After more than a decade in active combat, the U.S. is now entering an era that is neither war nor peace, and a fiscal environment that requires we do things differently. The Department of Defense will be especially challenged to deal with budget realities in a way that doesn’t diminish our national security or place our country at risk.
Here’s how it can be done.
Performance-based contracts, on the other hand, require that the product be both available and ready to use. And it’s the contractor, rather than the DOD, that is responsible for ensuring that readiness.
Performance-based agreements deliver exactly what the military needs to accomplish its mission because they provide an incentive to minimize maintenance costs. This happens because contractors spend more upfront for preventive repairs and maintenance. So service members get equipment that works; if it doesn’t, that cost is absorbed by the contractor.
Sounds like a great approach – and it is. Unfortunately, the number of performance-based agreements is actually on the decline.
The biggest impediment to increasing performance-based agreements is knowledge. The government incentive structure, budgeting process, upfront complexity and overall lack of understanding have limited their use. While there is plenty of evidence about their success and this approach has bipartisan support, performance-based agreements have no clear champion in the government.
The military first recognized the value of performance-based agreements in 2001 when DOD’s own assessment found they could save 10-20 percent, or $17 to $34 billion per year. A 2010 Aerospace Industries Association report found that increasing the number of performance-based DOD agreements could save up to $32 billion annually.
Think about it, savings of $32 billion could negate much of the pain associated with sequestration, a measure that President Obama referred to as “draconian” after visiting the Pentagon last week.
Alternatively, savings from performance-based agreements could fund investments in technology like more powerful and efficient engines for Blackhawk and Apache helicopters, which would enable these platforms to continue to serve well into the future.
This is just one example of how smarter contracting could blunt the effects of sequestration and ensure our troops have "the equipment and the technology that's necessary for them to be able to succeed at their mission," as President Obama called for last week.
This kind of business model isn’t new. Performance-based logistics have been successfully used in the private sector for decades.
For example, Walmart revolutionized its inventory management by becoming more performance-driven. By putting responsibility on its suppliers to monitor what individual stores sell and when to deliver, Walmart was able to negotiate a better price for its customers while increasing both its and its suppliers’ profitability.
Similarly, BMW addressed customers’ concerns about repair and maintenance costs by assuming the financial burden of all maintenance for the first five years after a car was purchased. By doing this, BMW alleviated customer fears and eventually became the number one luxury car company in the U.S.
United Technologies has successfully used this same performance-based approach with the U.S. Air Force and its F117 engine for 15 years. Because of that fixed cost, dollar-per-cycle structure, we’ve consistently met propulsion readiness requirements while eliminating costly and disruptive unscheduled engine removals. This resulted in $3 billion in cost savings between 1998 and 2011. We’ve had similar success with the U.S. Navy and in our commercial engine operations.
The global security landscape is changing daily. Our service members deserve the best, most technologically advanced equipment available. At the same time, we face real budget concerns that cannot be avoided. While this situation may seem daunting, it is actually the greatest opportunity in a generation to improve defense acquisition and the budget outlook. We need to take advantage of this moment.
DeFrank is vice president of communications and government relations for Pratt & Whitney, an aerospace manufacturer. He spent 30 years on active duty with the U.S. Air Force where he directed media relations for both the Air Force and Department of Defense and was a key architect of the Iraq War news media embed program.