Published on December 29, 2007
Cost Realism and Analysis —Renewed Focus in Today’s Environment: Cost Realism and Analysis — Renewed Focus in Today’s Environment June 2002 Richard Janda Vice President Independent Cost Evaluation Lockheed Martin Corp Agenda : Agenda Environment Cost Performance Path Forward Audience Questions Environment: Environment Environment: Environment Defense Industry Consolidated into a Few Large Players Intense Competition Budget Impact High Debt. . . Competitive Stratification Defense Industry an Oligopoly . . .BA $35.80. . . .LMT $43.95. . . .NG $94.80. . . .Raytheon $31.50. . . .BAE. . . .$5.19. . . .EADS $11.28. . . 4 SCEA June 2002.ppt Environment : Environment 5 SCEA June 2002.ppt Industry Margins Eroded-Single Digit ROS Common Industry ROS Below Historic Average Industry Operating Margins 1999 2000 2001 General Dynamics 12.7% 12.8% 12.3% Northrop Grumman 12.7% 15.1% 7.9% Raytheon 9.3% 9.6 9.0% Boeing 6.5% 6.7% 8.6% Lockheed Martin 7.2% 7.0% 7.5% R & D Subsidies of 90’s Fierce Competition For Few Remaining Opportunities Performance Issues Over Supply Remains Corporate Credibility Being Tested “Enronitis” Wall Street Ready to Punish Weak Performance Source: Annual Reports/10Ks EnvironmentFavorable DoD Policy Changes Emerging : Eliminated Paid Cost Rule Ordered End of R&D Subsidies Increased Progress Payments Encouraging Performance-based Payments Permit Contractor Share in Cost Savings Under Consideration Government Receptive To Industry Issues Environment Favorable DoD Policy Changes Emerging 6 SCEA June 2002.ppt Slide7: 1910 1950 1970 1990 0 5% 10% 15% 20% 25% 30% 35% 40% Environment Threats Drive Defense Spending Defense Spending as % of GDP Source: Lexington Institute 1930 WWII Korea Vietnam Cold War WWI 2007 Est. 9/11/01 Berlin Wall 12/07/41 Cuban Missile Crisis Desert Storm EnvironmentDoD Budget Authority: Environment DoD Budget Authority Current $ in Billions Bush Proposed 5 Year Budget Plan MILPERS O&M Procurement RDT&E Other QDR: QDR From “Threat” Based to “Capability” Based Key Goals Assure Allies Dissuade Adversaries Deter Aggression Decisively Defeat Operational Challenges Protect the Homeland Guarantee Information Systems Project Power Deny Sanctuary, Greater Surveillance Strengthen Space Operations Apply New IT Concepts (C4ISR) Recapitalization, Homeland Security, Transformation 9 SCEA June 2002.ppt Environment: Current $ in Billions MILPERS O&M Procurement RDT&E Other Bush Proposed 5 Year Budget Plan Environment Budget Stability Improving Spiral Development Nunn-McCurdy Enforcement Defense Budgets More Realistic 10 SCEA June 2002.ppt Environment: Environment Summary Defense Industry an Oligopoly with Unfavorable Operating Margins Government Receptive to Improving Industry National Security Dependent on Successful Transformation From “Threat” to “Capability” Deterrence The Path To Success is Through Solid Execution and Improved Performance The Nation Needs Good Performance! 11 SCEA June 2002.ppt Cost Performance: Cost Performance “The inability to control the cost of modern weapons is arguably America’s greatest long-term military vulnerability.” Fallows, James “Uncle Sam Buys An Airplane.” The Atlantic Monthly June 2002: 62-74. Cost Performance: Cost Performance Too Many Major Overruns SBIRS High Space Station Global Hawk Theater Ballistic Missile Defense What’s Causing The Cost Growth. . .? Source: Selected Acquisition Report (SAR) December 31, 2001 Top 10 Reasons For Poor Cost Performance: Top 10 Reasons For Poor Cost Performance Top 10 Reasons For Poor Cost Performance : Top 10 Reasons For Poor Cost Performance Proceeding Rightly From a Wrong Premise Estimating Cost Based on an Unsound Assumption Masks Significant Cost Risk. When (Not If) the Program Over-Runs, the Original Estimate will be Remembered but the Under-lying Assumptions Will Not Validate Assumptions. Do Not Assume Away Risk! Abbott: I say Who's on first, What's on second, I Don't Know's on third - Costello: You know the fellows' names? Abbott: Certainly! Costello: Well then who's on first? Abbott: Yes! Costello: I mean the fellow's name! Abbott: Who! Costello: The guy on first! 15 SCEA June 2002.ppt Top 10 Reasons For Poor Cost Performance (Cont’d): Top 10 Reasons For Poor Cost Performance (Cont’d) New Learning Curve Theory As the Quantity Increases, the Unit Price Does Not Change, and May Go Up If the Tasks are Not Highly Routinized, Repetitive, Labor Intensive, and Without Gaps, There is No Learning Top 10 Reasons For Poor Cost Performance (Cont’d): Top 10 Reasons For Poor Cost Performance (Cont’d) Do Not Mistake the Act of Planning for Actually Having a Plan Series of Program Plans D’Jour is a Certain Indicator of a Program in Trouble Today’s Plan Top 10 Reasons For Poor Cost Performance (Cont’d): New Moore’s Law Top 10 Reasons For Poor Cost Performance (Cont’d) For Development, Proven Trend of Less Cost Per Unit of Computer Function Equates to Greater Functionality for Same Cost, Not Less Cost (e.g., Hrs/Dwg) Graph Source: http;//www.intel.com/research/silicon/mooreslaw.htm Top 10 Reasons For Poor Cost Performance (Cont’d): New Math Concepts Top 10 Reasons For Poor Cost Performance (Cont’d) EVM New Math (.9 + 1.1) ÷ 2 = 1.3 at Complete Cum CPIs of 0.9 Can Never Be Offset by 1.1 TCPIs, Unless Aided by Outstanding Negotiation of Additional Scope Synergy Savings Formulae: $1.00 – 30¢ = $1.00 Unless Demonstrated, Benefits of New Initiatives Should Not be Assumed New Ways of Doing Business to Save Cost is Good Practice, Assuming 100% Realization of Same is Risky Top 10 Reasons For Poor Cost Performance (Cont’d): 20 SCEA June 2002.ppt Top 10 Reasons For Poor Cost Performance (Cont’d) Test As You Fly A Test Plan That Does Not Replicate Flight-like Conditions is Incomplete and Underscoped. Cutting This Corner Will Cause You To Pay Later in Spades. Top 10 Reasons For Poor Cost Performance (Cont’d): Schedule, Schedule, Schedule Top 10 Reasons For Poor Cost Performance (Cont’d) Aggressive, Accelerated Program Schedules Ensure Major Slips and Cost Growth. 21 SCEA June 2002.ppt http://www.sotafx.com/Roger/Gallery/Jack.html Top 10 Reasons For Poor Cost Performance (Cont’d): Top 10 Reasons For Poor Cost Performance (Cont’d) COTS = Certain Overrun To Schedule High Percentage of COTs/Heritage/Re-use Software Code in Development Means High Percent Overrun High Growth Low Growth Low COTS Assumed High COTS Assumed % of COTS/Re-use/Re-host S/W Assumed Total S/W Cost Growth % Top 10 Reasons For Poor Cost Performance (Cont’d): Soft Funding = Hard Times Top 10 Reasons For Poor Cost Performance (Cont’d) Changes in Funding Are Always Less Than Resulting Changes in Cost (Cumulative Impacts) Top 10 Reasons For Poor Cost Performance (Cont’d): Top 10 Reasons For Poor Cost Performance (Cont’d) Precision Without Accuracy Poor Up-front Definition of Requirements, Including Their Decomposition and Flowdown, and Program Plan (Technical, Contractual, Schedule and Cost) Portends a Troubled Program and a Cost Baseline Without Credibility Path Forward: Path Forward Path ForwardGood Example - JSF Acquisition Approach: Path Forward Good Example - JSF Acquisition Approach Phased Down Select to Award Parametric Life Cycle Cost Data by Anticipated Phase From Each Competitor Shoulder-to-Shoulder Review Reconciliation of Cost Estimates Between USG and Contractor Encourage, Identify, Fund and Prototype Cost Reduction Candidates Early During the Down Select Process Do Not Encourage Contractor Investment 26 SCEA June 2002.ppt Path ForwardGood Example - JSF Acquisition Approach: Weight Evaluation Criteria Toward Performance and Realistic Cost, Not Lowest Cost Recognize the Risk Associated with the Work Scope and Use the Appropriate Contract Type Development – Cost Plus Production – Wait Until Risk has Been Mitigated Incentivize the Winner for Good, Balanced Performance: Technical, Schedule and Cost Path Forward Good Example - JSF Acquisition Approach 27 SCEA June 2002.ppt Path ForwardContractors Should. . .: Path Forward Contractors Should. . . 28 SCEA June 2002.ppt 28 SCEA June 2002.ppt Vigilantly Protect Against “The Top Ten” Perform Independent Cost Evaluations (ICE) of Their “Single Best Estimates” to Validate and Substantiate Credibility Reconcile Program Estimates & Independent Assessments Between Customer & Contractor Understand Differences & Rationale But. . . Maintain Independence & Propriety Path ForwardContractors Should . . . (Continued): Path Forward Contractors Should . . . (Continued) 29 SCEA June 2002.ppt Track Estimates & Calibrate/Adjust Estimating Systems/Process/Models for Improved Accuracy Establish & Maintain “Headlight” Metrics Above & Beyond Standard Earned Value to Assure Early Warning of Performance & Risk Issues Conclusion: Conclusion U.S. Government and Aerospace Contractors Must “Partner For Success” While Maintaining Arms Length Relationship Open and Candid Communication To Ensure Success Proper Contract Type Successful Business Plans For Customer & Contractor Stable Program Requirements & Funding
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