The Insider

The Pentagon acquisition office recently released a "directive-type" memo outlining an updated acquisition policy for defense business systems (DBS). The memo:

Establishes policy requiring the use of the Business Capability Lifecycle (BCL) model as the acquisition process for DBS, and assigns responsibilities and provides procedures for meeting BCL and DBS requirements. The principles of BCL can be applied at the increment or at the release level - BCL provides the framework for structuring the definition, development, testing, production, deployment, and support of DBS. This model is a guideline and tailoring, consistent with statute and sound business practice, is encouraged.

The memo mandates that BCL is "the overarching framework for the planning, design, acquisition, deployment, operations, maintenance, and modernization of DBS," and applies to any DBS modernization effort with a total cost of more than $1 million. Further:

When a Major Automated Information System (MAIS) DBS employs an incremental acquisition approach, all functional capabilities associated with a given increment shall be reflected in any resultant Acquisition Program Baseline (APB) (cost, performance, and schedule) and must be achievable within 5 years from when funds were first obligated. For all DBS that are not MAIS or otherwise designated, they must achieve Initial Operating Capability within 5 years from Milestone (MS) A. Delivery of capability within an increment (e.g., releases, sub-phases, software drops) must be based on technologies that have been determined to be mature at the MS B decision review. Functional capabilities that are not supported by adequate cost estimates, mature technologies, etc., shall be deferred to subsequent program increment(s).

Lobbyists for Taiwan are claiming that allowing the island to import F-16 fighter aircraft would have a "positive impact" on U.S. jobs, noting Lockheed Martin announced last week that 1,500 workers would be laid off from its aeronautics division.

U.S.-Taiwan Business Council President Rupert Hammond-Chambers said in a statement released today:

The recent Perryman Report shows that the follow-on sale of F-16s to Taiwan would have a positive economic impact around the country, generating some US$8.7 billion in gross output and sustaining approximately 16,000 direct and indirect jobs over the life of the program. That would represent a significant economic boost to states such as Ohio and Florida -- where unemployment stands at 8.6 percent and 10.6 percent, respectively. Reports estimate that 1,800 workers in Ohio and 1,900 in Florida depend on an F-16 sale to Taiwan. Should the Taiwan sale fail to materialize, however, current orders would only sustain the F-16 production line for another two years.

Last week, Inside the Pentagon reported that Defense Secretary Robert Gates had quietly agreed late last year to transfer responsibility for the Defense Department's information network to U.S. Cyber Command, but reversed that decision in the twilight of his tenure, according to a memo he wrote. Further:

Gates' memo on the disestablishment of the Pentagon's Networks and Information Integration (NII) office, issued earlier this week, describes DOD's plans for shuttering the office following months of uncertainty about how the department would proceed.

Inside the Pentagon reviewed a copy of the memo, which is addressed to DOD acquisition executive Ashton Carter, NII boss and Chief Information Officer Teri Takai and Christine Fox, the director of the cost assessment and program evaluation shop.

Gates -- who retires today and will be succeeded by Leon Panetta -- first announced plans for NII's closure last August. Gates' chief of staff, Robert Rangel, set a March 30 deadline for the task. When DOD failed to meet the deadline, Pentagon officials admitted the task was harder than expected, but they declined to comment on the details of internal deliberations.

But the new memo reveals Gates "tentatively agreed" last December to "a conceptual approach that involves transferring significant responsibility for the operation of the DOD information network" from NII and the Defense Information Systems Agency to CYBERCOM.

The website for Takai's office states she is responsible for setting policy and providing oversight of information processes, systems and technologies. DISA provides information technology and communications support to the White House, the armed services and the combatant commands. CYBERCOM chief Gen. Keith Alexander has said his command coordinates, integrates and synchronizes activities to direct the operations and defense of DOD networks.

Gates writes that issues raised by Fox's office in February led him to "recognize there are a number of significant policy, operational and practical concerns with shifting DISA to CYBERCOM that no longer make it a viable approach."

The department will abandon plans for such a shift and refocus on disestablishing NII, the memo states.

"To this end, I believe the best course for the Department is to return to the original goal of disestablishing NII into a smaller and more focused and strengthened Chief Information Officer (CIO) office that has a strong relationship between DISA and CYBERCOM and achieves savings from eliminating functions that are duplicative or no longer necessary," Gates writes.

We now have a copy of the memo. Click here to view it.

Analysts from Wall Street firm Credit Suisse met with shipbuilder Huntington Ingalls Industries execs this week and noted "a cautiously optimistic tone." In a research note, Credit Suisse analysts write: "While HII sees upside in earnings and cash flow over the long-term, it is now focused on the heavy lifting required in the short and mid-term to build a cultural and operational foundation to achieve that end." Further:

■      No Guidance Yet: HII has yet to offer EPS guidance, citing visibility around Avondale as a key factor, and instead suggested investors track ship progress & milestones over financial targets.

■      Gulf Coast Margin Remains Key Driver & Watch Item: Mgmt reiterated its 9%+ L/T margin target by year-end 2014 (currently at 5-6% overall, and near 2% in the Gulf Coast).  Poorly priced contracts on LPDs 22-25 and LHA-6 (now at or near zero margin as prior mgmt’s plan for serial efficiencies were never realized) will begin to roll off later this year.  As new ships (DDG-113, LHA-7, LPD-26) move from planning to construction, margin should ramp, albeit slowly. HII noted that normally, lead ship contracts should earn ~8% while serial production ships represent a ~10% margin opportunity.

■      Mgmt Frames Report of Higher Potential Cost on Aircraft Carrier:  A June 2011 CBO report estimates that CVN-78 (Ford) may exceed its $12B budget target by $600M or more.  HII cautioned that its portion of the work is far below the $12B total cost, and the excess cited may not be attributable to HII.  Under this cost-plus contract, higher costs are recoverable, but fee could be impacted, depending on the responsible party & the share line.

■      No Near-Term Catalysts; Reiterate N with $35TP: While we see eventual EPS growth as bad contracts roll off, the linearity of improvement is unclear, especially since new work (with presumably better pricing) will be booked conservatively at first. Thus, visibility on margin improvement (the key catalyst) is still a year or more distant in our view. Reiterate N with a $35 TP.

Inside the Pentagon reported in April that HII, according to DOD, was not moving fast enough to fix its management deficiencies:

Huntington Ingalls Industries' shipyards stumbled last year in Defense Department reviews concerning earned value management, the Pentagon's top tool for ensuring industry delivers weapons on time and on budget. Since then, the shipbuilder has not made enough progress addressing the problems, said Capt. Cate Mueller, spokeswoman for Navy procurement chief Sean Stackley.

"The Navy participated in the recent EVM reviews with the Defense Contract Management Agency at the shipyards and, while noting progress, is not satisfied with the rate of progress," said Mueller. "We will continue to provide oversight while working with the shipyards to ensure appropriate priority is placed on correcting these deficiencies."

The Navy's comments came in response to remarks by Mike Petters, the shipbuilder's president and CEO, who recently said his company has "more work to do" on earned value management but also questioned whether all the rules should apply (Inside the Pentagon, April 7, p1).

DOD uses the EVM tool to flag problems, forecast cost and schedule performance, and get troubled Pentagon procurement programs back on track. Asked whether the company should apply all 32 of the Pentagon's management rules to each of its contracts, Petters said no.

"I wish it was that simple, but it's not," he said. "We get certified by our customer to invoice and report. And we do that, we go through all those certifications and we don't have any issues. Then we have another agency monitor and inspect and they come up with areas that we need to go work on. And then we take a look at those and say, 'Is that something that really makes sense for this business or not?' And then we have a discussion with our customer about that."

Two organizations that were under U.S. Joint Forces Command's umbrella have found new homes, according to the soon-to-be-defunct command.

The Joint Enabling Capabilities Command was reassigned from JFCOM to U.S. Transportation Command. According to JFCOM:

The JECC will retain the Joint Communications Support Element (JCSE), the Joint Public Affairs Support Element (JPASE) and the Joint Deployable Team (JDT) as subordinate organizations.

"The JECC is pleased to be a part of the USTRANSCOM team and we will continue our mission of providing joint enabling capabilities on short-notice to joint force commanders worldwide," said U.S. Navy Rear. Adm. Walter E. Carter, Jr., JECC commander.  "The support we currently supply to the joint warfighter will continue without interruption as we are reassigned to USTRANSCOM."

The JECC provides immediate, short-duration support to establish, organize and operate joint force headquarters across the globe and combines capabilities from the six unique functional areas of plans, operations, logistics, information superiority/knowledge management, communications and public affairs.

The JECC will be a subordinate joint command of USTRANSCOM.  The JECC headquarters, JDT and JPASE will remain in Hampton Roads, Va., and JCSE will remain at MacDill Air Force Base in Tampa, Fla.

Additionally, the Joint Warfare Analysis Center has been moved from JFCOM to U.S. Strategic Command. In a separate statement, the command announces:

The JWAC provides comprehensive technical analyses on a wide array of national security challenges and issues to inform and support decision makers engaged in both combat operations and in policy-making sessions at the highest levels of our government.

“Our military and civilian professionals will continue to support the joint force by providing innovative solutions to our nation’s most pressing war fighting problems,” said Marine Corps Col. Michael R. Orr, commander, Joint Warfare Analysis Center.

After transition to USSTRATCOM, JWAC will continue work from its current location in Dahlgren, Va.

The Congressional Budget Office today released an assessment of the Pentagon's five-year future years defense program. Among its conclusions:

-- To execute its base-budget plans for the period covered by the 2012 FYDP, DoD would need appropriations totaling about $206 billion (or 8 percent) more over those five years than if funding was held at the 2011 level of $536 billion. Over the 10 years from 2012 to 2021, DoD would need a total of $597 billion (or 11 percent) more than if funding was held at the 2011 level.

-- DoD's base budget would grow at a real (inflation-adjusted) average annual rate of 1.8 percent from 2012 to 2016 and by 0.5 percent from 2016 to 2030. At those rates, DoD's base budget would rise from $554 billion in 2012 to $594 billion in 2016 and to $642 billion in 2030.

-- The primary cause of long-term growth in DoD's budget from 2012 to 2030 would be rising costs for operation and support (O&S), which would account for nearly all of the increase. In particular, CBO projects significant increases in the costs for military and civilian compensation, military health care, and various operation and maintenance activities. O&S costs would grow steadily throughout the projection period, from $350 billion in 2012 to $459 billion in 2030, a growth rate of 1.5 percent per year.

-- That large contribution of operation and support costs to long-term budget growth is a change from the years before the wars in Afghanistan and Iraq, when sharp growth in anticipated requirements to replace and modernize weapon systems (the so-called bow wave) was the primary factor underlying projected budget growth beyond the years covered by the FYDP. In CBO's current projections, acquisition costs (the costs of developing and procuring weapon systems) would grow steadily from $189 billion in 2012 to a peak of $217 billion in 2019 (an increase of about 14 percent) before decreasing and leveling off -- albeit with year-to-year variations -- at an average of about $197 billion per year through 2030.

The White House released its national counterterrorism strategy this morning, a document that "formalizes the approach that President Obama and his administration have been pursuing and adapting for the past two and half years to prevent terrorist attacks and to deliver devastating blows against al Qaeda, including the successful mission to kill Osama bin Laden," according to an administration fact sheet. Further:

Rather than defining our entire national security policy, this counterterrorism strategy is one part of President Obama's larger National Security Strategy, which seeks to advance our enduring national security interests, including our security, prosperity, respect for universal values and global cooperation to meet global challenges.

This Strategy builds upon the progress we have made in the decade since 9/11, in partnership with Congress, to build our counterterrorism and homeland security capacity as a nation.  It neither represents a wholesale overhaul -- nor a wholesale retention -- of previous policies and strategies.