An Industry Perspective of the COMMERCIAL O&S SAVINGS INITIATIVE (COSSI)

31 JANUARY 1997

DUAL USE APPLICATIONS PROGRAM

National Center for Advanced Technologies
1250 Eye Street, N. W., Suite 1100, Washington, D. C. 20005
Phone (202) 371-8451 Fax (202) 371-8458 Internet ncat@ncat.com



Table Of Contents


Overview

The Department of Defense, through the Dual Use Applications Program Office, recently initiated a novel program to help reduce the operations and support costs of existing, fielded weapon systems. The program, entitled the Commercial Operations and Support Savings Initiative (COSSI), was formally launched with a January 15th, 1997 announcement and solicitation to the private sector to respond with proposals for evaluation and subsequent award. Preliminary discussions with industry representatives participating in the Multi Association Industry Affordability Task Force at NCAT prior to the issuance of the formal broad area announcement and solicitation, helped to formulate the concept of the initiative.

There has been a lot of activity in defense acquisition reform in the past four years. Many of the sacred cows of defense acquisition have been put under the strong light of "Necessity" focused by a lens of declining defense resources. A lot of changes have resulted. Specification reform, the Single Process Initiative, Cost Vs Performance Trades (Cost as an Independent Variable), and Integrated Product/Process Development, are a few of the sweeping changes that have been successfully initiated. Regulations and directives have been discarded or re-written ( DoDD 5000.1 and DoDI 5000.2 ). In many of these reforms, the voice of the industry was sought and listened to. More importantly, many of the ideas of the industry component have been accepted and incorporated in the changes. Most importantly, these comments and reviews were sought prior to the issuance of new direction; an unprecedented reliance on the partnership of industry and government. The environment has been one of clear receptivity to suggestion on the part of the department, and one of eager participation on the part of the industry.

The COSSI program is designed to develop and test a method to reduce operations and support costs of fielded military systems by inserting commercial technologies (products and processes). The concept underlying this initiative presumes the use of proven commercial products and processes which require less development, special equipment, and test costs and which will reduce the cost of operating and supporting the overall fielded system. It also supposes that the capability, reliability and efficiency of the system will, at the minimum, remain the same.

On balance, the program is innovative. It attempts to bring a fresh, new perspective to the world of defense acquisition. Lowering O&S costs being the primary motive, the traditional decision process will be changed by the COSSI. Based principally on the typical commercial activity of the "business case" the initiative shifts Profit & Loss (P & L) risk directly to the company. The concept of "product value pricing" versus "cost based" activity, shifts acquisition decision risk directly to the government acquirer. The decision to buy goods and services will now be based on price and best value alone. These ideas, new to defense procurement, are imbedded in other innovations and trial programmatic ideas, that, (if acceptable to both the defense community and the industry), could change the way the traditional defense acquisition system operates. However, there still exists a modicum of skepticism on the part of the industry because of traditional acquisition practices. This paper will attempt to point out the skepticism and remedies as it weaves through the issues.

Comments

General

The COSSI program incorporates a fast track solicitation, teaming, response, evaluation and award of a two stage process. The first stage involves a company forming a team of respondents (one of which needs to be a for profit company). A proposal to provide a prototype of a component, product, process, software or service, using commercial technology in the form of processes or products that will be imbedded in a system or subsystem, is then submitted. Incorporated in the proposal is a business agreement and a price for the subsequent production run, delivery and installation of "kits"; this is the second stage of the program. "Kits" are defined broadly, and could incorporate open commercial standard items (viewed more favorably in the proposal evaluation) as part of the solution, but could include a product or service that is either "for sale" commercially or is "just about to become commercially available". The program is open to all companies, large and small, and addresses only existing systems in the field. Industry fully supports this general concept.

O&S Savings vice S&T

This part of the Dual Use Applications Program, the COSSI, is targeted at reducing the operations and support costs on existing systems. Industry has actually been waiting for such a program and applauds the effort to dedicate resources to develop commercial technology insertion programs in existing fielded weapons systems. Sustainment has been an issue receiving greater attention in industry. Providing solutions to diminishing manufacturing sources and the rapidly growing number of obsolescent parts could get a big boost from the intent of the COSSI program. The use of commercial parts and processes could alleviate the need for lengthy development and costly test & evaluation programs if pursued according to the planned initiative. However, there is industry concern regarding the total acceptance of commercial technology insertion. Once a Phase I program development is bid and proposed, there is some concern that there might be attempts to conduct further EMD level development in phase II to address certification, testing, and qualification requirements. Companies are concerned that government agencies may insist on traditional certification and qualification routines that could drive costs higher. This type of addition to the program should be avoided. The intent of the COSSI program is to save O&S costs using existing commercial technology, therefore re-certification of platforms and subsystems because of the insertion of commercial parts would reduce or even eliminate any savings.

Cost Sharing

Normally one of the more controversial and least accepted parts of any government program is the idea of cost sharing. Of course, it is a good way for the DoD to leverage its diminishing resources. In the case of some programs that result in substantially "defense unique" products, cost sharing provides little incentive for the company participant. The unpopularity of cost sharing increases as the formula for sharing becomes more proscribed. For example, a specific per cent cost share mandated for entry into a program would likely result in less company participation. The COSSI, with its flexible cost share, provides a better incentive to company participation than other cost sharing programs because the percent of share can be calculated with the attendant risk and payback to both parties, then proposed as part of the total program, and accepted or rejected by the customer. Since Independent Research and Development (IR&D) accounts can be used by companies as an application of resources in the cost share, one would expect the companies to use this avenue to its maximum. The government, on the other hand, would probably see greater "faith" and confidence in the proposal if "cash" were offered as the cost sharing offset (more faith being displayed as the percentage gets closer to a shared "fifty-fifty" proposition). The flexible cost share of the COSSI program is seen as a factor that will allow for real competitiveness of participating companies as they put together their proposals. From the government's point of view, one of the discriminating factors of the selection process will be "how much is the company willing to put up front?". Covering the cost of bid and proposal, development and kit research and packaging with some portion of company money leveraged by the balance of government funds is an attractive business proposition to many companies. However attractive, there remains a good deal of skepticism that the good deal will fall apart when the proposal gets to phase II. Every attempt must be made to assure that programs continue through both phases.

There are separate issues regarding IR&D as a potential source of resource sharing. From a company perspective, IR&D funds have become very scarce for new program use. Using these scarce resources in projects without substantial payback will be hard to sell to the company leadership. Investing IR&D resources in a small program without apparent outyear support will not be a likely competitor for internal industry funding. Cost sharing IR&D could refocus these company resources into areas and directions other than originally planned. The reluctance to use IR&D as a source is heightened as it becomes apparent that phase II continuance weakens or commercial technologies evolve in directions different than anticipated for the project.

The likelihood of cash being offered for cost sharing is also a problem in the aerospace industry today. While the profitability of aerospace is up in the past year, the consolidations recorded in the industry today could lead one to assume that companies will be loath to apply cash resources to any share ratio program if the outyear recoupment is unclear. Given both sources of resources available, companies will probably opt more for the IR&D application of the cost share spectrum. The Dual Use Program Office, however, has continuously leaned more toward cash contributions. An in-depth dialogue to discuss cost sharing expectations should be expected at the bidders' conference. What should be remembered in all of these discussions is the underlying reason for the initiative, the reduction of O&S costs.

Other Transactions Authority (OTA)

The DARPA "Other Transactions Authority" (Sect 845 FY 1994 Defense Authorization Act, Sect 804 FY 1997 Defense Authorization Act), used as the vehicle for pursuing Phase I, provides an ideal situation for trying out the COSSI concept. Operating with more flexible contractual vehicles will cut proposal process time, and the attendant company costs of getting on contract. The flexibility afforded by the OTA will also allow concentration on aspects of the initiative with which companies have more concerns, such as: negotiations of the business case, agreements of proprietary rights, service agreements, warranties, guarantees etc. Since not many companies have done any government business within the guidelines of the other transactions vehicle, it might take some time for a degree of comfort, and confidence with the non-FAR apparatus to develop. There are some concerns regarding the non-traditional phase I OTA being followed by the traditional FAR contracting processes in Phase II. The COSSI intent is perceived to be a straight fixed price purchase of kits and services made according to the business agreement agreed upon in phase I. The industry skepticism is: the government auditor and overseer will still require cost based information during phase I, and in production (phase II), there will be a requirement for in-process specification review.

Service Involvement

Individual service program manager "buy in" as a team member was originally proposed during discussions as part of this initiative but is not seen in the BAA. A government team member participating "up front" in the process would be an outstanding method to insure total support by all the stakeholders. Weapon system O&S programs have traditionally been fragmented in support, usually suffering reduced resources as budget is used for other contingencies. Bringing the weapons system program manager into the COSSI program early, as originally proposed, would have increased the likelihood of successful program initiation and continuation through phase II commitment. There is concern that phase II continuations may not occur because of funding constraints or lack of dedicated resources to fund the second phase of the program. The concern is valid. It must be recognized that the COSSI business cases submitted by respondents will be built based on the assumption that both phases do occur, and phase two does contribute to the offset of resources applied in the development stage. It appears that the majority industry viewpoint is this: involvement of the program office as a COSSI program team member is the best assurance of program stability and will lower the risk of a phase II not occurring. From the government perspective it should be obvious that programs incapable of being funded for the second phase will not survive the process, unless the service is a team member, the final evaluator, and funder of the kit insertion in phase II. The clear identification and participation of the specific military customer, and the support for the proposed follow on phase II "kit" provides a strong incentive to participate in the COSSI. If a significant number of Phase II's disappear due to change of support, mission, or revised budgetary priorities after the completion of phase I, the credibility of the COSSI will be substantially damaged.

The timing of the initiative with respect to Phase I and Phase II insertion also warrants some attention. For large dollar programs, it may be financially imprudent for a company to commit appropriate resources for cost sharing considering the fact that obtaining commitment from the services will most likely require two years after Phase I startup. This could have a chilling effect on proposing more ambitious programs that are potentially capable of producing significant O&S savings.

Cost Vs. Price

Lastly, the transition from cost based contracting to price based purchasing appears to many on the industry side to be the most significant change to overcome. It is unclear how the government intends to establish a "fair and reasonable" basis for determining kit prices as it relates to projected O&S savings. Kits requiring significant non-recurring engineering (NRE) and other non-commercial costs in the "wrapping" for fielded system insertion will be difficult to analyze. While not required by the program, nor mentioned in the BAA, there is some concern that the provider will be requested to provide cost and pricing data to support the government customer analysis. There is some industry skepticism that the government customer will be able to complete an analysis of price without additional information from the provider. The concern revolves around the notion that the customer will inevitably find themselves in the position of asking "what is a reasonable amount of profit for the contractor to make based on their cost of development?" Unfortunately, that notion is contrary to the intent of this COSSI initiative. Commercial industry relies on price based purchasing where competition for market share, good product ideas, and best value purchases drive prices to a "fair and reasonable" level. Government customers will have to recognize this as a normal way of doing business. The COSSI experiment seeks to implement defense acquisition in more of a commercial model than the past; price based purchasing decisions for the government buyer should logically follow suit.

Summary

There are a number of new ideas embedded in this initiative that received close scrutiny and discussion. Further industry examination, continued review and comment, and certainly full and open participation between government and industry is necessary as the program evolves. These new ideas warrant close tracking by industry and government to insure that the successes are institutionalized and the pitfalls and "blind alleys" are catalogued and avoided in any future iterations of the program.

While the COSSI effort is addressing the shorter term issue of the DUAP program, there is a longer term component that must be infused into the DoD S&T program. The NCAT Multi Association Affordability Task Force, which provided the input for this white paper, is ready and willing to continue the dialogue for the S&T portion of the program and to address any future activities in the COSSI program that might catalogue lessons learned or pitfalls to be avoided.


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