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
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.
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.
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.
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.
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.
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.
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.
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.
Go to TOP of page
Home -
About NCAT -
Affordability -
IPPD -
Contacts -
Links -
Archives
This site is under continuous change, last updated on March 21,1999
Please email all comments, errors, or additions to the webmaster.