Department of Defense Press Briefing on Better Buying Power 3.0 in the Pentagon Briefing Room

Deputy Secretary of Defense Bob Work; Undersecretary of Defense for Acquisition, Technology and Logistics Frank Kendall III


DEPUTY SECRETARY OF DEFENSE BOB WORK: Good afternoon, everybody. Thanks for being here today. It's great to see all of you.

I just want to say a few words before I turn it over to the person you're really here to see, Frank Kendall, our undersecretary of defense for acquisition, technology and logistics.

He'll provide you with much more detail and answer all of your questions. What I want to do is just kind of brag upon Frank and his team on what they’ve done and to try to put this into a little perspective before Frank comes up and talks with you all.

Now, as its name implies, Better Buying Power 3.0 is the third iteration of this program. The first iteration started back in 2010 when Ash Carter, now our secretary of defense, was Frank's predecessor as the undersecretary of defense for AT&L.

Now, Better Buying Power 1.0, let me just take you back just a little, was all part of Secretary Gates' big efficiencies review, if you remember at the time, which aimed to get more capability and capacity -- force capability and larger number of forces, capacity, primarily by getting more value to the taxpayer, primarily by trying to shift from what was then called "tail to tooth," and getting more productivity.

And the animating idea behind Secretary Gates's whole endeavor, if you remember, was that because of the inflation in personnel and the inflation in operations and maintenance, the Department of Defense, if you want to have a balanced program -- if you just want to stay where you are, you need 2 percent to 3 percent real growth per year. And Secretary Gates said, "The era of increasing defense budgets in terms of real increases is over."

And he was right. In fact, for the past three years, fiscal years '13, '14, and '15, we have essentially had flat budgets.

Now, demand for our forces has remained high during this time, as you all know in this room. And so we had to focus our attention on force structure, capacity. We had to have enough forces to respond to what was happening in the world. We had to pay our people. And we had to pay for readiness.

So something had to give. And the place where it gave was in our modernization accounts. So without question for the last three years, our department has been chronically under-investing in weapons and new capabilities. And that is something that really, really bothers us here in the department.

Now, we've tried to get after this problem by becoming even more efficient and making more disciplined use of our limited defense resources. But it has still been extremely hard trying to keep up with the lost buying power that we've had by taking about $768 billion in reductions since F.Y. '12. And that's why we continue to pursue these reforms aggressively. And that's why 3.0 continues on the good work that was started by Secretary Carter and continued by Frank Kendall. Now, the original goal of Better Buying Power, which was to do more without more, remains our overriding focus. But Better Buying Power 3.0 really is animated by an urgent concern of ours, and that is what we see to be a steady erosion of our technological superiority that we have relied upon for so long in all of our defense strategies.

WORK: We all think this is one of the biggest issues facing our department and our nation.

Since the beginning of World War II, all of our approaches in defense have assumed that we would have technical dominance over all of our adversaries, and I think Dwight Eisenhower said it really well right after World War II.

He said, "While some of our allies were compelled to throw up a wall of flesh and blood as their chief defense against the aggressor's onslaught, we were able to use machines and technology to save lives." And that really is what Better Buying Power 3.0 is all about.

Secretary Carter, myself and Frank Kendall have all talked, and we're talking about it constantly now, about the fact that other countries have been investing very, very heavily in advanced capabilities while we have been constrained in doing so.

And they have been pushing specifically since they can study the way we go to war and the way we do business. They can apply their resources in a very, very targeted way.

So whereas Better Buying Power 1.0 and 2.0 focused on reforming our acquisition processes and making them more efficient, Better Buying Power 3.0 is primarily about providing dominant capabilities to the warfighter to try to maintain that technological overmatch that we've always enjoyed and, if anything, to try to extend it if at all possible.

This effort is all part of what we call the Defense Innovation Initiative, the DII. It's an effort to identify and invest in innovative ways to sustain and advance our military dominance into the 21st century.

We are trying to identify, develop and field breakthrough technologies and systems that develop innovated operational -- innovative operational concepts to help us use current capabilities in new ways.

I think you all heard that recently we fired a Tomahawk land attack missile, but we targeted it at a ship at sea without ever changing its seeker. And we demonstrated our capability of doing so, taking a weapon we already have and using it in a different way. That's really neat.

But the ultimate aim is to develop what we refer to as the Third Offset Strategy, or Strategies, because of our various challenges that we face as a nation are going to probably need unique strategies to address.

A central effort of this is the Long-Range Research and Development Planning Program, the LRRDPP. And Frank is leading that effort also.

So the tie between the LRRDPP and Better Buying Power 3.0 is not only there in concept but is there on the ground with the people who are doing this.

Now, before I became the deputy secretary, I studied up a lot on the Second Offset Strategy, which we adopted in the 1970s. And I got to tell you, it is an extremely fascinating story, because commercial industry and the department worked hand in glove to come up with that offset strategy, which exploited guided munitions, battle networks that employed them, stealth aircraft, new sensors and, most importantly -- a lot of people forget this -- they coupled it with a smaller, professional, all-volunteer force.

And those two things together, the breakthrough technologies plus the all-volunteer force, were the things that allowed us to offset the Soviet Union's advantage in conventional forces.

And that's what we're trying to do today. We're seeking to identify new technologies and concepts that will keep the operational advantage firmly in our hands, firmly in our force's hands.

We want to identify the weapons in the systems and the force today that we can use in more innovative ways, as I said, and we're looking for these promising technologies that we can pull forward. And that's what the LRRDPP, under Frank's leadership and his guys, will do.

Many of the key technologies that are going to be associated with this offset strategy are going to come from the commercial sector -- robotics, autonomous guidance systems, visualization, big data, biotechnology, miniaturization, advanced computing, additive manufacturing, whereas in the 1970s, most of the things were being pulled the U.S. government. There weren't that many commercial industries who were worried with -- about guided munitions.

But today, all of the commercial industries are really focused on these capabilities that many, many different people are going to be using in different ways on the military battlefield.

And so that's what we are really trying to look at. And Frank has some very good ideas on how to do that, and we'll talk about them in just a second.

WORK: So that means we have to devise new ways of engaging the commercial sector. We have to repeat what we did in '75. We have a lot more rules than we had in '75. Frank is trying to work through those. But we have to make sure that we can exploit all of the things that are going on in commercial industry so that our war fighters will be better off in the future.

So we're going to have to be able to integrate commercial technology faster, absolutely. We must continue to attract and retain the highest-quality people we can. We have to make sure our acquisition workforce is as innovative and creative and vibrant as what we see in the commercial industry.

Frank is focusing on professionalism and technical excellence, getting into the department the right people from those engineering disciplines that we really need to have. He's going after STEM. You know, science, technology, engineering and math. And it's all a big part of Secretary Carter’s -- as you probably heard him talk about the force of the future -- creating a more permeable Department, which allows us to bring talent in from the outside. And that's why we're improving -- I mean we're increasing our support of STEM education, and we're exploring innovative internships, fellowships, exchange programs -- all of those different things.

I want to stop by congratulating Frank and his entire team. They have been working on 3.0 for months. They have been iterating it constantly. They've been talking -- they've had open talks with industry. They've all worked so hard. I'm so proud of them. And they have really done a tremendous job, in my view, of implementing Better Buying Power 3.0 and putting together this new iteration to continue our focus on technical excellence. All - always focused on our war fighters. The men and women who serve in uniform throughout the world and the civilians and the contractors that support them in doing our nation's business.

Thank you very much for being here this afternoon. Like I said, I just wanted to take the opportunity to brag on Frank and his folks. He's the guy that you really want to talk to. So I'm not going to take any questions this afternoon. Besides, you'd ask me the questions, and I'd have to say, "Frank, what's the answer?"

So, I'm going to turn it right over to him. But I really think this is one of the most important things we're doing in the department. And I really thank you all for being here this afternoon.

UNDER SECRETARY OF DEFENSE FRANK KENDALL: Thank you, Deputy Secretary. I'm going to take a few minutes to -- just to make a few points, and then throw it open for questions.

We've given you quite a bit of material that I hope you've had a chance to look at, and will stimulate a few questions.

What you have is a large document, which is the implementing instructions for 3.0. We've done this after the other two versions that we've put out. And basically, writing the policy and talking about the intent is just the start of this process.

We released a draft last fall. We put it out for comment. We got an enormous amount of feedback from industry. We got an enormous amount of feedback from think tanks and other institutions. And we worked with the Hill on some of this.

We took a fairly longer period of time, actually, than I had originally intended to get to implementing instructions. And that was partly because of the complexity of what we're doing. There were a few distractions along the way. But I think we've ended up with a pretty good product here.

It is not everything we will do, but it is a good set of action items for us to take going forward. What we'll do going forward is, we'll use the Business Senior Integration Group, which we formed after we put out the first iteration of Better Buying Power. And it is essentially our management forum to implement all of these things, track them, identify other things that we can do and continue to make progress.

So it's the next step in what has always been throughout all of these different versions a -- a philosophy or management approach of continuous improvement. If you've heard me speak, you know I don't believe in dramatic acquisition reform steps that are going to change everything overnight. It's a lot of hard work on a lot of different fronts.

The deputy secretary did a very good job of setting the stage for why we're doing this. And it occurred to me, almost a year ago now, that we needed to move in the direction of doing more about our products and technical excellence and innovation and sustained technological superiority in general. And that was what the focus is here. It's a shift in emphasis. It's not a complete change in direction. We're going to keep going. And you see them on the list and in the write-up, a lot of the things that are designed to improve efficiency and productivity. So that's still very much a part of what we're doing with Better Buying Power. But what's added here is an increased emphasis on technological superiority.

I want to mention a few of the things that are in here. Some of the core initiatives that have been in every iteration, basically, of Better Buying Power are continued. Those include things like affordability caps for our programs so people have to design within a cost constraint. And that cost constraint is based on realistic projections about future budgets.

KENDALL: It allows people to stay in the box, if you will, about what's possible and what's affordable in the future for the Department so that we don't start programs we end up having to cancel.

We're continuing to emphasize ‘should cost’, and having our managers, all of our managers, not just our program managers for our big, big, big major programs, have all of them look at their cost structures, understand what their costs are, look for opportunities to reduce those costs, set targets for themselves, and then attack them. So ‘should cost’ is another core -- core value, if you will.

Competition would be in any issue of Better Buying Power as well. It's about creating environments, in many cases, where we don't have head-to-head competition so that people are nervous about losing their business and they're working harder because of that. That's the environment we're trying to create through competition one way or the other. And there are a lot of ways we can do that.

Effective incentives work the same way, financial incentives for industry in particular. I want to pay people reasonable profits, but I want them to earn them. So we're going to continue the emphasis on that. And we've refined our approach to that a little bit as we've learned more from the data that we've gathered on actual performance and what it does.

And then professionalism, emphasizing in this case professionalism in the technical areas, engineering and science. But professionalism of the workforce is another core value. It's a slight shift or increase in emphasis on the part of our professionals, but our contracting people, our program management people, our testers, all the other fields that we rely upon for the success of our programs are equally important. We're going to continue to make progress there.

So, what's new here? There are a few new items or a few changes in items I'm going to mention briefly. One is increased emphasis on being more responsive to threat changes. We cannot assume that when we put a system out, it's going to be fine for the next three or four decades. We've got to stay on top of what the threats are doing. They're moving quickly. They're responding to us, and we have to do the same.

So it means we design for upgrades. It means we have a tighter relationship between our requirements communities, our acquisition communities and our intelligence community. We've got a lot of actions in here designed to help us do that. Also new in here is a -- and this was not in the -- in last fall's -- one of the things we decided to put in over the last few months, is a bullet on cybersecurity. Cybersecurity is a pervasive problem for the department. It's a pervasive problem in the sense that it affects and is a danger, if you will, a source of risk for our programs from inception all the way through retirement.

And it includes the industrial base that supports us and their databases and their information. It includes what we hold in government. It includes the logistics support information, the sustainment information, the design information, the tactical information. Everything associated with the product is a potential point of attack. And we are under attack in the cyber world, and we've got to do a better job protecting our things.

So cybersecurity is going to be a major emphasis going forward that all of our managers need to be much more conscious of, and we need them to be much more attentive about best practices there and again staying ahead of the threat.

The deputy mentioned barriers to commercial firms doing business with us. We're going to try to break some of those down. We're going to try to make it easier for people to do business with us, use some of the creative ways we have of doing contracting. We're going to try to find ways to transition technology. We're going to do more outreach to commercial firms. We're going to take advantage of things like the small business innovative research program to do a better job there.

But we want to tap into that flow of technology that's moving much more quickly than our normal product development cycle is, and grab some of that technology and insert it into our programs. A big part of that is modular open system design so that we have opportunities to do technology refresh as we're going through development and into production and sustainment.

On the F-35, for example, we are on our third issue -- iteration of technology refresh already, and we're still in development. It's because the processing world is moving much more quickly than our programs move. Another good example in that area is the Army's use of network experimentation for tactical radios, where again technology and the commercial world has moved faster than a traditional government development program would move.

Get the most out of all of our R&D expenses. Another feature in here is a closer examination of all the things we're -- all the ways we're spending IR&D money, or R&D money. That includes corporate IR&D, internal research and development. It includes our funded corporate research and development. It includes our laboratories and what they're doing for us. In every case, we're taking another look at this to try to find ways to get more for that money.

And a couple -- in one case I'll mention with industry, we're going to put a little bit more regulation in place to tighten the relationship between government and industry for IR&D. We want to leave industry with the flexibility to make decisions about how to invest, and make that an allowable cost to them, but we want them to be more coupled more tightly to the government, which means we want them to find a government sponsor for that work before they start it and give us a report on it when it's done.

They're pretty minimal requirements compared to what we had once upon a time.

But we're going to move in a direction of bringing that -- that work in more tightly to work to the government.

As the secretary mentioned, the long-range R&D planning activity, it is an element of Better Buying Power 3.0. We decided to start this last fall and we already kicked this off already. Steve Welby, my lead system engineer and the nominee to be assistant secretary for research and engineering, is leading that effort.

We're well underway. It's going to be informing the F.Y. '17 process and our next few years of work in science and technology and earlier stage R&D. And it -- the goal among other things is to identify the technologies that can lead to the kind of offset strategy that Deputy Secretary Work talked about.

I mentioned modular designs and open standards as a way to bring things in more quickly and to give people the chance to innovate and offer us products that they might be able to offer us otherwise. And that's been done successfully on a few cases in the Pentagon; not enough. We're going to do it across more of our programs than we have been.

Another change is to add a mandate to give industry draft requirements early so we can get industry's feedback. I think in general, we need to have a better interchange of information with industry. We need to ask industry to exercise their creative energy and do concept definition work for us early on before we finalize our requirements.

And I think all of this will lead to better ideas and more realistic requirements and earlier identification of direction for the department to go in that will allow industry to make some of their own investments to be competitive at the same time. So that -- that should help there.

The category of professionalism I mentioned earlier. We're going to continue to strengthen professionalism across the board. We have a great workforce, but I think we can do -- we can all learn. We can all be better. And in particular, we're going to emphasize the engineering disciplines and scientific disciplines.

We're going to strengthen our organic engineering workforce. We want well qualified, well experienced technical managers running our development programs. We're going to try to move more in that direction than we have traditionally.

So that's pretty much it in a nutshell. The new items on the list that you didn't see if you're following this closely. I know there's some real Better Buying Power groupies out there. Last fall -- I got one laugh for that.

(LAUGHTER)

I've been doing this for a few years now. Dr. Carter and I did the first iteration in 2010. And neither one of us thought at the time that we would necessarily do any more iterations of it. But what happened was that over time, ideas came forward, needs to shift emphasis to kind of readjust came forward. And I think we've gone down a very logical path.

The initial iteration that Dr. Carter and I did was about best practices. The second iteration was much more about technical judgment, good judgment, and professionalism, and empowering people. This iteration is the next, I think, logical step in, again, a doctrine of continuous improvement.

The two new things that are in this one that you didn't see last fall, if you were following closely, are the cyber initiative and another initiative that I haven't mentioned yet, which was about removing bureaucracy where it impacts industry. Katrina McFarland, the assistant secretary for acquisition, has been working with industry for some time now to find ways in which we could remove some of the bureaucratic burdens that we place on industry. So that's an add. We've got some results from that. They're detailed in the writeup that you have.

So those are the two new items. The others were ones that we exposed with some minor tweaking.

I want to thank my team. They have done a terrific job. We've worked long and hard at this and we reached out to the services. We asked a number of program executive officers to kind of -- who were pretty busily employed most of the time, all the time with their full-time jobs, to come help us with this; put a number of teams together. That work took a little longer than initially we had intended, but I think we got a good result out of it. And I think we've got a good product here.

You know, the hard part is coming now. It's implementing this and finding additional ideas that we want to implement. We're doing this, of course, in the face of the threat of sequestration still. I don't want to give a talk and not mention sequestration and how devastating it is to us. It makes it much, much harder for us to do the things we're talking about here.

We're under financial constraints in any event, and getting as much value for the money, getting as much buying power for the money as we possibly can is what this is all about. The change here is to go in the direction of technical excellence, innovation and technical superiority, and to put that in the forefront of our thinking in a way we have not as much as we probably should have in the last few years.

So I'll stop there and take your questions. Thank you.

I'll start right here.

Q: Can you talk -- you talked about the increased emphasis on making sure weapons are able to be upgraded easily to address future threats. Could you talk more about how you plan to do that? And programs where you've had issues with doing such a thing recently?

UNDERSECRETARY KENDALL: Basically, what we have tried to do in the past, and we've had limited success with, is build what we call open architectures with modular designs. So that you pre-plan opportunities for tech insertion. So you can replace a sensor; you can replace a processor; add a weapons system. There are degrees to which you can do this, right?

In order to do this well, you have to basically control the interfaces and control the design at the modular level. The -- Bill LaPlante who’s here is the assistant secretary for acquisition in the Air Force -- has a slogan he's been using. It's more than a slogan. It's a program, where he's encouraging his people to own the technical baseline, which means that the government needs to own the baseline to the extent that we can control the interfaces. We can know exactly what needs to be done to put a product into an existing system, and have it work successfully.

We tried to do this in the past and we haven't always succeeded. And the reason we haven't succeeded is because we haven't simply done enough -- we just haven't done a good enough job. An example that comes to mind is common datalinks. We have had a very hard time having true competition for common datalinks. And we've -- again, it's about making sure you fully understand all the interfaces -- software interfaces as well as physical and other kinds of interfaces. And then -- and then have control of them so you can put them out to industry to bid against and they give you capability.

Next?

Q: You've said that -- Tony Bertuca, Inside Defense. You've said that incentives work better than regulations in cases of acquisition improvement for industry. When it comes to the IRAD piece, it seems like you've noticed that industry is not then properly incentivized to invest that money the way you'd want to see it invest. So now you're going to regulate that.

Is there another carrot somewhere in here that would incentivize industry to start doing those types of R&D investments you want to see?

UNDERSECRETARY KENDALL: Yes, I think there are a number of them, actually. I mentioned the open systems just now. That’s one. Okay? That's providing future opportunities to compete. And what we saw in tactical radios was while we were going along with the JTRS program, technology itself for the commercial world was moving much more rapidly than we were moving and companies were making investments to position themselves to offer us products, and we took advantage of that. We moved to more of a commercial model.

There is an item in here that I didn't mention. It is about defining best value in monetary terms so that people know what you're willing to pay for better performance and they're therefore motivated to get it and give it to you, and to offer it to you. And they need to do some research and development to prove to you that that's not just an idea, but it's reality. It's something that they can actually do.

And some of the IR&D work that we would expect industry to do is designed to support their assertions that they can give us better performance. When I ran IR&D for one of the major contractors, that was what we were trying to do, was develop things that we could then show to the government that were technically a sound basis for better performance than they could get otherwise.

The amount of -- it's a fair comment on regulation. The amount of regulation I'm talking about is minimalist, as far as I'm concerned. I've asked some of the firms how they felt about this. Having someone in the government who has reviewed your planned work, your project, and said, "Yep, signed off; yeah, I think that that's reasonable work for somebody to do." Just find anybody, anywhere in the Defense Department who will do that for you, essentially. I don't think it's a very high hurdle for people to get over.

And it also -- it enhances the communication between industry and government to have that requirement in place. So I think it's a minimalist requirement.

And then to have something that reports on the work so the government people know what's been done out there. We've established something under earlier versions of Better Buying Power called the Innovation Marketplace. Al Shaffer, who is here, set that up under Better Buying Power 1.0.

And that's been used by a fraction of industry so far. It's a good resource. We've populated it to a certain extent. But we can get a lot more in there. This way, government technologists can go in and they can look up what industry has done and they can identify technologies and they can inquire about it. So I think that's a pretty minimalist requirement, too. We are paying for this even though it's not directly contracted out.

I think that's -- that's a reasonable place to go. I have seen some behaviors, and they're not general, but I've seen enough of them to make me nervous, by industry. I've seen some behaviors where people have made what I think is de minimus investments designed more to define intellectual property than to actually advance technology. We want that balance restored a little bit.

The other places where people are in some cases asserting that they will use IR&D -- future IR&D expenditures in order to lower the evaluated price on a bid. That's not really what we want people to be doing with IRAD. So we're -- we're looking at that as well as something we can do something about.

Q: Can I take this from the interesting, but theoretical, to a couple of programmatics?

UNDERSECRETARY KENDALL: Sure.

Q: Okay. One, how -- the Army apparently did a pretty good job with the joint lightweight tactical vehicle program which is in source selection now, I think. It could save $19 billion potentially.

Play this out with the long-range strike program. How is the Air Force and OSD incorporating best -- Better Buying Power 1 and 2...

UNDERSECRETARY KENDALL: The bomber?

Q: And, secondly, on the CVN 79 for the Ford class, you were going to -- you were having a DAB [Defense Acquisition Board] on that yesterday whether -- to approve a $4 billion construction contract. How is Better Buying Power 1, 2 and 3 playing out on that program?

UNDERSECRETARY KENDALL: The first one, JLTV, I think you mentioned – or, oh the bomber. I can't say much about the bomber because it's a fairly classified program. I can say that modular designs and the idea of an -- competition for future upgrades is very much a part of that -- that approach. Okay, so we are doing some things that even -- and, of course, it's competitive at this point in time, right? So I think we will have opportunity to compete technologies that can go into the bomber to a degree we -- we would not have had on earlier or other programs before. I think the program office has done a good job with that.

That...

Q: And so the one -- one of the companies will win? And then in the future, you will compete upgrades among the companies?

UNDERSECRETARY KENDALL: The design is structured so that we have the opportunity to insert technology refresh in a way in which we have not had the flexibility to do in the past. That was one of the things we asked for of the components.

I can't go much further on -- on the bomber than that.

Q: Okay.

UNDERSECRETARY KENDALL: You asked about -- the other one was?

Q: '79. You had a DAB scheduled...

UNDERSECRETARY KENDALL: Yeah, the Navy's been working that very hard. I think Jim Thomsen's here from the Navy. We are going to get the cost down substantially on the next carrier. And we're doing that through competition. We're doing it through better design practices. We're in a situation there where it's a sole source -- basically, there's only one carrier maker in the United States. And there's not going to be another one anytime soon. So we got to work with that -- that vendor. We got to put strong financial incentives in place for the -- for Huntington, and we have to do things that allow for greater competition at the sub-tier levels.

A lot of what’s on that carrier is bought from other sources. So we can do a lot there, as well.

Q: Why did you postpone the DAB by the way?

UNDERSECRETARY KENDALL: Just a -- no fundamental issue, just a scheduling issue.

Q: Thank you. I wanted to ask you, on your plan to attract commercial companies, has there been any changes in DOD requiring intellectual property rights and cost data?

UNDERSECRETARY KENDALL: Great question.

Q: That seems to be the question that comes up every time you talk to a commercial company.

UNDERSECRETARY KENDALL: What we're after -- we -- we try to balance our interest in intellectual property rights. First of all, we can't require people to sell us intellectual property. It's their property, right? We do look at, when we do source selections, particularly in a competitive environment, what intellectual property they are asserting that they own in the product, so we understand what position we're in.

And it's much more attractive to us to buy something where we do control the interfaces, for example. So we do have that information. And we can go out and do competition for subsystems later.

So we also need to think about the life-cycle cost, and whether in sustainment, do we want to be able to break out components and bid for them separately?

If we're going to do software upgrades, we'd like to have modular software and control the interfaces there.

So if there's intellectual property associated with those things, we have a strong interest in acquiring it. And it makes an offer more attractive to us if those -- those intellectual property rights would not constrain us going forward.

So we do look at that. And we're trying to do this in a way which is respectful to the industry's rights, but at the same time, protects the government's interest. And that's the balance we're trying to strike.

I think we're doing a much better job of that. Once upon a time, I think we basically -- we're very -- we didn't pay much attention to this, frankly. We didn't manage it carefully. Over time, we started to manage it a lot more carefully. We've done a lot to educate our workforce. This goes way back to Better Buying Power 1.0. So I don't think we're perfect yet, but I think we actually moved the needle in the right direction. Now, industry doesn't always like this, because it means that we're inserting competition in a place where they'd like to be sole source in some cases. So we're trying to strike the right balance there.

I don't think we've gone too far. I think we're in about the right place.

Q: What about cost data? Cost and pricing data? Are you changing that at all?

UNDERSECRETARY KENDALL: I'll give you two questions. Fundamentally, no. There's nothing in here that really fundamentally changes that. There is some discussion of -- and we have talked about commercial of a type and how we manage that. I just put out a memo on that separately from Better Buying Power. We're trying to strike the right balance there, too.

When we buy something for the taxpayers, we need some way of verifying that we're paying a reasonable price. And competition does that for us by itself. When we don't have competition, if we're buying something that is truly commercial, and there are a lot of people out there selling similar things, and there's a market to establish a price, then we pretty much rely on that. It's the things that are in the gray area that are hard for us.

And we're trying to pay reasonable prices for industry so they make a reasonable margin. We're trying to protect the taxpayers' interest at the same time. And what our buyers have to do is -- is figure out whether or not they're in the right place there. And to do that, they need information from industry.

The extreme of that is cost data. We don't want that unless there's no other option for us to do that.

But at the end of the day, we -- our buyers do have to -- to, you know, have some reason to believe that they're paying a reasonable price. It's their duty.

Q: Colin Clark, Breaking Defense.

The intelligence threat stuff is really interesting over time, because requirements have been one of the big drivers behind cost increases.

The -- the B-2 is a classic example, for years after it started, redesigned in relation to the threat.

Are you concerned that by tying -- making institutional these ties of the threat analysis that you're going to get bumpier requirements over time?

UNDERSECRETARY KENDALL: It's something we have to manage.

I've seen programs canceled because the threats changed up from under them. I've seen programs...

Q: (OFF-MIC)

UNDERSECRETARY KENDALL: Hmm?

Q: Is that the DDG 1000 that you were referring to?

UNDERSECRETARY KENDALL: I was referring to ADATs, quite a long time ago.

I've seen changes occur for a variety of reasons.

When we've gotten into trouble on requirements, my -- my view is that it's happened for a couple of reasons.

One is we -- we -- we had unrealistic requirements. They were just too hard to do.

And one area in which we tended to do that is reliability. In some cases, we've asked for more reliability than was really reasonable.

Another area has been just in raw performance. We've made some changes there.

And we've gone to making sure technologies were mature. We have a much tighter review process now on technical maturity to ensure we don't try to do things that are just, you know, a hope and a prayer, essentially.

At the same time, we have to react to the threats. I mean, if the threat is changing, we can't ignore that.

I remember when ADATs, which was the Army air defense system from years ago -- when we canceled the program, it was because the Soviets at the time had built a weapon that could clearly overmatch the weapon we were building. It was going to be obsolete when it hit the battlefield.

And I remember the program manager coming to me, and he was very upset that we were canceling his program. He said, ‘well, I met my requirement.’

You know, we buy these things to be dominant on the battlefield. And if they're not going to be dominant on the battlefield, we got to stop buying them.

So what we're trying to do there is tighten the loop. We don't want to have requirements churn, where we're constantly changing requirements, so we got to manage this carefully.

But on the other hand, because threats are now moving at a -- at a rate that we're -- we've gotten a little complacent about, frankly, we got to pay closer attention, and we got to make intelligent adjustments.

F-35 is already starting, thanks to some support from the Congress, to do the follow-on development after the Block 3F code that's kind of the basic code we're buying. And the reason we need to start follow-on development is that the threats are changing, in the electronic warfare area, primarily, and we have to respond to them.

Part of the modular design idea that I talked about is to give us the opportunity to change our systems when the threats change then increase our requirements when we have to.

Let me get somebody in the back here.

Q: So one of the issues with the iterative process has been, at times, industry has reacted negatively, especially when it came to, for instance, LPTA or fixed price being encouraged.

One of the changes from the fall draft of this relates to performance-based logistics. The fall version included increasing effective use of performance-based logistics. The new had ensuring effective use.

I'm curious. You know, how much of past experience with suggestions maybe in Better Buying Power being taken too strongly by acquisition officers into this.

KENDALL: Good point. And that has happened. The reason that word change is there is I was asked to make that change by Dave Berteau, who's the assistant secretary for logistics and material readiness. And I think it was partly because of that reason. Counting how many PBLs we have is not the right metric. We want to make sure that the ones we have are -- are effective.

And we -- we -- we will probably increase our use, but we need to do in cases where it makes sense, and we need to make sure it's being done well.

The other example of that is the original guidance in Better Buying Power 1.0 on fixed-price contracts talked about FPI, fixed- price incentive, with very specific parameters: 120 target ceiling and -- percentage target ceiling and a 50/50 share ratio between government and industry.

That's -- that's a reasonable place to start when you're thinking about an FPI, but it's not the place you always want to end up. And there are some definite cases where you'd like to end up some place else, for a variety of reasons.

The -- the -- the guidance in 2.0 said, "Think about what type of contract to use, and use the right contract for the job." It still said we kind of like FPI, but it wasn't as strong or as specific.

And in this case, what we did, based on some analysis, based on actual data and actual performance results, we decided that there was a preference for incentive formulaic contracts, either CPI or FPI. And so that's what's in this iteration.

And we are changing, in some cases, our contracts. If it's a mature product, if you're well into production, it may -- we may go to FPI. We may use FPI for that.

But we want to leave, in general, industry with a good return for saving money, particularly for multi-year production.

I don't want to destroy the incentive to industry to reduce costs for us. So we've got to be careful how we do that. It's more nuanced. It's more difficult than a simple rule. And that's your point. And we've got a lot of work to do training our workforce to make sure they understand that and they apply the right practices in the right cases.

Way in the back?

You got one already, Andrea

I'll get you next.

Q: In January in a memo, you called for a cybersecurity enclosure for instruction 5000.02.

KENDALL: Yes.

Q: What's the status of that effort to develop it? And also, what specific implementation steps do you need to take to effect the changes in cybersecurity that you need?

UNDERSECRETARY KENDALL: It's in draft. I think there's a date in the memo somewhere for when I expect to get the draft. I expect to have that out in the next few months. I know Katrina is working that? Yeah.

Part of the reason for that being in Better Buying Power is to increase the awareness of the importance. And part of it is because we need to take some specific steps. We did something, and I want our program managers thinking about and conscious of cybersecurity all the time. And I want all the stakeholders in our programs to be thinking about it, conscious of it, all the time.

We put out some guidance through the DFAR last year, tightening up our requirements on industry. In fact, there were no requirements on industry for protection of unclassified technical data, and we were losing a lot of it through cyber theft. So we put some security requirements out. We're going to revisit those as we get some more data on that this year and see if they're tight enough. We're losing a lot of time advantage and a lot of financial advantage by having this data be extracted from us. We need to think about every interface that a weapons system has, and whether it's accessible through cyber methods or not. We need to think about all of the systems that that system -- that weapons system touches or is dependent upon. So there's a discipline we have to put into our management of this and we need to make it just a higher priority than we have in the past.

And we're finding as we look at weapons system that were built a long time ago that very little thought was given to this. And we're having to react in a few cases because of things that were done then. So that's the general picture of what we're trying to accomplish.

Yep?

Q: Tara Copp with the Washington Examiner.

Several elements of the Better Buying Power initiative seem very similar to Chairman Thornberry's acquisition reform effort. So I just wanted to ask you: How do these two efforts work together? If you could list out any of the ways that they differ from each other or they might be in conflict with each other.

UNDERSECRETARY KENDALL: We're looking at Congressman Thornberry's draft now. We have worked together. And I've had a number of conversations with him. Our staffs have worked together. We provided some legislative initiatives to him which -- the vast majority of which were included in the bill that he proposed.

He's got a lot of other things in there that we're in the process of reviewing. We're going to give him some comments. I'm really encouraged by the cooperation I'm getting from both sides of the Hill. Both the House and the Senate are working well with us; seem to be very open to hearing our ideas and getting our feedback. And I just hope that continues. I think it's a very healthy process so far.

And I particularly want to applaud what Congressman Thornberry has done. That's been a very constructive relationship and I think he's doing some very good things in what he's trying to do in the draft bill.

Q: So, this is in its third iteration, how -- is there any I guess risk that some of the program efforts or reforms already underway at DOD might be undermined by some of the reform efforts on the Hill?

UNDERSECRETARY KENDALL: I don't think there's anything in his draft that fundamentally undermines this. The thing -- he shares a desire to remove some of the bureaucracy that gets in our way, and simplify the rules. That's a large part of what we submitted to him.

There's an item in his bill about service chiefs being more involved in acquisition. I applaud that up to a point. I think service chiefs should be more involved in requirements. They should be more -- they are clearly very involved in the budget. And they're very involved in personnel matters.

The actual how to -- what kind of contract to use and how to structure a program, I don't think is something they should be all that involved in because it's not their expertise. But I like definitely working with them and having them more involved in all those other aspects that I mentioned.

So there are a few other things like that that there are nuances on that I'd like to work with the Hill. But by and large, we're supportive of what he did.

Q: Hi. Aaron Mehta with Defense News.

You mentioned the two things that were added between the draft and now, is the cybersecurity and removing bureaucracy.

UNDERSECRETARY KENDALL: Did I miss one? Go ahead. I'm sorry.

(LAUGHTER)

Q: Was that something that, you know, you put this draft out and you hear back from industry specifically on, or the Hill specifically on that; internally. What was the origin of adding those two back in now?

UNDERSECRETARY KENDALL: The cybersecurity one basically came from me because of its importance.

You know, we're doing other things in the cybersecurity area and I decided it was -- it would be useful to put it in here, draw everbody's attention to it and reflect the things that -- that are going on in that area, because I think they're very important to maintaining technological superiority.

The -- the item on working with industry and reducing bureaucracy was done because we had gotten to a point where, with Katrina's work with industry, we were ready to do some things, and this was a good opportunity to kind of highlight those make sure that they get done. So that -- that was the genesis of that one.

Yeah?

Q: Two questions. Dan DeLuce, AFP.

First, if this initiative goes as well as you might hope, isn't it the case that, even at that, the technological advantage that the U.S. has inevitably shrinks, given the pace of the technological change?

UNDERSECRETARY KENDALL: This will all, I think, help, Okay? But at the end of the day, the fundamental driver on how fast we can modernize is how much money we spend and on the quality of the people out there doing the work. And, we have limited ability to change the quality of the people that we hire to get, you know, (inaudible).

Legislative initiatives don't really do an awful lot to give me a better engineer or better program manager. But at the end of the day, it's their work and it's the resources that we have that drive more than anything else.

So that’s why I mentioned sequestration. Sequestration will end up a substantial cut to our modernization accounts

Relative to the president's budget, we added about $20 billion, I think, over last year in the investment accounts, in the budget submission. Sequestration, a lot of that would have to come out, I would expect -- a large fraction of that is research and development.

You know, we're -- and that's -- that directly correlates to the products that we have. I have three short things that I say about research and development.

The first one, I've already said, and that's that technological superiority is not assured. It is not something we can take for granted or assume will be there no matter what we do.

The second one is that R&D is not a variable cost. If you don't do R&D, you will not have a future weapons system. You won't have one, you won't have 100, you won't have 1,000, you won't have any.

So you have to do the R&D and all of that R&D for the product if you're going to have any of them. It's not a variable cost. So by not doing R&D, we are denying ourselves future weapons period, in any quantity.

Then the third -- third -- third one is I cannot recover time. Time is not recoverable. And if I don't do research, I have to do it later and take the time to do it.

Now, we can take risk, and I've seen programs where we've done that. Usually, taking excessive risk in a program leads to more time being taken rather than less.

We can always do some things to accelerate and reflect urgency in a program. We have provisions to do that.

But there are limits to how much you can do, and there -- and there are risks about the effectiveness of that when you do try to do it.

Time is not recoverable.

Q: And then just a follow-up on reducing bureaucracy, is -- are you concerned about the workforce at DOD not being correct -- the right configuration for this era?

UNDERSECRETARY KENDALL: We have a lot of talent in the workforce.

Q: (OFF-MIC)

UNDERSECRETARY KENDALL: We have an interesting demographic. Most of our workforce, there's a bell-shape -- a two-hump shape, because we have a lot of people approaching retirement, and we have a gap where we didn’t hire for a long time, and we have a lot of people we've been brought in over the last several years.

There are good and bad things about that.

The bad thing about that is that people at the top end of that scale are going to retire shortly and take an awful lot of capability and expertise with them.

The good thing is we got a lot of young people who are anxious to do a good job. They’re – they’re -- they have modern educations, they're -- they're not burdened down with years and years of doing things the same way. They're more interested in change.

So we -- we've got to manage our way through all of that. We kind of have what we have. One of the things that Secretary Carter was talking about is giving us the ability to bring more people in maybe in that middle phase, people who already have developed expertise and proven themselves, and we're looking at ways we might do that.

I don't have anything much specific in 3.0 for that at the moment, but we're going to look at some ideas there and see if we can do a better job. The deputy secretary alluded to those indirectly.

So we are trying to manage the demographics.

On the whole, I think we have a very capable workforce. The Defense Science Board looked at our science and technology base a few years ago, and they came back with -- gave us very high marks. We have a lot of people out there in our laboratories and other places who are very, very capable.

I give out awards every, what -- every quarter Al -- is that right, to -- to scientists for the work that that they've done, and I've gotten to meet a lot of these people.

The last one I gave out was somebody who had gone off and spent about six months or a year with Google working with them on some technology that he was bringing back into his lab for the government. Terrific experience.

We have a lot -- DARPA is obviously terrific at what they do, and they have very tight connection to the high-tech world. But our laboratory and our infrastructure does that as well.

Where -- where we run into trouble is inserting that technology into our programs. And while we're well-aware of it -- and industry's aware of it too. Our -- our suppliers are paying attention to what's happening in the commercial world.

And the trick, though, is getting it into our products, alright, and doing it in spite of the long development time that we have.

A lot of our programs have a long development cycle because they're very complex, and they do a lot of functions, and it takes time to design them and test them. And there's nothing you can do about that, really. I've looked at other countries and their cycle times, and they're basically comparable to ours. The job drives that, the difficulty of the design, the complexity of the design.

But having said that, you need to make provisions -- I mentioned some of the modular designs and tech refresh cycles -- that bring those technologies that are moving more quickly than we are into our products, where it makes sense to do so, and at a higher recycle time. So that's -- that's the approach that we're taking now.

Yeah?

Q: Sir, is there going to be a Better Buying Power 4.0?

(LAUGHTER)

Or do you think you have it right? And any...

UNDERSECRETARY KENDALL: Well, three's a good number. You know, it's sort of the...

QUESTION: It'll be like the 3.1, 3.2.

(LAUGHTER)

UNDERSECRETARY KENDALL: I could do that. It's interesting because there are -- Better Buying Power -- all of them have been sort of points in time where we sort of took a snapshot of what we were doing. But in reality, we're always doing a lot of things. And one of the reasons I did 2.0 was that we had collected a lot of things we were doing that weren't reflected in 1.0. And I wanted to give them some visibility to the workforce and talk about them so people would understand the intent.

3.0 was a little different in that it was this new focus and emphasis on tech superiority. And when I did 1.0, I did not anticipate 2.0. When I did 2.0, I did not anticipate 3.0. I'm trying to do 3.0 right now. We're going to put an enormous amount of effort over the next couple of years into implementing 3.0. And that's what our focus will be. I expect that at some time, in a year or a year and a half, or something, in the back of my mind, I'll start thinking about 4.0. But I have no idea what that is right now.

Some of my staff may have some ideas about what they'd like to see in there. So they haven't told me yet.

Okay, Andrea, you get a question now.

Q: I wanted to ask you sort of a bigger question about what the wisdom is of coming out and saying, "We suck at this" or "We're not doing as well at this as we have been." You know, is there -- you know, in the past, this kind of work has been going on in the background. And then you pop it out when you're ready.

UNDERSECRETARY KENDALL: Mm-hmm.

Q: What's the thinking behind being so open about it? And, you know, frankly -- I mean, Secretary Hagel announced this, you know, last fall. It's been nearly six months. So where's the beef? You know, what's the -- what -- what is the third offset strategy? It must (inaudible).

UNDERSECRETARY KENDALL: Oh. Well, the long-range R&D planning activity that Steve Welby's leading is still underway. We expect to get some things out of that that'll inform our budget. When we do that, then we'll have -- we'll be able to talk about that more explicitly.
I mean, there are ideas that we're talking about. And Secretary Work is very interested in automation and robotics -- that's one. We're interested in collaborative work between different platforms at a higher level than we have in the past. We're interested in operating at longer range because of the missile threats that we see.

So those are some of the ideas that -- kind of are framing ideas, if you will, at this time. But we've still got a lot of work to do. We're about halfway through the LRRDPP study effort. And when we're done, I'm sure we'll have something to say about that.

Q: What about this question of, like, being so open about...

UNDERSECRETARY KENDALL: Ah. That's in part because I'm concerned about the adequacy of our resources. Yeah, we have -- if you look at our research and development accounts, we are -- we have protected size and technology reasonably well -- about $10 billion, $11 billion a year. We have put more and more money into upgrading old products. And we're putting less and less money into our product pipeline -- our new products. And I look at what we're doing and I look at what others are doing. There's a pretty significant difference. And it's the concern about that -- and I've been watching this for five years now -- I -- if you were to look at what some of our potential adversaries or competitors, if you will, are doing in terms of IOC'ing -- initial operating capability for new products. It's substantially more than we're doing. We -- we came out of the Cold War and out of the first Gulf War with such huge dominance, unprecedented historically, I think, military dominance. And we've been living off of that capital investment we made before that ever since. And that situation's changing. People need to recognize that. It was what the secretary was talking about. And it's one of the reasons we're so concerned about the possibility of sequestration.

Q: Yeah. Secretary Work said that the focus of Better Buying Power 1.0 and 2.0 was more on acquisition reform, and this one is more on technological superiority. Can you comment more on that? Does that mean you're de-emphasizing acquisition reform?
UNDERSECRETARY KENDALL: It's -- well, I generally do not use the term "acquisition reform." I prefer to talk about improvement and continuous improvement. I think there is a body of thought out there that there -- and there has been historically, that if we just did a couple things differently, everything would be much, much better.

I don't think that's the case. I think, first of all, this is a very complex business. I think we're actually pretty good at it. We have the best military in the world, and we have had the best military in the world for quite a long time.

I think we can get a lot better, and I think we need to do a better job in a number of different facets of what we're doing, as a -- as a industry person or as a government person.

I believe that identifying specific things you can do that will actually have an impact, trying them in some cases and seeing if they do and attacking on a number of fronts, kind of prioritizing those fronts and going after the things you think will have the greatest benefit is the right approach.

We've learned from our own experience here, and I think we're actually making quite a bit of progress.

If you look at the data, I think you may be starting to see some changes in terms of results. If you look at Nunn McCurdys, if you look at degrees of overruns and schedule slips, program cancellations and so on, I think we're progress.

But it's a long lead time between any changes we make and those results being visible. It's also incredibly noisy data.

So that's why we're trying to learn, we're trying to collect data and do correlations. But it's -- it's a -- it is not an easy task to improve defense acquisition. It is a long-term fight to do that on a lot of fronts.

And that's what Better Buying Power's been all about. That's what it's been all about since 1.0 and 2.0 and 3.0. We're going to continue that.

It's not really, to a great degree, about laws and regulations; it's about our practices, our capability, how we incentivize industry. I think we have the tools we need in general to improve.

I think we can tweak things around the margins, I think we can remove some of the bureaucratic burdens our people are distracted by, and I think we can do a better job in a number of fronts.

But it's -- it's -- it's slow, steady and growth and slow, steady progress that I'm after, not some kind of a revolution overnight. So that's what we're about. And I do think -- this may be wishful thinking, but I do think we're starting to see the ship turning a bit and -- and that we're starting to see better results.

Q: Jared Serbu from Federal News Radio.

On your bullet on the chain of command -- I think it's another point that you have in common with Mr. Thornberry -- you talk about the callout that you did to all the P.M.s for their unvarnished opinions on the status of their programs.

I know you're not going to tell us exactly what they said, but was there a common theme or takeaways for you that lead you to (inaudible)?

UNDERSECRETARY KENDALL: Well, if there was one, it was to reinforce what I just said in the answer to the previous question.

I'm getting assessment from P.M.s who were doing programs in sustainment, who are -- programs in early production, programs in development, and I'm seeing a wide variety of problems that they're dealing.

And they're in the details. They're not problems that our big policy changes are going to fix; they're problems that maybe by a small change to a regulation, by a small change to fiscal law and how it covers the money that we're allowed to spend, by a better job of getting competition into the original design. I'm -- I'm learning enormous amounts from them.

And one of the things that I'm learning from them is how impressive our program managers are. I'm seeing some terrific assessments come in that really show that our people have their -- their hands on their programs, they understand them, they know what needs to be done, and they're trying very hard to do it. So that's very encouraging.

I think it was -- it was a move that was done with -- asking for that was done -- there was some people who argued against it -- I think it was exactly the right thing to do, and I think it's been very beneficial.

As I read through them, I keep thinking to myself, I'd like to publish this, because -- and I'm thinking about doing that. I'm thinking about asking a number of them if I can do that and just put a bunch of them out. Because I think if you read them, you start to get a much, much better sense of the real-life problems all these people are facing and how tough their lives are and how difficult their jobs are and what a great job they're doing at them.

(CROSSTALK)

Q: ... one point of clarification, on cyber security, given the emphasis in 3.0, when will cyber security become a source-selection criteria along with cost, schedule, performance?

UNDERSECRETARY KENDALL: I hadn't thought about it in those terms, but cyber security should be a requirement, period, on our programs. So I can see it being inculcated into risk assessments and so on.

And compliance with basic security requirements, it already is a requirement. I mean, it's a contractual requirement.

The reason we made the DFARS change last year was to put a contractual requirement on all of our contracts that people had to protect unclassified technical data to a certain standard. So that's an enforceable requirement.

So...

Q: How so?

UNDERSECRETARY KENDALL: Through -- through -- through review by the government, the same way DCMO would enforce any other contract requirement -- DCMA rather, excuse me.

Q: Okay, so at this point, it's not -- you're not mulling a criteria in source selection to...

UNDERSECRETARY KENDALL: It's more of a -- it's a more pass/fail, Tony.

It's more you've got to be good enough on cyber security to get to do the job, is really what we're after. Yeah. Okay?

Last one. One more.

Q: (inaudible) South Korea newspaper.

I raise this question to the last moment because it's not directly related to BBP. I'd like to ask about the THAAD system because you in charge of the acquisitions. Recently, because of the controversy over the THAAD system, more Koreans became aware of the THAAD system is more effective than the other missile defense system.

But even so, Korean government and USFK commandant wants it deployed in Korean peninsula. There is no THAAD batteries available at the moment. When would be the earliest time that you have in mind to be ready for deployment in Korea?

UNDERSECRETARY KENDALL: I'm not going to be able to answer that. I'm not aware of any discussions about putting THAAD in Korea. I know the secretary is there -- Secretary Carter, but I don't believe he plans to discuss that at this time. So I'm not going to be able to answer your question. Sorry.

Q: If there was a plan to acquire more THAAD batteries...

UNDERSECRETARY KENDALL: I honestly don't know the availability of THAAD batteries.

Q: Would there be any possibility that can change if the threat (inaudible) North Korea changing (inaudible).

UNDERSECRETARY KENDALL: That's not a question I'm able to address. It's not my position to address questions like that. I'm sorry I can't give you an answer.

Okay. Thank you, everybody.