The economics of enterprise transformation: An analysis of the defense acquisition system.

다국어 초록 (Multilingual Abstract)

Despite nearly 50 years of attempts at reform, the US defense acquisition system continues to deliver weapon systems over budget, behind schedule, and with performance shortfalls. A parade of commissions, panels, and oversight organizations have studied and restudied the problems of government acquisition with the objective of transforming the defense acquisition enterprise, yet the resulting legislative and procedural changes have yielded little, if any, benefit. Thus, the obvious question is why has acquisition reform failed? Three potential contributors were identified in the literature: misalignment of incentives, a lack of a systems view, and a lack of objective evaluation criteria. This dissertation attempts to address each of these problem areas.
First, I consider the issue of incentivization in the context of defense technology policy. A frequent criticism of defense acquisition programs is that they tend to employ risky, immature technology that increases the cost and duration of acquisition efforts. To combat this problem the Department of Defense rewrote their acquisition regulations to encourage a more evolutionary approach to system development. Nominally, this requires the use of mature technologies, but studies have revealed that acquisition programs continue to use immature technologies in spite of the new policies. To analyze this issue, the defense acquisition cycle was modeled as a stochastic process. Then, assuming that each acquisition program serves a diverse set of stakeholders, game theory was applied to show that the stable solution is to employ immature technology. It turns out that there is a tragedy of the commons at work in which the acquisition program serves as the common resource for each of the stakeholder groups to achieve its objectives. Since there is no cost to using the resource, there is a tendency to overexploit it. The result is an outcome that is worse than if there had been a coordinated solution. Thus, the rational actions of stakeholders will lead to a contradiction of acquisition policy. Consequently, if the Department of Defense expects adherence to its evolutionary acquisition policy it must either strictly enforce technology maturity requirements or else realign incentives with desired outcomes. Second, I evaluate cost and performance implications of the most recent defense acquisition transformation initiative, evolutionary acquisition. Proponents suggest that evolutionary acquisition will lower acquisition program costs, shorten delivery times, and improve the performance of fielded systems through the use of shorter and more incremental acquisition cycles. Supporting arguments focus on the impact of evolutionary acquisition on individual programs but fail to consider the defense acquisition enterprise as a system.
To address this shortcoming, I analyze the impact of evolutionary policies through the use of a discrete event simulation of the entire defense acquisition system. It was found that while there should be an increase in the performance of fielded systems under evolutionary acquisition policies, the cost of operating the defense acquisition system as a whole does not inherently decrease. This is because the shorter acquisition cycles created by evolutionary polices mean that the overhead costs of each acquisition cycle are incurred more frequently. If these overhead costs do not decline sufficiently, the net cost to operate the acquisition system rises. This finding demonstrates the importance of considering the entire acquisition system before implementing a new policy. Finally, I address the lack of objective evaluation criteria by developing a method to value acquisition process improvements monetarily. This is accomplished through the combination of price indices and options analysis.
Since the US government is a non-profit entity, traditional cash flow based valuation methods are not applicable. Instead, the use of price indices captures the changes in the government's buying power induced by acquisition reforms. This may be converted into an equivalent augmented budget stream that allows traditional investment evaluation tools to be applied. An additional advantage of the buying power method is that it captures the impact of the economies of scale inherent in the production of military systems. The augmented budget stream serves as the basis for applying options analysis, which properly accounts for the risk mitigating effects of staging. A comparison of this new method with more traditional methods reveals that only considering cost savings can significantly undervalue acquisition improvement opportunities, and even small improvements can have large returns.