2

3

0%

2%

4%

6%

8%

10%

1985 1990 1995 2000 2005 2010 2015FY

5-­‐year  Moving  Average:  MDAP  Contract  Portfolio  Annual  Total  Cost  Growth

5-­‐year  Moving  Average 31-­‐year  average

5-year Moving Average of Annual Growth of Contracted Costs

(largest contracts on major programs, 1985–2015)

3

4

5

Post Goldwater-Nichols

Reinventing Gov’t Transformation TSPR

Better Buying Power

2

Reagan Buildup 31-year average

War on Terror

Contract Growth: Development and Early Production (scope growth + overruns; in dollars, after inflation)

1

n = 1,123 contracts for 239 programs

TSPR = Total System Performance Responsibility

Approved for Public Release; Distribution Unlimited. 16-S-0565, 2 Dec 2015.

4

0%  

2%  

4%  

6%  

8%  

10%  

12%  

14%  

16%  

18%  

2010   2011   2012   2013   2014   2015  

EBITDA

 Margin  (%

)   Average  

Lockheed  MarAn  Corp  

Northrop  Grumman  Corp  

Raytheon  Co  

General  Dynamics  Corp  

Boeing  Co/The*  

BAE  Systems  PLC  

DoD Prime Suppliers Profitability Analysis

Historical EBITDA Margin (%) of the Largest Six DoD Primes

2010 2011 2012 2013 2014 2015Average 11.8% 12.5% 11.3% 12.8% 13.7% 13.3%

Lockheed  Martin  Corp 11.2% 10.7% 11.5% 12.1% 14.4% 14.0%

Northrop  Grumman  Corp 12.0% 14.5% 14.4% 14.7% 15.3% 15.1%

Raytheon  Co 12.0% 13.2% 14.1% 14.3% 15.9% 15.1%

General  Dynamics  Corp 13.9% 13.5% 4.6% 13.6% 14.2% 14.8%

Boeing  Co/The 10.4% 10.9% 9.9% 9.7% 10.3% 9.7%

BAE  Systems  PLC 11.3% 12.4% 13.1% 12.4% 12.1% 11.0%

Underperforming  GD  acquisiAons  drove  $2B  writedown  of  goodwill.  

Boeing  BDS  operaAng  margin  used  as  trend  proxy  in  the  absence  of  segment  EBITDA.  

5

Development:

Median Biennial Change in Major Program Costs (Realized plus Estimated)

-­‐2%

0%

2%

4%

6%

8%

10%

1999  to2001(n=62)

2001  to2003(n=56)

2002  to2004(n=58)

2003  to2005(n=60)

2004  to2006(n=69)

2005  to2007(n=72)

2007  to2009(n=76)

2009  to2011(n=80)

2010  to2012(n=69)

2011  to2013(n=70)

2012  to2014(n=70)

dollar basis

program  basis

Both  generally  decreasing

Biennial Funding Change in Total RDT&E

Median biennial change in program total funding needed has been near zero since 2010

6

Procurement

Median Biennial Change in Major Program Costs (Realized plus Estimated)

Biennial Funding Change in Total Quantity-Adjusted Unit-Procurement Recurring-Flyaway

-­‐2%

0%

2%

4%

6%

8%

10%

1999  to2001(n=64)

2001  to2003(n=54)

2002  to2004(n=57)

2003  to2005(n=56)

2004  to2006(n=62)

2005  to2007(n=67)

2007  to2009(n=67)

2009  to2011(n=71)

2010  to2012(n=65)

2011  to2013(n=67)

2012  to2014(n=69)

dollar basis

program  basis

Both  generally  decreasing

Median biennial change in program total funding needed has been near zero since 2009

7

Major Program Contract Cost Growth Related to Negotiated Cost Targets

Cost-Over-Target on Contracts for Currently Active MDAPs (controlling for inflation)

Development Early Production

   -­‐40%

-­‐20%

0%

20%

40%

60%

80%

100%

Jan-­‐00 Jan-­‐05 Jan-­‐10 Jan-­‐15

January 2009

-­‐40%

-­‐20%

0%

20%

40%

60%

80%

100%

Jan-­‐00 Jan-­‐05 Jan-­‐10 Jan-­‐15

January 2009

(not firm-fixed price contracts)

8

Percent of Major Programs With Cost Reductions Relative to Original Baseline

Significant positive shift from 2009 to 2014 statistically significant difference

As of 2014: As of 2009:

better

Upward shift

better

Development

“Should Cost” at work

9

Percent of Major Programs With Cost Reductions Relative to Original Baseline

statistically significant difference

As of 2014: As of 2009:

Upward shift

Production

better better

Significant positive shift from 2009 to 2014

“Should Cost” at work

10

Major Programs Crossing Congressional Cost-Growth Critical Thresholds

Fewer major programs are crossing Congressional cost-growth critical thresholds

0

2

4

6

8

10

2007 2008 2009 2010 2011 2012 2013 2014

Count

Critical  Nunn-­‐McCurdy  Breaches

Trend (statistically significant)

MDAP Critical Nunn-McCurdy Breaches

11

Major Program Contract Lengths

Contract Cycle Time for Currently Active MDAPs

Development     Early  Production  

   0

2

4

6

8

10

12

14

Jan-­‐00 Jan-­‐05 Jan-­‐10 Jan-­‐15

Years

January 2009

0

2

4

6

8

10

12

14

Jan-­‐00 Jan-­‐05 Jan-­‐10 Jan-­‐15

Years

January 2009

Development Early Production

12

29%

9%

23%

9%

28%

40%

50%

5%

0%

10%

20%

30%

40%

50%

Tight Obliging Tight Obliging Tight Obliging Tight Obliging Tight Obliging

FY  1970–1980

FY  1981–1982

FY  1987–1989

FY  1983–1986

FY  1990–1993

none FY  1994–2000

none FY  2001–2002

FY  2003–2007

DSARC Post-­‐Carlucci DAB AR Post-­‐AR

n/a n/a

no  Obligingcomparison

no  Obligingcomparison

Effect of Budget Climates on Program Acquisition Unit-Cost Growth

Median PAUC Growth Between Budget Climates Within Same Policy Regime (FY1970–2007)

statistically significant difference

13

Principle 1: People matter most; we can never be too professional or too competent Principle 2: Data should drive policy Principle 3: Critical thinking is necessary for success; fixed rules are too constraining Principle 4: Controlling life cycle cost is one of our jobs; staying on budget isn't enough Principle 5: Continuous improvement will be more effective than radical change Principle 6: Incentives work – we get what we reward Principle 7: Competition, and the threat of competition, is the most effective incentive Principle 8: Defense acquisition is a team sport Principle 9: Our technological superiority is at risk and we must respond Principle 10: We should have the courage to challenge bad policy

Better Buying Power Principles

14

$0

$5

$10

$15

$20

$25

$30

$35

$40

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

(FY17$,  B)

Fiscal  Year

6.7:  Operational  Systems  Dev.

6.5:  System  Dev  &  Demonstration

6.4:  Advanced  Component  Dev.  &  Prototypes

6.3:  Advanced  Technology  Dev.6.2:  Applied  Research

6.6:  Management  Support

6.1:  Basic  Research

RDT&E Funding Our Problem Is Not Innovation; It Is Access

to Capital For New Product Development

NOTE: Includes OCO through FY17

UNCLASSIFIED

15

1. Set reasonable requirements 2. Put professionals in charge 3. Give them the resources they need 4. Provide strong incentives to succeed

All Acquisition Reform Comes Down to Four Basic Things