budget cycle could also allow the Executive and
Legislative Branches of government to spend one of the two years on a
necessary, but generally ignored, evaluation process. It should help the Services
to better manage their programs, and Congress to stick to its deadlines and
schedules. Having spent a year reviewing ongoing activities, Congress should be
able to begin earlier and move faster in the appropriation year.
One of the major arguments against biennial budgeting is that it builds too
much inflexibility into the system. National security objectives and priorities,
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however, ordinarily do not change appreciably from year to year, nor should
military strategy or the military force structure change radically over a two-year
period. In addition, the appropriate tools needed to make any changes
required in the second year of budget execution are already in existence.
Current reprogramming, supplemental, and budget amendment procedures
are more than adequate to address the need. Reprogramming thresholds and
transfer limitations within program categories should be reviewed by both
Congress and DoD in a biennial budget context, and additional flexibility should
be provided if needed. Rescissions and deferrals are also techniques that can be
used when necessary.
Primarily, however, a two-year appropriation for defense would stop the
yearlong chaos of budget-making that we now have, or at minimum, allow it to
happen only every two years rather than annually. This would surely provide a
greater degree of stability over a longer period of time.
We applaud DoD support for two-year defense budgets and growing
support within the Congress. We are particularly encouraged by Secretary
Weinberger's commitment to the concept. He echoed the Commission's
sentiments in his letter transmitting the April 1, 1986, Report on Two-Year
Defense Budgeting to the Armed Services Committees and Appropriations
Committees when he stated:
. . . The resulting improved stability could increase the efficiency of defense
operations. Such an approach could also serve to simplify the currently lengthy
and time consuming budget process. Both Congress and the Executive Branch
would have significantly more time to focus on the resolution of policy issues
and the establishment of priorities. Moreover, the adoption of biennial
budgeting should reduce the need for Congress to fund our (defense)
operations through limited and ineffective Continuing Resolution Authority
procedures. . . .
B. Milestone Authorization, Baselining, and Multi-Year
Procurement
To complement biennial budgeting, the Commission believes that milestone
authorization, baselining, and multi-year procurement should be instituted and
expanded by both DoD and Congress for all major defense programs.
Milestone authorization would allow the Armed Services Committees to
focus their review of major acquisition programs on two key program
milestones, the beginning of full-scale engineering development and the start of
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high-rate production. Programs advancing through these milestones in either
the first or second year of a particular biennial authorization request would be
identified to Congress by DoD, which would provide a program baseline for
each identified program. A program baseline would describe the cost, schedule,
and operational performance of the systems to be acquired during the
production lifetime of the program, would be certified at the highest level of
responsible officials within DoD, and would establish a contract between the
Executive and Legislative Branches based on mutual expectations for the
program.
If such a process were in place, the Armed Services Committees would not
need to subject defense programs performing well, relative to an approved
baseline previously established at a key milestone, to the same level of scrutiny as
programs arriving at key milestones. In fact, to the maximum possible extent,
programs that proceed successfully through congressional authorization at the
high-rate production milestone should be executed through multi-year
procurement. Once multi-year procurement is initiated, changes to a program
baseline, either through DoD action or through later congressional
authorization or appropriation action, should be avoided because of the
financial penalties involved. In the Commission's view, milestone authorization,
baselining, and multi-year procurement would promote the kind of stability
and proven cost savings in budgeting for national defense that are central
objectives of our recommendations.
C. Changing the Structure of the Defense Budget
Finally, the Commission believes that the Congress, DoD, and the Office of
Management and Budget must together begin the hard work necessary to
reduce an overly detailed line-item review of the defense budget and to bring a
broader, operational perspective to the defense budget and its companion Five-
Year Defense Program.
The Five-Year Defense Program has been constructed to provide a
crosswalk between the input (financial) side of the nation's defense budget and
the output (forces, weapon systems, manpower, etc.) side where defense
programs are grouped according to the operational purposes they serve.
However, the relative lack of attention historically directed at operational
concepts to guide defense spending has resulted in relatively poor structural
development of the output side. While the basic foundation of an operationally
oriented structure has been in place in the Five-Year Defense Program for some
time, much more work must be done to build a new, and more adequate,
budget structure for congressional biennial defense authorizations and
appropriations.
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For example, such a new budget structure might better show the
contribution of the B-1 bomber to national defense by grouping the B-1
program and other appropriate programs within a budget account titled
"Modernization of Strategic Nuclear Forces" rather than, as is now the case, a
budget account called "Aircraft Procurement, Air Force." A revised budget
structure of this type would allow a better review of the different types of
strategic nuclear systems, in relationship to each other and to overall national
security objectives, than is now the case.
In addition, it would allow for more management judgment to be
introduced by aggregating, consolidating, and reorganizing thousands of line
items into fewer budget activities within the Military Departments. For example,
if all Army cargo and utility helicopters and their modifications, spares, and
simulators were placed in a new, single, aggregated activity, 39 line items could
be reduced to 4. Similarly, 358 line items for trucks could be reduced to 11. This
would permit more reasoned, practical, and balanced decisions to be made.
Recommendations
CONGRESS
A joint effort among the Appropriations Committees, the Armed Services
Committees, the Office of Management and Budget (OMB), and the
Department of Defense (DoD) should be undertaken as soon as possible to
work out the necessary agreements, concepts, categories, and procedures to
implement a new biennial budget process for defense. Biennial budgeting for
defense should be instituted in 1987 for the fiscal year 1988-89 defense
budget. Congress should authorize and appropriate defense funding for those
two years. The second year of this new biennial budgeting process should be
used by both Congress and DoD to review program execution where
appropriate.
Congress should reduce the overlap, duplication, and redundancy among
the many congressional committees and subcommittees now reviewing the
defense budget.
The leadership of both parties in the House and the Senate should review
the congressional process leading up to annual budget resolutions with the
intent of increasing stability in forecasts for defense budgets for future years.
We cannot stress strongly enough that a responsible partnership in providing
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for the national defense means agreement between Congress and the President
on an overall level of a five-year defense program early in a new President's
term in office and adherence to this agreement during his Administration.
The chairmen and ranking minority members of the Armed Services
Committees and the Defense Appropriations Subcommittees should agree on
a cooperative review of the defense budget that has the following features:
? Review by the Armed Services Committees of the defense budget in
terms of operational concepts and categories (e.g., force structure,
modernization, readiness, and sustainability, etc.);
? Review and authorization of individual programs by the Armed
Services Committees that concentrate on new defense efforts at key
milestones?specifically the beginning of full-scale development and
the start of high-rate production?in terms of their contributions to
major defense missions; and
? Review by the Appropriations Committees, using the new budget
structured in terms of operational concepts and categories, to adjust the
the President's defense budget to congressional budget resolution
levels through refinements based on information not available when
the President's budget was formulated months earlier.
Congress should adhere to its own deadlines by accelerating the budget
review process, so that final authorizations and appropriations are provided to
DoD on time, and less use is made of continuing resolutions.
Congress should review and make major reductions in the number of
reports it asks DoD to prepare and should closely control requirements for
new reports in the future.
EXECUTIVE BRANCH
The President should direct the Secretary of Defense and OMB to
institute biennial budgeting for defense in 1987 for the fiscal year 1988-89
defense budget and budgets thereafter.
The Secretary of Defense should develop and submit to Congress defense
budgets and five-year plans within an operationally oriented structure. He
should work with the appropriate committees of Congress and with OMB to
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establish the necessary mechanisms and procedures to ensure that a new
budget format is established.
The Secretary of Defense should institute a biennial programming
process within DoD to complement the proposed biennial planning and
budgeting processes.
The Secretary of Defense should work with the Armed Services
Committees to define procedures for milestone authorization of major defense
programs.
Baselining and multi-year procurement should be used as much as
possible to reinforce milestone authorization.
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V. Conclusion
Defense of the nation demands that better links be forged among national
security objectives, national military strategy, and defense budgets.
The President must initiate the effort. He must challenge the Secretary of
Defense, the Chairman of the Joint Chiefs of Staff, and the nation's key military
leaders to create a national military strategy that can become the basis of
America's protection into the next century. Only the President can define the
terms and boundaries necessary to set such a broad gauge effort in motion, and
he must be confident that it will yield the proper result.
Prepared with this kind of a national military strategy, the President can
provide Congress a blueprint for national security, and a constructive
partnership can be formed to carry it out?through a five-year national defense
program that logically follows. This partnership will, however, require
Congress to improve its methods and make them more responsive to the
requirements of national defense.
In the end, all responsible senior officials must exercise leadership if better
methods are to take hold and yield a better national defense. We must depend
upon dedicated and talented people to take the concepts we have presented and
build upon them for the future.
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Chapter Two
Military Organization
and Command
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o accomplish meaningful, long-range defense planning, certain modifica-
tions are needed in our defense establishment.*
The President and the Secretary of Defense require military advice that
better integrates the individual views of the nation's combatant commanders
and the Chiefs of the Services. Today, there is no one uniformed officer clearly
responsible for providing such an integrated view, who can draw upon the best
thinking of', and act as an effective spokesman for, our senior military leader-
ship. The current authority of the Chairman of the Joint Chiefs of Staff is in-
sufficient to enable him to perform effectively in this capacity. The Chairman's
advisory relation to the President and the Secretary of Defense, the Chairman's
mandate over the Joint Staff and the Organization of the Joint Chiefs of Staff,
and the Chairman's place in the channel of communications between the Secre-
tary of Defense and the Commanders-in-Chief of the Unified and Specified
Commands (CINCs), all must be strengthened to this end.
So, too, must the views of the CINCs be more strongly and purposefully
represented than they are at present within the councils of the Joint Chiefs and
in weapons requirements decision-making. Because it is the responsibility of
the Chairman to integrate the sometimes conflicting advice of the Service
Chiefs and the CINCs into a national strategy, the necessity for impartiality
and objectivity in doing so argues for another voice in the Joint Chiefs of Staff
to represent the views 6f the CINCs. For these purposes, and to assist the
Chairman in his existing and additional responsibilities, we conclude that the
position of Vice Chairman of the Joint Chiefs of Staff should be established.
There is an important need to provide for continuity of advice to the Sec-
retary of Defense and the President in the absence of the Chairman of the
Joint Chiefs of Staff. The current system, in which the members of the Joint
Chiefs of Staff (JCS) rotate quarterly as Acting Chairman, has provided conti-
nuity better than earlier systems. It also has served to enhance a needed joint
perspective among the Service Chiefs and increase their effectiveness in both
their JCS and Service roles. The establishment of a Vice Chairman as a mem-
ber of the Joint Chiefs of Staff having special responsibilities for representing
the interests of the CINCs and reviewing weapons requirements would be an
important innovation. While underscoring the importance of continuity, the
*With certain important additions, this Chapter represents relevant findings and
recommendations presented earlier in our Interim Report.
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Commission believes the procedures under which an Acting Chairman is desig-
nated should remain flexible. Under the President's direction, the Secretary of
Defense should be permitted to adopt those procedures which are best suited
to the particular circumstances and to revise them in accordance with changing
needs.
The Commission believes that the present authority of the Chairman of the
Joint Chiefs of Staff to influence the quality of the personnel assigned by the
Armed Services to the Joint Staff is adequate to assure proper support for him,
and for the Joint Chiefs of Staff. We note that the JCS corporately control all
military personnel, and therefore are in the best position to provide the Chair-
man with the best possible staff. We do not believe that Congress can usefully
legislate new rules for selecting and promoting Joint Staff officers.
We find that improvements also are needed in the several Unified (i.e.,
multi-Service) and Specified (i.e., single Service) Commands into which our
combat forces are organized.
The measure of command now accorded the nation's combatant com-
manders is not always sufficient for our forces to perform with high confidence
of success and coherence of effort. Unified Commanders require broader au-
thority than "operational command," as now understood and practiced, in or-
der to meet the heavy responsibilities that their missions place on them.
In our Interim Report, we expressed the conviction that, were combatant
commanders authorized and directed to do so, they could reduce significantly
the numbers of headquarters subordinate to them and their components, as well
as the numbers of personnel assigned to staff duties in these headquarters. We
remain convinced that increased authority for each CINC should enable him so
to rationalize his command structure. We therefore urge that the Secretary of
Defense elicit, through the JCS, specific recommendations to that end.
The Unified Command Plan divides responsibilities among combatant
commanders too arbitrarily on the basis of geographical boundaries. Today,
some threats overlap those boundaries and must be dealt with functionally.
Moreover, the current command structure reflects command arrange-
ments that evolved during World War II to deal with high-intensity conflict
across vast regions of the globe. However well the layers of the present com-
mand structure suit the contingency of general war, they are not always well-
suited to the regional crises, tensions, and conflicts that are commonplace
today.
Finally, loose coordination of strategic lift of military forces throughout
the world now constrains military effectiveness. There are demonstrated mana-
gerial shortfalls in our ability to allocate available air, land, and sea transporta-
tion among many claimants.
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The specific changes recommended by the Commission are necessary to as-
sure unified action by our Armed Forces. On April 24, 1986, in a Special Mes-
sage to Congress (see Appendix D to this Final Report), the President endorsed
our recommendations on military organization and command and requested
early enactment of legislation required to implement them. As the culmination
of a major legislative effort begun in the House of Representatives in 1982 and
joined in the Senate by passage of the Barry Goldwater Department of Defense
Reorganization Act of 1986, we anticipate enactment of our basic recommenda-
tions by the end of 1986.
Recommendations
The Commission recommends the following reforms in federal law and
DoD practices.
Current law should be changed to designate the Chairman of the Joint
Chiefs of Staff (JCS) as the principal uniformed military advisor to the Presi-
dent, the National Security Council, and the Secretary of Defense, repre-
senting his own views as well as the corporate views of the JCS.
Current law should be changed to place the Joint Staff and the Organiza-
tion of the Joint Chiefs of Staff under the exclusive direction of the Chair-
man, to perform such duties as he prescribes to support the JCS and to re-
spond to the Secretary of Defense. The statutory limit on the number of
officers on the Joint Staff should be removed to permit the Chairman a staff
sufficient to discharge his responsibilities.
The Secretary of Defense should direct that the commands to and reports
by the Commanders-in-Chief of the Unified and Specified Commands
(CINCs) should be channeled through the Chairman so that the Chairman
may better incorporate the views of senior combatant commanders in his ad-
vice to the Secretary.
The Service Chiefs should serve as members of the JCS. The position of
a four-star Vice Chairman should be established by law as a sixth member of
the JCS. The Vice Chairman should assist the Chairman by representing the
interests of the CINCs, co-chairing the Joint Requirements and Management
Board, and performing such other duties as the Chairman may prescribe.
The Secretary of Defense, subject to the direction of the President,
should determine the procedures under which an Acting Chairman is desig-
nated to serve in the absence of the Chairman of the JCS. Such procedures
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should remain flexible and responsive to changing circumstances.
Subject to the review and approval of the Secretary of Defense, Unified
Commanders should be given broader authority to structure subordinate
commands, joint task forces, and support activities in a way that best sup-
ports their missions and results in a significant reduction in the size and
numbers of military headquarters.
The Unified Command Plan should be revised to assure increased flexi-
bility to deal with situations that overlap the geographic boundaries of the
current combatant commands and with changing world conditions.
For contingencies short of general war, the Secretary of Defense, with
the advice of the Chairman and the JCS, should have the flexibility to estab-
lish the shortest possible chains of command for each force deployed, con-
sistent with proper supervision and support. This would help the CINCs and
the JCS perform better in situations ranging from peace to crisis to general
war.
The Secretary of Defense should establish a single unified command to
integrate global air, land, and sea transportation, and should have flexibility
to structure this organization as he sees fit. Legislation prohibiting such a
command should be repealed.
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Chapter Three
Acquisition
Organization
and Procedures
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I. Introduction
The President established the Blue Ribbon Commission on Defense
Management in part because public confidence in the effectiveness of the
defense acquisition system has been shaken by a spate of "horror stories"?
overpriced spare parts, test deficiencies, and cost and schedule overruns.
Unwelcome at any time, such stories are particularly unsettling when the
Administration and Congress are seeking ways to deal with record budget
deficits. A major task of this Commission has been to evaluate the defense
acquisition system, to determine how it might be improved, and to recommend
changes that can lead to the acquisition of military equipment with equal or
greater performance but at lower cost and with less delay. For this purpose, the
Commission formed an Acquisition Task Force.*
We analyzed the horror stories, as others have done, but concluded that a
diagnosis based on recognized deficiencies could lead only to band-aid
treatments for a system more fundamentally ill. Therefore, our basic
methodology has been deliberately quite different.
We compared the defense acquisition system with other systems, both
government and commercial, that develop and produce equipment of
comparable complexity, in order to find success stories that could provide a
model on which reforms of the defense acquisition system could be based.
Defense acquisition represents the largest and, in our judgment, the most
important business enterprise in the world. It deserves to be managed with the
highest standards. We therefore conducted a "search for excellence" by
examining organizations that had been most successful in acquisition, in order
to find a model of excellence for defense acquisition.
Chances for meaningful improvement will come not from more regulation
but only with major institutional change. During the last decade or so a new
theory of management has evolved. It has been developed by a limited number
of U.S. companies, and it has flourished in Japan. These new management
*The findings and recommendations of this Chapter are substantially those presented
earlier in A Formula for Action: A Report to the President on Defense Acquisition, submitted April 7,
1986. Additional recommendations, first presented here, relate to rights in technical data and
industrial mobilization.
The work of the Acquisition Task Force was directed by William J. Perry. In addition to
David Packard, its members included Louis W. Cabot, Charles J. Pilliod, Jr., R. James Woolsey,
and the late Ernest C. Arbuckle.
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practices have resulted in much higher productivity and much higher quality in
the products being produced. They involve the participation of all of the people
in the organization in deciding among themselves how the job can best be done.
They involve, above all, trust in people. They involve the belief that people in
an organization want to do a good job, and that they will?if given the
opportunity?all contribute their knowledge, skill, and enthusiasm to work
together to achieve the aims and goals of their organization. Supervision can be
minimized, and detailed review of work can be greatly reduced. A real sense of
teamwork can be established. Every group in an organization can become a
center of excellence, and in this way the entire organization achieves a level of
excellence in every aspect of its work.
Centers of excellence have evolved here and there in the acquisition
process, in the form of project teams that have developed and produced new
weapons rapidly, efficiently, and with high quality performance. Unfortunately,
this is not the way DoD typically operates. All too many people in DoD work in
an environment of far too many laws, regulations, and detailed instructions
about how to do their work. Far too many inspectors and auditors check their
work, and there is a hierarchy of oversight in far too many layers, requiring
much wasteful reporting and paperwork.
The quest for excellence in defense management will be successful only if a
new management philosophy can replace the old. Instead of concentrating on
the things that are being done wrong and trying to fix them with more laws,
more regulations, and more inspectors, DoD should concentrate on those things
that are done right and use them as models.
Common sense must be made to prevail alike in the enactments of Congress
and the operations of the Department. We must give acquisition personnel more
authority to do their jobs. We must make it possible for people to do the right
thing the first time and allow them to use their common sense. When this is
done, layers of supervision can be eliminated, reporting can be minimized, and
DoD can get by with far fewer people. Only then will productivity and quality
become hallmarks of defense acquisition.
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II. The Scope of the Defense Acquisition
System
Defense acquisition is the largest business enterprise in the world. Annual
purchases by the Department of Defense (DoD) total almost $170
billion?more than the combined purchases of General Motors, EXXON, and
IBM. DoD's research and development (R&D) expenditures are more than
fifteen times those of France, Germany, or the United Kingdom, and eighty
times those of Japan. Defense acquisition involves almost 15 million separate
contract actions per year?or an average of 56,000 contract actions every
working day.
DoD makes only a small percentage of its equipment. It depends primarily
on the nation's industrial companies to develop its weapons and to
manufacture everything from belt buckles to aircraft carriers. In general, these
companies do not work solely on defense contracts. Most of the top 50 defense
contractors also engage in substantial commercial production. Boeing, for
example, supplies aircraft both to DoD and to commercial airlines. IBM
supplies computers for military and commercial applications. In this way, the
technological base developed for commercial products can be effectively
applied to military products, and vice versa. On the other hand, this dual
commercial-military product base greatly complicates DoD's task of regulating
and auditing the technical and financial performance of industry.
DoD employs more than 165,000 people, both civilian and military, to
manage this vast array of R&D, procurement, and logistics programs. Nearly
all of these people work for the Services, which directly manage these
programs subject to the oversight of a relatively small staff in the Office of the
Secretary of Defense (OSD). Further oversight is provided by the Executive
Office of the President, including the Office of Management and Budget,
particularly in connection with the President's defense budget. And the
Congress, in exercising its constitutional responsibility to provide for our
Armed Forces, authorizes and appropriates funds for each of more than 2,600
specified procurement and R&D line items, and plays a major role in
overseeing acquisition programs.
A responsible analysis of problems in the defense acquisition system must
take into account the complexity and scope of acquisition programs. A
responsible prescription for change must address the actions of everyone
who?for better or worse?can influence these programs, from defense
contractors and program managers to OSD officials and Members of Congress.
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III. Problems With the Present Acquisition
System
11 of our analysis leads us unequivocally to the conclusion that the defense
acquisition system has basic problems that must be corrected. These
problems are deeply entrenched and have developed over several decades
from an increasingly bureaucratic and overregulated process. As a result, all
too many of our weapon systems cost too much, take too long to develop, and,
by the time they are fielded, incorporate obsolete technology.
Recent public attention has focused on cases of spare parts overpricing
that have been prominently reported by the media. Many of these cases were
uncovered by DoD itself, which has a major effort underway to detect spare
parts overpricing and to minimize such problems in the future. By contrast, we
have focused on the acquisition of major weapon systems, because improved
efficiency there can lead to cost savings greater by orders of magnitude. We
nonetheless also analyzed the spare parts cases to determine whether they are
indicative of systemic problems and, if so, how these should be addressed.
Although each of the cases we examined had its own peculiarities, we
identified a number of problems that frequently recurred: for example,
government insistence on rigid custom specifications for products, despite the
commercial availability of adequate alternative items costing much less; the
ordering of spare parts so late in a program, after the close of the production
line, that they must be expensively hand tooled; the use of unsuitable cost
allocation procedures that grossly distort the price tags of inexpensive spare
parts; the buying of spare parts in uneconomically small quantities and hence
at higher prices; and the simple exercise of poor judgment by acquisition
personnel.
In general, we discovered, these problems were seldom the result of fraud
or dishonesty. Rather they were symptomatic of other underlying problems
that affect the entire acquisition system. Ironically, actions being prescribed in
law and regulation to correct spare parts procurement tend to exacerbate these
underlying problems by making acquisition procedures even more inflexible
and by removing whatever motivation exists for the exercise of individual
judgment. This Chapter will concentrate on ways of improving the efficiency of
the overall acquisition system. Removing bureaucratic inefficiencies in our
acquisition of major weapon systems also will realize significant improvements
in our procurement of associated spare parts.
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Problems with the present defense acquisition system begin with the
establishment of approved "military requirements" for a new weapon, a step
that occurs before development starts. Two common methods exist for
establishing the need for a new system?"user pull" and "technology push."
Both methods are unsatisfactory.
User pull defines the institutional process by which users (notably the
Services) assess the adequacy of existing weapons to meet military needs, and
state the characteristics of the next generation of equipment desired to
overcome identified inadequacies. In general, this process does not adequately
involve participants with a sophisticated knowledge of the cost and schedule
implications of technical improvements required to satisfy these characteristics.
Consequently, user pull often leads to goldplating?that is, the inclusion of
features that are desirable but whose cost far exceeds their real value. If users
understood the likely impact of their requirements on the schedule, quantity,
and maintainability of the weapons they eventually received, they would have
strong motivation for compromise. Generally, however, that compromise?a
conscious trade-off between performance and cost?does not take place to an
adequate degree. Implicitly, it is assumed that military requirements should be
((pure," and that any necessary trade-offs will take place later in the process.
Alternatively, requirements often are established by technology push. A
government or industry team conceives of a new or advanced technology. It
then tries to persuade users to state requirements that will exploit the new
technology. Most of the really significant improvements in military
technology?radar, jet engines, and the atomic bomb, for example?have
occurred by technology push rather than by an abstract statement of
requirements. Because participants in this process tend to push technology for
its own sake, however, this method is no less prone to result in goldplating than
user pull.
Once military requirements are defined, the next step is to assemble a
small team whose job is to define a weapon system to meet these requirements,
and "market" the system within the government, in order to get funding
authorized for its development. Such marketing takes place in a highly
competitive environment, which is desirable because we want only the best
ideas to survive and be funded. It is quite clear, however, that this competitive
environment for program approval does not encourage realistic estimates of
cost and schedule. So, all too often, when a program finally receives budget
approval, it embodies not only overstated requirements but also understated
costs.
Funding having been approved, the DoD program team is then enlarged
and given the task of preparing detailed specifications. Weapon system
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specifications for a major program typically run to thousands of pages, not
counting generic military specifications included by reference. System
specifications effectively become a surrogate for overstated military
requirements, which tend to fade from view.
DoD then invites industry to bid on the program. The overly detailed
system specifications serve as a basis for defense contractors to prepare
competitive proposals describing how they would meet the specifications, and
at what cost to them and price to the government. The preparation of
competitive proposals may very well expose technical problems with the
specifications, or reveal modifications that would be cost effective. The
environment in which program competition typically takes place, however,
encourages improvements within specifications, but discourages modifications
that deviate from specifications. This effectively forecloses one principal
factor?trade-offs between performance and cost?on which the competition
should be based. The resulting competition, based instead principally on cost,
all too often goes to the contractor whose bid is the most optimistic.
In underbidding, contractors assume there will be an opportunity later in
a program to negotiate performance trade-offs that make a low bid achievable,
or to recover understated costs through engineering change orders. Today,
however, most production and many development contracts are negotiated on
a firm, fixed-price basis. For the government, the advantages of a fixed-price
arrangement, particularly the incentives it creates for realistic bidding, are
obvious. The disadvantages to the government, while more subtle, are
nevertheless of real concern. Fixed-price contracts effectively can enshrine
overstated requirements and understated costs in a legal arrangement that
allows little or no flexibility for needed trade-offs between cost and
performance. This contractual arrangement, intended to protect the
government, may cause both sides to lose.
In the face of these daunting problems, DoD selects a successful bidder
and launches the program. The DoD program manager sets out to accomplish
the improbable task of managing his overspecified and underfunded program
to a successful conclusion.
But what was merely improbable soon becomes impossible. The program
manager finds that, far from being the manager of the program, he is merely
one of the participants who can influence it. An army of advocates for special
interests descends on the program to ensure that it complies with various
standards for military specifications, reliability, maintainability, operability,
small and minority business utilization, and competition, to name a few. Each
of these advocates can demand that the program manager take or refrain from
taking some action, but none of them has any responsibility for the ultimate
cost, schedule, or performance of the program.
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None of the purposes they advocate is undesirable in itself. In the
aggregate, however, they leave the program manager no room to balance their
many demands, some of which are in conflict with each other, and most of
which are in conflict with the program's cost and schedule objectives. Even
more importantly, they produce a diffusion of management responsibility, in
which everyone is responsible, and no one is responsible.
Meanwhile, throughout this process, various committees of Congress are
involved. During the marketing phase, it is not enough for the program
manager to sell the program to his Service leaders and the various staffs in the
Office of the Secretary of Defense. He also must sell the program to at least
four committees and to numerous subcommittees of Congress, and then resell
it for each fiscal year it is considered. In so doing, the program manager is
either assisted or opposed by a variety of contractors, each advocating its own
views of the program on Capitol Hill. While congressmen have an abstract
interest in greater program effectiveness, they also have an intense pragmatic
interest in their own constituencies. These two interests are frequently in
conflict, as they exert pressure on specific programs through legislative
oversight.
All of these pressures, both internal and external to DoD, cause the
program manager to spend most of his time briefing his program. In effect, he
is reduced to being a supplicant for, rather than a manager of, his program.
The resulting huckster psychology does not condition the program manager to
search for possible inconsistencies between performance and schedule, on the
one hand, and authorized funding, on the other. Predictably, there is a high
incidence of cost overruns on major weapon systems programs.
But a much more serious result of this management environment is an
unreasonably long acquisition cycle?ten to fifteen years for our major weapon
systems. This is a central problem from which most other acquisition problems
stem:
? It leads to unnecessarily high costs of development. Time is money, and
experience argues that a ten-year acquisition cycle is clearly more expensive
than a five-year cycle.
? It leads to obsolete technology in our fielded equipment. We forfeit our
five-year technological lead by the time it takes us to get our technology from
the laboratory into the field.
? And it aggravates the very goldplating that is one of its causes. Users,
knowing that the equipment to meet their requirements is fifteen years away,
make extremely conservative threat estimates. Because long-term forecasts are
uncertain at best, users tend to err on the side of overstating the threat.
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This description of the acquisition system is stark, but it by no means
exaggerates the environment of many, if not most, defense programs. Given
this pernicious set of underlying problems, it is a tribute to the dedication of
many professionals in the system, both in and out of DoD, that more programs
do not end up in serious trouble.
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IV. An Acquisition Model To Emulate
problems attendant to defense acquisition are not new, nor are such
problems unique to DoD. Rather, they are typical of the way in which large
bureaucracies, particularly government bureaucracies, manage large, complex
projects. With this in mind, we compared how other large institutions have
managed programs of similar complexity?that is, multi-year, multi-billion
dollar programs incorporating state-of-the-art technology.
Two recent efforts have been made to draw such a comparison (see
Appendix F). Notably, average cost growth in major defense programs has
been found to be less than that experienced by many comparable civil
programs, including highway projects, water projects, public buildings, and
large processing plants. The good news from these studies is that DoD is no
worse than other large bureaucratic organizations in managing major
programs.
This leaves unanswered, however, what level of excellence can be achieved
in defense programs. To answer this question, a landmark study was
undertaken by the Defense Science Board (DSB) last year. The DSB compared
typical DoD development programs with successful programs from private
industry. It used as case studies the development of the IBM 360 computer,
the Boeing 767 transport, the AT&T telephone switch, and the Hughes
communication satellite. Each of these programs compares in complexity and
size to a major weapon system development, yet each took only about half as
long to develop and cost concomitantly less. These commercial programs
clearly represent the models of excellence we are seeking, but it is not obvious
that DoD, or any large bureaucratic organization, can follow successfully the
management procedures used in private industry.
To address that question, the Acquisition Task Force examined several
DoD programs that were developed under special streamlined procedures?
the Polaris missile, the Minuteman missile, the air-launched cruise missile
(ALCM), and several highly classified projects. We found that, in these
programs, DoD achieved the accelerated schedules of the successful
commercial programs.
It is clear that major savings are possible in the development of weapon
systems if DoD broadly emulates the acquisition procedures used in
outstanding commercial programs. In a few programs, DoD has demonstrated
that this can be done. The challenge is to extend the correct management
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techniques to all major defense acquisitions, and more widely realize the
attendant benefits in schedule and costs.
To this end, we analyzed a number of successful programs to identify
management features that they had in common, and that could be
incorporated in the defense acquisition system. We identified six underlying
features that typified the most successful commercial programs:
1. Clear command channels. A commercial program manager has clear
responsibility for his program, and a short, unambiguous chain of command to
his chief executive officer (CEO), group general manager, or some comparable
decision-maker. Corporate interest groups, wishing to influence program
actions, must persuade the responsible program manager, who may accept or
reject their proposals. Major unresolved issues are referred to the CEO, who
has the clear authority to resolve any conflicts.
2. Stability. At the outset of a commercial program, a program manager
enters into a fundamental agreement or "contract" with his CEO on specifics of
performance, schedule, and cost. So long as a program manager lives by this
contract, his CEO provides strong management support throughout the life of
the program. This gives a program manager maximum incentive to make
realistic estimates, and maximum support in achieving them. In turn, a CEO
does not authorize full-scale development for a program until his board of
directors is solidly behind it, prepared to fund the program fully and let the
CEO run it within the agreed-to funding.
3. Limited reporting requirements. A commercial program manager reports
only to his CEO. Typically, he does so on a "management-by-exception" basis,
focusing on deviations from plan.
4. Small, high-quality staffs. Generally, commercial program management
staffs are much smaller than in typical defense programs, but personnel are
hand-selected by the program manager and are of very high quality. Program
staff spend their time managing the program, not selling it or defending it.
5. Communications with users. A commercial program manager establishes
a dialogue with the customer, or user, at the conception of the program when
the initial trade-offs are made, and maintains that communication throughout
the program. Generally, when developmental problems arise, performance
trade-offs are made?with the user's concurrence?in order to protect cost and
schedule. As a result, a program manager is motivated to seek out and address
problems, rather than hide them.
6. Prototyping and testing. In commercial programs, a system (or critical
subsystem) involving unproven technology is realized in prototype hardware
and tested under simulated operational conditions before final design approval
or authorization for production. In many cases, a program manager establishes
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a "red team," or devil's advocate, within the program office to seek out
pitfalls?particularly those that might arise from operational problems, or from
an unexpected response by a competitor. Prototyping, early operational
testing, and red teaming are used in concert for the timely identification and
correction of problems unforeseen at a program's start.
It is clear from our earlier description that defense acquisition typically
differs from this commercial model in almost every respect. Yet a number of
successful DoD programs have incorporated some or all of these management
features to a greater or lesser degree. We therefore concentrated our efforts
on deriving a formula for action?steps by which defense acquisition can come
to emulate this model to the maximum extent practical.
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V. A Formula for Action
While we would model defense acquisition after the practices of the best
industrial companies, we recognize the unique problems DoD faces.
Management of the acquisition of military equipment requires a unique blend
of flexibility and judgment. The contributions of innovative scientists and
engineers, necessary for equipment to achieve maximum performance, must be
matched by those of military personnel who will use and maintain the
equipment. Overlaying these complexities is the need for an informed trade-
off between quantity and quality. At some point, more weapons of lower
performance can overcome fewer weapons of higher performance. Hence it is
necessary to achieve a critical balance between high military capability and low
life cycle cost. In these and other respects, defense acquisition is one of the
most difficult management jobs.
Despite the difficulties, we believe it is possible to make major
improvements in defense acquisition by emulating the model of the most
successful industrial companies. Surely this will not be easy, because present
procedures are deeply entrenched. Acquisition problems have been with us for
several decades, and are becoming more intractable with the growing
adversarial relationship between government and the defense industry, and
the increasing tendency of Congress to legislate management solutions. In
frustration, many have come to accept the ten-to-fifteen-year acquisition cycle
as normal, or even inevitable.
We believe that it is possible to cut this cycle in half. This will require
radical reform of acquisition organization and procedures. It will require
concerted action by the Executive Branch and Congress, and the full support
of defense industry. Specifically, we recommend that the Administration and
Congress join forces to implement the following changes in the defense
acquisition system.
A. Streamline Acquisition Organization and
Procedures
As we noted in our Interim Report, federal law governing acquisition has be-
come steadily more complex, the acquisition system more bureaucratic, and
acquisition management more encumbered and unproductive. In the absence
of a single, senior DoD official working full time to supervise the overall
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acquisition system, policy responsibility has become fragmented. As a result,
the Services have tended to assume policy responsibilities and to exercise them
at times without necessary coordination or uniformity. Worse still, authority for
executing acquisition programs?and accountability for their results?has
become vastly diluted.
For these reasons, it is fundamental that we establish unambiguous
authority for overall acquisition policy, clear accountability for acquisition
execution, and plain lines of command for those with program management
responsibilities. It is also imperative that we streamline acquisition procedures.
This can be facilitated by five related actions:
1. We strongly recommend creation by statute of the new position of
Under Secretary of Defense (Acquisition) and authorization of an additional
Level II appointment in the Office of the Secretary of Defense (OSD).
This new Under Secretary should have full-time responsibility for
managing the defense acquisition system. He should be a Level II Presidential
appointee and should have a solid industrial background in the management
of complex technical programs. The new Under Secretary should be the
Defense Acquisition Executive. As such, he should supervise the performance
of the entire acquisition system and set overall policy for R&D, procurement,
logistics, and testing. He should have the responsibility to determine that new
programs are thoroughly researched, that military requirements are verified,
and that realistic cost estimates are made before the start of full-scale
development. (In general, we believe, cost estimates should include the cost of
operating and maintaining a system through its life.) He should assure that an
appropriate type of procurement is employed, and that adequate operational
testing is done before the start of high-rate production. He also should be
responsible for determining the continuing adequacy of the defense industrial
base.
Appendix G sets out an illustrative reorganization of acquisition responsi-
bilities within OSD. Reporting to the new Under Secretary should be a
Director of Research and Engineering*; an Assistant Secretary of Defense for
Production and Logistics*; the Assistant Secretary of Defense for Command,
Control, Communications, and Intelligence; the Director of Operational Test
and Evaluation; and such other offices and agencies as the Secretary of
Defense may designate. The Under Secretary should be responsible to the
Secretary of Defense for balancing the sometimes conflicting views and
interests of these various offices. He should establish overall acquisition policy,
*We use these new titles to represent a reorganization of acquisition responsibilities for
officials reporting to the new Under Secretary.
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as well as contract audit policy; should promulgate and issue appropriate
directives and regulations; and, except for criminal investigations, should
supervise oversight of defense contractors. Finally, he should prepare annual
and other reports to Congress on major issues of acquisition policy and on
acquisition programs.
2. The Army, Navy, and Air Force should each establish a comparable
senior position filled by a top-level civilian Presidential appointee.
The Commission considered recommendations to consolidate all defense
acquisition activities under the Defense Acquisition Executive, but concluded
that such centralization would not serve the cause of reducing the bureaucracy,
because it would tend to separate further the acquisition staff from the military
user. We believe that it is important to maintain the Services' traditional role in
managing new weapon programs.
Accordingly, we recommend that each of the Military Departments
establish a Service Acquisition Executive selected by the Service Secretary in
consultation with the Defense Acquisition Executive. The Service Acquisition
Executive should be a top-level civilian Presidential appointee, of rank
equivalent to a Service Under Secretary. He should be responsible for
administering Service acquisition programs under policy guidance from the
Defense Acquisition Executive; accordingly, he should have substantial
experience in acquisition and should devote full time to his acquisition
responsibilities. For major programs, the Defense Acquisition Executive and
his Service counterpart should function respectively like chief executive
officers of a corporation and a principal corporate subsidiary. They should
resolve major issues and conflicts as they arise, and represent programs before
most senior decision-makers (here, the Secretary of Defense, the President, and
Congress, rather than a board of directors).
3. Each Service Acquisition Executive should appoint a number of
Program Executive Officers.
Each Service Acquisition Executive should appoint a number of Program
Executive Officers (PEO) who, like group general managers in industry, should
be responsible for a reasonable and defined number of acquisition programs.
Program managers for these programs should be responsible directly to their
respective PEO and, on program matters, report only to him. In other words,
every major program should be set up as a center of excellence and managed
with modern techniques. The Defense Acquisition Executive should insure that
no additional layers are inserted into this program chain of command.
4. Federal laws governing procurement should be recodified into a
single, greatly simplified statute applicable government-wide.
A streamlined organization for defense acquisition is not enough. It must
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be matched by streamlined procedures. Over the years, Congress and DoD have
tried to dictate management improvements in the form of ever more detailed
and extensive laws or regulations. As a result, the legal regime for defense
acquisition is today impossibly cumbersome. For example, we have identified
394 different regulatory requirements in the Federal Acquisition Regulation
(FAR) and the DoD FAR supplement that are pegged to some 62 different
dollar thresholds, ranging from as little as $15 to as much as $100 million or
more. In our judgment, there can be far fewer of these requirements, and those
that are retained can apply at far fewer dollar thresholds.
The sheer weight of such requirements often makes well-conceived reform
efforts unavailing. At operating levels within DoD, it is now virtually impossible
to assimilate new legislative or regulatory refinements promptly or effectively.
For these reasons, we recommend that Congress work with the Administration
to recodify federal laws governing procurement in a single, consistent, and
greatly simplified procurement statute.
5. DoD should substantially reduce the number of acquisition personnel.
The fundamental intent of the Commission's recommendations is to
simplify the acquisition system by consolidating policy and oversight, reducing
reporting chains, eliminating duplicative functions and excessive regulations,
and establishing an environment in which program managers and their staffs
can operate as centers of excellence. This should allow for a substantial
reduction in the total number of personnel in the defense acquisition system, to
levels that more nearly compare with commercial acquisition counterparts.
Eliminating a layer of management by moving the functions and people of that
layer to some other layer clearly will not suffice.
B. Use Technology to Reduce Cost
We recommend a high priority on building and testing prototype
systems to demonstrate that new technology can substantially improve
military capability, and to provide a basis for realistic cost estimates prior to
a full-scale development decision. Operational testing should begin early in
advanced development, using prototype hardware. The early phase of R&D
should employ extensive informal competition and use streamlined
procurement processes. To promote innovation, the Defense Advanced
Research Projects Agency should engage in prototyping and other advanced
development work on joint programs and in areas not adequately emphasized
by the Services.
Fully exploiting our technological leadership is critical to the national
security. The Soviet Union has twice as many personnel in its armed forces,
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and produces military equipment in far greater quantities than the United
States. We depend on our technological advantage to offset this quantitative
disadvantage. But our technology can be exploited in two quite different ways:
to reduce cost (so that we can better compete in quantity), or to increase
performance (so that we can compensate for our smaller quantity).
We believe that DoD should place a much greater emphasis on using
technology to reduce cost?both directly by reducing unit acquisition cost and
indirectly by improving the reliability, operability, and maintainability of
military equipment. Cost reduction has been a primary motivation in the
introduction of new technology to commercial products. This emphasis has led
to a tenfold reduction in the cost of computer products during the past decade.
DoD should give a similar high priority to cost reductions by exerting greater
discipline in the setting of performance requirements for new platforms, and
by increasing the use of technology to extend the life of existing platforms. We
could, for example, extend the effective life of most of our existing aircraft ten
to twenty years by replacing their electromechanical subsystems with modern
microelectronics. This would reduce the cost of operating and maintaining our
aircraft, and at the same time improve their performance.
In some of our new weapon systems?fighter aircraft, for example?the
need for maximum performance will be sufficiently compelling to justify the
introduction of state-of-the-art technology. But this is not the case for all new
systems. A weapon system should be predicated on state-of-the-art technology
only when the benefits of the new technology offset the concomitant risks. This
principle, easy to state, is hard to apply because of the difficulty in getting
reliable information with which to make the trade-off of risks and benefits.
The only consistently reliable means of getting such information is by
building prototypes that embody the new technology. Accordingly, we
recommend that such prototyping, either at the system or critical subsystem
level, be done as a matter of course for all major weapon systems. Operational
tests should be combined with developmental tests of the prototype to uncover
operational as well as technical deficiencies before a decision is made to
proceed with full-scale development.
The early phase of R&D should follow procedures quite different from
those of approved production programs, in order to complete the entire
prototyping cycle in two or three years. Contracting should be streamlined to
speed up the process of evaluating diverse new ideas. In the advanced
technology phase of a program, competition should play a critical role, but the
emphasis should be on an informal competition of ideas and technologies,
rather than a formal competition of cost. At this stage, a formal competition
based on detailed specifications not only is ineffective, but also introduces
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substantial delay. In fact, recent emphasis on cost competition has stretched out
the time required to let some R&D contracts from a few months to as much as
a year.
In general, prototyping and testing in the early stage of R&D should be
done by the Service that would be the primary user of the resulting system. In
order to promote the use of prototyping, however, we recommend expanding
the role of the Defense Advanced Research Projects Agency (DARPA).
At present, DARPA conducts research and exploratory development in
high-risk, high-payoff technologies. DARPA should have the additional
mission of stimulating a greater emphasis on prototyping in defense systems. It
should do this by actually conducting prototype projects that embody
technology that might be incorporated in joint programs, or in selected Service
programs. On request, it also should assist the Services in their own
prototyping programs. The common objective of all of these prototyping
programs should be to determine to what extent a given new technology can
improve military capability, and to provide a basis for making realistic cost
estimates prior to a decision on full-scale development. In short, the prototype
program should allow us to fly?and know how much it will cost?before we
buy.
C. Balance Cost and Performance
A restructured Joint Requirements and Management Board (JRMB),
cochaired by the Under Secretary of Defense (Acquisition) and the Vice
Chairman of the Joint Chiefs of Staff, should play an active and important
role in all joint programs and in all major Service programs. The JRMB
should define weapon requirements for development, and provide thereby an
early trade-off between cost and performance.
Full-scale development of a new weapon system is the single most critical
step in the acquisition process. At this point, a number of fundamental
decisions must be made?whether to undertake a new development or adapt
an existing system, how far to push the new technology being incorporated in
the system, what cost and schedule to authorize, and what the management
structure will be. Misjudgment about any of these items can start a program off
on a course that dooms it to failure. Currently, this critical decision is made by
the Secretary of Defense, acting on advice from the Defense Systems
Acquisition Review Council (DSARC), after the DSARC has made a detailed
review of whether the proposed system will meet the stated user requirements
and whether the cost and schedule estimates are credible. The recommended
new emphasis on prototyping will contribute materially to improving the
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judgments about cost and schedule estimates. But the DSARC process, while
adequate to determine whether the proposed specifications will meet the stated
user requirements, lacks a viable mechanism for challenging those requirements.
Fundamental to the ultimate success of a new program is an informed
trade-off between user requirements, on the one hand, and schedule and cost,
on the other. A delicate balance is required in formulating system specifications
that allow for a real advance in military capability but avoid goldplating.
Generally, users do not have sufficient technical knowledge and program
experience, and acquisition teams do not have sufficient experience with or
insight into operational problems, to strike this critical balance. It requires a
blend of diverse backgrounds and perspectives that, because the pressures for
goldplating can be so great, must be achieved at a very high level in DoD.
The DSARC is not the proper forum for effecting this balance. It has had
very little success, for example, in stimulating the use of nondevelopmental
items as an alternative to developing unique military products. Any time the
military needs new trucks, tractors, radios, computers, and transport aircraft,
for example, it should be the rule rather than the exception that DoD adapts
products already developed by industry or by the armed forces of an allied
nation. Much greater reliance on such items could realize major savings of
money and time, but experience indicates that a decision to use non-
developmental items must come from a high level in DoD, and must reflect
operational judgment as well as technical sophistication.
We recommend, therefore, that the JRMB be restructured to make such
trade-offs and then to decide whether to initiate full-scale development. The
JRMB should have this authority for all joint programs and appropriate
Service programs. It should evaluate major trade-offs proposed as a program
progresses. Its determination, in effect, should substitute for the decision now
made by the DSARC at what is called Milestone II. The JRMB should be
cochaired by the Under Secretary of Defense (Acquisition) and the Vice
Chairman of the Joint Chiefs of Staff.
Thus, the JRMB should be responsible for two decisions commonly made
in industry, but not now an explicit part of DoD's decision-making process.
One of these is the "affordability" decision, and the other is the "make-or-buy"
decision.
The affordability decision requires that a subjective judgment be made on
how much a new military capability is worth. If a new weapon system can be
developed and produced at that target cost, it may be authorized for
development; otherwise, ways should be found to extend the life of the
existing system. Determining a target cost is difficult, to be sure, but CEOs in
industry must make comparably difficult decisions on which their companies'
survival depends.
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The make-or-buy decision requires that the JRMB assess the need for a
unique development program, and determine if it is possible instead to buy or
adapt an existing commercial or military system. At present, DoD passes up
many valid opportunities for adapting existing systems, opportunities that
could improve military capability more quickly and at reduced cost.
D. Stabilize Programs
Program stability must be enhanced in two fundamental ways. First, DoD
should fully institutionalize "baselining" for major weapon systems at the
initiation of full-scale engineering development. Second, DoD and Congress
should expand the use of multi-year procurement for high-priority systems.
In connection with the decision to begin full-scale development of a major
new program, the program manager should prepare a brief baseline
agreement describing functional specifications, cost, schedule, and other
factors critical to the program's success. This baseline agreement should be
submitted, through the responsible Program Executive Officer and the Service
Acquisition Executive, for approval by the Defense Acquisition Executive.
Within the terms of this agreement, the program manager should have
full authority to execute the program. He should be fully committed to abide
by the program's specified baseline and, so long as he does so, the Defense and
Service Acquisition Executives should support his program and permit him to
manage it. This arrangement would provide much-needed program stability,
which could be enhanced significantly if the program were approved for multi-
year funding. We recommend that Congress approve multi-year funding for
the development and low-rate production of all major programs approved for
full-scale development by the JRMB. In this way, Congress could join in the
baseline agreement with the program manager, enhance program stability, and
promote lower unit prices.
A program manager should agree to a baseline for all phases of his
program. For the Acquisition Executives, however, the agreement should
extend only to the first two phases of a program, full-scale development and
low-rate production. Before a program could enter its third phase, high-rate
production, it must be subjected to developmental and operational testing.
Operational tests are particularly critical, and should continue through full-
scale development. The first units that come off a low-rate production line
should be subjected to intensive operational testing. Low-rate production
should continue during testing, but a program should not be approved for
high-rate production until the results of these tests are evaluated.
The JRMB should then reconsider the program at its second major
milestone?whether to authorize high-rate production, at what level of
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funding, and on what schedule. At this stage, available test results should
provide a realistic portrait of the weapon's probable performance under
operational conditions, current intelligence data should yield a realistic threat
estimate, and low-rate production experience should provide a realistic
estimate of production costs. Thus, the JRMB would possess the necessary data
to make an informed judgment on high-rate production.
If the JRMB so determines, a program manager could proceed in
accordance with the balance of his baseline agreement. Congress would be
asked to authorize multi-year funding for the production phase of the
program.
E. Expand the Use of Commercial Products
Rather than relying on excessively rigid military specifications, DoD
should make greater use of components, systems, and services available "off-
the-shelf." It should develop new or custom-made items only when it has
been established that those readily available are clearly inadequate to meet
military requirements.
No matter how DoD improves its organization or procedures, the defense
acquisition system is unlikely to manufacture products as cheaply as the
commercial marketplace. DoD cannot duplicate the economies of scale possible
in products serving a mass market, nor the power of the free market system to
select and perpetuate the most innovative and efficient producers. Products
developed uniquely for military use and to military specifications generally cost
substantially more than their commercial counterparts. DoD program
managers accordingly should make maximum use of commercial products and
devices in their programs.
A case in point is the integrated circuit or microchip?an electronic device
used pervasively in military equipment today. This year DoD will buy almost $2
billion worth of microchips, most of them manufactured to military
specifications. The unit cost of a military microchip typically is three to ten
times that of its commercial counterpart. This is a result of the extensive testing
and documentation DoD requires and of smaller production runs. (DoD buys
less than ten percent of the microchips made in the U.S.) Moreover, the
process of procuring microchips made to military specifications involves
substantial delay. As a consequence, military microchips typically lag a
generation (three to five years) behind commercial microchips.
When military specifications for microchips were first established, they
assured a high standard of quality and reliability that was worth a premium
price. The need for quality and reliability in military equipment is as great as
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ever. In the last few years, however, industrial consumers of microchips have
come to demand equivalent standards, and manufacturing processes and
statistical methods of quality control have been greatly improved. It is now
possible for DoD program managers to buy the bulk of their microchips from
commercial lines with adequate quality and reliability, and thus to get the latest
technology at a substantially lower cost. The Electronic Systems Division,
responsible in the Air Force for the quality of electronic devices, recently began
revising its procedures to achieve these objectives. We recommend that the Air
Force accelerate its efforts and that the other Services follow its lead.
This same principle?the expanded use of commercial items?can apply to
a great variety of products and services bought by DoD. These range from
personal computers, computer software, and professional services, to a host of
non-technical products such as bath towels and steak sauce.
We recommend that the Defense Acquisition Executive take steps to assure
a major increase in the use of commercial products, as opposed to those made
to military specifications. He should direct that program managers get a waiver
before using a product made to military specifications, if there is an available
commercial counterpart. When a "make-or-buy" decision must be made, the
presumption should be to buy. This would invert present procedures, biasing
the system in favor of commercial products and services, but permitting the use
of items made to military specifications whenever a program manager believes
it necessary to do so.
In addition, we recommend that the DoD Supplement to the Federal
Acquisition Regulation be changed to encourage streamlining military
specifications themselves. Applying full military specifications, far from being
ideal, can be wasteful. A program manager should strive to invoke neither
minimum nor maximum, but only relevant, requirements; and he should think
in terms of optimization rather than deviations and waivers.
Thus, DoD should reduce its use of military specifications when they are
not needed, and should take steps to improve the utility of military
specifications when they are needed. This will require a serious effort to
harmonize military specifications with the various commercially used
specifications. For example, required military drawings for integrated circuits
could incorporate a manufacturer's standard design specifications, test
methods, and test programs. More generally, military specifications could be
based on industry standards, such as those promulgated by the American
National Standards Institute and the American Society for Testing and
Materials. This would provide the technical underpinning for DoD to make
substantially greater use of commercial devices and products, and thereby take
advantage of the much lower costs that result from larger production runs.
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One indirect benefit of buying commercial products is that the price is
determined by market forces. This should relieve DoD of the administrative
burden and cost of verifying a producer's overhead costs. For DoD to realize
the full benefit of commercial buying, it should let competitive market forces
provide a check on price and direct its own attention to validating quality.
A more detailed explanation of current issues concerning the expanded use
of commercial products is contained in Appendix H.
F. Increase the Use of Competition
Federal law and DoD regulations should provide for substantially
increased use of commercial-style competition, emphasizing quality and
established performance as well as price.
Even when commercial products are not suitable for DoD's purposes, it
can still use commercial buying practices to real advantage. Foremost among
these practices is competition, which should be used aggressively in the buying
of systems, products, and professional services. DoD clearly understands the
need for such competition, which was articulated in the 1981 Carlucci
Initiatives. Although DoD has made major efforts in this direction, much more
can be done. It is particularly important to focus on achieving more effective
competition, modeled after the competitive procurement techniques used in
industry.
Commercial procurement competition simultaneously pursues several
related objectives: attracting the best qualified suppliers, validating product
performance and quality, and securing the best price. Price is, of course, as
important a factor in commercial procurement as it is in DoD procurement.
But it is only one of several equally important factors. Price should not be the
sole determinant, especially for procurement of complex systems and services.
Defense procurement tends to concentrate heavily on selecting the lowest price
offeror, but all too often poorly serves or even ignores other important
objectives.
In validating product quality, for example, DoD places too much emphasis
on specific details of how the manufacturing process is to be done and too little
on modern techniques of quality control. Industry makes extensive use of
statistical sampling, and will accept or reject an order on that basis. Typically,
an industrial company will keep lists of qualified suppliers that have
maintained historically high standards of product quality and reliability. As
long as these standards are maintained, industrial buyers do not require
exhaustive inspection, and thereby save expense on both sides. Suppliers are
highly motivated to get?and stay?on lists of qualified suppliers by
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consistently exceeding quality control standards.
Moreover, because competition is not a one-way street for the buyer,
defense procurement practices must be less cumbersome if DoD is to attract
the best suppliers. Procurement officers must be allowed and encouraged to
solicit bids through purchase descriptions that are stated as functional
performance characteristics rather than through detailed design and "how-to"
specifications; to limit bids to qualified suppliers; to give preference to
suppliers that have demonstrated the quality and reliability of their products;
and to recognize value (quality and price) based on products' commercial
acceptance in the marketplace. These practices have been found to yield
effective competition in the commercial field, and their use in defense
acquisition could provide better military equipment at no increase in cost.
Although Congress has ardently advocated increasing competition, some
provisions of recent legislation in fact work at cross purpose to that objective.
For example, burdening suppliers of off-the-shelf catalog items to identify all
component parts and their producers, or to submit detailed pricing
certifications, inhibits qualified companies from competing for government
contracts. Regulatory implementation?for example, DoD's efforts to require
contractors to release rights in technical data on their products?has a similar
effect.
A further problem stems from confusion regarding the intent of recent
legislation?notably the Competition in Contracting Act's (CICA) requirement
of "full and open competition," which some have interpreted to mean that the
government must buy from the lowest offeror. CICA sought to make it clear
that the award of a contract through competitive negotiation is a method of
procurement no less acceptable than an award using formal advertising or
sealed bids, and thus to recognize that competition entails more than just an
assessment of lowest price. This goal has been obscured by the notion that full
and open competition precludes the government from establishing
qualification criteria, and forces the award of a contract based on price without
regard, for example, to technical expertise or life cycle costs. This reinforces
DoD's proclivity for writing detailed military specifications rather than
functional product descriptions?in this context, in order to insure that all
bidders offer identical items. At the same time, however, these narrow product
specifications preclude the acquisition of most commercial products and, in
effect, DoD's doing business with many qualified suppliers. Thus, the full
potential of CICA is not being realized because of a focus on the quantity
rather than the quality of competition.
In sum, we believe that DoD should greatly increase its use of truly
effective competition, using as a model the competitive buying practices of
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major corporations and their suppliers. We recommend the elimination of
those legal and regulatory provisions that are at variance with full
establishment of commercial competitive practices.
G. Clarify the Need for Technical Data Rights
DoD must recognize the delicate and necessary balance between the
government's requirement for technical data and the benefit to the nation that
comes from protecting the private sector's proprietary rights. That balance
must be struck so as to foster technological innovation and private investment
which is so important in developing products vital to our defense. DoD
should adopt a technical data rights policy that reflects the following
principles:
? If a product has been developed with private funds, the government
should not demand, as a precondition for buying that product,
unlimited data rights (except as necessary for installation, operation,
and maintenance), even if the government provides the only market.
Should the government plan later to seek additional (competitive)
sources, the required data rights should be obtained through the least
obtrusive means (e.g., directed licensing) rather than through the
pursuit of unlimited rights.
? If a product is to be developed with mixed private and government
funding, the government's rights to the data should be defined during
contract negotiations. Significant private funding should entitle the
contractor to retain ownership of the data, subject to a license to the
government on a royalty-free or fair royalty basis.
? If a product is developed entirely with government funds, the
government normally acquires all the rights in the resulting data. To
foster innovation, however, the government should permit the rights to
reside in the contractor, subject to a royalty-free license, if the data are
not needed for dissemination, publication, or competition.
DoD is a major developer and user of high technology, most of which comes
from government contractors. DoD can use its unique position to enhance
U.S. industry's worldwide technological position; or unwittingly, through the
pursuit of other shorter term goals, to reduce incentives for developing new
technology; or, even worse, make commercially valuable technology available to
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international competitors. It is in our national interest to encourage innovation
in the U.S.; and we should heed the words of Abraham Lincoln: "The patent
system added the fuel of interest to the fire of genius."
In order to operate and maintain the systems it acquires, DoD must have
certain rights to use internally technical data pertaining to products developed
by its contractors. DoD's suppliers fully understand this need. Recently,
however, these suppliers have become alarmed by DoD's increasingly vigorous
pursuit of unlimited rights in technical data to be used in fostering competition.
DoD's search for technical data needed to obtain competition is reflected in
the Department's new rights-in-data regulations and in its contracting actions.
This search has been intensified as a result of unfavorable publicity, as well as
recent legislative initiatives regarding competitive procurement practices in both
DoD and the civil agencies. The two principal statutes resulting from these
initiatives are broad and are thus susceptible to varying interpretation,
particularly where the statutes use different words to address the same point.
But DoD's approach to these problems is shaped less by statute than by its own
policies. Because no concrete, plainly stated government-wide rights-in-data
policy has been adopted or insisted upon, the Department (and each of the
Services within DoD) has been left to develop an individual approach.
An authoritative statement of government-wide policy on balancing the
interest of the parties in technical data is required. This in turn must be followed
by specific implementing guidance in the Federal Acquisition Regulation (FAR),
supplemented as necessary in the DoD FAR Supplement (DFARS). This
guidance must embody uniform concepts and definitions to overcome the
confusion and disagreement that now prevail among the separate components
of DoD and among the departments and agencies of the executive branch.
The technical data rights regulations as now proposed need much work if
they are to be fully responsive to the statutes, clear and consistent enough to be
followed, and equitable. In this regard, DoD's rights-in-technical-data contract
clause should be gimplified and made more precise and workable.
In addition to refinement of the statutes and basic reworking of the
procurement regulations touching on technical data, improvements are needed
in the areas of commercial product data, software (which should have special
treatment), and technical data management. A detailed analysis of the technical
data rights issue is contained in Appendix I.
H. Enhance the Quality of Acquisition Personnel
DoD must be able to attract and retain the caliber of people necessary for
a quality acquisition program. Significant improvements should be made in
the senior-level appointment system. The Secretary of Defense should have
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increased authority to establish flexible personnel management policies
necessary to improve defense acquisition. An alternate personnel
management system should be established to include senior acquisition
personnel and contracting officers as well as scientists and engineers.
Federal regulations should establish business-related education and
experience criteria for civilian contracting personnel, which will provide a
basis for the professionalization of their career paths. Federal law should
permit expanded opportunities for the education and training of all civilian
acquisition personnel.
Our study convinces us that lasting progress in the performance of the
acquisition system demands dramatic improvements in our management of
acquisition personnel at all levels within DoD.
A pivotal recommendation of the Commission is the establishment of the
position of Under Secretary of Defense (Acquisition) and comparable Service
positions, all to be filled by leaders with outstanding business management
credentials. Recruiting the most capable executives for jobs of such importance
to the nation is extremely difficult, however, in the face of current disincentives
to entering public service. A recent report of the Presidential Appointee
Project of the National Academy of Public Administration* analyzes this
problem and details twenty-three separate recommendations for improving the
recruitment of senior-level Executive Branch personnel. These include, for
example, specific suggestions for simplifying financial disclosure reports and
for allowing Presidential appointees to defer capital gains taxes incurred by
divesting assets to comply with conflict-of-interest provisions. Such steps would
improve the government's ability to attract and retain the highly qualified
people needed for effective senior management of defense acquisition. We
strongly support these proposals.
Comparable improvements also are required for effective middle
management and better line personnel. The defense acquisition work force
mingles civilian and military expertise in numerous disciplines for management
and staffing of the world's largest procurement organization. Each year billions
of dollars are spent more or less efficiently, based on the competence and
experience of these personnel. Yet, compared to its industry counterparts, this
workforce is undertrained, underpaid, and inexperienced. Whatever other
changes may be made, it is vitally important to enhance the quality of the
defense acquisition workforce?both by attracting qualified new personnel and
*Leadership In Jeopardy: The Fraying of the Presidential Appointments System (Final Report of
the Presidential Appointee Project), November 1985.
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by improving the training and motivation of current personnel.*
The General Accounting Office (GAO) has been engaged in an important
study to evaluate the capabilities of DoD program managers and contracting
officers. The results of GAO's studyt confirm the central importance of
improving the quality of training for these two critical acquisition specialties.
The caliber of uniformed military personnel engaged in program
management has improved significantly of late. Military officers manage over
90 percent of DoD's roughly 240 program offices. Their ranks range from 0-5
(lieutenant colonel/commander) to 0-8 (major general/rear admiral). Each of
the Services has established a well-defined acquisition career program for its
officers. These include the Army's Materiel Acquisition Management (MAM)
program, the Navy's Materiel Professional (MP) programs, and detailed career
planning regulations for Air Force technical personnel and program managers.
We strongly support these measures. We also support recent legislation that
has further defined career paths for all program managers. In 1984, Congress
established a minimum four-year tenure for program management
assignments. The 1986 Authorization Act prescribed requisite qualifications
and training, including at least eight years of acquisition-related experience
and appropriate instruction at the Defense Systems Management College (or
equivalent training).
By contrast, much more remains to be done concerning civilian acquisition
personnel generally. Civilians frequently cite the rigid pay grades and
seniority-based promotion standards of the federal civil service as disincentives
to continued employment. Higher pay and better opportunities in private
industry lure the best college graduates and the brightest trainees away from
government, particularly in such highly competitive fields as science,
engineering, and contracting. One extremely important means to improve the
acquisition workforce is to establish an alternative personnel management
*To this end, the Assistant Secretary of Defense for Acquisition and Logistics recently
proposed creating a single Defense Acquisition Corps, modeled after the State Department's
Foreign Service. See DoD Acquisition Improvement?The Challenges Ahead, Perspectives of the
Assistant Secretary of Defense for Acquisition and Logistics: White Paper No. 2?Revitalization
of the DoD Acquisition and Logistics Workforce (Nov. 5, 1985). We studied this proposal
carefully, and support many of its specific features. Because it would have the undersirable
result of putting too much distance between acquisition programs and users, however, we do
not support the proposal in its full form.
tSee U.S. General Accounting Office, DoD Acquisition: Capabilities of Key DoD Personnel in
System Acquisition (GAO/NSIAD-86 45).
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system permitting greater flexibility with respect to the status, pay, and
qualifications of civilian employees.
We reviewed the results of the Navy's so-called China Lake personnel
project, in which recruitment and retention of key civilians were correlated
with pay, incentives, and advancement based on performance. The China Lake
experiment, which is outlined briefly in Appendix J, served to increase the
retention of engineers and scientists, improve supervisor-employee
relationships, and dramatically reduce management paperwork. Legislation is
now pending to implement such a system for all federal scientists and
engineers. The China Lake personnel system has produced significant benefits.
It merits expansion. We therefore recommend that federal law permit the
Secretary of Defense to include other critical acquisition personnel in such a
system, and facilitate greater professionalism among civilian acquisition
employees through government sponsorship of graduate instruction in
acquisition management.
Among acquisition personnel, contract specialists have an especially critical
role. More than 24,000 members of DoD's acquisition workforce specialize in
the award and administration of contracts. Eighty-five percent of these contract
specialists are civilians. Contract specialists must master the extensive, complex
body of knowledge encompassing materials and operations management,
contract law, cost analysis, negotiation techniques, and industrial marketing.
Yet, the Office of Personnel Management designates the Contract Specialist
personnel series (GS 1102) as an administrative and not a professional series
under Civil Service Title VIII. This administrative designation prohibits the
establishment of any business education requirement for contract specialists. As
a result, only half of DoD's contract specialists have college degrees, which may
or may not be business-related. We recommend establishing a minimum
education and/or experience requirement for the Contract Specialist series.
Such a requirement, similar to that now established for the Accounting
personnel series, would mandate an entry-level criterion of twenty-four
semester hours in business-related courses or equivalent experience.
Independently, DoD should enhance the professional status of contract
specialists by increasing the number of outside hires, conducting on-campus
recruitment, mandating the use of written tests for in-service placement and
promotion, and establishing upward mobility programs for purchasing agents
(GS 1105) and procurement clerks (GS 1106). DoD already has established
acquisition training programs at five major facilities, and requires that all
civilian contract specialists complete an average of six-hundred hours of
mandatory training. According to a 1984 report of the DoD Inspector
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General,* however, approximately two-thirds of all DoD contract specialists
had not completed this training. In a recent report, the Executive Committee
on Federal Procurement Reform t also recognized the inadequate training
given contract specialists.
Insufficient management attention and financial resources are serious
impediments to adequate training of contract specialists and, for that matter,
all acquisition personnel. Such training?like that provided generally in DoD
intern programs?should be centrally managed and funded. This is necessary
to improve the utilization of teaching faculty, to enforce compliance with
mandatory training requirements, and to coordinate overall acquisition
training policies.
Training, promotion opportunities, acquisition regulations, education
levels, and public perceptions were among the many issues addressed in the
Commission-sponsored 1986 Survey of Department of Defense Acquisition Workforce.
The Commission conducted its survey to determine the opinions and
perceptions of those who must translate procedures and policy into contract
decisions and to learn from the workers themselves how to attract, motivate, and
retain a team of excellence. The study, which is summarized in Appendix K,
focuses on contract specialists, with a matched sample of other acquisition team
members responding for comparison.
This survey provides powerful support for many key Commission
recommendations?clarifying regulations, streamlining organization, enhancing
education and training, building a personnel system based on performance, and
designing a compensation system sufficiently flexible to attract and retain the
best available team players.
Key findings of the survey are:
? DoD's acquisition team members say they operate under inefficient,
confusing regulations which often are inconsistent with sound business
practices.
? In evaluating the relative competence of their fellow DoD team players,
contract specialists, in every case, express greater confidence in the
capabilites of defense industry personnel.
*Office of the Inspector General, DoD, Report on the Audit of Department of Defense
Procurement Training, No. 84-047 (Feb. 14, 1984).
tExecutive Committee on Federal Procurement Reform Task Group No. 6, Guidance on
Establishing Procurement Career Management Programs, Vol. I (May 1985).
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? Members of headquarters staff are rated as least likely to provide needed
support to other team members.
? Nearly one-third of the respondents feel that their supervisors do not
really know whether or not jobs are performed well. Another 30 percent
feel their formal evaluations do not accurately reflect performance.
? Civilians, who form the majority of the work force, name pay and
benefits as their most valued work reward and overwhelmingly believe
private sector compensation for similar work to be much greater.
? A majority of the respondents say that important resources such as time,
office space and equipment, and clerical support are lacking to such a
degree that professional effectiveness is significantly hampered.
In spite of such difficulties, these acquisition workers describe themselves as
possessing a healthy self-respect, taking great pride in meeting the challenges of
defense acquisition, and using their talents to serve their country. They want to
provide quality defense products and services to the American military. They
take seriously their moral responsibilities to the taxpayers, saying that the nature
of defense contracting requires higher ethical standards than does normal
business practice.
The wealth of data produced by the survey has immense potential for use
by management to improve both efficiency and effectiveness of the acquisition
process. The Commission commends the survey and its data base to the new
Under Secretary for Acquisition, with a strong recommendation to make
maximum use of them as management tools in striving for excellence.
I. Improve the Capability for Industrial Mobilization
We recommend that the President, through the National Security Council,
establish a comprehensive and effective national industrial responsiveness
policy to support the full spectrum of potential emergencies. The Secretary of
Defense, with advice from the Joint Chiefs of Staff, should respond with a
general statement of surge mobilization requirements for basic wartime
defense industries, and logistic needs to support those industries and the
essential economy. The DoD and Service Acquisition Executives should
consider this mobilization guidance in formulating their acquisition policy,
and program managers should incorporate industrial surge and mobilization
considerations in program execution.
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Historically, the United States has not worried much during peacetime
about industrial mobilization. All the major wars fought in this century have
allowed ample time for unhindered industrial buildup after the beginning of
hostilities. At this time there is no effective national policy on industrial
mobilization even though the missions of various agencies include
responsibilities in these areas.
The DoD's own industrial facilities (e.g. arsenals, shipyards, and
manufacturing equipment) are aging. United States industry is becoming
increasingly dependent on foreign sources for not only strategic raw materials
but subassemblies and manufactured components. American industry
essentially does no mobilization planning. With a few exceptions, contractors are
not given firm requirements upon which to base their planning; and in any case,
the preparation of such plans is not funded by DoD.
Our concepts of stockpiling?historically done at the raw-materials level
and driven by domestic politics?need modernization. Components and
structures that can make a difference in the early period of a crisis should be
stockpile candidates?not solely ores (that require a year or more to move
through the economy).
In mobilizing industry to meet crisis and wartime needs, time, not money, is
the major constraint. DoD can no longer assume that American industry will be
able to respond automatically to production surge requirements. Additionally,
dependence on foreign sources is becoming common for economic reasons.
This can have serious consequences for maintenance of our technology base for
the next generation of weapons and equipment.
Finally, DoD's procurement practices lead to significant disincentives for
U.S. manufacturers to modernize their production processes, and thus impact
both peacetime efficiency as well as crisis responsiveness.
Production surge capability is essential for improved readiness and
sustainability of United States forces. Up to now, planning for surge and
industrial mobilization has been an ad hoc affair, largely the result of individual
initiatives rather than done on a regular basis or in response to a shift in the
threat, U.S. national strategy, or world economic conditions. Industrial
preparedness typically loses out in the competition for DoD funds. The problem
has been studied, reviewed, and analyzed by many?with documented findings.
There is a need now for selective and prudent investments to obtain real
improvement in industrial base responsiveness.
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Chapter Four
Government-Industry
Accountability
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I. Introduction
Our study of defense management compels us to conclude that nothing
merits greater concern than the increasingly troubled relationship between
the defense industry and government. We have, therefore, given highest
priority to development of recommendations which, if implemented, will result
in a more satisfactory working relationship between government and that
industry. In our Interim Report, we made six broad recommendations directed
toward improving that relationship. In this conclusion of our work, we offer
more detailed observations that will treat the more troublesome aspects of
government-industry accountability.
From its earliest days, the United States has relied on private industry for
procurement of needed military equipment. The vigor of industry is
indispensable to the successful defense of America and the security of our
people.
The Department of Defense (DoD) annually conducts business with some
60,000 prime contractors and hundreds of thousands of other suppliers and
subcontractors.' In 1985, the Department placed contracts worth approximately
$164 billion, seventy percent of which went to a group of 100 contractors.
Twenty-five contractors did business of $1 billion or more, 147 did $100 million
or more, and almost 6,000 did $1 million or more.
Acquisition of the tools of defense is an immense and complex enterprise.
The Commission believes that DoD reliance on private industry has not been
misplaced. The success of this enterprise, however, is now clouded by repeated
allegations of fraudulent industry activity. With notable results, DoD has
devoted increased attention and resources to detecting and preventing unlawful
practices affecting defense contracts.2 But a plethora of departmental auditors
'See The Government's Role in Preventing Contractor Abuse: Hearings before the Subcommittee on
Oversight and Investigations of the House Committee on Energy and Commerce, 99th Cong., 1st Sess. 402
(1985) (Statement of Joseph H. Sherick, Inspector General, DoD). As noted in our Report on
Defense Acquisition, defense contracting is a business of nearly 15 million separate contract actions
each year ? an average of 56,000 such actions every working day. Contract goods and services
sustain 5,500 defense installations and activities throughout the world.
2As of May 1985, 131 separate investigations were pending against 45 of the DoD's 100
largest contractors. These involved such issues as defective pricing, cost and labor mischarging,
product substitution, subcontractor kickbacks, and false claims. From June 1983 to April 1985,
12 separate investigations were instituted against one major contractor alone.
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and other overseers?and the burgeoning directives pertaining to procurement
?also have tended to establish a dysfunctional and adversarial relationship
between DoD and its contractors.
Widely publicized investigations and prosecutions of large defense
contractors have fostered an impression of widespread lawlessness, fueling
popular mistrust of the integrity of defense industry. A national public opinion
survey, conducted for the Commission in January 1986, revealed that many
Americans believe defense contractors customarily place profits above legal and
ethical responsibilities. The following specific conclusions can be drawn from
this survey:3
? Americans consider waste and fraud in defense spending a very serious
national problem and one of major proportions. On average, the public
believes almost half the defense budget is lost to waste and fraud.
? Americans believe that fraud (illegal activity) accounts for as much loss in
defense dollars as waste (poor management).
? While anyone involved in defense procurement is thought likely to
commit fraudulent and dishonest acts, defense contractors are widely
perceived to be especially culpable for fraud in defense spending.
? In overwhelming numbers, Americans support imposition of the severest
penalties for illegal actions by contractors?including more criminal
indictments?as a promising means to reduce waste and fraud.
? Nine in ten Americans believe that the goal of reduced fraud and waste
also could be served through development and enforcement of strict
codes of conduct. Americans are almost evenly divided, however, on
whether defense contractors can be expected to live up to codes they
develop for themselves.
3The survey ? U.S. National Survey: Public Attitudes on Defense Management (Jan. 1986) ? was
designed to provide the Commission information about American public opinion on a broad
range of defense management issues. These included, among others, the seriousness and causes
of waste and fraud in defense spending, as well as possible solutions for these problems. The
survey was performed by Market Opinion Research, whose compilation and analysis of survey
results are included as Appendix L to this Final Report.
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? Four in five Americans think that defense contractors should feel an
obligation, when doing business with DoD, to observe ethical standards
higher than those observed in their normal business practices.
The depth of public mistrust of defense contracting is deeply disquieting
for a number of reasons. First, the public is almost certainly mistaken about the
extent of corruption in industry and waste in the Department. While fraud
constitutes a serious problem, it is not as extensive or costly as many Americans
believe. The nation's defense programs lose far more to inefficiency than to
dishonesty.
Second, a lack of confidence in defense contractors may affect public
support for important defense programs, and thus weaken our national
security. Restoring public confidence in our acquisition system is essential if we
are to ensure our defense.
Third, the current popular impression of runaway fraud and waste
undermines crucial support for implementing precisely those management
reforms that would increase efficiency. These include executive and
congressional support for sensible new longer-term planning and budgeting
procedures, recommended by the Commission, to eliminate major but hidden
costs that instability imposes on our overall defense effort.
Fourth, the Commission is concerned that the current adversarial
atmosphere will harm our industrial base. It is important that innovative
companies find it desirable to contract with DoD. In current circumstances,
important companies could decide to forego this opportunity.
Finally, it is significant that private businesses bear the brunt of public
indignation over waste and fraud in our defense programs. With most
Americans, we believe that those who contract in the defense of our country
must perform at a higher level than business as usual. It stands repeating, from
our Interim Report, that:
management and employees of companies that contract with the Defense
Department assume unique and compelling obligations to the people of
our Armed Forces, the American taxpayer, and our nation. They must
apply (and be perceived as applying) the highest standards of business
ethics and conduct.
By this measure, the national opinion survey represents a striking vote of no
confidence in defense contractors generally.
Though government oversight is critically important to the acquisition
process, no conceivable number of additional federal auditors, inspectors,
investigators, and prosecutors can police it fully, much less make it work more
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effectively. Nor have criminal sanctions historically proved to be a reliable tool
for ensuring contractor compliance.4 We conclude there is a particular urgency
in dealing affirmatively with contractor practices.
To this end, leaders in the defense industry recently have committed
themselves to an initiative, consistent with recommendations of our Interim
Report on Government-Industry Accountability, that promises collective and
highly constructive action. This noteworthy effort is embodied in a document
signed to date by at least 32 major defense contractors who pledge to adopt and
to implement a set of principles of business ethics and conduct that
acknowledge and address their corporate responsibilities under federal
procurement laws and to the public.5 All signatories pledge to:
? have and adhere to written codes of conduct;
? train their employees in such codes;
? encourage employees to report violations of such codes, without fear of
retribution;
? monitor compliance with laws incident to defense procurement;
? adopt procedures for voluntary disclosure of violations and for necessary
corrective action;
? share with other firms their methods for and experience in implementing
such principles, through annual participation in an industry-wide "Best
Practices Forum"; and
? have outside or non-employee members of their boards of directors
review compliance.
4Prosecutorial resources are limited. Evidence of criminal conduct is often insufficient for
proof beyond reasonable doubt. Some cases lack prosecutive merit or jury appeal. In others,
criminal sanctions are deemed less appropriate than administrative remedies. Still other cases
involve little or no financial loss to the federal government. For these and other reasons, the
Department of Justice declines to prosecute approximately six in ten possible fraud cases
referred to it by federal agencies. See U.S. General Accounting Office, Fraud in Government
Programs: How Extensive Is It? How Can It Be Controlled? GAO/AFMD-81-57, at 28-30 (May 7,
1981).
5See Defense Industry Initiatives on Business Ethics and Conduct (June 1986), included as
Appendix M to this Final Report.
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To lend additional force and credibility to their initiative, these contractors
further propose that a respected organization, independent of both the
government and defense industry, be commissioned to report annually the
results of a survey assessing compliance with the above principles.
Such a commitment by its leaders would be an impressive undertaking for
any industrial group, and it is particularly appropriate for defense contractors.
We hope many other firms will make this pledge of self-governance and share in
an initiative voluntarily begun and freely joined by defense contractors
themselves. At least one major industry association is, we understand,
considering making adherence to these principles a condition of membership.
We are convinced that significant improvements in corporate self-
governance can redress shortcomings in the procurement system and create a
more productive working relationship between government and industry.
Corporate managers must take bold and constructive steps that will ensure the
integrity of their own contract performance. Systems that ensure compliance
with pertinent regulations and contract requirements must be put in place so
that violations do not occur. When they do occur, contractors have
responsibilities not only to take immediate corrective action but also to make
disclosures to DoD.
We do not underestimate this task?it is enormous and demanding.
Requirements of diligence imposed on contractor management are
unquestionably stringent but are not more stringent than the public has a right
to expect of those who hold positions of authority with businesses on which the
national security depends. Contractor effort to improve performance should
not be impeded by DoD action; instead DoD should foster effective contractor
self-governance. It is in this context that we offer the recommendations that
follow.
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II. Industry Accountability: Contractor
Self-Governance
In our view major improvements in contractor self-governance are es-
sential.
Contracting with DoD is markedly different from other commercial
contracting activity. Defense contractors must observe various unique and
complex contractual, regulatory, and statutory requirements in bidding for,
performing, and warranting fixed-price and cost-type contracts. A distinct body
of contract principles has evolved in the defense contracting field.
Recent cases have involved violations of specific contractual and regulatory
provisions. Many of these violations have resulted from management failure to
establish internal controls to assure compliance with unique DoD requirements.
Contractors historically relied on DoD auditors to identify instances where
standards were not followed, and contractor failure to establish internal controls
has developed in this regulated environment. Also in this environment,
contractor defaults were largely resolved contractually rather than through
criminal or civil actions.
Today, defense contractors should be aware that a concerned and
responsible government will aggressively enforce compliance. Contractors will
be required to do much more than they have done in the past to comply with
contractual, regulatory, and statutory standards and to provide adequate
supervision and instruction for employees. To do so will necessitate their putting
in place broad and effective systems of internal control. The effectiveness of
such systems depends upon a host of factors, including:
? good organizational structure, providing for proper delegation of
authority and differentiation of responsibilities;
? clear policies and procedures, well adapted to business objectives and to
specific tasks and functions;
? training of and communication with employees at all performance levels;
and
? ongoing arrangements to monitor compliance with, and to evaluate the
continuing efficacy of, internal control.
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The requirements of defense contracting establish an especially high
standard against which the adequacy of systems of contractor internal control
must be measured. It is not prudent or possible to detail specific systems of
control adequate to the needs of every defense contractor. This must be
determined in light of each contractor's circumstances, including its size,
operating habits, nature of business, range of products and services, and
geographical.dispersion of operations. Contractors should undertake careful
review of the adequacy of their specific internal control systems, evaluate
potential improvements, and determine what steps will provide greater
assurance of compliance with contracting requirements.
Information developed by the Commission indicates that corporate controls
could be greatly improved in at least three fundamental areas:
? development of codes of conduct addressing problems and procedures
incident to defense procurement;
? promulgation and enforcement of more effective internal control systems
to ensure compliance with those codes and the establishment of internal
auditing capacity to monitor, among other things, compliance with codes
and the efficacy of the control systems; and
? establishment of a more effective oversight of the entire process by an
independent committee, such as an outside audit committee of the board
of directors.
A. Contractor Standards of Conduct
Defense contractors must promulgate and enforce codes of conduct that
address their unique problems.
Written standards of conduct are necessary to establish an environment in
which a contractor's goals and its administrative and accounting controls become
understood and functional. A well-drafted code is more than a mere direction to
employees on what is and what isnot permissible conduct, although that is
certainly a major function of the code. It can provide a conceptual framework
for both management and employees to understand how company policy
interrelates with other applicable policies. It can articulate principles on the basis
of which decisions should be made when government regulations fail to address
issues specifically. In the broad sense, a code of conduct should be designed to
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preserve or enhance a contractor's reputation for integrity. In our Interim Report
we recommended:
Defense contractors must promulgate and vigilantly enforce codes of
ethics that address the unique problems and procedures incident to
defense procurement. They must also develop and implement internal
controls to monitor these codes of ethics and sensitive aspects of contract
compliance.
This recommendation was based, in part, on a study undertaken for the
Commission by the Ethics Resource Center, Inc.6 In surveying the practices of a
representative sampling of major defense contractors, the Center inquired
about the:
? processes for establishing, and the form and content of, corporate
policies and procedures for ensuring ethical conduct in dealings with the
federal government and with subcontractors, suppliers, and others;
? means contractors use for communicating these policies and procedures;
? internal systems contractors use for monitoring and enforcing their
policies and procedures; and
? internal contractor systems for adjudicating and punishing violations.
The Center's survey documents more widespread adoption of business
codes of conduct among defense firms than among American companies
generally, and suggests relatively greater appreciation by contractors of the risks
of unethical conduct and the value of explicit standards of behavior. The survey
also indicates, however, that contractors' codes often fail to address areas in
government contracting where the incidence of misconduct is highest. For
example, matters such as cost allocation, quality control, bidding and billing
practices, defective pricing, materials substitution, contract negotiation, the
monitoring of contract compliance, and the hiring of former Defense
Department personnel were explicitly addressed in only a third of the codes of
those defense contractors surveyed.
6Ethics Resource Center, Inc., a non-profit organization located in Washington, D.C., has
done extensive study of issues involved in ethical corporate governance. The results of its work
for the Commission are set forth in a Final Report and Recommendations on Voluntary Corporate
Policies, Practices, and Procedures Relating to Ethical Business Conduct (Feb. 18, 1986), which is
included as Appendix N to this Final Report of the Commission.
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There are also inadequacies in the communication and enforcement of
standards of conduct. For example, only half the contractors with written codes
indicated that they distribute copies to all employees, and many reported that
distribution was limited to only senior management. Only half the codes
specified procedures for employees to follow in reporting possible misconduct,
and barely one in five provided procedures for protecting employees who bring
unethical practices to light. Finally, although trends indicate an increasing
attention by upper management to business ethics issues, the survey documents
the need for much better mechanisms at highest corporate levels to monitor
and enforce compliance. Too often industry regards promulgation of a code of
conduct as the end product and does not aggressively pursue its enforcement.
The Commission makes the following specific recommendations
regarding codes of conduct for defense contractors:
1. Each contractor should review its internal policies and procedures to
determine whether, if followed, they are sufficient to ensure performance that
complies with the special requirements of government contracting.
Contractors should adopt?or revise, if they have adopted?written standards
of ethical business conduct to assure that they reasonably address, among
other matters, the special requirements of defense contracting. Such standards
of conduct should include:
a. procedures for employees to report apparent misconduct directly
to senior management or, where appropriate, to a member of the committee of
outside directors?ideally the audit committee?that has responsibility for
oversight of ethical business conduct; and
b. procedures for protecting employees who report instances of
apparent misconduct.
2. To ensure utmost propriety in their relations with government
personnel, contractor standards of ethical business conduct should seek to
foster compliance by employees of DoD with ethical requirements incident to
federal service. To this end, contractor codes should address real or apparent
conflicts of interest that might arise in conducting negotiations for future
employment with employees of DoD and in hiring or assigning
responsibilities to former DoD officials. Codes should include, for example,
existing statutory reporting requirements that may be applicable to former
DoD officials in a contractor's employ.
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3. Each contractor must develop instructional systems to ensure that its
internal policies and procedures are clearly articulated and understood by all
corporate personnel. It should distribute copies of its standards of ethical
business conduct to all employees at least annually and to new employees
when hired. Review of standards and typical business situations that require
ethical judgments should be a regular part of an employee's work experience
and performance evaluations.
4. Contractors must establish systems to monitor compliance with
corporate standards of conduct and to evaluate the continuing efficacy of their
internal controls, including:
a. organizational arrangements (and, as necessary, subsequent
adjustments) and procedural structures that ensure that contractor personnel
receive appropriate supervision; and
b. development of appropriate internal controls to ensure
compliance with their established policies and procedures.
5. Each major contractor should vest its independent audit committee?
consisting entirely of nonemployee members of its board of directors?with
responsibility to oversee corporate systems for monitoring and enforcing
compliance with corporate standards of conduct. Where it is not feasible to
establish such a committee, as where the contractor is not a corporation, a
suitable alternative mechanism should be developed. To advise and assist it in
the exercise of its oversight function, the committee should be entitled to
retain independent legal counsel, outside auditors, or other expert advisers at
corporate expense. Outside auditors, reporting directly to the audit
committee or an alternative mechanism, should periodically evaluate and
report whether contractor systems of internal controls provide reasonable
assurance that the contractor is complying with federal procurement laws and
regulations generally, and with corporate standards of conduct in particular.
The Commission believes that self-governance is the most promising
mechanism to foster improved contract compliance. It follows that each
contractor must individually initiate, develop, implement, and enforce those
elements of corporate governance that are critical to contract compliance,
including a proper code of conduct. The extent of each contractor's efforts in
doing so will reflect the level of reputation for integrity it intends to set for itself.
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B. Contractor Internal Auditing
Contractors must develop and implement internal controls to ensure
compliance with corporate standards of conduct and the requirements of
defense contracting.
Contractors must also establish an internal audit capacity to monitor
whether the controls they have put in place are effective. Internal auditing will
help ensure contractor compliance with internal procedures, standards of
conduct, and contractual requirements. An internal audit organization, to serve
these purposes, must be staffed with competent personnel able to operate with
the requisite degree of independence and candor.
Use of internal auditing to review adherence to procurement requirements
involves a significant broadening of the traditional application of this
monitoring device. In developing new auditing processes to review these issues,
contractors must consider which areas are most sensitive and in need of audit
review, as well as which auditing devices will be most cost-effective and efficient.
Recommendations in our Interim Report encouraging increased self-
governance were based, in part, on an internal audit study completed for the
Commission by the certified public accounting firm of Peat, Marwick, Mitchell &
Co.7 Over 210 business units?aggregating approximately $90 billion in DoD
fiscal year 1985 outlays for negotiated contracts?participated in the survey.
The survey was designed to ascertain, among other things, the following:
? the extent to which internal auditing, in addition to its traditional
applications, has been utilized to monitor defense contract compliance;
? the scope and coverage of such expanded auditing efforts;
? the effectiveness and usefulness of such internal auditing; and
? the extent to which, in view of recent developments, contractors intend to
expand their internal audit capability or coverage.
7Peat, Marwick's Report on Survey of Defense Contractors' Internal Audit Processes (Feb. 1986) is
included as Appendix 0 to this Final Report of the Commission. For survey purposes, "internal
auditing" was considered to include any regular, cyclical, or special examination conducted by or
on behalf of a company's management to assess the extent of compliance with the company's
established policies, procedures, and systems of internal controls. This excluded normal
supervisory efforts as well as financial audits performed by a company's independent
accountants.
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The survey indicates that most contractors have internal audit functions of
some kind and that many companies recently have expanded internal auditing
to cover more aspects of their government contract operations. But it also
provides compelling evidence of a need for defense industry generally to
upgrade the capabilities and broaden the mission of its internal auditors.
Among other important results of the survey are the following:
Internal Auditing Capacity. Over one-quarter of the business units surveyed
had no formal internal audit function; over two-thirds had no such function at
their operating levels. Seven in ten indicated that they rely for audit coverage, in
whole or in part, on the work of independent accountants and on government
auditors. Given the added degree of effort needed to monitor government
contract work, internal audit staffs are too small: 58 percent of the business units
surveyed had fewer than 10 internal auditors, and almost two-thirds reported
that their internal audit staffs do not complete a full cycle of auditable areas
within a three-year period.
Scope of Internal Auditing. To serve the purpose of improving compliance
with federal procurement laws, internal auditing must address a variety of
practices specific to government contracts. Effective audits of such practices
require more penetrating evaluations performed more frequently than do
traditional financial audits. The survey shows that, despite recent efforts by
contractors to broaden internal auditing efforts, sensitive issues of contract
compliance are not reviewed adequately. These include key areas of labor cost
distribution and controls, material management, estimating practices, cost
allowability, accuracy of costing and reporting, and contract administration.
Competence of Internal Audit Staff Internal audit staffs?where they exist?
generally have a satisfactory professional background. They need substantially
more formal training, however, in areas critical to compliance with federal
procurement law, including Cost Accounting Standards, Federal Acquisition
Regulation, Truth in Negotiations Act, and fraud detection. Approximately a
quarter of the units surveyed provide training in none of these areas, and less
than a quarter provide training in all of them.
Effectiveness of Internal Auditing. Internal auditors must operate with
independence and objectivity.8 By this measure, the basic design of contractors'
internal audit programs appears to be good. The survey nonetheless indicates
8The independence of internal auditors depends in part upon the organizational levels to
which they communicate results of their work and to which they report administratively. These
are indicative of internal auditors' ability to act independently of individuals responsible for the
functions being audited. The objectivity of internal auditors may be judged from findings and
recommendations made in their reports, the frankness of which can depend in important part
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several areas of concern. Audit design may be inadequate because its scope is
determined largely by management requests. Management may not in all cases
be assuming proper responsibility or taking necessary action for follow-up on
problems identified through internal auditing. Moreover, the wide availability to
government personnel of internal audit reports and supporting work papers
may not be conducive to auditors' candor and objectivity concerning the
performance of the individuals responsible for the functions being audited.
We conclude that defense contractors have failed to take advantage of
assistance that internal auditors may provide to management responsible for the
design and function of systems of internal control of government contracting.
Identifying important elements of such systems and remedying their weaknesses
and deficiencies should be matters of the highest priority to all defense
contractors. This demands ongoing study and evaluation of a sort that cannot be
provided by either a company's outside auditors or by government auditors.9
Defense contractors must individually develop and implement better
systems of internal controls to ensure compliance with contractual
commitments and procurement standards. To assist in this effort and to
monitor its success, we recommend contractors take the following steps:
1. Establish internal auditing of compliance with government contracting
procedures, corporate standards of conduct, and other requirements. Such
auditing should review actual compliance as well as the effectiveness of
internal control systems.
2. Design systems of internal control to ensure that they cover, among
on the extent to which such reports are regularly accessible to others, particularly to government
agencies. See American Institute of Certified Public Accountants, Statement on Auditing Standards
No. 9, "The Effect of an Internal Audit Function on the Scope of the Independent Auditor's
Examination."
9A company's outside auditors ordinarily review and evaluate internal control (primarily
accounting control) only to determine the nature, extent, and timing of audit tests they must
conduct annually in examining a contractor's financial statements. Even for this limited purpose,
however, internal control of government contracting poses audit considerations broader than
has yet been reflected in the accounting profession's formal guidance to its own members on
traditional financial audits of government contractors. See American Institute of Certified
Public Accountants, Audits of Government Contractors (2d ed. 1983). A Task Force of the American
Institute of Certified Public Accountants is now at work on a revised industry audit guide that
promises to be of greater assistance to outside auditors, internal auditors, and contractor
management.
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other things, compliance with the contractor's standards of ethical business
conduct.
3. Establish internal audit staffs sufficient in numbers, professional
background, and training to the volume, nature, and complexity of the
company's government contracts business.
4. Establish sufficient direct reporting channels from internal auditors to
the independent audit committee of the contractor's board of directors to
assure the independence and objectivity of the audit function. Auditors
should not report to any management official with direct responsibility for the
systems, practices, or transactions that are the subject of an audit. Such
structure assures frank reporting of and prompt action on internal audit
results. To encourage and preserve the vitality of such an internal auditing
and reporting process, DoD should develop appropriate guidelines heavily
circumscribing the use of investigative subpoenas to compel disclosure of
contractor internal auditing materials.
Major contractor improvements in recommended self-governance will, no
doubt, require considerable effort over several years. Making these
improvements will also require greater involvement by contractors' boards of
directors and top management. The importance of the executive leadership role
in achieving a proper control environment cannot be overemphasized. The
necessary initiatives must be instituted by industry, not government. Defense
contractors must take the steps described above or run the risk of action by
government, in response to public expectations, that may be both excessive and
unavailing. We share the concerns of the Ethics Resource Center that:
intensive federal regulation has not only increased costs and lead-time,
but may have actually decreased the sense of individual and corporate
responsibility for the quality of products and services delivered to the
federal government. The standard of ethical business conduct seems to
have become regulatory compliance, rather than responsible decision
making. In areas where these are not coincidental or where regulations
do not dictate conduct, the management conscience may fail. The sense
of moral agency and ethical responsibility may be overridden by the
?`gamesmanship" attitude fostered by regulatory adversarialism.
Whatever actions the present Administration or the Congress may take to
improve the effectiveness of federal regulations and oversight activities,
serious attention must be paid to the inherent limitations and possible
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counter-productivity of an approach that is almost entirely a matter of
external policing.'?
The process by which a contractor recognizes and distinguishes
responsibility for compliance from a mere facade of compliance is
self-governance, and essential elements of that process are implementation and
enforcement of proper codes of conduct and internal auditing systems.
Vigorous programs of the sort recommended hold far greater potential for
ensuring the integrity of defense contracting than does increased government
oversight. Successful self-policing by defense contractors has the considerable
advantage of making such oversight more efficient and effective. For very
practical reasons, therefore, government must exert its authority to oversee the
defense acquisition process in ways calculated to hasten the progress of
responsible companies toward improved self-governance. Our study of DoD
practices?with respect to administering its own standards of ethical conduct,
coordinating its own auditing and oversight efforts, and employing the range of
possible sanctions against contractor misconduct?suggests various areas for
improvement. These we address below.
10See Ethics Resource Center, Final Report and Recommendations, Appendix N.
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III. Government Accountability: DoD
Auditing and Oversight, Standards of
Conduct, and Enforcement
o ensure accountability for its own operations and programs, the federal
government has systems of administrative and accounting control that are
analogous to those in the private sector. Their effectiveness is dependent on
comparable factors such as organization, policies and procedures, and
personnel. Our study persuades us that, much as with defense industry, DoD
must exert substantially better internal control if it is to improve the
effectiveness of its programs for contract auditing and oversight, employee
standards of conduct, and civil and administrative enforcement.
A. Department of Defense Auditing and Oversight
Oversight of defense contractors must be better coordinated among DoD
agencies and Congress. Guidelines must be developed to remove undesirable
duplication of official effort and, when appropriate, to encourage sharing of
contractor data by audit agencies. The new Under Secretary of Defense
(Acquisition) should establish appropriate overall contract audit policy.
As stated in our Interim Report, there is an unquestioned need for broad and
effective administrative oversight of defense acquisition. DoD monitors the
performance of defense contractors and the integrity of contractor compliance
by a number of processes, including investigations, inspections, and special-
purpose reviews conducted by personnel of:
? the Defense Contract Administration Services (DCAS) of the Defense
Logistics Agency (DLA);
? the Services' respective plant representative offices (PRO), audit agencies,
investigative services, and inspectors general;
? the Defense Contract Audit Agency (DCAA);
? the Defense Criminal Investigative Service;
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? the DoD Office of the Inspector General (OIG); and
? DoD's many procurement and contract management organizations.
Overseeing these efforts are the General Accounting Office (GAO),
committees and subcommittees of Congress, and congressional staff.
The oversight apparatus within DoD has evolved over time. As various
organizations and activities have been established, their jurisdictions, functions,
and responsibilities have emerged, often without clear delineation. Today, a
distinction may be drawn between criminal investigative and internal auditing
responsibility?largely consolidated under the OIG?and procurement and
contract administrative responsibility?traditionally exercised by the DCAS and
cognizant Service PRO with the advice and assistance of DCAA auditors.
Proper coordination and economy of oversight effort have proven particularly
difficult to achieve in view of the multiplicity of DoD organizations involved.
At the outset of our work we were aware of concerns that control over DoD
contract oversight efforts had degenerated. Most notably, the Senate Armed
Services Committee has expressed the view that contract auditing requires
sound overall coordination to promote efficiency and minimize duplication of
effort." In December 1985, the OIG reported the results of a survey conducted
by that office to determine whether effective coordination exists among various
DoD organizations involved in the oversight of contractor operations in order
to avoid unnecessary duplicative efforts.'2 The survey examined 25 separate
DoD reviews conducted in 1984 at two major contractor locations. Fourteen of
these 25 oversight exercises?involving altogether some 13 different DoD
organizations, the GAO, and a prime contractor?were found to involve
elements of needless duplication. The Inspector General concluded, "Unless
specific actions are taken to address the problems of coordination, unnecessary
duplicative reviews (of this sort) are likely to continue."
Our own work confirms the Inspector General's conclusion. It also
underscores the enormity of the problem.
In December 1985, we engaged the certified public accounting firm of
Arthur Andersen & Co. to study DoD contract auditing and oversight, including
"S. Rep. No. 41, 99th Cong., 1st Sess., 214 (1985).
"See Office of the Inspector General, DoD, Report on The Survey of Department of Defense
Oversight of Contractors' Operations, No. APO 86-001, at 4 (Dec. 1985).
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its overall design and any duplication of effort.'3 Arthur Andersen 8c Co.
reviewed pertinent laws and regulations, consulted with responsible DoD
officials, and made nationwide field visits to ascertain the recent experience of
some 15 major defense contractors that together do substantial work for each of
the Services and for the DLA. Figure 1 reflects the principal findings and
recommendations that emerged from this study. It is noteworthy that Arthur
Andersen 8c Co. and the OIG found identical problems of a systemic nature
among DoD contract oversight organizations:
? Their efforts lack advance planning and coordination.
? Their respective responsibilities are ill-defined.
? They are unwilling to rely on each other's work.
? They are reluctant to share information.
Arthur Andersen & Co. concluded that "duplication in the oversight
process is extensive. Changes are clearly required to enhance efficiency and
reduce costs to both contractors and the government." (Emphasis added.)
In our view, necessary changes are not likely to be accomplished, however,
without first consolidating the authority to make and implement contract audit
policy in a senior DoD official.
For these purposes, we recommend the following:
1. Among his other responsibilities, the new Under Secretary of Defense
(Acquisition) should:
a. oversee DoD-wide establishment of contract audit policy,
particularly policy for audits conducted in support of procurement and
contract administration;
b. except for criminal investigations and DoD internal audits,
supervise establishment of policy for all DoD oversight of defense contractors,
including oversight performed by procurement and contract management
organizations; and
c. recognize established GAO and professional auditing standards.
"The full report of Arthur Andersen Sc Co.'s work ? Study of Government Audit and Other
Oversight Activities Relating to Defense Contractors (Feb. 25, 1986) ? is included as Appendix P to
this Final Report.
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Figure 1
ARTHUR ANDERSEN & CO.
STUDY OF GOVERNMENT OVERSIGHT ACTIVITIES
PRINCIPAL PROBLEMS IDENTIFIED
PERVASIVE LACK OF COORDINATION
AMONG DoD ORGANIZATIONS
* Reluctant to rely on each other's work
* Unwilling to share information
* Deficient in advance planning
* Inconsistent in interpreting
?contract and other requirements
?results of audits and reviews
* Respective responsibilities poorly
defined
?e.g., increased DCAA involvement in
non-financial areas
* Not observing DoD regulations designed
to ensure coordination of audit and
oversight
* Organizations possess no centralized
coordinating authority
INDISCRIMINATE APPROACH BY DoD
ORGANIZATIONS
* Nature, timing, and extent of audit and
oversight shows inadequate attention to
?contractors' past performance
?results of prior and ongoing reviews
?relative costs and benefits
ERODING AUTHORITY OF ADMINISTRATIVE
CONTRACTING OFFICERS (AC0s)
* DoD Directive 7640.2 (Dec. 29, 1982)
limits ACO authority to resolve audit
recommendations
* ACO no longer functioning as
government's "team leader"
* Indecision, delays, unnecessary and
costly disputes
RECOMMENDATIONS AND COMMENTS
REAFFIRM AUTHORITY OF ACO
* To function as DoD's team leader in all
dealings with contractor
* Responsible for
?determining final overhead rates
?coordinating all DoD auditing and
other oversight at contractor location
* Supported by DCAA in advisory capacity
?reevaluate DoD Directive 7640.2 .
REEVALUATE AND CLARIFY RESPECTIVE
AUDIT AND OVERSIGHT RESPONSIBILITIES
* For example, those of contract
administrative organizations versus
DCAA in the areas of
?operational auditing
?compensation and insurance reviews
* More generally, to improve planning,
organization, and control
IMPROVE DAY-TO-DAY WORKING
RELATIONSHIPS
* Organizations should rely on each
other's work
* Share data base of contractor information
ADHERE TO REGULATORY PRINCIPLES THAT
PROMOTE EFFICIENCY
* Audit and oversight plans should reflect
appropriate consideration of
?contractors' past performance
?effectiveness of their internal control
systems
?results of prior and ongoing reviews
?relative costs and benefits
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2. To optimize the use of available oversight resources by eliminating
undesirable duplication of official effort, contract audit policy should be
designed to:
a. delineate clearly respective responsibilities and jurisdictions of
DoD oversight organizations;
b. develop guidelines and mechanisms for DoD oversight
organizations to share contractor data and otherwise to rely more extensively
upon each other's work; and
c. improve audit strategies for the conduct, scope, and frequency of
contract auditing. These strategies should reflect due consideration for
contractors' past performance, the proven effectiveness of their internal
control systems, the results of prior and ongoing reviews conducted by DoD
organizations and by contractors themselves, and relative costs and benefits.
B. Department of Defense Standards of Conduct
DoD should vigorously administer current ethics regulations for military
and civilian personnel to assure that its employees comply with the same high
standards expected of contractor personnel. This effort should include
development of specific ethics guidance and specialized training programs
concerning matters of particular concern to DoD acquisition personnel,
including post-government relationships with defense contractors.
An extensive body of law and regulation exists to prevent conflicts between
personal interest and public duty of current and former uniformed personnel
and civilian employees of DoD. These laws and regulations:
? impose financial disclosure reporting obligations on broad categories of
DoD personnel, including extremely detailed reporting by the most
senior officials;
? describe standards of behavior for all DoD personnel, including the
general requirement that they avoid any circumstance, whether or not
expressly prohibited, that might create the "appearance" of impropriety;
? broadly penalize conduct by DoD or other federal employees that could
involve personal enrichment in connection with ongoing official duty,
including bribes and gratuities, the so-called private supplementation of
federal salaries, representation of private parties in matters of federal
concern, and official acts that affect personal or family finances or the
financial interests of a prospective private employer; and
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? restrict in various ways what former federal employees generally, and
DoD personnel specifically, may do upon leaving government service.
Figure 2 summarizes current post-employment disqualifications and
certain related statutory provisions.
Standards thus established for the conduct of current and former DoD
acquisition personnel seek to maintain an environment in which DoD's internal
fiscal and managerial controls can work. Like codes of conduct adopted by
private contractors, they help protect the integrity and promote the efficiency of
the contracting process, minimize conflicts of interest, and assure the public that
defense contracting is managed effectively and honestly.
The Commission conducted a careful review of the adequacy of DoD's
ethics programs for military and civilian acquisition personnel." Several facts
prompted this review. In defense acquisition, as throughout the government,
there is a substantial incidence of federal employee involvement in reported
cases of fraud and other unlawful conduct. Many cases have involved bribery or
other criminal activity by relatively low-level purchasing officials at military
procurement facilities, and others have involved gratuities for senior personnel.
Such official misconduct in the acquisition system is doubly destructive: it
subverts operations of DoD and defense industry, and corrodes public
confidence in government and business generally. It is critical in defense
management to establish and maintain an environment where official standards
of conduct are well understood, broadly observed, and vigorously enforced. We
believe that significant improvements are required.
Our study indicates, for example, that?much as is the case with the defense
industry?DoD's published conduct regulations do not provide timely or
effective guidance to personnel engaged in the acquisition process. DoD
Directive 5500.7, Standards of Conduct, has not been updated since 1977 or
revised to reflect such subsequent legal developments as passage of the Ethics in
Government Act of 1978. Even in its current version, Directive 5500.7 provides
only general ethical guidance to personnel and components throughout DoD.
No comparable directive provides more specific guidance to all of DoD's
acquisition personnel.
Nor does any system exist to ensure that all DoD acquisition personnel
receive, on a periodic basis, a prescribed minimum of ethics training specifically
"Our public meeting of May 5, 1986, was devoted exclusively to testimony on this subject.
As part of our review of relevant laws and administrative practices, we received an extensive
briefing and detailed conclusions and recommendations from the Office of the Inspector
General.
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related to the acquisition function. Just as among defense contractors,
considerable disparity exists in the efforts that DoD acquisition organizations
expend in this area. An effective program of instruction and compliance
concerning ethics matters, including post-employment disqualifications and
reporting, should be established and implemented. To do so will require
sustained leadership throughout DoD and a commitment of greater personnel
and administrative resources:5
In our Interim Report, we thus expressed the general view that the important
challenge for defense management lies in improving compliance with existing
ethical standards, not in defining new or more stringent standards. We
nonetheless also have reviewed the substance of current laws and regulations
from two distinct points of view: first, for their effect on recruitment of capable
senior-level personnel to run the acquisition system; and second, for their
adequacy to protect the integrity of that system from perceived dangers posed
by the so-called revolving door phenomenon. The "revolving door" refers, in
this context, to the movement of a DoD acquisition employee into a position with
a private company for whose government contracts he has or had some official
responsibility.
Both our Interim Report and our Report on Defense Acquisition emphasize the
importance of improving the government's ability to attract and retain the
highly qualified people needed for effective senior management of defense
acquisition. We agree with the Presidential Appointee Project of the National
Academy of Public Administration that ethics regulations:
have assumed a very important role in the appointment process. Their
impact is mixed. In some ways, these laws have brought genuine benefits
to the American people by eliminating blatant potential conflicts of
interest and enhancing opportunities for the identification and prosecu-
tion of those who would violate the public trust. On the other hand, these
changes have been costly: costly to the government's ability to recruit presiden-
tial appointees, costly to the relations between the news media and public
'5At the Commission's May 5, 1986, meeting, DoD's General Counsel reviewed plans,
pursuant to the President's April 1986 directive, for improved administration of current ethics
regulations for DoD personnel, as recommended in our Interim Report. We support this effort. It
should, we believe, focus in important part on the need for specialized guidance and training of
DoD acquisition personnel. It should also seek to establish better mutual understanding
between, and promote complementary efforts to address the respective ethical concerns of,
government and industry.
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officials, and costly in financial sacrifices to a number of honest and
dedicated public officials.'6
Our examination of the substance of current ethics regulations underscores
an important truth: ethical standards are only as easy to observe, administer,
and enforce as they are certain in scope, simple in concept, and clear in
application. Undue complexity and vagueness?for example, that we believe
characterizes current financial disclosure reporting requirements?serve no
legitimate public purpose. Either can transform ethical standards from matters
of principle to mere traps for the unwary, and put at risk the reputation of
anyone who enters or leaves a responsible position in government.
Figure 2 outlines established criminal statutory restrictions on what federal
employees and retired military officers may or may not do once they have left
government. Actions of officials still in federal service have been restricted to
exclude matters in which they, or prospective private employers with whom they
are negotiating, have a financial interest. These statutes should be enforced
more vigorously, and their import made clear to DoD employees far more
effectively, than is now done.
Figure 2 also outlines the one current criminal statute, Public Law 99-145,
concerning for whom defense acquisition officials may work after they have left
DoD. This new provision, and comparable measures now pending in Congress,
significantly depart from prior law in attempting to define as criminal conduct
certain post-government employment per se. They do so on a highly selective
basis?applying only to personnel involved in the acquisition process, and only
to such personnel as are employed by DoD. More significantly, they pose serious
problems of definition, never satisfactorily resolved in statutory form,
concerning precisely which DoD personnel should be covered and precisely
what sort of exposure to a contractor should lead to the employment
prohibition. In practice, these definitions are very difficult to work out sensibly
and fairly. This is reflected in the confusion concerning the applicability of
Congress' one current venture into restricting post-government employment per
se, Public Law 99-145. The highly uncertain impact of these new and proposed
statutes, and the understandable desire of law-abiding individuals to avoid even
the remote chance of a criminal violation, may well prompt talented people not
to work for DoD in the first place or to leave once such restrictions appear
imminent.
'6Leadership in Jeopardy: The Fraying of the Presidential Appointments System (Final Report of the
Presidential Appointee Project), November 1985, at 13 (emphasis added).
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sectors, and set a standard that others?notably Congress and other Executive
departments?should emulate.
For these purposes, we recommend the following:
1. DoD standards of conduct directives should be developed and
periodically reviewed and updated, to provide clear, complete, and timely
guidance:
a. to all components and employees, on ethical issues and standards
of general concern and applicability within DoD; and
b. to all acquisition organizations and personnel, on ethical issues and
standards of particular concern to DoD acquisition process.
2. The acquisition standards of conduct directive should address, among
other matters, specific conflict-of-interest and other concerns that arise in the
course of official dealings, employment negotiations, and post-government
employment relationships with defense contractors. With respect to the last
category, the Secretary of Defense should develop norms concerning the
specific personnel classification, type of official responsibility, level of
individual discretion or authority, and nature of personal contact that, taken
together, should disqualify a former acquisition official from employment
with a given contractor for a specified period after government service. These
recommended norms, observance of which should be monitored through
existing statutory reporting requirements, would establish minimum
standards to guide both acquisition officials and defense industry.*
*Comment by Herbert Stein:
Although I do not disagree with what the Commission says about the
"revolving door," I wish to add the following comment:
Department of Defense officials whose position in the acquisition process
enables them to affect substantially the interests of particular contracting
companies should not be employed by those companies for a period, such as two
years, after leaving the Department, except in special cases where the national
security clearly dictates otherwise. This principle is not now adequately
recognized in the standards of proper conduct in the Department or among
defense contractors. For the Department, the Secretary should clearly state the
principle, define the categories of officials to which it applies and identify the
individual officers and their contractor-relationships covered. Undoubtedly the
line between covered and uncovered relationships will be difficult to draw, but
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3. DoD should vigorously administer and enforce ethics requirements for
all employees, and commit necessary personnel and administrative resources
to ensure that relevant standards of conduct are effectively communicated,
well understood, and carefully observed. This is especially important for all
acquisition personnel, to whom copies of relevant standards should be
distributed at least annually. Review of such standards should be an important
part of all regular orientation programs for new acquisition employees,
internal training and development programs, and performance evaluations.
C. Civil and Administrative Enforcement
Suspension and debarment should be applied only to protect the public
interest where a contractor is found to lack "present responsibility" to
contract with the federal government. The Federal Acquisition Regulation
should be amended to provide more precise criteria for applying these
sanctions and, in particular, determining present responsibility.
Specific measures should be taken to make civil enforcement of laws
governing defense acquisition still more effective.
Failure to establish internal disciplines necessary to responsible self-
governance subjects a defense contractor to a variety of governmental
enforcement remedies. Thus, the government may seek relief against a
contractor for breach of contract and, even in the absence of technical breaches,
criminal and civil sanctions for contractor and contractor-employee misconduct.
Our Interim Report recommended "continued, aggressive enforcement of
federal civil and criminal law governing defense acquisition." This was
predicated on the view that such enforcement "punishes and deters misconduct
by the few, vindicates the vast majority who deal with the government lawfully,
Comment cont'd.
it will be better to draw the line imperfectly than either to ignore the revolving
door problem or to leave officials and contractors in a state of uncertainty.
Contractors' codes of conduct should include a bar to employment that violates
this principle.
I believe that if the standards of permissible employment are clearly
defined both officials and contractors will voluntarily abide by them. In line with
the Commission's desire to foster an atmosphere of trust among the
Department, contractors and the public, I would much prefer to see the
problem handled in this voluntary way. But if experience shows that reliance on
voluntary observance of the principle is inadequate, legislative remedies should
be considered.
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and recoups losses to the Treasury." In this section we discuss noncriminal
sanctions by which the government can protect its interests.
Unlike criminal or other punitive measures, suspension and debarment are
sanctions intended to ensure that DoD may "solicit offers from, award contracts
to, and consent to subcontracts with responsible contractors only."" The Federal
Acquisition Regulation sets forth specific circumstances in which suspension
(disqualification pending the completion of investigation or legal proceedings)
or debarment (disqualification for a specific period of time) may be applied.'8
Imposed in appropriate circumstances, these sanctions seek to serve "a public
interest for the Government's protection" rather than to provide for increased
punishment for wrongdoing.19
While suspension and debarment are indispensable tools in assuring that
DoD not contract with those lacking present responsibility, they nevertheless are
severe remedies that should be applied only in accordance with their stated
purpose and legal standards. Members of the defense contracting industry claim
that neither the purpose nor the standards have been observed, and that the
threat of imposition of the sanctions has become the government's primary
negotiating weapon in criminal prosecutions to force contractors to enter guilty
pleas to avoid suspension or debarment.2? There is concern that DoD has
improperly concluded that the fact of a criminal indictment of a contractor or a
management employee is an "automatic" ground for suspension, without
sufficient regard for corrective actions already taken.21 Such claimed abuses are
said not only to constitute arbitrary denials of protected personal and property
"Federal Acquisition Regulation (hereinafter FAR) ? 9.402(a) (emphasis added).
i8FAR ?? 9.406-1, 9.407-1(b). Following imposition of the sanction, a contractor and its
subcontractors may continue to perform work on ongoing contracts, but the contractor is
rendered ineligible for future awards during the period of suspension or debarment.
'9FAR ? 9.402(b).
20There is little doubt that suspension or debarment, whether properly or improperly
imposed, can be devastating to a contractor wholly or heavily engaged in the defense industry.
While such contractors may suffer but survive heavy civil and criminal penalties, they may not
survive a lengthy suspension or debarment. Not intended and not imposed as punitive
measures, suspension or debarment may nevertheless be the most severe sanction confronting a
wayward contractor.
2'It is generally conceded by suspending/debarring authorities that suspension occurs upon
issuance of an indictment, and that the contractor is thereafter afforded opportunity to show
cause why the suspension should not be terminated. Any one of the three Military Services and
the Defense Logistics Agency (DLA) may suspend or debar a contractor, and the other Services
and the DLA will honor the sanction.
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rights, but also to eliminate as the criteria for suspension, the measure of a
contractor's "present" responsibility.22
Whatever the merit of defense industry claims, it is clear that nowhere is the
attitude of mutual mistrust between DoD and the defense industry more in
evidence than in DoD's exercise of its powers of suspension and debarment.
In recent years there has been a marked increase in the number of actions
taken to suspend or debar individual or corporate contractors from entering
into new contracts with DoD. In 1975 there were 57 suspensions and
debarments by DoD; in 1980 there were 78. In 1985 there were 652 suspensions
and debarments, a greater than eightfold increase in just five years. This
increase is due in part to a more determined and aggressive enforcement stance
by DoD and a greater willingness to apply the sanctions.
Today's problems can be addressed by developing a sounder basis for both
government and industry to carry out their respective functions. By working
together with more cooperation and dedication to performance and less
mistrust and suspicion, a renewed commitment to excellence can be made.
1. Circumstances in Which a Contractor May Be Suspended or
Debarred
a. Current Rules for Suspension
Suspension of a contractor is in the nature of a preliminary remedy
available to the government before full development of the facts. It should be
imposed "on the basis of adequate evidence . . . when it has been determined
that immediate action is necessary to protect the government's interest."23
Adequate evidence is defined as "information sufficient to support the
reasonable belief that a particular act or omission has occurred."24
22While contractor conduct that justifies a criminal indictment may be prima facie evidence of
irresponsibility, such conduct often precedes an indictment in the contracting industry by two or
more years. The bare fact of an indictment may thus be an improper measure of the contractor's
"present responsibility" should suspension occur at the time of indictment. During the period
following the misconduct alleged in the indictment, the contractor may have replaced employees
guilty of wrongdoing, corrected faulty systems, made restitution, better communicated and
implemented a corporate code of conduct, improved internal auditing practices, and otherwise
taken actions demonstrating its current responsibility. An "automatic" suspension does not
afford opportunity for such proof, and may defeat incentives for implementing more
responsible self-governance.
"FAR ? 9.407-1(b).
"FAR ? 9.403.
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The Federal Acquisition Regulation sets forth particular conditions in
which suspension may be applied. A contractor may be suspended, for example,
upon "adequate evidence" of the commission of a fraud or criminal offense in
the procurement process, the violation of federal or state antitrust statutes, the
commission of various other criminal offenses, and the commission of any other
offense showing "lack of business integrity or business honesty" that "directly
affects" the contractor's present responsibility. Indictment for any of these
delineated actions constitutes adequate evidence for suspension. A contractor
may also be suspended for any other cause that shows an absence of present
responsibility.25
b. Current Rules for Debarment
Regulations governing debarment provide that the responsible official
"may debar" a contractor if it has been convicted for any offense listed above
that may provide a basis for suspension. The regulations further state that the
existence of one of the described causes does not require debarment. "[T]tle
seriousness of the contractor's acts or omissions and any mitigating factors
should be considered in making any debarment decision."26
25FAR ? 9.407-2, Causes for Suspension, provides:
(a) The suspending official may suspend a contractor suspected, upon adequate evidence,
of?
(1) Commission of a fraud or a criminal offense in connection with (i) obtaining, (ii)
attempting to obtain, or (iii) performing a public contract or subcontract;
(2) Violation of Federal or State antitrust statutes relating to the submission of offers;
(3) Commission of embezzlement, theft, forgery, bribery, falsification or destruction of
records, making false statements, or receiving stolen property; or
(4) Commission of any other offense indicating a lack of business integrity or business
honesty that seriously and directly affects the present responsibility of Government
contractor or subcontractor.
(b) Indictment for any of the causes in paragraph (a) above constitutes adequate evidence
for suspension.
(c) The suspending official may upon adequate evidence also suspend a contractor for any
other cause of so serious or compelling a nature that it affects the present responsibility of a
Government contractor or subcontractor.
26FAR ? 9.406-1(a).
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2. Improvements in Regulations Governing Conditions Under Which a
Contractor May Be Suspended or, Debarred
Existing regulations can be improved in crucial respects by providing
criteria for government officials making present responsibility determinations.
a. Determination of Present Responsibility
The requirement that all suspension/debarment decisions be based on a
present responsibility determination should be more clearly set forth by
amendment of particular provisions of the Federal Acquisition Regulation.
Such amended provisions should include an explicit requirement that
suspension and debarment must be related to a lack of present responsibility
before either sanction is applied. For example, adequate evidence of the
occurrence of a criminal offense by a contractor or its employee should not
necessarily result in suspension. Nor should conviction for a prior offense be the
sole predicate for debarment. Basis for imposition of suspension or debarment
is lacking unless the suspending or debarring authority determines that
conditions causing the criminal misconduct are present problems within the
company. Provisions referred to above setting forth particular conditions in
which a contractor may be suspended or debarred should be amended to clarify
that such a condition is a sufficient basis only if it can be linked to a lack of
contractor present responsibility.27
b. Criteria for Present Responsibility
Administration of suspension/debarment would also be improved if
regulations were amended to include specific criteria to be considered in
determining whether a contractor is "presently responsible." Such criteria are
not now set forth in the regulations. The following are recommended for
consideration as proper criteria:
27The cited regulatory provision (FAR 9.407-2(b)), stating that indictment for any of the
listed causes "constitutes adequate evidence of suspension," is particularly troublesome. Given
the time-consuming nature of litigation, indictments are invariably based on prior misconduct.
The events causing an indictment generally precede an indictment by one or more years. Thus,
where an agency suspends a contractor on the sole basis of an indictment, it applies this sanction
without regard to the requirement that suspension should be predicated on lack of present
responsibility. Such administrative action involves an abdication of the suspending authority's
obligation under current law. This provision of the Federal Acquisition Regulation ? stating
that indictment constitutes adequate evidence ? should be reexamined.
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? The nature of integrity programs, if any, currently being implemented by
the contractor. The debarring/suspending authority should be
particularly interested in the extent of the contractor's affirmative efforts
to implement ethical standards of conduct that address contract
performance and systems of internal controls to monitor compliance with
those standards.
? The contractor's reputation for probity on recent procurements with
DoD and other federal agencies.
? The reputation of the contractor's management and directors in recent
circumstances as persons of good character and integrity.
? The extent to which misconduct is symptomatic of basic systemic
problems within the corporation as opposed to isolated, aberrational
corporate behavior.
? The nature and extent of voluntary disclosure and cooperation offered
by the contractor in identifying and investigating the misconduct.
? The sufficiency of remedial measures taken to eliminate the causes of the
misconduct.
c. Determination of Public Interest
Before suspending or debarring a contractor the responsible official must
determine, in addition to present responsibility, whether such action serves the
"public interest." To an extent, consideration of public interest is subsumed in
the determination whether the contractor is currently responsible. Some factors
affecting public interest are, however, distinct from those affecting present
responsibility and should be considered separately. Except where a contractor's
misconduct endangers life or property, in which case the government's interest
is clearly indicated, the Federal Acquisition Regulation should be amended to
mandate review of the effect a proposed suspension/debarment might have on
the ability of DoD and other government agencies to obtain needed goods or
services.
In making the public interest determination, the suspending or debarring
agency should consult with agencies both within and outside DoD. The decision
that suspension or debarment will serve the public interest requires a careful
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balancing of public needs against any potential harm that might occur from
continued dealings with the contractor.
d. Cursory Suspension of Contractors
The current practice of "automatic" suspension of contractors following
indictment on contract fraud should be reconsidered by DoD with a view that it
be more discriminating and take into account all circumstances of a particular
situation. In our Interim Report we stated, "Suspension and Debarment should
not be imposed solely as a result of an indictment or conviction predicated upon
former (not ongoing) conduct. . . ."
A device that has been used by a military department in lieu of "automatic"
suspension is the so-called "shock and alarm" letter. Such a letter brings sharply
to the attention of the executive of a defense firm DoD's cause for concern of
wrongdoing, and the executive is urged to take immediate corrective action.
What distinguishes the "shock and alarm" technique is that it does not carry with
it the formal and immediate sanction of suspension. It provides the contractor
an opportunity to put its own house in order before suspension becomes
imperative.
e. Scope of Suspension or Debarment Orders
Once a determination is made to suspend or debar a contractor, the Military
Service or DLA must determine the appropriate scope of the order. The
government may elect to suspend or debar a particular division or similar
organizational component of the contractor, a number of divisions or
organizational components, or the entire corporate structure of which the
contractor is a part.
An overly broad suspension or debarment of a contractor involved in
numerous procurements can deny DoD important sources of supply and cause
economic and commercial harm to the contractor. On the other hand, an
inappropriately narrow application of these sanctions can lead to continued
government dealings with irresponsible parties.
Current regulations give the responsible agency wide authority to tailor the
scope of a suspension or debarment order without providing guidance about
how the agency should exercise its discretion. Suspension applies to "all divisions
or other organizational elements of the contractor, unless the suspension
decision is limited by its terms to specific divisions, organizational elements or
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commodities."28 Similarly, "debarment constitutes debarment of all divisions or
other organizational elements of the contractor, unless the debarment decision
is limited by its terms to specific divisions, organizational elements or
commodities."29
Given the significance and difficulty of these determinations, responsible
officials should have more specific guidance in considering the scope of possible
suspension or debarment actions. The Federal Acquisition Regulation should
mandate review of the following criteria:
? the extent to which the misconduct was confined to a particular
organizational unit and the autonomy of that unit;
? the extent of knowledge corporate management and directors had of the
relevant misconduct;
? the extent to which sanctions must be imposed to provide minimum
protection of the public interest; and
? other effects that could occur if organizational units other than that
within which the misconduct occurred are suspended or debarred.
Suspending and debarring authorities should craft application of these
sanctions as narrowly as possible to exclude only those organizational units that
threaten the integrity of the procurement process.
f. Independence of Determinations
The government, because of broad discretionary powers entailed in
declaring contractors ineligible for awards, carries a heavy burden. It must
affirmatively seek to avoid arbitrary action. DoD should ensure that
opportunities for abuse are reduced by insulating decisionmakers in the
suspension and debarment process from untoward pressure from within or
without DoD. Present policies do not provide sufficient insulation for officials
involved in the process.
28FAR ? 9.407-1(c).
29FAR ? 9.406- 1 (b).
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g. Procedures Guiding Suspension and Debarment Within Components of DoD
Under current regulations, the several suspending and debarring
authorities are given discretion to "establish procedures" governing suspension
and debarment "decision-making" processes.3? This discretion has resulted in
each of the authorized agencies developing different and somewhat inconsistent
procedures. The Inspector General made the following pertinent observations:
Each suspension/debarment authority within DoD has developed its own
method of processing suspension and debarment determinations and
implementing suspension and debarment procedures regarding the pro-
vision of notice to contractors and the conduct of hearing procedures.
For example, if a contractor requests and is provided a hearing on a
debarment matter in DLA, the General Counsel, as the suspension/de-
barment authority, conducts the hearings. Argument and testimony is
directly presented to the suspension/debarment authority, who can assess
the credibility of witnesses and can examine all evidence. In the Air Force,
suspension and debarment hearings are held before the Debarment and
Suspension Review Board, which in turn makes recommendations to the
suspension/debarment authority."
Given the severity of suspension and debarment, the Commission believes
that uniform procedures should guide the review and decision-making process
in each of the agencies. It is, for example very important that debarring officials
in each agency should be of a similar stature and that hearing procedures
should be comparable. In the absence of uniformity, inconsistent and unfair
results may follow. The Secretary of Defense should ensure that uniform
policies govern each agency's decision-making process and the Federal
Acquisition Regulation should be amended to so require.
h. Alternative Civil Remedies
The government should expand its use of and more aggressively pursue
civil remedies. To make civil enforcement more effective, our Interim Report
recommended specific measures that included the passage of Administration
"FAR ?? 9.406-3(b)(1), 9.407-3(b)(1).
mOffice of the Inspector General, DoD, Review of Suspension and Debarment Activities within the
Department of Defense, at 86-87 (May 1984).
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proposals to amend the Civil False Claims Act and to establish administrative
adjudication of small civil false claims cases.
It is suggested that those officials charged with administration of
suspension/debarment ? in particular instances when the propriety of
imposition of suspension is questionable ? give greater consideration to civil
sanctions as a complete remedy. For such an alternative to be effective, DoD
must have available to it expanded civil remedies for recovery of assets.
Expansion of traditional civil money judgments is a much needed resource, and
by endorsing legislation still pending in the Congress ? i.e., the Program Fraud
Civil Remedies Act ? the Commission has sought to encourage the grant of
sweeping new administrative powers to levy fines more effectively against
individuals and corporations engaged in wrongdoing of a lesser nature.
3. Voluntary Disclosure of Irregularities
Contractors have a legal and moral obligation to report to government
authorities misconduct discovered in the process of self-review. The
Departments of Defense and Justice should jointly initiate a program
encouraging the voluntary disclosure of irregularities by contractors. Such
a program, if successful, could afford the government timely notice of
improprieties that otherwise might not be available, and provide details of
known wrongdoing without the expense and compulsion of an adversarial
investigation.
A voluntary disclosure program will be effective if there are inducements
that assure skeptical contractors they will not suffer greater sanctions by coming
forward. Private companies that fail to disclose should not be rewarded by the
fortuitous inability of government investigators to make a timely discovery of an
irregularity. Nor should contractors benefit that come forward only under
compulsion of imminent discovery.
Guidelines considered by DoD in a voluntary disclosure program should
include:
? The timing of the disclosure with respect to the contractor's initial
awareness of the irregularity and the proximity of government oversight
action.
? The completeness, accuracy, and truthfulness of the disclosure, as well as
other factors supporting voluntariness.
? Management levels at which the wrongdoing occurred and at which the
decision to disclose was made.
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? Whether internal corporate procedures or standards of conduct covered
the conduct of those involved in the wrongdoing and in the disclosure
decision.
? Whether there were in place internal auditing systems that, when
properly implemented, addressed the irregularity.
For these purposes, we recommend the following:
1. The Federal Acquisition Regulation should be amended:
a. to state more clearly that a contractor may not be suspended or
debarred except when it is established that the contractor is not "presently
responsible," and that suspension or debarment is in the "public interest"; and
b. to set out criteria to be considered in determining present
responsibility and public interest.
2. The Department of Defense should reconsider:
a. "automatic" suspensions of contractors following indictment on
charges of contract fraud;
b. suspending and debarring the whole of a contractor organization
based on wrongdoing of a component part;
c. insulating its suspending/debarring officials from untoward
pressures; and
d. establishing uniform procedures to guide the review and
decision-making process in each agency exercising suspension/debarment
authority.
3. DoD should give serious consideration to:
a. greater use of broadened civil remedies in lieu of suspension,
when suspension is not mandated; and
b. implementation of a voluntary disclosure program, and incentives
for making such disclosures.
4. Specific measures should be taken to make civil enforcement of laws
governing defense acquisition still more effective. These include passage of
Administration proposals to amend the Civil False Claims Act and to establish
administrative adjudication of small, civil false claims cases. In appropriate
circumstances, officials charged with administration of suspension/
debarment should consider application of civil monetary sanctions as a
complete remedy.
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PRESIDENT'S BLUE RIBBON COMMISSION
ON DEFENSE MANAGEMENT
David Packard, Chairman
6..,A
Robert H. Barrow
Nicholas F. Brady
Louis W. Cabot
diX-&-4. ?
Frank C. Carlucci
-
0/deleiL
William P. Clark
f;'J1.
Barber B. Conable, Jr.
Paul F. Gorman
Ernest C. Arbuckle, In Memoriam
Carla A. Hills
James L. Holloway, Ill
p
William J. Perry
Charles J. Pilliod, Jr.
Brent Scowcroft
Herbert Stein
R. James WLo(lf.e4147olsey
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PRESIDENT'S BLUE RIBBON COMMISSION
ON DEFENSE MANAGEMENT
Staff
Rhett B. Dawson, Director
Paul S. Stevens, Deputy Director and General Counsel
Robin Deck, COunselor for Legislative Affairs
Rebecca D. Paulk, Executive Secretary
Madeline C. Aldrich, Executive Assistant to the Chairman
Penny Chanin, Executive Assistant to the Director
Toney Stricklin, Staff Coordinator and Executive Assistant to the Director
PROFESSIONAL AND TECHNICAL STAFF
Richard C. Morris
James G. Ling
Robert Steve Dotson
Andrew Hamilton
Mary F. Nugent
Jeanne Briguglio
SENIOR CONSULTANTS
Vincent Puritano
Jacques S. Gansler
John C. Beckett
ADMINISTRATIVE STAFF
Peter R. O'Connor, Administrative
Juanita Berry
Esther F. Evans
Stephanie D. Johnson
David M. Hochbrueckner
Mary Hill
Phillip L. Harrington
James J. Lindenfelser
John T. Kavanaugh
Robert T. Marlow
Michelle S. Kalkowski
Donna N. RiveIli
PUBLIC AFFAIRS
Herbert E. Hetu, Counselor
Alexis B. Allen
Deputy
Rosemary McCarthy
Miles E. Rountree
Patricia Stith
Ray S. Thompson, Jr
Irvin A. Tull
TECHNICAL ADVISERS TO THE ACQUISITION TASK FORCE
E. Oran Brigham
Dale W. Church
Paul G. Kaminski
Roger Lewis
Walter M. Locke
Bill B. May
Barry H. Whelan
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