2
3
0%
2%
4%
6%
8%
10%
1985 1990 1995 2000 2005 2010 2015FY
5-‐year Moving Average: MDAP Contract Portfolio Annual Total Cost Growth
5-‐year Moving Average 31-‐year average
5-year Moving Average of Annual Growth of Contracted Costs
(largest contracts on major programs, 1985–2015)
3
4
5
Post Goldwater-Nichols
Reinventing Gov’t Transformation TSPR
Better Buying Power
2
Reagan Buildup 31-year average
War on Terror
Contract Growth: Development and Early Production (scope growth + overruns; in dollars, after inflation)
1
n = 1,123 contracts for 239 programs
TSPR = Total System Performance Responsibility
Approved for Public Release; Distribution Unlimited. 16-S-0565, 2 Dec 2015.
4
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2010 2011 2012 2013 2014 2015
EBITDA
Margin (%
) Average
Lockheed MarAn Corp
Northrop Grumman Corp
Raytheon Co
General Dynamics Corp
Boeing Co/The*
BAE Systems PLC
DoD Prime Suppliers Profitability Analysis
Historical EBITDA Margin (%) of the Largest Six DoD Primes
2010 2011 2012 2013 2014 2015Average 11.8% 12.5% 11.3% 12.8% 13.7% 13.3%
Lockheed Martin Corp 11.2% 10.7% 11.5% 12.1% 14.4% 14.0%
Northrop Grumman Corp 12.0% 14.5% 14.4% 14.7% 15.3% 15.1%
Raytheon Co 12.0% 13.2% 14.1% 14.3% 15.9% 15.1%
General Dynamics Corp 13.9% 13.5% 4.6% 13.6% 14.2% 14.8%
Boeing Co/The 10.4% 10.9% 9.9% 9.7% 10.3% 9.7%
BAE Systems PLC 11.3% 12.4% 13.1% 12.4% 12.1% 11.0%
Underperforming GD acquisiAons drove $2B writedown of goodwill.
Boeing BDS operaAng margin used as trend proxy in the absence of segment EBITDA.
5
Development:
Median Biennial Change in Major Program Costs (Realized plus Estimated)
-‐2%
0%
2%
4%
6%
8%
10%
1999 to2001(n=62)
2001 to2003(n=56)
2002 to2004(n=58)
2003 to2005(n=60)
2004 to2006(n=69)
2005 to2007(n=72)
2007 to2009(n=76)
2009 to2011(n=80)
2010 to2012(n=69)
2011 to2013(n=70)
2012 to2014(n=70)
dollar basis
program basis
Both generally decreasing
Biennial Funding Change in Total RDT&E
Median biennial change in program total funding needed has been near zero since 2010
6
Procurement
Median Biennial Change in Major Program Costs (Realized plus Estimated)
Biennial Funding Change in Total Quantity-Adjusted Unit-Procurement Recurring-Flyaway
-‐2%
0%
2%
4%
6%
8%
10%
1999 to2001(n=64)
2001 to2003(n=54)
2002 to2004(n=57)
2003 to2005(n=56)
2004 to2006(n=62)
2005 to2007(n=67)
2007 to2009(n=67)
2009 to2011(n=71)
2010 to2012(n=65)
2011 to2013(n=67)
2012 to2014(n=69)
dollar basis
program basis
Both generally decreasing
Median biennial change in program total funding needed has been near zero since 2009
7
Major Program Contract Cost Growth Related to Negotiated Cost Targets
Cost-Over-Target on Contracts for Currently Active MDAPs (controlling for inflation)
Development Early Production
-‐40%
-‐20%
0%
20%
40%
60%
80%
100%
Jan-‐00 Jan-‐05 Jan-‐10 Jan-‐15
January 2009
-‐40%
-‐20%
0%
20%
40%
60%
80%
100%
Jan-‐00 Jan-‐05 Jan-‐10 Jan-‐15
January 2009
(not firm-fixed price contracts)
8
Percent of Major Programs With Cost Reductions Relative to Original Baseline
Significant positive shift from 2009 to 2014 statistically significant difference
As of 2014: As of 2009:
better
Upward shift
better
Development
“Should Cost” at work
9
Percent of Major Programs With Cost Reductions Relative to Original Baseline
statistically significant difference
As of 2014: As of 2009:
Upward shift
Production
better better
Significant positive shift from 2009 to 2014
“Should Cost” at work
10
Major Programs Crossing Congressional Cost-Growth Critical Thresholds
Fewer major programs are crossing Congressional cost-growth critical thresholds
0
2
4
6
8
10
2007 2008 2009 2010 2011 2012 2013 2014
Count
Critical Nunn-‐McCurdy Breaches
Trend (statistically significant)
MDAP Critical Nunn-McCurdy Breaches
11
Major Program Contract Lengths
Contract Cycle Time for Currently Active MDAPs
Development Early Production
0
2
4
6
8
10
12
14
Jan-‐00 Jan-‐05 Jan-‐10 Jan-‐15
Years
January 2009
0
2
4
6
8
10
12
14
Jan-‐00 Jan-‐05 Jan-‐10 Jan-‐15
Years
January 2009
Development Early Production
12
29%
9%
23%
9%
28%
40%
50%
5%
0%
10%
20%
30%
40%
50%
Tight Obliging Tight Obliging Tight Obliging Tight Obliging Tight Obliging
FY 1970–1980
FY 1981–1982
FY 1987–1989
FY 1983–1986
FY 1990–1993
none FY 1994–2000
none FY 2001–2002
FY 2003–2007
DSARC Post-‐Carlucci DAB AR Post-‐AR
n/a n/a
no Obligingcomparison
no Obligingcomparison
Effect of Budget Climates on Program Acquisition Unit-Cost Growth
Median PAUC Growth Between Budget Climates Within Same Policy Regime (FY1970–2007)
statistically significant difference
13
Principle 1: People matter most; we can never be too professional or too competent Principle 2: Data should drive policy Principle 3: Critical thinking is necessary for success; fixed rules are too constraining Principle 4: Controlling life cycle cost is one of our jobs; staying on budget isn't enough Principle 5: Continuous improvement will be more effective than radical change Principle 6: Incentives work – we get what we reward Principle 7: Competition, and the threat of competition, is the most effective incentive Principle 8: Defense acquisition is a team sport Principle 9: Our technological superiority is at risk and we must respond Principle 10: We should have the courage to challenge bad policy
Better Buying Power Principles
14
$0
$5
$10
$15
$20
$25
$30
$35
$40
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
(FY17$, B)
Fiscal Year
6.7: Operational Systems Dev.
6.5: System Dev & Demonstration
6.4: Advanced Component Dev. & Prototypes
6.3: Advanced Technology Dev.6.2: Applied Research
6.6: Management Support
6.1: Basic Research
RDT&E Funding Our Problem Is Not Innovation; It Is Access
to Capital For New Product Development
NOTE: Includes OCO through FY17
UNCLASSIFIED
15
1. Set reasonable requirements 2. Put professionals in charge 3. Give them the resources they need 4. Provide strong incentives to succeed
All Acquisition Reform Comes Down to Four Basic Things