Video – Other Transactions for Sustainment

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SI’s Founder, Rick Dunn, video chats with Mike McGrath of McGrath Analytics to discuss Other Transactions and their prior and potential use for sustainment.

 

RD: Good morning!  This is another Strategic Institute Acquisition Web Talk.  Our guest this morning is Mike Mcgrath of Mcgrath Analytics, and we’ll be talking about using, among other things, about using other transactions for sustainment and talking about a very successful program that existed in the past and could be implemented, or recreated, by folks today who want to upgrade our capabilities and save money on replacement parts and components of our fielded systems.

So, Mike Mcgrath graduated with his bachelor’s degree from Catholic University, got his Engineering Doctorate from George Washington University.  He and I overlapped at DARPA for a few years in the 1990s, he was a program manager there and I think, Mike, you were in the Undersea Warfare Office for part of that time?

MM: I was first in the information technology office and then the defense sciences office.

RD: Okay. I had you connected with the Navy there. I’m sorry. There’s reason for that however.

Mike went on to SRI International for a few years and then he was appointed the Deputy Assistant Secretary of the Navy for Research and Development. I guess from about 2003 to 2007 he held that position and went on from there to the Analytical Services Corporation where he was a vice president for systems and operations and I think you were a board member with them or one of their subsidiaries for a while as well.

MM: I was a corporate officer at ANSER, but I was the chairman of the board of a South Carolina company that manages OT consortium, ATI, Advanced Technology International.

RD: Okay. Thank you, thank you.  For a number of years now you’ve been a consultant on your own with Mcgrath Analytics.

So, the program I want to emphasize today, and I hope Mike will provide us all the key details, it’s called the Commercial Operations and Support Savings Initiative (COSSI) and this was a powerful program. Again, Mike will give us the details, but at the outset of it was run at DARPA for the first couple of years. It was handed off to the Office of the Secretary of Defense, eventually it was supposed to be institutionalized in the services and when that transition occurred it basically faded away. But for the two years at DARPA, the Under Secretary of Defense for Acquisition Technology and Logistics, Jack Gansler at the time, quoted the figures that “for 100 million dollars of R&D investment, this program resulted in three billion dollars of procurement and O&M savings.”  So that’s a 30:1 savings, which is not to be sneezed at. There are other figures that are even higher than that, but it was a powerful program despite the difficulties that it ran into.  Mike, you were involved at the inception and have been a student of the program, so over to you.

MM: Thanks, Rick.  So, my route for getting to DARPA was unusual.  My government career started in the sustainment community at NAVAIR, and then moved to the acquisition community in OSD, and then to the science and technology community at DARPA, and what I found was that each of those communities held the other communities in somewhat lower priority than perhaps I did. So, the acquisition guys, it was hard to get them to think about life cycle support because they were focused on the acquisition phase. The science and technology guys were trying to invent new things for new systems and not terribly concerned about supporting current systems, and we had the opportunity in the COSSI program to address the need that was very evident to the leadership in DOD acquisition: that affordability was a problem, and it was life cycle affordability, and anything we could do to save money over the life cycle, would be a big step forward. So that was the objective in COSSI, to look at operation and support costs and to partner with commercial industries, non-traditional sources of technology, to find solutions that could reduce those costs for the department.  Rick, as you said, we generated a lot of successes. We were able to attract the interest of the non-traditional suppliers by using, what was then a new authority at DARPA, for other transactions.  Rick, you may have more to say about how we how we structured that program to take advantage of the authorities, but we set it up to do cost-shared development of a prototype and the competition was based on how much money could you save the government with your technology.  So we partnered a proposer with a program office in DOD, and together, they put together a 10-year net present value savings stream and that was the basis for the competition. And the business deal was if your technology works when we test the prototype, and demonstrates it has the savings potential you’ve claimed, then we’ll buy a retrofit kit to put the adapted commercial technology into DOD weapon systems, so that we can achieve the savings.  And that follow-on procurement, which we called phase two at the time, would have had to be done under the FAR, and we said well these are commercial items and we’ll use FAR part 12 for that follow-on procurement.  So that was the setup. There were, I think, 75 or 80 projects that were funded over a three-year period.

Rick, as you said, there was a huge return on investment. I think Jack Gansler’s figure of 100 million dollars invested by the government is a bit low…there was a little close to 500 million invested over a three-year period, with about a third of that coming from industry and two-thirds coming from government. So, the first hundred million achieved the savings numbers you quoted and we moved on from there.

RD:  He (Jack Gansler) was referring to just the two-year period and the 100 million in his numbers.

MM: Okay so, the first two years was run out of DARPA and then we transition the program to the services, and I actually moved back to the Pentagon to oversee that process. So, there was a third year So that was COSSI back in the 1990s.

RD: So to elucidate a little bit as I recall it, the prototype development resulted in what was called a kit, which was the integration of the commercial item with the form, fit, and functionality characteristics of what was needed to plug into the government system.  That had to be qualified.  So, you had both a technical hurdle and then a financial hurdle, that in order to acquire, it was less than what they were already paying for the legacy component or system. So, if you cross those two hurdles, the government was supposed to guarantee you a market and the market was sort of understandable. We know how many of these platforms we have, we know how many of these components typically need to be replaced, and so the commercial world sort of had an understanding of what the potential payoff was for their part of the investment.  You know, to me, having the government think through that way, what makes this attractive to the commercial world, and then the second aspect of it, actually having the science and technology guys talking to the buying command guys, those are things that are actually not routinely done, I think. This program, sort of sociologically, was a change in addition to just doing business differently. To me, that seems very powerful.  You had a very much closer look at this whole thing and can tell us how well, or not so well, those concepts were in practice.

MM: Well, I think an important concept here was value-based pricing, which is how the commercial market operates and the commercial marketplace decides what the value of something is. Here we had an instance where DOD could look at a proposal and pick it on the basis of cost savings and there was a fixed price for the kit as part of that discounted cash flow analysis.  So, when the kit was demonstrated to do what it claimed to do, and not degrade the performance of the weapon, then there was a basis for fixed price procurement.  The government didn’t need a lot of insight into the cost of the kit, it was here’s the price of the kit and at that price we can save this much money, it’s a good deal!

RD: YEP. Thinking that you don’t often see. You know, I remember former senator Jeff Bingaman, who was very instrumental in the whole other transactions legislation and both the original legislation and then the prototype legislation, who has this quote:  “The government system spends millions to save thousands.”  As an example by the way, if folks can see this, the example on the bottom called the E2C, the multi-functional control display. You said you were at Naval Air Systems Command.  We did some education and training at Naval Air Systems Command more than a year ago, and we were working with an organization called IMPAX, which is their partnership intermediary (PIA). I happened to be talking about the COSSI program and I had these examples with me and went through them with one of the managers there at IMPAX.  He looked at it and he said “I flew in the E2C. I remember when that high definition panel came in.  We had no idea where it came from, but it was a great improvement.” I just had to chuckle that we had accidentally run into somebody who had benefited from the COSSI program, even though he didn’t know that there was a COSSI program or how it operated. He had benefited from it.

MM: NAVAIR embraced that program very well, but I think there were a couple of institutional problems that sort of truncated the program. The first was a budget problem. At the time that the proposal came in, a program office had signed a letter saying if the kit passes its test and evaluation, I want to buy it and here’s the quantity I will buy. But in the intervening time, some of those programs took budget cuts or had other priority changes, and when the bill came due they said “oh this is great, it passed the test, I would like to buy it, but I don’t currently have money in my budget, and so it’s going to take me two years to get the money.”

That was one type of problem. The other was when a contracting officer looked at the arrangement and said, “I don’t care what DARPA told you, we have to compete this.” So, you passed your test, now you have an opportunity to compete for the follow-on procurement.

Those two things kind of poisoned the well with industry. There was much less industry interest after that behavior by the government and the program sort of slowly faded into oblivion. So, recent authorities, which you can talk about, give us the opportunity to fix that problem, right? To deal with the budget gap and to deal with follow-on procurement if there was competition in the prototype phase.

RD: Well yeah, and quite frankly, even the budget issue almost seems to me to be a red herring because the program office knew it was going to buy replacement parts and if it could buy replacement parts more cheaply, I mean it ought to have had the budget lined up. I mean, just the logic of saying “I don’t have the money now” is questionable to me.

MM: Yeah, well you know DOD and the office that buys the spare parts and has the budget for the spare parts may not be the same office that was in charge of engineering and the engineering change, and signed the original letter. I mean that’s not unsurprising.

RD: No, but it is an example of you know, we have this issue of the government talking to industry, but the government often doesn’t talk to itself and one hand doesn’t know what the other is doing. COSSI partially solved that problem of opening communication, but your example shows it did not completely solve the problem. The legal authority issue was substantially changed with amendments. There were attempts to create follow-on production for prototype projects going back to the early 2000s and there were actually two different amendments, but the people that drafted those amendments basically weren’t thinking through what a prototype it is, and they wanted price and quantity determined on the front end of the prototype project. And prototypes, along with other kinds of R&D are basically where you acquire knowledge. The knowledge that you acquire allows you to understand capability, as well as cost implications, so you shouldn’t assume those sorts of things on the front end of a prototype. You might have a goal, but you can’t say for sure this is how it’s going to turn out. In COSSI, you had a little bit different scenario, because you already had a developed commercial product and the question now was adaptation of that product to the kit. In any event, the legal authority that is different today is, in an amendment a few years ago, congress added a follow-on production proviso to the prototype authority, which said if you have a successful prototype project, you may go in to follow on production without additional competition and the instrument that you award could be a modification of your prototype other transaction, it could be a separate production other transaction.  In other words, the S&T organization might have awarded the prototype development of the kit, but the follow-on production OT could be awarded by the buying command or program office, or you could have a non-competitive procurement under FAR. The other thing that hasn’t happened yet, is the statute also allows the Secretary of Defense to create an entirely different contracting approach for follow-on production.

So, I mean, the authority is basically there, whatever approach you want to take, you can seamlessly go from a successful prototype project, from developing a COSSI kit into the production arena. Even naysaying contracting officers and naysaying lawyers would be embarrassed to say no in light of the clear words of the statue.

MM: Well Rick, I think COSSI gives us a confidence-building data point that this can be done, but if you look at today’s needs in defense and today’s commercial technology, there may be some more urgency to this and there may be some greater opportunities. These new authorities have come at a good time for the department.  I think the urgency in the eyes of the war fighter, this is about readiness. Affordability is still very important to the department, but improving readiness is now a front burner goal for all of the services. GAO, last year, put out a report on aircraft readiness, frontline tactical aircraft readiness, being substantially lower than the goals. The Secretary of Defense set even higher goals and the services committed to try and meet those goals for aircraft readiness, which is going to take investment.  GAO also published a report on our aging depots and the outdated equipment and outdated facilities at the depots, which are leading to delays in depot turnarounds, so equipment is kept out of the inventory in some queues at a depot. Modernization of the depots and getting new technology into the depots is now a priority. Spare parts was a big part of the readiness problem the GAO looked at, and so new technologies for replacing obsolete parts, and for rapidly producing parts that currently have lead times of a year or even two years that we’d like to be able to get in 30 days.  Those possibilities are technically achievable in many areas.  I think it’s an opportune time for the department to take a new look at sustainment as a target for technology improvement or improvement through technology, and for new processes that are enabled by technology. There is a lot we can learn from commercial companies and I think that the difficulty is in getting those commercial companies interested in working with DOD.

RD: Yeah, there’s artificial intelligence, additive manufacturing, I mean, we’ve all seen plastic things made this way, but now with these titanium slurries being used to create very sophisticated parts out of metals like titanium. Many of the needs of the services, aircraft and otherwise, can be accomplished through these methods and there are people out there in the commercial sector developing the production techniques to do these things. I think, in addition to metals like titanium, there’s even the potential for embedded electronic parts and a wide variety of things that are sort of mind-blowing that those capabilities are coming on.  The department needs to reach out and embrace folks and get those technologies into the depots and other places.

MM: So introducing those technologies does require a process change and the sustainment community is not really in the business of R&D and prototyping, and so I think, there’s a perception there that you need RDT&E appropriations to be able to do prototypes. There may be a lack of appreciation that a prototype could be a prototype of a new process that’s enabled by a technology. The authorities, as I understand it, don’t specify that you may only RDT&E funds.  You have to use the funds for the purpose in which they were appropriated.  O&M funds, which are about 1/3 of the defense budget, and whose purpose is readiness, are available and are mostly controlled by the sustainment community. So, applying some of those funds to technology-enabled improved processes, certainly is doable.

RD: O&M funds are, in fact, exactly the appropriate fund for the improvement of a fielded system. Especially one that’s out of production. There is a canard that has gone around in the department that if you use these authorities, you can only use RDT&E. The DOD OT guide debunks that by saying choice of instrument is different from choice of appropriation. The point you make about O&M is absolutely correct.  O&M funds could be used for a COSSI-like program. They could be used to bring in new technologies for sustainment and unfortunately, I think, there are people in the department who resist that notion. When the legal authority is there, you’re not going to find any objection, even in the financial management manual, to the concepts that we’re talking about or GAO, it can be done. I think we are at a point where it really needs to be done.

MM: Well GAO pointed out that many of the depots are required by law to invest six percent of their revenues in modernization of the depot and its processes. So, making that community aware of the authorities in OTs and of the power of bringing in a commercial technology, adapting it to the military environment, prototyping it with the user in the loop and getting it right, and then going on to procure it is a faster and more effective path than the normal process…which, I think, is to identify here’s what the depot needs exactly, put that in a specification, put the specification out for bid and go through a normal procurement process. There’s an alternative that just isn’t built into the thinking of the sustainment community and so this education process that you’ve launched, may have a wide audience that needs to hear about it.

RD: You know, it just strikes me that, as the two of us sit here and exchange views in our virtual environment, that between the two of us, we actually have a wealth of knowledge to share for anyone in the sustainment community or in even an acquisition position that wants to interface with sustainment…both on the history of COSSI and ideas of how to use the authorities that congress has given us.  I mean, I have artifacts from the original COSSI program, such as the program announcement and one of the techniques there was to lay it out in one place, in one document, everything that the commercial sector would need to know on how to engage the government. Take the mystery out of doing business with the government, so that non-traditionals, small guys, whoever could contribute can do so without going into a research project or hiring a Sherpa to guide them through, up the mountain passes of government procurement. I’m sure you would be willing to help folks out who want to put a program like this together. I was going to say I won’t speak for you, but I just did speak for you. 😊

MM: Well in fact, I have mentioned that I have a relationship ATI, which is one of the consortium management companies. I’m probably biased, but I think they’re the best at what they do but, in the consortia that are managed by ATI, there has been interest in sustainment. I think that while COSSI formed individual teams and individual transactions for these, and that is a viable route we’ve proven, one advantage of consortia is that we’re going to need a partnership between the non-traditional supplier of the commercial technology and a defense prime contractor if this thing is going to get into a weapon system. Those relationships and facilitating that collaboration is routinely what happens in the OT consortia. I think it’s a big factor in why they’ve become so popular in the R&D community. If they were discovered by the sustainment community, they might find that there’s an overlap of interests.

RD: One of my concerns about consortia is that it doesn’t always happen. The emphasis on competition in their subproject awards avoids reaching out and premeditatedly creating these collaborative relationships. You mentioned ATI.  I know ATI has sent representatives to every one of our Strategic Institute conferences. They’ve heard me say this and I believe that they have actually taken this, just as you have suggested, have taken this concept back to their consortia, but I’m not sure it’s universally true that all of the consortium are emphasizing collaboration, as well as competition in the way that they do things. I think the government contracting offices have failed to pick up on this and realize that there can be a consortium within the broader consortium structure.  That small teaming arrangements, for example, between a defense prime and one or more contributors of advanced technology who are non-traditional can take place. I mean if that approach was multiplied throughout, the there’s almost three dozen of these consortia now, their power would be greatly increased.  The consortium management firms can do something in the area of education and spurring this on, but the government contracting offices need to get with the program too.

MM: Well, I agree with that. I think that facilitating that collaboration is what the consortium managers need to do. When you look at the membership of all of those consortia, there’s a lot of commercial companies already participating. Most of the consortia are open and with very low barrier to entry so that if a particular need comes along and there’s a commercial supplier who has a solution, bringing them into the consortium and facilitating the collaboration and making it easy for them to do business with the government, providing a sort of buffer, all of that I think is value-added.

RD: Yeah, that’s an important contribution to the to the consortium model that we have now because it was initiated, I think, basically as a replication in the OT world of the federal acquisition streamlining act, where they did legitimize multiple award task order contracts. Because those came along in the mid-1990s, and the first consortium was basically in the early 2000s, and it was structured very much like a multiple award task order contract, which emphasizes competition among the potential awardees as opposed to collaboration. The collaboration idea is coming in later, but at least it’s starting to come in and it has the power that you just you just suggested.

MM: Yeah, I think competition is familiar and comfortable ground for government contracting and acquisition people, as is compliance, and so collaboration is a somewhat new thought and it’s going to take time for the culture to embrace it.

RD:  Mike, I have really appreciated you taking time to be with us. Do you have any additional remarks you’d like to make, or do you think we’ve covered this subject pretty well?

MM: Well, I think we’ve opened the subject for, I hope, lots more discussion and so thank you, Rick, for teeing up COSSI and sustainment as an area of need and opportunity.  I hope, this is one that attracts some interest from the department.

RD: Great talking with you Mike. I really appreciate it.

MM: Great to see you, Rick. So long!

 

 

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