 Good morning. Welcome to the Center for Strategic and International Studies. I'm David Burto. I'm the Director of our National Security Program on Industry and Resources. Welcome to our new building. It was built expressly for this kind of a discussion this morning. One of the side benefits, though, is that many of you get to see people who you don't necessarily see on a day-to-day basis. So we try to build in some face-to-face discussion time as well. That was the time between 7.30 and now. And so now we're ready to move on. I want to also welcome our viewers on the web. We have a growing web presence and an awful lot of you watch from the web. At the end, when we're doing the questions, I'll give you my e-mail. So those of you who are on the web and want to e-mail questions in can e-mail some questions as well. I have just a couple of administrative announcements before I turn it over for the introduction. If you would silence your cell phones, we do have substantially better reception here than we did in our old building. And so it's more important now that you silence your cell phones than it used to be because if you were far enough back in the basement, it couldn't penetrate anyway. And also to the viewers on the web, you do not need to silence your cell phones. John, I will bring you up to introduce our guest this morning, our CEO and President, Dr. John Hammer. Please walk me in. Thanks everybody. Thank you for coming. Glad you're here. I'll just apologize. This is still a construction zone. We're still moving in. Every night there's crews here trying to fix the punch list. I think we're down to 1,700 items now. So we're making progress, you know? But I do think that we're ready here and we're delighted to be able to welcome all of you. And I want to say special thanks to Frank Kendall for coming. This is the first big thing that we've done here. We did our global security forum earlier and of course his boss was here. But that's a little bit more show. This is a little more work. And we're really delighted that Frank is here to kind of kick this off. Obviously, you all came because you know who Frank Kendall is. So my standing here to introduce him would be a waste of your time. But it is a real privilege that we are able to have someone of his talent and dedication, you know, who's working in the department these days. It is a tough time. It's a really tough time. I can't remember a more complicated landscape for especially the acquisition executive. What can you count on that's real? You know, what's going to happen in the Congress? You know, what planning horizon is feasible? And it's probably the most complex landscape that you could imagine. And yet the business of government is sound, sensible, fair decisions that have to be made. And Frank is championed at, which I think we're all grateful for. He's going to, you know, I suspect a lot of people here are going to ask questions about other things. But we want him to speak about success in transforming and streamlining the acquisition process. I think he will at least try to get some of that in. And I would ask you to focus on that while he's here because that is the purpose of the day. But understand the complexity of the problem that he's working with and then you'll realize what an honor it is that he's breaking away for some minutes and spending the time with us. So with your applause, would you please welcome Frank Kendall. Thank you, John. It's always great to be here. Well, I guess it's always great to be at CSIS. Eight-year journey to bring this building to reality and to move over here. Congratulations to the organization. It's a great venue. And I'm delighted to be your first topical conversation here. Secretary Hagel was here earlier, as John mentioned. I'm going to talk about the things that John described, both what I'm doing in the acquisition system and also the current budget situations. He's absolutely right that, and I would agree with you, John, that this is probably the worst time I've seen to in terms of our ability to do a sound plan and execute it with any kind of confidence at all. I'm going to start out by talking a little bit about our acquisition system and how it's doing. I put out a document a few months ago. How many of you have seen the performance of the Defense Acquisition System's first annual report? It's a document that I put out a few months ago without a great deal of fanfare. It's gotten a lot of reaction and response from various and sundry communities. The intent was to put some data on the table and start looking at how we're actually doing by a number of different metrics and to get a feel for who's doing better than some other people and why, start to understand what's happening, and then you can go start to analyze why. So I tried to take out of it a lot of the analysis or speculation, really, about why these things are as they are, but let's start with what's going on. What's really been happening over the last 20 odd years and even longer. One of the things that strikes you when you do that is how little things seem to change, despite all the different episodes of acquisition reform that we've had. I've lived through most of them. John's lived through many of them. Debra Toh's lived through many of them. A lot of you in the audience have lived through a lot of them. And I tend to shy away from talking about acquisition reform. I think a better way to think about this and a better way to talk about it is to talk about acquisition improvement. Because that forces you to confine your thinking to specific things you can do that will make a difference. I don't think, frankly, that you can wave away the entire system and start over and expect to have something that looks very, very different from what you have today. The types of decisions we have to make, the types of processes we have to go through to field weapons systems, the fact that we have to do contracts and have to do them with a certain set of rules isn't going to change. So we have to look deeper than that. And the idea was to start that process of looking deeper than that and really understanding. The other thing that's true about acquisition is that it's incredibly complex. It encompasses so many different things that have to be done well to get good outcomes. That it's very, very difficult to pull out and correlate specific factors. We looked at, in the course of preparing the report, we looked at a whole host of different things. And it was very hard to find correlations, even if you look back over 20 or 30 years of data. I do want to share with you something from the report. It's a discussion of a specific program. I'm going to kind of loosely quote this here. The program had an innovative but unconventional design. It was criticized as extravagant. It included a multi-mission requirement that spanned both irregular warfare and high-intensity warfare, putting conflicting demands on the design. It included the use of exotic materials that's delayed construction and raised costs. There was a divided political establishment that argued over the need and the cost. Contracts were spread around a number of states, largely for political purposes. Cost growth was excessive, and it caused schedule slips and program instability. The Congress was alarmed at the cost and scheduled delays and conducted inquiries and railed against the waste that was going on in the program. Everybody know what the program was? 1794, the first six frigates that we built for the Navy. Sound familiar? So there's been a lot of acquisition reform, not just in our lifetimes where people have been talking about it for a very, very long time. It was not, as some of you might have guessed, the F-35 or anything else that's more current. So this is not a new problem for people to address and try to solve. So I think that the way we have to attack it is by getting a deeper look at the data and recognizing that maybe some of the fundamentals are our problem. Maybe it's not the organization of OSD. Maybe it's not the type of contract we choose. There's interesting data in here that suggests that contract type does not really change things very much. My belief, my firm belief, is that at the end of the day there's some very simple factors that drive outcomes and acquisition. And it starts with professionalism. I was interviewed the other day about one of our programs and I was asked what we could do to improve. And I started with that, professionalism on both the industry side and the government side. Leadership matters. It's incredibly important. Hard work is next. And then the last thing I'll put on my list is a measure of courage to do the hard things when it's expedient many times and just go ahead. You know, spend the money or the contract. Don't wait until you've got the right business deal. Don't wait until the risk is out of the program. Just keep going. It takes a certain amount of courage to do that. I think those are the things that at the end of the day matter. And all of those things are not about, you know, the degree of how we organize the decision process or whether OSD checks something or not. They're really about people and their ability and their power to do their jobs well. And I think as I built this year's version, last year's version of Better Buying Power, I added that element. And I'll talk a little bit more about that as I go on. There are no easy answers. In Better Buying Power, Better Buying Power 2.0, we went from about 20 items up to about 35. And I was criticized for that by a former undersecretary for acquisition who said that's too many. You know, you've got to have like four or five so people can remember the list, I guess. I think we actually are doing many more things than are on the Better Buying Power list. We're doing hundreds of things to try to improve. And I think that is actually how you do improve. You have to attack on a lot of fronts and get a lot of things right. It's a very detailed, difficult work. What's going to happen next with this? I was asked to talk about that. This says it's the annual report of 2013. There will be another one. And I hope this will be a continuing process. The intent is to expand on the data set that we have. So we'll build on that. It may see a bit more analysis. There are some things in here like the fact that statistically fixed pricing and cost plus pricing seem to get the same results in terms of the statistical outcome as the data shows. That's sort of surprising to me. I'm going to try to dig deeper and understand why that happens. There are a couple of possibilities. Some of them are good and some of them are not so good. One is that we're not using fixed price the way it was intended to be used. We're actually adding money when there's a need for more money to complete the job, which is not what the intent normally is with fixed price. We'll expand the data set. We'll look deeper. There will be some more analysis. We'll bring in some new data. One of the sources of the data that we're used here are largely public databases. The federal procurement database system and the SAR reports that we send to the Congress. We're going to go beyond that and start using it. We're looking at some very interesting data out of the cost reporting that CAPE gets. CAPE has all of our programs basically, this is my statute I think, report the costs that they experience. We're looking at that data. It's proprietary because it shows people's rates and so on. We can look at it as class within the government and then start to aggregate it and draw some conclusions. What you can look at there interestingly is profit. You can look at margins. You can see what something cost, but you can also see what the government paid as a fee to industry to do that particular job. It's a very interesting result. Some of them are quite consistent with what you would expect. But there are cases where we pay higher fees for poorer performance. That's a very interesting thing to say. It's an inverse incentive. We have to do that. One of the elements of better buying power is to go in and look at the way we tied incentives together with outcomes, with performance. So that industry is motivated to do as well as they can. In general, what those numbers tend to show is that we're paying a relatively modest margin for R&D for development of our programs. We're paying a significantly higher margin for production. I think that's as it should be. I think that I want industry to recognize that getting out of development and into production is important. I think we publish these numbers that will be kind of interesting industry to learn this. I'm not sure that there's a deep understanding of this, so you would expect that. I'm not sure that understanding really exists to the extent that it ought to in industry. I'm going to mention a couple of other things that I'm doing. I know many of you are anxiously awaiting 5,000 or two to come out. I was hoping that when this came out, I might get on The Daily Show. I am absolutely certain that 5,000 or two will not get me on The Daily Show. But it's very close. I've been working on it. It's how I spend most of my weekends, unfortunately. I'd like to stop that. It'll be out very soon. I think I'll look at some final edits, I think, later in the week. We'll have it out as an interim document. I'll make a couple of comments about it. There is a draft that's been circulating, so I think many of you are probably aware of this. Emphasizing tailoring even more than previous editions did. We show people multiple models of how you can structure an acquisition program, depending upon what the product is. At the end of the day, the way you structure the program to develop, produce, and field the product depends on what the product is and what it takes to get that job done. There's a logic and a flow that has to be consistent with what you're trying to accomplish. It's definitely not a one-size-fits-all business. We do a large range of different types of things. 5,000 or two is coming. It's very close. One of the things that I learned, and I've mentioned this before here, I think, as I went through and we redid 5,002, partly because there have been a number of laws passed that we needed to include in the document and implement through the document, was how complex this had all become. There's a section at the front of the 5,002 which basically lays out what the acquisition system is and what the program structures look like, what the major decision points are, and so on. And then there's a series of tables that have all those statutory compliance requirements and those tables go on and on and on. And the reason they're there, and the reason there's so much is because a large body of statutes that have passed over the years governing acquisition. And all of this is well-intentioned. And all of this encompasses, for the most part, things that are positive that have a good outcome, but it has become amazingly complex. So if you're a major acquisition program, if you're a major automated information systems program, if you're a business program, if you're an IT program, you have a whole set of rules that you have to follow. And then, of course, we add down to that a few other things such as urgent needs and how we respond to those. So what is needed, frankly, is somebody to go back and take a look at all the things essentially that we've done since Goldwater Nichols was passed that have piled on somewhat independently and made our program managers' lives incredibly complex and simplifies that. And I've got one of my staff, I've got Andrew Hunter who was my chief of staff and who has come back recently into a situation in the building where he has more time to do this. I've asked him to lead this effort. And I want to work closely with the Hill on this. I think this is not something we want to do in isolation. We don't want to throw everything out and start over, but we do want to take that body of law and look at what's being accomplished by it or tempted to be accomplished by it and simplify it so that program managers have a much clearer, more easily understood body of requirements that they have to follow. So that's an initiative and that's not going to be a quick and easy job. It's going to take us several more months at least to do that. I've mentioned Better Buying Power 2.0. We're well into implementation of 2.0. We've got a lot of work left to do there. We've had a few distractions like furloughs and government shutdowns. But we're still working on that. The business senior integration group that I chair still meets about monthly and largely is tracking our progress and moving things forward there. Not as quickly as I had hoped on some of them. There are new ideas, of course, that come out as we go through that. One of the things we're going to be instituting that I signed out recently is we're establishing essentially professional qualification boards that will be looking at our senior people, our people who will handle or be asked to take on what we call key leadership positions. These are positions like program manager, deputy program manager, chief engineer, chief contracting officer, chief support official in the program, logistic support person, program support person. Those people and a few others that are the leadership I talked about earlier that make or break the successful program on the government side. And what we're going to have is a system of joint boards that look at the qualifications of these people and give them sort of the stamp of approval, if you will, that they are ready to take on a key leadership position. And it's going to be a mixture of real life experience, education, training, as well as some references from some of the senior people that those people have worked with. And I think doing this across the department is going to strengthen overall the level of professional we have in that workforce. Now this won't be initially, because it will take some time to get this in place, this will initially be a discriminator among people. But as we get it more in place, I think it's going to become a necessity for people who want to occupy those positions to be certified or qualified by the boards we're setting up. I do not have a plan right now to do a Better Buying Power 3.0, but give me another year or so and we might start to think about that as more ideas get on the table. We're also working closely with industry. We've had some interest from industry and continuing, and this was always something we intended to continue independent of the Better Buying Power initiatives. Some interest in doing some more work on reducing overhead. And I know John has written, so John Hammer has written some things about this. I've asked industry to give us some inputs and we have a team that Katrina McFarland, whom I think I saw walk into the room. My assistant secretary for acquisition is putting together to work within the government but with a great deal of input and interaction with industry on things that are adding cost but not adding value. There are a lot of things that we impose on industry. We've heard this from industry a lot. We want to get to the specifics. Again, it's not about reform, it's about improvement and specific things we can do to move us forward in the right direction. So I'm hopeful that we'll get some good results out of that and drive some unnecessary overhead out of the system. I want to talk about the budget situation. Briefly, John mentioned it. It is one of the worst environments that I've ever seen to try to manage it in the Pentagon. There are several things about the current situation. We're confronted right now with what we call the Orange Triangle. If you heard the briefings on the Strategic Choices Management Review, we often refer to this region on our PowerPoint slides on the graph of cuts that we'd have to take where we try to figure out how we're going to fill in those cuts. It's called the Orange Triangle, and it's sort of the period between now, basically, in the next three or four years because we can't remove forest structure, we can't remove civilian workforce from the DOD instantaneously and because the cuts are very steep and do happen instantaneously, we have this period of about three or four years where we really have a very, very hard time fitting into it a reasonable set of budget content. That's called the Orange Triangle. Now, we're in the Orange Triangle. We started into it in 13, and what we did in 13 was essentially FY13 was what I would call damage limitation. Sequestration was imposed in the spring, and what everybody did was try to find a way to get by with 8% less than they thought they were going to have. That's essentially what we did. We moved some money around within our reprogramming authorities that Congress gave us to help readiness primarily. We deferred a lot of work. We deferred work that we could delay into, presumably, FY14. But that was assuming sequestration went away. There was no money in FY14 to do that deferred work, and in fact, we have to take the sequestration stays in place over $50 billion out of FY14. So we're operating under a CR. We're trying to constrain our spending, even though right now sequestration has not been implemented for 14. It doesn't happen until January. We're operating at a rate which we hope is consistent with sequestration as much as possible so that we don't have the kind of problem we had last year. One of the things that last year's situation where we did not lower our rate early forced on us was the furloughs of the civilian workforce government, which we have every hope and every intention of not having to repeat. But that being the case, we've got to get the spending down now. We can't wait till January. We've got to lower it now. Otherwise, we're just setting up a bill for ourselves, particularly in the readiness accounts, further on. Of all the problems that sequestration brings, there are three I'll mention. The worst one, I think, in a way, is the uncertainty that we face right now. The other problems are associated with the things I've been talking about. We took 10% out. We took $50 billion out a couple of years ago per year. Sequestration takes another $50 billion per year. That's a large cut below the level we thought we needed to defend the country. So there's the steepness of the cut, which forces some very difficult choices. There's the lack of a ramp that I talked about earlier where you've got to come down on a slope that is such that you can gracefully make changes and not do them abruptly. It's a much better... In fact, it makes it manageable, essentially, if you have a ramp. It's almost unmanageable if you don't. The impact of a ramp, and I'll say one more thing about that, is that we inevitably are in a situation where for the next few years, we will have in some way a force that you could call hollow. We will not have enough training. We will not have enough acquisition. We'll not have enough investment. So one way or the other, over those next three years, until we can get force structure out, we are going to have shortfalls that are going to be debilitating the department. There is no avoiding that, as sequestration stays in place. The other problem that is really plaguing us right now is the uncertainty. That's what John mentioned. We don't know what the plan for. So if we don't know where we're going to go, it's very hard to figure out how to get there. So we're looking at a range right now of possibilities and their implications. The skimmer was... The strategic choices management review was intended to take a first cut at that. We did it and we put on the table things like the orange triangle I talked about and some of the problems. And the very difficult choices between capability and capacity came out of the skimmer. But now we're into the reality of looking at budgets that are consistent with that. And that's a very, very painful process to go through. And it's compounded enormously by the fact that we don't know where we're going to end up in terms of budgets. Because where we're going to end up will drive how much force structure we can afford. Because we're going to have a force structure that we can buy readiness to support so that it's not a hollow force so it's trained and equipped properly as maintenance spare parts and so on. And we're also have to do investments that are consistent with that size force which not means both production and research and development. So we're in a bit of a dilemma right now as we try to go through this and hopefully we'll get some resolution. The worst case probably frankly is to just kind of leach forward from budget crisis to budget crisis. This is what we've been doing for the last few years. So hopefully out of the current process we can get some relief from that and get into a better management environment. I want to talk a little bit about the things I'm worried about. I've mentioned some of them. The things that are keeping me awake at night right now. The first one is this concern about the next three years and what's going to happen to the Defense Department over that period of time and how hard it's going to be to recover from that. I was a small unit commander many years ago in Germany and I lived through the readiness crisis of the 70s where we could not get spare parts. It was a horrible environment to operate in from an operational side. You couldn't do your job. You knew you couldn't do your job. It's hard to keep your soldiers motivated and we weren't ready. We couldn't have gone to war very effectively if we'd been asked to do it. It's a very hard thing to manage through. We can have a hollow force from the point of view of training and readiness or maintenance. We can have a hollow force from the point of view of not doing enough investment in the future. The impacts are different points in time. The hollow force for readiness is right now. The hollow force because you didn't do enough R&D and procurement is a few years down the road but it's going to be there. There's a pipeline for the Department of Defense in terms of the things that we have to do to sustain the force. So I'm worried about that. I'm worried about the next three years and how we get through it. I'm particularly worried about research and development accounts and what we're doing to them or maybe forced to do to them as we get to lower levels of budget. If you think about it, research and development is essentially a fixed cost for the department or not to be. Research and development is essentially the account that governs how fast we can modernize. And if we have a suite of equipment and we have ships, tanks, planes, et cetera and you want to keep those systems at a current state of technological superiority relative to any adversary, then you have to do the R&D to support all those pieces of equipment at that rate. That is a fixed cost. It doesn't matter how many ships or how many tanks or how many planes you have, the R&D stays basically the same. The variable cost is the production rate. And you can change that. Production is a little bit different. Production depends on the size of the force that you have and how old you're willing to let your equipment get before you replace it. So there's more variability in theory, at least, in the production side of the house. But it obviously has to be tied to the size of the force structure and how long you're going to keep your equipment. But I am worried about R&D because it tends to be, if you look historically at what happens in drawdowns, the thing that gets cut. I am worried about industry. It's easy sometimes in the Pentagon as we're sitting around talking about the force structure and the readiness of the force and so on to not be aware of the fact that industry is part of our force structure. We are dependent on industry to equip the force. And if we don't have a healthy industrial base, we're not going to have a healthy force. So that keeps me up a little bit at night as well. And particularly in these near years because if we try to sustain readiness in these near years, that means the only place left to pay the bills is in the investment accounts and R&D and procurement, which means it comes out of industry. And as we were going through the furlough situation, I put out a note to the workforce and I said, you know, we're all affected by this. The military people don't have the training they need to do their job. They don't have the equipment they need. They're not getting spare parts. Civilian workforce is being furlough. They're losing, they're having days without pay. And in industry, we're laying people off. We don't have the money to contract out to do the work. People are simply laid off. And I don't think there are a number of areas in the industrial base. I think Alana Whitman's with me here today, my industrial base person, that she is looking at very carefully for me and we're looking at this very consciously as we go through the budget deliberations. The problem is, we just don't have very much flexibility. So that's on my list of words. Then the government workforce. We have put our workforce on the government side through a lot lately. They've been through three years of pay freezes. They've been through furloughs last summer. They went through the government shutdown and all the uncertainty about that. Some of my best people are really thinking carefully about, do they really want to work for the government in this environment? And as far as recruiting is concerned, well, recruiting is tough. Let me just put it that way right now. It's not the economy starting to come back up and people who would come to the government thinking that that was a place you could do meaningful work and have a reasonable amount of job security are not seeing that from the government right now. It's hard. Building the professionalism of the workforce in this environment is a big part of the job. I'm going to close with a little story from one of my former bosses that I think is probably relevant. Secretary Gates told a story once about how he, this is when he was secretary. He had a staff meeting one morning. He had just been out at Texas A&M, I believe, where he'd formerly been the president. And he talked to a group of ROTC students out there. He said, you know, I went in on this class. All they wanted to talk about was strategy. They kept asking me questions about what I was doing. And I kept wanting to tell them, I'm just trying to get through the day. I'm just trying to get through the day most days. So let me stop there and take a few questions. Thank you. Andrea, go ahead. You're in front of me. Hi, I'm Andrea Yashel with Reuters. Last week there was an interesting incident in which Navair posted a pre-solicitation notice to purchase 36 additional super hornets or growlers. And the notice then revoked or canceled. And it just kind of raised a lot of questions about, you know, what is exactly happening in terms of acquisition priorities and the sort of exchange between the F-35 program and the super hornet and some of those choices. It sort of seemed like it was showing a little leg of the process behind the scene. So can you illuminate what happened there and what you're sorry about that? I think the short answer is somebody made a mistake. If, first of all, you know, we have a budget that we aren't changing anything in our plans right now, except as we're forced to and the budget's not going up, it's coming down. I just put out an ADM on the F-35. We just did a very deep review of the F-35 and its status. And basically the short version of the ADM is that I think at this point in time we're prepared to budget to increase what's going to be subject to how much money we actually have. There are some things that need to be done on the F-35 to finish the job of the development job, essentially. And I highlighted getting the software done. I highlighted improving the reliability of the aircraft, a number of its components, and I highlighted the ALIS system, the logistic support system as things that we need to make additional progress on. And I want to tie actually increasing the rates and putting in those airplanes that we might put as well as completing working off some of the design issues that we've been working for the last couple of years. But the F-35 remains our highest priority. I think we're at a point now where we need to get the job done. And I'm feeling much more positive about the program than it was a couple of years ago. So there is no real tradeoff going on between 18s and 35s right now in the department. Okay. Let me get one. I'll get you in a minute, Tony. Let me get one right here first. I'm finding they were quiet. Oh, sorry. I didn't know I needed that. My name is Everett Pye. I'm the Farmer Acquisition Executive of the Navy. I'd like to congratulate you on the report. In my opinion, it is the most significant document of systems acquisition since Peck and Shearer. That's 50 years. So that's one. But out of that report came, to me at least, the realization that there's 300, 400 billion dollars of planned overruns that are incorporated in the out years. And that, to me, would be a tremendous target of opportunity in the long-range planning that you're trying to deal with. So that's an observation made from many rounds of bloody meetings. And I just hope that we can use that money to do some of the things in readiness that you're talking about and squeeze out that fat. I'd like to add a bit about the Constitution story. The Greeks can have the same story about the ships they built to defeat the Persians 3,000 years ago. The same thing happens. They had all the same debates. The ships were victorious and the Persians were sent back to Persia. So time doesn't change. Thank you. I'm not sure where that 300 billion dollars is, but I want you to come tell me. One of the things that's true is if you look and struggle at our programs, there is a certain amount of very consistent, on average, overrun in development and production. It's come down a little bit in the last several years, partly because I think we're budgeting to the ice now, the independent cost estimate. But there's no management reserve in the department. And one of the problems I deal with is that absent that, it's very hard to adjust things as programs get in trouble. One of the points I probably should have made is that we and it relates to the constitution of the Six Frigates of 1794. Those ships went out and were an incredible success. They went out and they won 8 out of 11 single combats against the best in the world. It was shocking to England to discover that somebody could actually beat them in a single ship combat. And we did it repeatedly. And we did it because of the things that are described in part in the new materials and so on, well-trained sailors obviously. But the results you get when you take chances often pays off. And I was asked in an interview not too long ago if I thought we were taking too much risk in the department. My answer was no, we're not taking enough. You don't get to be the best in the world unless you take some risk. You don't get to be a generation ahead of everybody else unless you take some risk. Now you've got to manage that risk, part of managing that risk ought to be some kind of an account that you can deal with things as they will happen in programs. But we don't have that. Okay, the department doesn't have that. So on average we overrun in development somewhere around 30%. On average in production, early production we overrun around 10%. So there's the opposite of the 300 billion essentially built into our budget out there somewhere for those things to happen. And then we have to make adjustments as we go through. Programs can put a little bit of reserve into their programs as they build them. But we don't have that. So we take money out of some other program in some cases to fix one that's having problems to keep it going and keep it on track which is not a very efficient way to run things either. Tony, I thought I'd give you one. You're in the background. I want to ask you about unobligated balances that might be used to defray the FY14 sequestration. And in 13 you know that about $5 billion was used to defray investment cuts. Do you see roughly the same as 13? And are your acquisition people slowing down issuing ADMs and contracts in hopes of husbanding uncommitted or unobligated funds to use in case of a full sequestration kicks in? I don't know the answer to your first question. I don't know how much will be available. I think we have used up in going through 13 some of our flexibility going forward. I am holding back a few things right now because of the commitment in a couple of cases we are doing that. Things that we may at least we may not want to cancel them outright but we may want to defer them for a few years until we get through that orange triangle I talked about. It's going to be a very hard period to manage through. Once we get through that then we have to appear to where we can start to recover and bring readiness back up and do some of the things that we can't do right now. So there's going to have to be a lot of effort to do that planning. Could you comment on the utility analysis that you are getting to inform your acquisition decisions particularly in regard to where you are and where you are and where you are and where you are and where you are and where you are and where you are and where you are and where we are having to react in some cases to things that others are doing that are challenging our capabilities. So that's one of the things that's driving us. A lot of analysis going on in that. Areas like some of the missile threats we face some of the electronic warfare threats we face for example. There is a fair amount of analysis that's being done to kind of set a strategic framework for the earlier S&T work and to prioritize one space and other where we are doing things that are with a strategic focus more. Now the individual things that get done in those categories are the results of analysis that's conducted at a lower level. I finally got somebody I don't know the name. You're going to think I have rigged who's going to have questions I'm going to take here. Good morning Mr. Kendall Max I'm going to speak to both the Marine Corps CIO and the new Head of Army Cyber and both of them expressed some frustration with the limitations of acquisition and contracting. When it comes to getting the technology that they need for what they do General Nally said he's frustrated because he doesn't need stuff tomorrow he needs stuff today he needs cyber when it comes to better buying power and some of the things that you've learned since you issued the first report what kinds of things are you talking about that might help General Nally and General Corden when it comes to being able to get stuff when the technology change pace is so rapid and their needs are so urgent. There are other things that are very quickly if it's COTS IT equipment for example you do that very quickly there are other things and in a cyber world it's particularly true the cyber world you have to be very agile particularly both for cyber defense and offense so if you're doing things there you need a situation where you can immediately apply resources there are individual projects that are very small but they need to be implemented immediately when you need something done I think we have systems in place by and large to do that I'll have to talk to those people and see what specific problems they're having one thing where I think we do have difficulties is the contracting process the contracting process can take a long time the other place where we can have problems is getting money there's a couple of year lead time in the budget process to get money that's going to be done here we can do a lot of things that deal with those two problems O&M money for example which is what we use a lot in the cyber world and it's appropriate kind of money to use for this for really quick fixes on the scene quick fixes and acquiring equipment that's COTS that's IT equipment that you can buy more or less through a GSA catalog should be something you can do fairly quickly also and I have to find out exactly what's getting in the way there but I'll take a look Mitzi have a name tag it's a pleasure to hear you I'm Mitzi Wertheim with the Naval Postgraduate School but I've been on the with or on the fringes of DOD for 37 years so I've watched all these changes what I'm struck by is the complexity we don't train people to think in complex terms and I guess I've longed for 37 years for maps what's the flow how does this go which my perception is might be tools to help you educate this constant rotation of people on Capitol Hill if you were to do that the other thing I do want to raise is on the social science contracts that you have but maybe they don't belong to you my perception is a citizen is the reason we do the social science ones because we want to get data today that we can put out into the field I was at a Minerva contract review or whatever a couple of years ago and I asked for the charts and they said oh no you can't get these until they're published well whatever solutions they were suggesting we would have moved way beyond that and as a citizen I find that troubling we're trying to learn from our experiences as we go a lot of programs come through in the pipeline and they've had their experiences one type or another some of them are great case studies and we're trying to publish those out at DIU so people can learn from them I think people learn from stories probably more efficiently than any other way so when you look at what happened on you take the F-35 or the A-12 or any of our programs understanding how somebody got in trouble and what they then had to do about it to get out of it is a very important learning experience for people so the stories really do matter getting case studies out that are current I think helps too because then people can relate to that much more better and one of the reasons I'm publishing this data is to force people to start to look at the data and so as every year we're going to upgrade it and start to track our trends a lot of the things that happen in acquisition have a long lead lag time so if I put in a policy today and people start to implement it through their contracting practices say for the next three or four years it'll be several years before there'll be any data available to tell us what the impact of that was it didn't have anything statistically significant certainly and one of the reasons I started this was that I've worked for a lot of different undersecretaries for acquisition I've been a deputy and now the undersecretary we all come in with our own ideas about what will work and we all leave before anybody can find out whether they were successful or not and then the new guy comes in with his new ideas I've actually put the names it's true I've got a chart in there that shows performance of programs and it's in time scale overruns and costs and I've got the names of the different acquisition executives that were there when the decision was made to take that program into development and I believe in accountability I put on all of my ADMs who the program manager is I had occasion recently to go back and look at a program and got in trouble and say I'd like to see who was in charge when they came here and said this was all okay so we can let the leadership and the service know that this wasn't just a random event there were people who came and said this program is executable I've got enough money it's going to work I'd like to know who that was because if it gets in big trouble I'd like to talk to that person way in the back this will be the last one no I couldn't do that Michael Shragg I was struck with your earlier list of the importance of people and management and courage and leadership in delivering the programs I would like you to comment on the nature of oversight and governance of programs and in your view to what extent has oversight degenerated into compliance management versus really playing a role in accelerating and improving the quality of programs that's a great question when I got back in the building almost four years ago and I started looking at the kinds of decision memorandum we're putting out I was struck by the long list of action items most of which were come back and brief the OSD staff on X you know in 90 days or whatever or do a report and give it to staff element such and such I started just excising those out of all our ADMs I said we're here to make a decision to commit billions of dollars to a project what I want to know from you is is it ready to go or not I'm talking about my staff I don't want you to go try to manage the program after this decision is made I want you to tell me if the program manager is ready to go do it and if it's a sound plan and then I want it out of the way it's been three and a half years now I made progress with that I still have work to do probably as we were putting five thousand and two together it's basically structured with a large section it's kind of the overall system and then there are a bunch of enclosures different areas of like program management system engineering developmental tests and so on and I not entirely jokingly referred to some of those areas as sort of the I had to go through as I'm editing and say no the purpose of this is not that somebody has to come give you data or tell you something so you can do oversight the purpose of this is to help the program manager and the people in the chain of command do a better job so we're pushing back on that there is a I view my role as an executive when it comes to individual programs is largely making the major commitments for that program and assuring myself that I've got a sound plan to progress to justify those decisions and then I want an empowered chain of command to execute and elements of my staff are responsible for enhancing certain disciplines if you will like system engineering and developmental test and they have a role to play there but they're not managing the program okay they're called OIPT Leads the offices that have the various baskets of program types like strategic and tactical or C3I and so on and they organize that and they orchestrate it and they give me great advice I rely very heavily on all these people but once the program has got permission to go ahead it's supposed to go ahead under the chain of command that's in charge I don't like the term oversight very much I'm a manager and I like having a clear chain of command I like having people in charge of things oversight's a very vague term to me either you're in charge or you're not if you're not in charge you can help or you can get out of the way that's a little bit blunt but that's the way I feel about it okay Mr. Kendall one of the ways we get you to come back is we get you out of here when you're supposed to leave yeah I've got to go see the secretary and so we could go on for another hour in terms of questions but I do know you have to leave and I would like you to come back and tell us an update later on I enjoy it and this is my favorite topic to talk about Charlie and David it's always great to be with you it's great to be with John and now that you've got this wonderful venue we're back for more absolutely please join me in a round of applause we're going to move directly to our panel now and so I'll ask the panel members to come up and join me while they're coming up you can sort of take a break in place I do want to recognize the support and help that we had in pulling this together from the Aerospace Industries Association and I want to extend my gratitude and CSIS's gratitude for pulling this event together with their assistance and support and ask my panel members now to join me up on the stage Pierre Chao, John Etherton and Arnold Pinaro so welcome so we all heard the same things that you all heard over the last 45 minutes but obviously this is a much longer trail than a 45 minute speech and question and answer session so at the beginning we decided to pull together a panel of folks who have been watching these issues for a few days and ask them to join us here and provide some insight some commentary and perhaps some additional perspectives if you will to my immediate left John Etherton John as most of you know spent a few years on the Senate Armed Services Committee creating these problems and then has for the subsequent 20 years or so been trying to figure out how to deal with them and to fix them and of course he's been a stalwart in the acquisition and the interaction of the executive legislative branches on acquisition for a long and distinguished career I've asked him to provide some insight and to specifics about what Mr. Kendall said this morning and also what he didn't say to John's left is Pierre Chow Pierre of course was the founder of our defense industrial initiatives group here at the Center for Strategic International Studies a long time engaged in the defense industry and defense financing of defense industry and now runs his own firm Renaissance Strategic Advisers but he remains a senior associate here at CSIS as well and I think just a few days ago testified before the House Armed Service Committee on how to solve all these problems and then finally at the other end of the table here Arnold Pinaro Arnold also spent a few years creating the trouble as staff director of the Senate Armed Service Committee now runs a Pinaro group and has a number of comments to make as well at the end here so we're going to go in order and then we'll open up for questions first I'll give each of these gentlemen an opportunity to ask another person on the table a question and then we'll open it up to questions from the audience when we get to that we'll run the same process you'll raise your hand we'll identify you wait for a microphone and we'll follow that process there John I'll turn the floor over to you thanks David I guess this is working first of all I want to say a couple things just about my sort of general approach in my environment so that you have a sense of where some of my comments are coming from I live in the political world of decision making a lot of which is on Capitol Hill I think that one of the facts of life is that Congress is involved in this issue they've been very heavily involved in the last six or seven years and given the discussions that we're having about the ACA implementation I think next year's likely we're going to be involved even further in this and also the interest of the two committees of the armed services committees in the issue will ensure that there will continue to be legislation and I also believe that we have to expect that legislation is the main product of Congress and so when they see a problem rather than wanting to hold a hearing and look at it they're actually going to put it in some point we'll see to what extent that that occurs in the next couple of weeks as the Senate takes up the defense authorization bill on the floor I want to second the comments that Ed Pyatt made I mean I think that this report is one of the best things from my perspective it's come out of the department of defense on acquisition policy in decades I think it while it is a first step it looks at more correlation instead of looking at the underlying causative issues in some of the things that it looked at and the different factors that it looked at I think it's a very important first step and a very good process that we need hopefully to institutionalize in the department as we look at various policy choices that we'll be facing in the future I'm hopeful I've talked to the people on the hill about this and you know said drop whatever you're doing grab it and read it because it's been my experience up there that a lot of the legislation that gets developed it's done on the basis of the anecdotes maybe an oversight report or one other sort of isolated thing and then it tends to drive a lot of decision making and behavior for many years so if we could get on to a process that is fed more by reports like this and the approaches like this then I think we're going to be on a much sounder basis as we go forward especially in this very difficult environment that we're in and looking at these issues I think that the discussions within the report of the various factors and what seems to be the case when we have cost overruns or schedule changes or whatever and what doesn't seem to be the case or doesn't seem to be in any way related again is important I think it's interesting to note in my reading of this that some of the at least the instincts that inform the Weapons Systems Acquisition Reform Act like improving the cost estimating system in the process there or looking at technology readiness and decisions to go into production a lot of those issues at least the importance of those issues seem to be borne out by the information at least preliminary information coming out in this report so I think I've said to people up there I think that they can take a little bit of credit for at least being on the right track and I think that the most recent GAO report looking at trends in major weapons programs the one that they issue every spring although I think the points in there are very subtly made frankly you really have to dig through it to get a sense of what they're saying basically bears out the fact that we are starting to see some glimmers of hope on some of the issues that people have been concerned about with respect to major systems acquisition so I think there's some hope there it's also interesting to see that at least again from the preliminary information that we have in the report the contract type whether we do a fixed price contract especially in LRIP doesn't really seem to matter one way or the other in terms of outcomes at least from the information that we see and then again Congress has been very preoccupied with this both in the development side and on the side of low rate initial production and it doesn't seem to matter so that's another point I think from this report and that I've also made to the people including some of them who sponsored some of the recent legislation so I think these kinds of this kind of approach to more rational acquisition policy making in that process recognizing that we are going to have various players engaged in it and Congress is going to continue to legislate on this I also think that going forward that it's going to be critical that this process be institutionalized and not be simply the product of one individual or a small group of individuals who feel very strongly and are driving the process to produce these products they're very labor and they are they do involve resources that also have other things that they need to do and so I think that's an issue that really we need to I'm a little bit concerned about as we go forward the other issue that I think also plays into this is the degree to which the current degree of dysfunction that we have in the budget process as we go forward will essentially swamp any efforts to really understand what the underlying management behaviors are and what that the outcomes are because if we get into a situation of such great uncertainty and such great chaos and such unpredictability I think it's going to be very difficult to support future acquisition policy decision-making with any kind of reports like this I also think we need to be looking at a situation where there are sort of correlation of forces or maybe new systems that will be in place which will enable sort of much more sort of real time understanding of the issues right now in the area of auditability and the systems that are being put in place now to achieve full some degree of auditability by FY17 I think that there are some real opportunities to try to plug in some of these techniques and processes into that system and to get a more real time understanding of what's going on in the system and how we spend money I also think though that there are some limitations with this that this is mainly focused around major systems acquisition which is admittedly a very large area for DoD and the use of resources but there are other areas like services acquisition that I don't think I don't know how well this will work that these kind of techniques will work and I think there are some issues there that we need to try to deal with on a more rational basis I think the other limitation that we have is that this is primarily driven based on past information and past data I think we're on the verge of making policy choices in such areas as how do we properly define commercial items I think that's going to be a huge issue as we go forward over the next couple of years the rights, roles and responsibilities with respect to intellectual property is another area but I think is an evolving policy I'm not sure that how much we can look at this kind of approach to predict what the policy outcomes will be for significant changes in those areas and I think we're going to need to look at the implications but I think that again in general I think if we could move the broader decision making process on acquisition policy to a system that relies on these kinds of information these kinds of studies as they unfold I just think that we'll all be better off wherever the chips may fall as a result we'll look at the data thank you John thank you you've given us quite a long list of items there to pursue your perspective Dave thanks so if John comes at this as a deep student of the policy as well as from a political aspect I come at it from again a student of the policy but also from a business perspective and also someone who tries to help people with strategy as well as committing capital in this market so we come at it very much from a forcibly cold hearted approach I think and I also come at it from somebody who firmly believes that these things come in cycles and you have to distinguish between what are cyclical trends versus which ones are longer term secular trends and which ones are disruptive so the issue of acquisition reform and where we in the acquisition system is a cyclical phenomenon and I think one of the biggest mistakes we can make in the last 10 we've been in an up ramp to the last 10 years we are in a downturn that is undeniable anyone just needs to take a look at the numbers even though some people sit there and claim that we're not in one the the market peaked in 2009 and actually since the building is working on the 2015 budget frankly we're actually six years into the downturn you may not feel like it if you're in parts of the industry on the other hand talk to the companies about vehicles or many or armor et cetera and they'll tell you flat out that they are feeling the effects of the downturn and so this creates as usual I think a window of opportunity to sort of relook and reassess where we are so what's important I would argue and this is a theme that I've begun to see in a lot of these types of forms thousands of years actually spending time and commissions and studies and reports trying to figure out how to fix the system there's a lot of familiar faces in this room collectively I shudder to think how many commissions and studies we've all collectively worked on so the theme has become let's not invent more things to figure out what to do let's just figure out how to do them and that's actually not a bad place to be and this recent effort that the Mac Thornberry and others up on the hill are trying to restart another look at again at the acquisition system I believe they're actually approaching it in a very thoughtful fashion which is essentially saying can we just mind what's being out there and let's figure out what to do and there are no rush to do a legislative package just for the sake of doing one they actually want to try to purchase thoughtfully which is interesting so I think with that theme in place which is interesting I think we should all resist the urge to sign up for yet another commission to take a look and redo the analysis I think we pretty much know I think the other thing where we've made another place where we've made huge strides and David and CSIS worked on this with Beyond Gold or Nichols and the other projects this notion of let's stop trying to tweak the acquisition system with the small A which is trying to fix a broken screw with a 20 foot and instead let's take a look at the big A which is the interface between the acquisition system the requirement system and the budget the budgetary system I think that has been a massive leap in the conceptualization of the problem that's occurred over the last seven years or so I think when people started talking about it this way because I would attribute one of the reasons why you could never end up getting different results is the fact that we have layered more and more rules more and more oversight we've moved boxes around we've moved people around we've created Zars we've shot Zars we've we've done all of this stuff and yet the result end up being exactly the same it's because ultimately if you're not looking at the inputs into the system a badly architected house no matter how good your builder is is still going to be a lousy house right and so this notion I think is a notion we need to preserve as we go through this debate and not let go of right if we placed as many hours and as much mental energy into looking at how we do the requirement system as we have done on the acquisition system I think we'd actually kind of input some discipline in it I think we'd get relatively far and ultimately this gets I think a central point studies, commissions results things that people talk about in the end they're trying to fix the symptoms and not the root causes right I'm also encouraged with one other word that's beginning to show up which we never heard in 20 years the word incentives right lots of these commissions and studies and reports that sit there and says well this is what should be done and no one has said well what exactly is the incentive in order to cause the people to adopt the root cause issue I think is tied to the incentives issue part of what's embedded in the root cause one of the things that's in the root causes we are actually asking industry end the department and its organic ability sets in some cases to push the limits of technology because we have decided almost 70, 80 years ago the technological superiority was going to be one of the asymmetric advantages of the United States if you're going to push the technology limits it's going to cost a period full stop and you will have overruns because you cannot by definition guess exactly how much it's going to cost me to invent unobtainment which occasionally we do right and so you will never ever ever get the overrun numbers down to zero now that's back again to the requirements debate of where should we be pushing for those technological limits and where should we accept the 80% solution and that's not everywhere so the incentive system tied to you know where do we push for technology versus not I think is a topic that we rarely talk about the time frames that everybody operates under are disconnected amongst all the actors right I have a 10 year program I'm trying to get executed with 18 month to two year program managers overseen by two year congressional cycle two and six year congressional cycles 18 month to three year you know USD-ATNL you know under executed by industry that has to report on a quarterly basis right all those time mismatches creates such intense friction in the system and will continue to do so because those cycles exist for different reasons and other reasons so the only issue that we can do I would argue is try to mitigate some of those differentials can we budget milestone can we put program managers by milestone having people in like Ken Creek Frank Kendall and others who actually are would like to and are willing to stay in the job long enough to overcome the well I can just ignore that guy because he's going to be gone in 12 months you know oh no he's actually going to be here for a little bit longer than that maybe I ought to listen to them that phenomenon are all parts of the ones that if you really want to spend some time would probably bring the greatest fruit and this is where we need industry to do as much of an education to the government side as well as the government side doing an education to the industry side right the lack of cross fertilization of people and that spread that has occurred over the last decade or so does mean we have fewer and fewer people that sort of understand each other and have that that dialogue but this is a system you know that it's the weirdest one in the world where we would much rather spend a billion dollars and give 5% margins than spend $600 million and give 20% margins which if anybody can do the math and their heads right away knows it's actually better for the taxpayer to pay $600 million and 20% margins right and so as long as those economic incentives are on their heads I think you're still going to keep getting the types of numbers those incentives also drop into the programmatic side right you actually reward bad performance if you're a program manager who has blown their budget what usually happens you get budget given to you if you're a program manager that actually performs and delivers under budget and under time what happens to you your money gets taken away from you right so I think time being spent on those topics and I know Frank is astutely aware of some of those with the central notion that what I'm trying to do is not eliminate them to zero but mitigate and reduce I think will go a long way I'm a firm believer and never let a crisis go to waste we're going through a crisis it certainly feels like one and that gives an opportunity I think to do that and I'm frankly look I'm the hopeless optimist on these topics of acquisition reform I'm willing to bang my head against the brick wall but you're beginning to hear I would argue the right kinds of terms you know in the system one size doesn't fit all let's not do yet another study let's figure out how to implement it you know I used I heard three congressmen use the word incentives in a hearing right I've heard people talk about big A we should I would argue that those are really really full places for us to be mining if we actually really want to get from here to there thanks thank you Pierre and that was a good survey of kind of where we are and what some of our opportunities are to focus going forward we have there have been a lot of efforts over the years to figure out what to do and sometimes you find yourself wondering if these are such good ideas why are they so hard well they're hard in part for a whole bunch of other reasons but it turns out that in fact things are even bleaker than we thought and in order to shine a spotlight on that I want to turn to our last panelist general welcome sir thank you so my my focus is going to be on the war fighting side of the military is a former infantry platoon commander with a start in Vietnam and ended my career up as a division commander my greatest worry right now is the war fighting capability of the military and as an infantry officer I have to use pictures because I have a hard time being as eloquent as John and Pierre and words before I get started I want to give a shout out to Brett Lambert the former deputy assistant secretary for industrial base and manufacturing policy because what we're talking about here today and what I'm going to emphasize is the technology that our military needs Brett did similar work and trying to find out what's happening in our industry particularly at the second and third tier suppliers and you're going to hear my case today that without cutting edge technology I don't care what battlefield you're on he's back out in the private sector now Brett thanks for the terrific work you did over in the Pentagon in that area and second some of the yeah thanks great and some of the concepts I'm going to talk about this morning I owe the discussions with my colleagues over a number of years Michael Bayer and I have a presentation that we call kind of the ticking time bombs in the defense budget or other things we've worried about these things for years Kim Winkup Christian Marrone my colleague over at AIA and so some because I'm going to focus on the long term everybody's got a big hot pucker factor about the sequester and they should but in the final analysis when it comes to having real war fighting capability it's what happens in the far battle not the close in battle as a military commander you're always preparing for three phases the close in battle as the enemies in the wire and you better be able to deal with that you're always worried about the far battle and in defense for example in Desert Shield Desert Storm the great units that we had and individuals in the equipment every bit of that was put in place in the Carter administration and the early years of the Reagan administration not one weapons system on that battlefield was in the later years of the Reagan administration not one in the Bush administration so the decisions we make today are really the ones that are going to determine if we have any real war fighting capability we have the world's finest military we have it today to have it ten years from now there are three essential ingredients one is quality personnel two is the consistent and meaningful training that we give those personnel at the unit level every individual has got a unit skill whether you are a rifleman or a machine gunner or a cyber warrior or a pilot helicopter pilot you have to be trained in your individual skill and then whatever unit you're in whatever unit has a set of things called mission essential task list metals and they're geared towards what that unit's role is on the combat battlefield and those units so right now that training is not occurring across the board and finally you have to have cutting edge technology and the cutting edge technology as Frank Kendall and Pierre and John have said in the R&D it takes investment it takes industry putting their capital in an area where they think they're going to get a return it's a lot of testing all by error and a lot of our systems have trouble beginnings but become magnificent over time but you've got to have that going on at all times the sequester right now is shredding two of those three legs that make up the world's finest military training and the chiefs are testifying this morning before this ask they're going to talk about that readiness and the technology when you look at what the 13th sequester even the prior your obligations Tony Capasio had a question for Frank about the prior year cuts maybe didn't hurt you know well actually they did they were all in procurement in R&D the 6 billion they took in prior years was money that was supposed to be spent on procurement in R&D then they added another 10 billion in 13 and then I'll show you some charts in a minute on that so the modernization is being put at risk and again you can have the world's finest people and even if you get meaningful training and you don't have the technology you know how you advance the slides but I think you click on that mouse where do you click it Dave this is this is this is why the Marine Corps all we've ever wanted Epi to deliver for the Marine Corps was a tungsten stiff bayonet that never needed sharpening alright so let me see let me push that button that didn't work let me push that button there you go okay if there's three buttons you can count on the Marines to push them in the wrong order put the word out all future speakers actually that was the left button I don't like pushing things on the left I'm kind of on the right you need to kind of understand the back office and again this is stuff that Michael Bair and Kim Winkup Christian and I we worry about all the time if you want to look at the raw numbers the downturn that we're having right now is actually less than what we had in post-Vietnam post-co-war in numbers but it's dramatically different in its effect for two reasons one we don't have the fighting room we had after the Cold War we took a million active duty people out of the force at the end of the Cold War and killed off just about every major weapons system that's not there today you're not going to take the current 1.4 million active duty force down by a million people number two and the most important thing the internal cost drivers are fundamentally different and changed so between personnel healthcare deferred compensation for example military retirement for 2.4 million personnel is $100 billion a year and the cost growth and acquisition that's taking an ever-increasing percentage of the internal budget defense-wide spending has gone from 5% to 20% of the budget in just the last 10 years and the ratio what we call the tooth-to-tail ratio it's never been great but it's actually getting worse so we've got more overhead and less combat and the last thing is and we've talked about this a lot the external political balance of power is not as favorable to defense even though the world is more even though the threats are worse I would tell you right now and John and Pierre John's a true expert on Capitol Hill the spending cut hawks and the deficit hawks have a lot more votes than the defense hawks so you're not going to win this on the political landscape that we used to be able to so if we don't make some fundamental changes in the way we're approaching decisions today to be ready 10 years from now we're going to have a dramatically smaller fighting force that force will be dramatically smaller less ready and less capable all at the same time about 50% smaller it certainly won't be a force that can provide for our national security we just finished a study over let's back up one anyway we just finished a study at the bipartisan policy center this isn't the slide I wanted but I don't know how to go back press the right I did I pushed that I'll turn it over to somebody smarter than I if you can make there you go yeah MIT I can't believe it they don't even have a football team for crying out loud I went to the University of Georgia my old boss Senator Nunn used to say Arnold went to the University of Georgia that's in Athens, Georgia it's a dangerous place you drive through there with your window down they'll throw a diploma in your car I think I was sober when they threw my diploma in the car I'm not sure so CSIS all the think tanks have come to the same conclusion we did a study because there are people out there saying the sequester is not having an impact baloney it's gone from stupid to dangerous four elements and again all the think tanks whether it's McKinsey over at AEI Todd at CBSA Dave Berto Clark Murdoch there's a tremendous consensus force readiness is a deteriorating I mean I went through the bad days of the hollow force I worked in the Senate in the Carter administration and when we had the late 70s early 80s right now our C1 force readiness rating is just as bad as it was in those days the chiefs are speaking about it but not a lot of people are listening and I know from first hand experience as an infantry patoon commander in Vietnam the adverse effects when you have individuals that aren't properly trained and you don't have the equipment or ammunition that you need bad things happen and that's where we are right now in force readiness modernization is being really really cut you know the bulk of the cuts in 13 and 14 are going to be in that area and all that's going to do is make all these adverse trends worse because it's going to run up the unit cost it's going to stretch these programs out it's going to de-incentivize industry from investing in R&D where they don't see any return on that investment Frank Kendall talked about the decision process is hopelessly broken right now actually when the Department of Defense is probably the best most thoughtful process for figuring out how to prioritize industrialization and appropriation bills that's been broken for sure by the sequester and then the structural problems that I just illuminated about the increasing cost of personnel and other things basically the sequester doesn't really deal with any of that so bottom line is if we stay on the course we're on now and again this Clark Murdoch and CSIS has done some studies on this everybody and if you talk to the people in the building as many of us have while they can't say it publicly they come to this same conclusion the force the force structure the fighting force of our military and that's why we have a Department of Defense for goodness sakes not to so we all should be concerned about that and I don't care whether you de-measured in division equivalents or brigade equivalents fighter attack airplane naval combatants you know everything is and by the way in going down and the sequester is only accelerating that reduction and this again kudos to CSIS Clark Murdoch and company Kim Winkup looked at this we looked at it in some of our analytical work and there's general agreement that as the top line squeezes down and the runaway cost particularly in the personnel area when you get to 2021 at the end of the sequester there's no money left and deferred compensation and you look at if you want to measure the cost of people in O&M or you want to measure the fully burden cost of personnel which DOD doesn't do they don't track the fully burden cost the average cost a day of a soldier's $384,000 a year and that's why when they say we want to increase 10,000 troops in Afghanistan it has billion dollar price tags and so these things keep climbing and the four structure keeps decreasing this one just shows you what I talked to about in graphic terms the bathtub we actually under the sequester it's a hockey stick it pretty much it goes down in 13 and 14 then flattens out and it flattens out in constant $14 at actually a higher level than the previous drawdowns but the problem is the bang for the buck is not there so the money that's left is going to basically a lot of overhead and a lot of non-war fighting if you talk about where we are in real numbers right now and look at the sequester level at 13 Frank made the point hey we're spending at FY13 post sequester levels because we know if we start spending like we did in one October last year we're going to go in the hole we're not going to have the money so if you want to compare what the 14 sequester level looks like to the current run rate the burn rate the 13 sequester it's minus 20 billion so it's 20 billion less you want to compare it to the budget request that's the 52 billion dollars here's what pentagon wanted in the budget but at the current burn rate it's about minus 20 so what's going to happen and the big thing right now is this budget conference and I'll be candid it's probably the last chance we have to fix the sequester and if it doesn't get fixed coming out of that we're in the desk power for about the next three years so what's going to happen there this is kind of my crystal ball with all the stuff in the witches brew double-double toilet and trouble witches brew and conference muddle you know if anybody knows about you know they're a lot smarter than we are here's some possible outcomes that run from let me start at the bottom six grand or baby bargain that means you know revenues entitlements everything gets fixed for 10 years how many people here believe there's going to be a grand bargain coming out of the thing okay how about how many people believe I don't believe there will be I said hell freezes over of course remember when Jimmy Carter was running for president they said a snowball has a better chance he got elected so who knows eliminate the sequester how many people think they'll just get rid of the sequester I didn't think so alright now then you have the impasse remains that's you know bet number one is they'll get nothing done and we'll just continue how many people would like to bet on the current impasse just continuing yeah so it's a good good shmattering there no relief meaning we stuck with the cuts but we'll give defense a little flexibility but there really isn't anyway how many people think that might be the likely outcome yeah and then you've got the three and four pretty close short delay in partial offset meaning you delay it for a year or two maybe you wouldn't take away the hundred billion that we've got to cut out a discretionary spending half in defense the other one would be you know delay it a year or two and we'll find a hundred billion in offset how many think one of those two so basically you know you got your best chance between numbers you know one in four nobody knows where it's going to come out I can tell you that all of us believe in a strong national defense and believe in our country being able to fight and win wars we better be focused on that budget conference and getting the votes there to get some kind of relief hopefully we'll get a year or two breathing room so we can get back to a sensible way of decision making because if nothing happens there I fully believe we're in the absolute despiral through the remainder of this administration you have a new president and a new congress and by the way all the alarming trends that we talked about that Michael is articulated in his briefs and Clark here at CSIS Todd, Mackenzie, Gordon Adams everybody the sequester makes every single one of them worse it doesn't fix one thing it doesn't it makes the tooth to tail worse it doesn't deal with any of the runaway cost on personnel it continues to drive down in strengths it continues to allow the overhead to stay in place and it makes the deal all the good things that Ash and Frank had been doing and others before them it just is going to wipe those things off you better buying power 2.0 when it comes up against the tsunami that's the sequester that tsunami is going to drown every bit of that out this is just more detail on the procurement to show you these are real cuts and these cuts hurt particularly when you've cut you touched all 800 procurement programs and you know you can see that in detail and look them up on CSIS website same thing in R&D R&D by the way already was the bill payer in the FY14 to 18 budget what was growing the kagers in the budget as submitted by the administration R&D was down about Brett was at about 15 to 19 percent so it and other things were growing like 1 or 2 percent FY14 to 18 so it before the sequester it was already the bill payer and it's made a lot worse and I mean this is our seed corn this is the bottom line if we're going to have a world class fighting force 10 years from now if we basically continue on the path on R&D we are not going to be where we need to be and here's the reason why people said there was no impact the 37 billion that was cut in 13 that was budget authority but it only had a 10 billion dollar outlay impact in the last four months of fiscal 13 and there will be 20 billion of the 13 cut that is hitting now in 14 there will be another 20 billion I just mentioned to you and outlays from the 14 so that's 40 billion times worse right in 14 then it was in 13 and you can see it's cumulative and it gets to the peak in 15 so the notion out there by some that would like to keep the sequester in place it's not having any bad impacts it's just balderdash and then here's the way things ought to be done you know you've got vital interest you've got threats you have strategy you develop requirements you have the PPBE you come to the congress you make your case they approve it or disapprove it and it worked and it provided the world's finest military for a lot of years yeah it's an ugly process but it worked and it provided it and now the sequester comes in and just breaks those links so that's where we are right now and when you break those links the area that we're focused on here today which is modernization and the final analysis it's the heart and soul of our military again you know we have a joke in the that's everything but they can't walk on water so if Ed Piat doesn't give us amphibious ships how do you get him to the fight you know the C-17 you gotta have planes like that to move you gotta have helicopters you gotta have a global positioning system everything we do in the military today depends on precision where does that come from that comes from R&D it comes from trial and error it comes from industry so without a healthy industrial base you know we are just not gonna make it and we are absolutely on the wrong bend side of the curve in all these areas right now thank you General Pinaro thank you it's a very um uplifting and uh you know I want to I want to suggest that perhaps you've earned another diploma here this morning an MBA for a mouse briefing aptitude and I'm grateful to you for that opportunity thank you at this point I was gonna give the panel an opportunity to ask each other questions but we've only got a few minutes left and I know there are a lot of questions left from the floor so I think we'll give the first opportunity for questions from the floor raise your hand we'll bring a microphone down and I'll start with the column because you got left out in the previous version so if you come on down for the first question here and if you want to grab my eye and be next in line this is a good time to do it Colin Clark breaking defense I think everybody here knows and would agree that bad and are likely to get worse given that the deficit hawks the budget hawks whatever you want to call them are in the ascendancy the tea party did get delivered several knocks in the elections yesterday but given the small number of Americans who actually have anything to do with the military given the small number of people on the hill who've ever had any experience in the military why do we think that things will get better well I'll start no that's fine I mean I'm not sure that I think things will get better but I do think I'm always looking for hopeful elements or hopeful things in the environment I do think that notwithstanding the fact on the hill that you have a lot fewer people that have actually served in the military I do think that's especially for people to understand the military life and the hardships and some of the challenges there I do think that we I'm impressed and I think Pierre alluded to it in terms of talking about the hearing last week with the armed services committee I think to the extent that the people have a sense of the choices that they have to make in a clear sense of that I am impressed with the level of discussions that people are having in these places and I think that as we get more information and I look at obviously my focus is on the acquisition system and the choices there but I think to the extent that we have information about the impacts and things like that we have a very well experience especially at the senior level on the hill on the committees that do have jurisdiction and in some cases even into the leadership in the House and Senate at least a framework a conceptual framework that would allow them to understand things as long as they can see the evidence of things happening and again to the extent that people can put choices out there that are clear I am hopeful that once as the evidence accumulates that it will drive people in a better place on decision making I also think it's really important to define what better means right and I don't mean to be sort of parsing words but from the perspective of yeah if better we mean by process and how we decide I think there's a lot of work that can be done relative to that if better you mean by I don't want the budgets to drop get over it the budgets are dropping and they do they have since 1776 they go up and they go down so the mere fact that they're going down is not the reason to frankly go berserk and in fact only in DC is a decrease of an increase of cut okay those charts that show those big cycles which are constant dollars that's really important for policy wonks the world lives in a current dollar world right on a current dollar basis that chart has gone up and continues to go up and we're talking about it going flat right so there's there's there's certain elements of it in fact even if you take the worst predictions and now some people are saying you could get worse than the worst prediction but the worst predictions at the bottom still has our bottom higher than where the peak of the Reagan build-up was if you had told somebody in 1990 that the next bottom of the next cycle was going to be actually not higher but but near the top of the Reagan build-up they would have told you you're friggin insane for you for thinking that it would be quote unquote that good right we have an industry that is going into this downturn with a senior management team whose formative management experiences were in the last downturn I would submit you they know how to handle the downturn if you know you have an industry that has the lowest levels of debt that they've ever had so they're going in financially healthy into a downturn right so the parts that are feeling horrible I think more have to do with this decision making process and all that right if you told the Pentagon here is your number five years from now and you have five years to plan for it it will do a very good job and the commerce and the industry the I think the angst that we're all feeling is in the mechanism by which we're doing it and the turmoil that's creating in the frankly the short circuiting of all of these good positions that we're in and so you know the better from that for that you know so the last point I would make though is and I've said this before right because I've looked at the work for example that my firm has done in 2008 we were doing five year forecast I look back at what were we saying in 2008 about 2013 we were within five billion dollars of where we are including sequestration not because we were geniuses but if you're willing to be cold hearted about the analysis I bet you this entire room collectively we can figure out where 2018 is plus or minus 10% and if this room can figure out where 2018 is plus or minus 10% you can do strategic planning and you can plan for that we're in a very weird world where normally the future is fuzzy I agree I cannot predict the next six weeks but I submit this room pretty much if you're willing to get to be cold hearted about it we know where 2018 is so get on with it I think that's the right approach but the bigger it's not the number it's what we get for what we spend and if we can have a certain number and follow the right decision process but if they don't tackle the ticking time bombs within the defense budget the defense wide the growth of personnel health care the ever increasing cost of weapons you're not going to have the military force that you need and I find that as you inform people and you educate people particularly on the hill and you talk to them in sensible terms and say look we need to buy some time there's a chance that they they may you know vote with you and when you talk about what the troops need to prevail you know I'm reminded of the story or what's going to happen he says why we'll whip them Yankees with corn stalks well the war came out the right way he ran for governor of Georgia got elected that same reporter asked general tombs what happened he said them Yankees didn't fight with corn stalks so when you go tell our congressman and senators do you want our troops fighting with corn stalks well absolutely not well senator that's what you're doing right now under the sequester we need some breathing technology so that because we don't know what that battlefield 10 years from now is going to absolutely look like but we know that if we don't make the investments in the next 10 years we're not going to prevail that resonates with them now well that when the day and the votes the other thing they understand though too is force structure a lot of these people they may not have defense industries and their kids may not be in the military but trust me when you have a 24th year you have two armored cords at Fort Hood or you have Air Force Research Center and Dayton they understand the job impacts and they understand when industry lays off people it's jobs but when the military and the civilian workforce gets laid off it's jobs too so as bad as the congress is on a lot of things one good thing is they still understand it's people with jobs of keeping on the same course art my apologies two other quick points 2014 we had more members of congress coming out of the former veterans so I think that thing is starting to swing back the other element it's speaking truth to power part of the thing that's going on and Ken Krieg has pointed this out in other settings we've gone from a draft military to an all volunteer military to a professional military there's a difference between those three categories that partly belies what some of those numbers are and a professional military is an expensive military even relative to a volunteer one relative to and that's part of again just admitting what it is and budgeting and planning appropriately for like Secretary Kendall I like to do analysis with real data the analysis I've just done is we got one question seven minutes left I'm going to squeeze two questions in and then see how we can do so if you bring the mic to the gentleman here who's got his hand up in front no, no you bring the mic to him and you bring your mic over here to the guy in the middle and both of you ask a question and we'll answer them together Jeff Bialos I'm a Washington lawyer I guess my question is the following I'm someone with Pierre on this in 1999 to 2000 when Bill Lynn brought to the leadership when I served there the budget for 2000 and he said look what we've done we have a 300 billion dollar budget it's up from 240 and everybody got up and applauded today the number you're talking about is five something or other that we're going to be at with sequestration and I guess my devil's advocate instinct is to ask why if we don't can't we if it's a downturn can't we live within those means and still have a robust military and I think there are three things to me to think about here one is the chart we saw up on the board before that showed the number of aircraft and carriers I question whether that's the most meaningful way to look at US military power going forward I have serious questions I didn't see a lot of other kinds of capability up there from UAVs to cyber security to a whole range of other things that defines how potent we are and I think I do agree with the general on this point which is that the reality is you need to figure out a way to cut force structure if you don't cut force structure in a sequestered world the reality is you are going to have these problems pushing all the cost on R&D and three a rule of thumb we got through the 90s by keeping the RDT&E budget reasonably level while the defense procurement budget went down unless I looked we fought at the end of the 90s and thereafter and you have to ask yourself why isn't data a way forward here in a period where we're not going to probably have too many new major programs starts thanks all right Jerry thank you very much for the presentation Jerry Brown anyone who comes into the department from the outside in the tail section looks around and says why do we have three of these and four of those and six of these and so on and so forth time and memorial you know back to McMarion DLA I'd like the folks on the panel given the squeeze on you know the growth of tail but the squeeze on cost to give me odds since you're all great strategic thinkers on the odds that two years from now we'll be back in this room talking about major consolidations of organizations and functions in the tail area 100% at least on that question right that's where anybody in corporate America would tell you when you sort of face a downturn and a squeeze what's the first thing you go after is overhead and certainly Gates and Panetta started talking about it so if you really want to do it it's the issue of taking a look at what the priority stack is and what's genetically core to the institutions that we're talking about and what will they start to shed right frankly in some ways there's too much money in the system for people to start looking hard at that if we go down the curve you know and look at buying power you're going to have a good hard look at all those which is why in some ways I'm actually long term structurally bullish about the opportunities for the industry on taking over some of those functions I think you know Jeb you're pointing about capabilities versus sheer numbers is a very astute and pointed one in terms of how we how we measure that I think at some point numbers become quantity becomes quality right we're probably not close to that in lots of areas based on where you go and the only difference where history doesn't repeat itself but it rhymes you know with that element is I could cut a lot of procurement and keep my R&D alive the last time around because I had all that cold war inventory to live off of which I'm still living off of is now getting really really old and so the question becomes do I have a reversion of that phenomenon where I don't have that that inventory to live off of that forces me to do a procurement versus R&D trade off so I think that's going to be one of the hardest issues and one of the most fascinating ones to zoom in on is not the overall investment dollar number but what's that mix shift between R&D and procurement and that's going to be a little bit partly I think a function of kind of where we are in reality relative to some of the issues that you've raised about I'm going to cut it off at that point we could actually discuss this usefully and in fact half of this audience could be up on the podium here as well or maybe all of you and this is a topic that we're not going to finish today but in deference both to our panel members and to those of you have given up a big chunk of your morning to be here we do want to end on time because that way we're going to come back as well I would ask you to do two things one join me in thanking the Association Aerospace Industries Association for their support and second join me in thanking our panel for their participation in joining and we'll assemble a victory party after the budget conference has produced a result thank you