 About a year ago, I used this same medium to communicate with you on several acquisition and planning initiatives. Since then, a lot has happened and I thought it was just about time that I gave you a progress report on what we've been accomplishing. I guess the first thing I ought to say to you is that the initiatives are still alive and very well, every last one of them. Some of them have been cuffed around a bit, but they've accumulated surprisingly little scar tissue in the intervening year. Since the original videotape was made, I've been on a full-court press, as have my product division commanders and other acquisition managers, to get the word out, both within government and the industry, to get it out specifically about what we're trying to do. We've tried to have the sort of interchange that I believe is absolutely essential to the success of any complex endeavor such as this. Last October, I hosted a meeting for the chairman or president of the twenty companies with which we do the most business. In addition to being one of the most productive days that I've spent as commander of systems command, I think my industry guests enjoyed feeding back to me some of their ideas and suggestions about the initiatives. Everyone left, myself included, with a much warmer feeling about what we're trying to do and the degree to which we could push it. Our product division commanders, who were also at that October meeting, have been hosting similar seminars at their organizations as a way of measuring industry response. The point is, my radio isn't wired to transmit only. I've had the volume way up on receive as well, and it'll stay that way. I said that this is going to be a progress report, and I can truthfully say that we have made considerable progress in this last year, real progress. I can tell you with conviction, backed up by hard data, that we're currently doing a much better job of managing the taxpayers' money than we were before we started these initiatives. Obviously, that was the whole idea in the first place. The first thing I'd like to talk about today, as I did last time, is Project Vanguard, the name that we've given to the initiative to improve our planning process. I talked about Vanguard first, last time, because it sets the stage for everything that follows. We've institutionalized this process over the past year, and it's now become standard operating procedure with us. Every dime we spend on R&D and acquisition is now directly traceable to the Vanguard plan. I told you last year that the major operating commands are customers like SAC, TAC, and MAC who are participating with us in Vanguard. This year, the Air Staff has agreed to join us as well, and we've been working hand in glove now for several weeks using this process to develop the R&D and acquisition part of the 1982 to 1986 PON. Another tool I talked about in the earlier videotape is baselining. I'm very proud of our accomplishments on this one, although it hasn't received the outside attention of some of the other initiatives. I guess that's because it's basically internal to systems command. But it is definitely this one in our process, something that I believe was badly needed. As of today, we have a near zero net base year cost growth since we started baselining our programs. This accomplishment notwithstanding a rather major cost growth on one of our programs that came to light during the process of establishing its baseline. Now I don't want you to think that I think that baselining is a panacea that's going to solve once and for all our cost growth problems. It certainly isn't that, but it sure does help. I guess of all of the new management initiatives in AFSC, the ones that have received the greatest attention from industry, and I might say the greatest publicity or notoriety depending upon your viewpoint from the media, are those dealing with contracting. I guess most of you are aware by now that I've been emphasizing such things as more competition, increased use of firm fixed price contracts, where they make sense, tighter incentive contracts, greater use of warranties, heavier weight to pass performance in source selection, draft RFPs, multi-year contracting, and a few others. Now we've made significant gains this year in competition. The number of competitive awards has increased by just under 30% since we started the drive on competition, and as this chart will illustrate, sole source dollars were cut by more than half this past fiscal year, from 34% of our new contract dollars in 1978 to 15% in 1979. And about half of those remaining sole source dollars are subject to only limited control by AFSC. These dollars are dedicated to things like 8A minority awards, unsolicited proposals, educational institutions, directed procurements in the life. To be sure the record is straight, I want to repeat something I've said many times. We're not trying to compete everything, just everything where we believe competition will yield a tangible benefit to the taxpayer. Now some have asserted that we're pushing competition at the expense of legitimate unsolicited proposals. We definitely are not doing that, as the statistics on this chart will clearly show. Our rate of acceptance of unsolicited proposals rose from 47% in 1977 to 53% in 1978 to 77% in 1979. Now we've made reasonable progress in getting more competition thus far, but I'm not satisfied yet. Unfortunately we still have some residual sole source folklore to contend with in spots, but we'll handle that. We also will continue for some time to be plagued with situations where in the past we just didn't buy enough data to enable us to compete some things. A good example of that is when we want to make a major mod to one of our older systems. In such cases we quite often have to go sole source to the original manufacturer just because we don't own enough data to compete. I tell you that to explain my current penchant for assuring that adequate data, or data rights, are bought when we make the original contract. Now related to competition, another bit of folklore that's making the rounds is that we want to second-source everything, that just isn't so. We expect and demand an economic payback for any second-source development, and if we can't forecast that payback then we just won't second-source. I expect each contractor to have a good potential to reap a reasonable reward for his investment in the program. That's true for the original source and it's true for the second-source, and if that situation can't exist second-sourcing isn't in the cards. Now we already have second-source contracts for Gaeid Ammo and a few others and we're currently planning leader follower or second-source for such programs as the advanced medium range air-to-air missile or AMRAM, the joint tactical inflammation distribution system or JTEDS, class two terminals, and for now Star User Equipment and there are going to be others. As I said earlier we've cut sole-source contract dollars in half. In fiscal year 80 I intend to keep the steam up on scrubbing of individual program contracting strategies to be sure we stay in a competitive mode. I'll be concentrating very directly on trying to establish a better competitive atmosphere. I'd like to get to the point where competition is accepted as a given in our industry as it is in other industries. I believe industry, government, and the taxpayer will all benefit if we can cross that Rubicon. I'm convinced not only that we can but that we're three-quarters of the way across already. I intend personally to keep pulling hard on the oars as long as I can contribute anything to the task. I guess that the area within my contracting initiatives most often discussed by industry is the use of firm fixed price contracts. A few months back there was a lot of comment around the circuit for the effect that Slay was trying to force FFP contracts on everything and was pushing all the risk of development off on the contractor. I was quite regularly button-holed by people who obviously viewed my ventures into the world of FFP with a considerable degree of alarm. But when I explained what my policy really is on FFP there was generally a pause in the conversation and a comment that went something like this, well yeah that sounds okay and I don't object to that but your people are going to overreact. That was several months ago. I believe that by now everyone is concluded that I'm really not a bomb-throwing anarchist and that my policy on FFP is not that unreasonable after all particularly from a taxpayer's viewpoint. Also I detect more and more acceptance of the FFP policy as being fairly reasonable even from a corporate business viewpoint. We still have some understandable worry about overreaction. I worry about it myself. A good bit of that has gone away or at least has been put in a holding pattern and I intend to keep a close eye on that. Don't misunderstand me. I know that there's just bound to have been some overreaction somewhere out there and there undoubtedly will be some more here and there. I'd be rather naive if I believed anything else but I think we're over the hump. Everyone I talk to down in our AFSA trenches has a correct word on my policy regarding FFP and is trying his best to implement it with good judgment. Once again for the record I'll restate that policy. We do not specify firm fixed price contracts for risky development efforts or for any other effort where cost visibility and program stability have not been established. It's true that there's been a big increase in the use of FFP at systems command as this chart shows FFP dollars on new contracts tripled in FY79 over FY78 while cost reimbursable contract dollars declined from 47% to 20%. This tripling of our FFP dollars this year has occurred mainly because I've insisted that FFP be used on mature production programs. Only about 9% that's NINE percent of our R&D money is awarded on FFP contracts and most of that is for level of effort studies and a few competitive prototypes. 80% of our R&D money is still spent on cost plus type contracts where the government shoulders the bulk of the risk. We've also been tightening up share ratios and lowering ceiling prices on fixed price incentive production contracts. In 1977 only 46% of our FBI contracts had share ratios of 75, 25 or steeper. That number was up to 86% this past year in FY79 and I expect to see the number increase further in FY80. The average ceiling price on our FBI contracts has also dropped during the same period from 123% to 119%. Now you recall that I promised that with firm fixed price contracts and tighter FBI contracts goes extra profit. That's completely in accordance with DOD policy and it's completely in accordance with common sense. You ask, how have we done in that regard? I believe that this chart tells it all. We've followed through on that promise. Since we started these contracting initiatives our negotiated profit rate has increased across the board from 10.7% to 12.1% almost a percentage point and a half. That is totally consistent with my drive to get industry to share more of the risk with us. In my book, more risk equals more potential profit. Less risk equals less potential profit. Another area of current emphasis is on warranties. This requires a lot of study and a lot of tailoring. In August we held a joint systems command industry meeting in Seattle to discuss the subject where we agreed on the scope of the issues involved. In November we met again with industry and log command and nominated several programs on which we're going to try out some of those new warranted methods. I'll let you scan the list. As you can see, these programs just about run the gamut of what we buy from airframes and engines to munitions, electronics, satellite ground station equipment, etc. This new venture will probably involve revising some regulations. It'll certainly mean developing a specific warranty, a product performance approach for each program. We might consider, for example, to guarantee of only a critical system or component rather than the entire system itself. Or, on the other hand, we might want to negotiate a rate of fixes with a contractor. In that latter case, we would agree to pay for a certain flat percentage of the fixes and the contractor would pick up the remainder regardless of how they were caused. Of course that would require a very close coordination with the log command and their depot people, but I think it's workable. Our use of draft RFPs and industry murder boards is an area that's received a very favorable response and is working well in practice. There are many recent cases where we've incorporated industry comments to the benefit of both parties. We've been emphasizing draft RFPs more and more. In fact, we've doubled our use in the past year and industry response has been absolutely great. Last year, we got over six times the number of comments we received the previous year. This kind of very positive response is going to greatly improve our RFPs and I believe it's going to improve the entire acquisition process. Many of you have already heard that we've completed our experiment on past performance. We tested it as a major rank factor in seven recent source selections and as a general consideration in seven others. We found past performance to be an effective tool, a highly effective tool, and we're now using it in all our source selections. Not too surprisingly, we found that past performance was useful to us only when it was relevant to the contract currently being considered. In other words, if we were letting a contract for a radar system we didn't worry too much if the company had had some technical problems constructing a bridge and that's also firmly implanted as part of our policy. We've already made one big award and a couple of small ones where past performance was a swinger on the selection. We plan to weave it into every major evaluation area so that it'll have significant weight throughout a program. If for instance a contractor proposes to use a data management system similar to the one that he used on an earlier program, we want to know how well that previous system worked. Our push for multi-year contracts has gotten a lot of attention and support from industry but our progress in government can only be described as not spectacular. Therefore, us and industry completely agree that it beats the present system by a mile. Dribbling our requirements out one year at a time as we now do it makes long range planting difficult. Difficult for you and difficult for us and it also costs the taxpayer some money. That system certainly doesn't do much to incentivize industry to make capital improvement in planting equipment. But I have to report sadly that I haven't had much success. I haven't yet broken the code on multi-year. I don't know whether I'm tipping over too many rice bowls in this process or whether I'm just going about it wrong but I've accumulated three strikes thus far on multi-year and I'm still trying very hard for my first success. I guess if I were the type to get discouraged I would be now on multi-year. We failed completely on the A10 buyout and on the second generation laser-guided bomb and it now appears that we just busted our pick again on the ALQ-155 B-52 power management system. That was a 54 million dollar effort where the contractor was investing 500,000 of his own money in tooling and developing a second source for a critical sub-component. A multi-year contract on that item would have saved the taxpayer over 10 million dollars. We thought it was a good deal for everyone but thus far we've been unable to get the full funding regulations waived. We're still pushing multi-year very hard and we want it on the next contract for Gal 8 ammo. That's for the A10. That one looks like a winner to me but then I thought the ALQ-155 was a winner so it just shows how much I know. The problem is that in spite of congressional and GAO clamoring for more flexible use of them over here we still manage to trip ourselves up with all the bureaucratic rules and red tape. To try to correct that I'm personally sponsoring a combined door change and legislative package that's going to allow if it gets through systems acquisition through multi-year. I'm going to keep plugging away at this dragon until I either make a dent in his hat or he eats me up and right now I wouldn't guarantee which will happen. Believe it or not I'm still confident of eventual success. Just remember Tampa Bay almost made it to the Super Bowl. Getting back for a moment to our October seminar one of the three panels was on our productivity problem how to get increases and how to incentivize industry. That's one of my greatest concerns. It's a concern not only as commander of AFSC but as a citizen as well. I feel very deeply that we just have to improve our productivity if we're to hold our heads above water over the next couple of decades. Every sector of American industry and the aerospace industry in particular is faced with an aging industrial plant and stiff competition overseas. In my last videotape last spring I mentioned that I visited many European and Japanese aerospace plants and was very impressed by what I saw. But you don't have to take my word for it. This chart depicts productivity rankings in the western world over the last few years. It clearly shows that the United States is practically at the bottom of the heap. But even more alarming to me is not just our declining rate but the fact our overall productivity will be surpassed by several countries in just a few years. The aerospace and defense industry is unfortunately not exempt from this productivity blight and at a time when we're talking about increasing production of some of our systems I'm deeply concerned. I've discussed this at great length with a number of you in industry and with other government people and I fully realize it's a very very difficult problem to solve. A tight capital market such as we have now lack of proper incentives etc make many contractors unwilling or unable to invest sizable corporate funds and productivity improvements. The end result in many cases is a continued reliance on old government supplied equipment and facilities. A couple of strategically placed people have tried to convince me that the marketplace should prevail and that the government shouldn't have to incentivize capital improvements. Well philosophically I can agree with that but unfortunately I haven't seen much in the way of industry stepping up to bat some but not much and I think I understand why. That understanding tells me that the marketplace factors that force modernization in the consumer goods industry just does not and probably can't have the same effect on a considerable sector of our defense industry. I wish that weren't so but unfortunately I believe that's the fact of life that we have to contend with. Therefore we've been looking very hard for ways to incentivize capital improvements. The largest and most comprehensive of these incentive plans was a twenty-five million dollar government investment at General Analytics for Worth. That total investment of twenty-five million by the government and one hundred million by the contractor is expected to reap net productivity savings of over two hundred million dollars. The package included government manufacturing technology funds, special termination protection, award fee use and shared savings. We used elements of that plan on similar packages on Guy E. Ammo and on other contracts and we're planning the same approach for other programs with large production requirements. Things like AMRAM, GPS user equipment to mention a couple. I strongly urge that you and industry put your minds to this problem. I know you've already been doing that but as I said before we've got to do better. I need hard proposals for deals like the one in G.D. Fort Worth. I need concrete suggestions as to what should be done to facilitate industry investment. I need help carrying the message to Congress for legislative action to address the problem. I want to solve amount of full court press on this thing now. The timing will never be better because the right people are in a listening mood right now on the subject and we really need to see some progress. The final initiative I want to report on is our push towards standardization. We're now working in close coordination with Air Staff to publish lists of items that project managers and program managers have to review before they specify government furnished or contractor furnished equipment. Right now that list is only in the hundreds of items that we expected eventually to be in the six thousand to ten thousand item range. On many of the smaller items we'll develop multiple sources so that we can continue to have the benefit of competition. I know that there are drawbacks to standardization. We could standardize on mediocrity for example or we could standardize and make it easier for the intimate to counter our weapons and we could standardize and stifle competition. We could even standardize and stifle inventiveness and technological advancement to allow any of those things to happen would be dumb and rule number one in my book is don't do anything dumb. The world won't stand still and we know that constant changing threats and changing technology are going to continue to require new developments but we have to make sure we aren't constantly inventing new wheels when the old set would do us just as well. You recall that on that last videotape I gave industry seven challenges. I can't say that we've been able to vanquish all seven of those dragons but by golly we've stepped up to them and we've stepped up to them jointly with industry. At the core of my program of contracting initiatives is a very very simple truism. It takes two signatures to make a contract. It'll take two parties to make these initiatives work without industry understanding and cooperation we're dead in the water. That's why I've been so actively seeking advice from our partners in industry. That's why I make so many speeches on the subject. That's why I hosted the seminar last October. That's why my product division commanders are hosting similar seminars. That's why I meet so often with aerospace executives. That's why I'm on the phone so often with so many of you. I believe all of that communication is needed. The payoff I expect is simple also understanding of my goals and expectations. I believe that that understanding will foster cooperation and cooperation is what it's going to take to get the job done. To wind up this session I'd like to say something I've said before but it's something that bears repeating over and over and over. Under no circumstances do we want to manage the taxpayers money in such a way as to constipate our system. I certainly intend never to lose sight of and I don't want you to of the driving principle of everything that we do in AFSC and of everything you do in defense related industry. We're here for a simple single but overriding purpose all of us to develop and build equipment which will be adequate for us to win a war we hope we never have to fight. Management techniques and contracting strategies are totally subordinate to that purpose. In and out of themselves they have no meaning no substance. My initiatives relate to the process but the process is not the end. That centrally important fact often gets lost in the shuffle in our business. I remind you of that fact as I remind myself. I ask you to keep it in your middle computer and help me to ensure that we in systems command don't forget it. I thank you very much for giving me your time.