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Defense Acquisition Trends, 2015: Acquisition in the Era of Budgetary Constraints

Core Content Overview

This report, Defense Acquisition Trends, 2015, examines the trends in U.S. Department of Defense (DoD) acquisition in the context of budgetary constraints. It is part of an annual series by the Center for Strategic and International Studies (CSIS) titled Defense Outlook, focusing on strategy, budget, forces, and acquisition. The report analyzes the evolution of DoD's procurement approach, the role of innovation and R&D, and the changing dynamics of the defense industrial base.

Main Sections and Key Findings

1. What Is DoD Buying?

• Defense Innovation Initiative (Third Offset Strategy):

  • Launched in 2014, the Third Offset Strategy aims to maintain U.S. technological superiority through human-machine collaboration and combat teaming.
  • Success is measured not just by technology development, but by how effectively these technologies solve operational problems.
  • Key guideposts for success include funding, force structure and doctrinal changes, and responsive investment priorities.

• R&D Contract Obligations:

  • Despite overall budget cuts, early-stage R&D (Basic and Applied Research) has seen a notable increase in share of total R&D contract obligations, rising from 27% in 2009 to 38% in 2014.
  • System Development & Demonstration (6.5) has declined significantly, indicating a five-year trough in major weapon systems development.

• Services Contracts Resilience:

  • Spending on services has remained relatively stable even as overall defense spending has declined.
  • Services declined less than product and R&D obligations, suggesting that services may be more resilient in the current budgetary environment.

2. How Is DoD Buying?

• Acquisition Reform Efforts:

  • In 2015, the DoD launched Better Buying Power 3.0 (BBP), which focuses on preserving U.S. technological superiority rather than just improving efficiency.
  • The 2016 National Defense Authorization Act (NDAA) introduced significant reforms, including consolidation of acquisition authority and accountability within the military services.

• Contract Incentive Structures:

  • There has been a shift toward fixed-price incentive contracts, which have increased in use, while other types of fixed-price contracts have declined.
  • Cost-plus fixed fee contracts have grown, and disfavored incentive types like award fees have declined.
  • The report suggests that future efforts may see an increase in both types of incentive contracts.

• Effective Competition:

  • Despite policy goals to increase competition, the rate of effective competition (contracts receiving at least two offers) has remained steady.
  • The Air Force has seen a notable decline in effective competition within its services contracting portfolio.
  • The report emphasizes that the majority of contract breaches and terminations occur on large, long-term contracts, highlighting the complexity and risk in these areas.

3. Whom Is DoD Buying From?

• Small Vendors:

  • Small vendors accounted for the largest share of defense contracts in 2014 (19%), the highest since the series began in 2000.
  • In real dollar terms, their obligations did not increase, but they managed to maintain their share in a challenging market, indicating a success in accessing innovative small firms.

• Big 5 Defense Vendors:

  • The Big 5 (Lockheed Martin, Boeing, Northrop Grumman, Raytheon, General Dynamics) have seen a decline in their share of R&D contract obligations, from 63% in 2006 to 41% in 2014.
  • This decline is attributed to the cancellation or maturation of large R&D programs and the lack of new major development programs.
  • The Air Force is expected to reverse this trend with upcoming large development contracts, while the Army remains uncertain.

• Defense Industry Consolidation:

  • The defense industry is consolidating, which may affect the diversity of suppliers and the ability to access innovative technologies.
  • DoD is beginning to engage more with Silicon Valley, though the base of such participation remains narrow.

4. What Are the Defense Components Buying?

• Army:

  • Struggles to start and sustain new major development programs following the failure of the Future Combat Systems program.
  • Has the opportunity to re-evaluate future threats and missions due to the current lack of developmental funding.

• Navy:

  • Has major development programs in the pipeline, such as the Ohio-class ballistic missile submarine replacement.
  • However, budget constraints have delayed timelines for these programs.

• Air Force:

  • Preparing to begin large-scale development efforts, including for the Long Range Strike Bomber (LRS-B).
  • The trend of declining R&D obligations for the Big 5 is expected to reverse as new programs are initiated.

• Defense Logistics Agency (DLA):

  • Plays a key role in procurement and logistics, with a significant share of contract obligations.

• Missile Defense Agency (MDA):

  • Focused on developing and fielding missile defense capabilities, which are critical for national security.

• Other DoD Components:

  • Include various agencies and offices responsible for different aspects of defense acquisition and R&D.

Conclusion

• The DoD is navigating a period of budgetary constraints, which have led to a decline in contract obligations and a shift in acquisition priorities.
• The Third Offset Strategy is a key initiative aimed at maintaining technological superiority through innovation and integration with military personnel.
• Acquisition reform efforts, such as BBP 3.0 and the 2016 NDAA, are underway but will take time to show results.
• The defense industrial base is evolving, with small vendors gaining more share and the Big 5 losing ground in R&D.
• The focus on contract incentives and effective competition remains a challenge, with complex contracts posing the greatest risk.
• The report underscores the need for patience and strategic planning in assessing the long-term impacts of these changes on defense acquisition.

Key Information Highlights

• Budgetary Constraints: Postwar drawdown, budget caps, and sequestration have significantly impacted DoD spending and acquisition capabilities.
• Third Offset Strategy: Aims to enhance military advantage through innovation and technology integration.
• R&D Trends: Early-stage R&D has increased in share, while later-stage programs have declined, indicating a shift in focus.
• Small Vendors: Have shown resilience, particularly in services and electronics & communications (E&C) sectors.
• Big 5 Vendors: Losing market share in R&D, especially due to the lack of new major development programs.
• Contract Incentives: Fixed-price contracts are on the rise, but come with higher risks of termination and cost overruns.
• Acquisition Reform: Requires time and careful implementation to yield meaningful results.
• Silicon Valley Engagement: A growing area of interest, though participation remains limited and focused.

Data and Methodology

• The report uses data from the Federal Procurement Data System (FPDS) and DoD financial summaries.
• It includes detailed analysis of contract obligations by budget account, platform, and vendor size.
• CSIS emphasizes the importance of long-term evaluation and the complexity of the acquisition system in assessing reforms and trends.

Implications for the Future

• The recovery from budget constraints is expected to be slow and limited.
• The Army may benefit from the current pause in major development programs to reassess future requirements.
• The Air Force and Navy are expected to see some reversal in R&D trends as new programs are initiated.
• The role of small vendors and the integration of commercial and non-traditional technologies will be increasingly important in the future of defense acquisition.