Making Sustainment Programs More Sustainable

Making Sustainment Programs More Sustainable Government and industry can work together to build a culture of collaboration that improves weapon system performance. 1

Leading a big-budget military sustainment program these days is a bit like trying to drive through fog with no lights. As Congress discusses potential budget cuts, program leaders know reductions are coming but not their extent. Programs are presented with hazy information about finances and performance multiple data sources, missing data, insufficient detail in some places, and excessive detail in others. And the relationship among costs, deliverables, processes, the government, contractor organizations, and performance remains hard to untangle. By ensuring that they are shooting for the same goals and have a solid view of program performance, the government and its partners can build a culture of trust and collaboration. Many large sustainment programs use performance-based logistics (PBL) strategies to buy a level of maintenance performance rather than specific parts or components, and the arrangements have brought great benefits and savings to defense programs. Yet when funding is cut, programs can struggle to find solutions to maintain system performance at required levels, because so much of the day-to-day management responsibility has been outsourced. However, the tools for strong sustainment results are there, even in a time of austerity. By ensuring that they are shooting for the same goals and have a solid view of program performance, the government and its partners can build a culture of trust and collaboration that brings long-term success for all parties. Putting the Fundamentals in Place For large military programs to succeed over the long term, the government and its contractors have two priorities: understand each other s definition of success, and maintain a reliable view on program performance. Define success. The math is simple: A healthy program needs healthy private-sector companies supporting it. Government decisions at the program level have a profound, direct impact on the health of these firms. Program leaders can ensure successful partnerships by understanding how their contractors make decisions and how they define success. Executive compensation structures are a good start, as they highlight the key performance indicators upon which senior leaders are evaluated. Similarly, industry can benefit by understanding the government s motivations and objectives. Increased transparency gives all parties a clearer picture of where improvements can be made and where investments would be most worthwhile and mutually beneficial. Increasing visibility. All stakeholders must understand how program activities are done and how well they are performing. It is also crucial to understand how the inter-relationships among 2

costs, processes, organization, and deliverables drive performance outcomes and form the underpinnings of a successful sustainment program (see figure 1). Most programs have access to significant amounts of data, but have trouble gaining insight from data that is often hard to decipher or categorized in ways not tied to performance outcomes. In many programs, data is broken down by contract line-item numbers, when senior leaders would benefit much more from seeing costs broken down at the program, project, sub-project, process, or capability level. For example, cost estimates for avionics software upgrades may combine multiple requirements, so assessing the cost of individual requirements can be difficult for program managers. Furthermore, many programs have not taken a close look at or lack a full understanding of the data they have and how they can use it. Although many large programs are required to report earned value management (EVM) numbers, some program managers may not use this data to its fullest. The Benefits of Better Alignment and Visibility The fundamentals above lead to better collaboration and greater trust between the government and its suppliers and result in more informed and effective sustainment. There are three primary areas where sustainment programs benefit: Program health monitoring. Increased collaboration reduces the program s need to rely on ad hoc requests from either government or industry providers. As a result, teams can better identify potential performance problems and financial challenges before they arise, improving the effectiveness of corrective actions. Additionally, establishing and maintaining centralized data reduces the cost and effort to gather and compile data periodically. Figure 1 Understanding the interrelationship of costs, processes, organization, and deliverables leads to success Costs Budgeted costs Negotiated costs Obligations Funding types Processes Contracting Supply chain management Reliability-centered maintenance Depot flow planning Organization Program office-integrated product team Subcontractors Repair depots Deliverables Spare parts, repairs Software upgrades Reliability improvements Trend and integrity analyses Source: A.T. Kearney analysis 3

Scenario trade-off analyses. Improved data access enables the use of scenario and costperformance trade-off analyses. These help all parties understand what costs are linked to activities with an immediate influence on performance (such as repairs) and those that have more indirect impacts. Understanding this information enables the program office and contractor to join together to fund more important cost areas and reduce or reallocate funds in areas that have a lower impact on performance. Resolution timeliness. A more trusting, cooperative relationship encourages all program stakeholders to share more information, enhance their mutual understanding, and make decisions based on common data. While program execution may cause some challenges, frequent changes in customer requirements may cause other issues. With a common understanding of what affects costs and schedules, all parties can agree more quickly on future actions. Making the Effort While the benefits will not come overnight, they do not require an organizational restructuring. Rather, the government and industry can pilot a small number of focused efforts quickly to make an immediate impact. PBL arrangements offer many benefits, but the challenges of today s environment require government-industry collaboration for continued strong performance. Define the data required, not just what is provided. At the start, program leaders must decide what questions they want to answer and determine what data will help answer those questions. Contractual, legal, or policy requirements often determine what data the supplier must provide and offer a good starting point for establishing a baseline for existing data, but it is important not to be limited to regularly reported data only. Several questions were critical for a recent warfighter program: What is the detailed breakdown of costs for our major sustainment activities? What are the relationships between costs and program performance? How is our team (government and contractor) performing against performance metrics? Is the contractor making an appropriate profit and return on its capital? Is the breakdown of labor, materials, overhead, and profit fair? Take advantage of existing data sources. As noted above, much of the data is currently available it is just a matter of getting the most out of it. Existing data to explore more fully includes: Financial data. Supplier invoices and EVM reports contain the basic information to monitor costs. 4

Program performance. Incentive metrics built into contracts and logistics metrics (such as those reported in fleet management reports) provide important data related to operational status and efficiency. In addition, individual groups within government or supplier organizations may track their own data (such as manpower planning, task lists, and supply chain cycle times) that may prove useful to the broader program. Comparisons to similar programs. Comparing data from similar programs can help assess strengths and whether the costs are reasonable. Bring change to operations. Taking full advantage of improvement opportunities may require a shift in standard operating procedure among all parties. The first step in making this shift is creating a common focus on improvement opportunities and providing the transparency to uncover them. This will incorporate insights into ongoing program management processes, such as monthly performance reviews, negotiations, and strategic planning. Next, organizations need the training and tools to be able to analyze the data and answer the important questions. Accomplishing this starts by assessing current skill levels in terms of data analysis, data request handling, data presentation, and data architecture (see figure 2). Employ the right business intelligence. The appropriate data, presented at the right level of detail and refreshed in a timely manner, enables the government and its suppliers to hold fact-based discussions. Providing senior leaders with data presented in a top-down manner, aggregated at their level (for example, by program or project), ensures its most effective use. This enables them to identify the high-level issues and then drill down to lower levels to understand the primary causes without being overwhelmed by extraneous information. A dashboard hierarchy is useful for organizing the data (see figure 3 on page 6). Figure 2 Assessing skill levels helps determine what needs to be done at each level of ability Stage 1 Stage 2 Stage 3 Data analysis Limited. The team does not look at the data suppliers provide or accepts the data largely as is. Issues that arise catch the program by surprise. Partial. The team understands well the data the supplier provides, but root-cause analyses of issues focus mainly on the supplier. Full. Data is fully understood and analyzed from multiple directions with a holistic focus on root causes, both from supplier and government perspectives. Data request handling Passive. Data is passively accepted as provided per initial contract requirements. Reactionary. Additional data is only requested when problems arise. Forward-thinking. Data needs are determined based on an ongoing discussion about key business questions that need to be answered. Data presentation to leadership Ad hoc. Data requests are sent as needed to leaders and compiled to varying levels of detail and clarity. Aggregated. Data presentations occur but are manually assembled, which is resourceintensive and time-consuming. Automated. Required presentations are consistent and understood up front. Aggregation is automated to enable data to be refreshed regularly. Data architecture Decentralized. Each team individually defines, acquires, and builds its own data analysis and business intelligence tools. Centralized. Central business intelligence tools and strategies lead to new requests and changes that take time to implement. Balanced. Teams collaborate and use central business intelligence tools for most reports. Additional reports are quickly sized and prioritized. Temporary solutions are allowed for high-priority items, but the solutions are incorporated into the enterprise system. Source: A.T. Kearney analysis 5

Figure 3 A dashboard hierarchy can break down data effectively Illustrative Costs Depot maintenance Parts Sustainment Modernization Sustaining engineering Supply chain management Radar Canopy Performance Sustainment Modernization Availability Schedule Schedule Milestones 80% 0.98 0.95 70% Repairs Spares Contractors Supplier 1 Supplier 2 Risks Sustainment Modernization No issues Concern Mitigation New risks Mitigation New risks 80% 5 50% 5 Item management Inventory control point Supplier 3 Years 2011 2012 2013 Excessive Funding types 3400 3010 BP10 Source: A.T. Kearney analysis Furthermore, linking progress metrics to underlying projects will help effectively monitor issues and detect potential problems. Often, EVM cost and schedule metrics track the progress of certain elements that are not clearly tied to definable project goals (particularly for service-related activities). Lastly, not all data is needed on a real-time basis. More important is compiling the data at a pace (for example, weekly or monthly) that ensures it is recent enough to be acted upon and that trends can be detected early. Structure IT systems to support the right outcomes. Enabling the necessary level of data reporting may require new or modified IT tools. The trick is in balancing potential quick-anddirty options against more sophisticated corporate business intelligence suites. In an ideal world, one central business intelligence application supported by a solid data warehouse gathers and reports on all of this information. However, developing and installing such an application is likely expensive and lengthy. So program leaders must weigh IT considerations against the amount of data available and the complexity of the data relationships. Often, a spreadsheet or simple database is enough to meet the program office s needs. In the end, focus should be on which data gathering and analysis techniques bring the most value, not on merely rolling out the latest software applications. 6

A Practical Example We recently helped a large defense sustainment program manage its relationship with its prime contractor. We helped the program improve its data aggregation so it could transform that data into meaningful information. Several challenges spurred program leadership to analyze its relationship: Potential impending Congressional budget cuts and a need to do more with less Limited visibility to meaningful data, hampering its ability to conduct data-driven negotiations every year for large sustainment contracts Recent, unanticipated supplier actions in program management, annual contract proposals, and strategic investments that prompted program leadership to question the prime contractor s incentives Mandates to comply with the principles of the Better Buying Power initiative driving leadership to consider improving cost management The program leaders wanted to improve cost transparency and understand what the specific sustainment activities and modernization capabilities were costing the program. The program had lots of data related to cost (for example, invoices, EVM data, and contract budget estimates), but this data had not been turned into useful insight. The data was often structured based on how contract and purchase orders were executed, not based on how work was actually organized and managed. As a result, truly understanding the cost and performance picture for a project required extensive effort and unique knowledge. By reorganizing and creating a drill-down structure that made sense to program managers, the government was able to analyze more effectively where money was spent and which parts of the program were in trouble and in need of additional attention. Another priority was better understanding the prime contractor s incentive structure so that the sustainment team could improve and realign priorities with the prime contractor, which in some recent cases had reacted differently to requests than the program office had expected. Using publicly available documents and holding discussions with industry analysts, the program learned more about how the prime contractor s senior leaders were compensated, and how the sustainment program impacted some of the major executive compensation metrics. Through this analysis, program leaders were able to explain why their leverage had decreased over time as spend flattened and the prime contractor diversified its revenue streams with other markets. Different tactics were needed to manage the relationship better. This incentives analysis, coupled with increased transparency into the program s cost, contractor organization, and process, assisted program managers in understanding the relationship among cost, performance, organizations, processes, and contractor incentives. All of this helped the program plan how to operate on a daily basis to influence the prime contractor s behavior and achieve the program s overall objectives. 7

Worth the Effort PBL arrangements offer many benefits, but the challenges of today s environment require government-industry collaboration to bring continued strong sustainment performance realized as a result of aligned incentives and increased transparency. The crucial step is in enabling the government and its contractors to see the same data so they can detect issues early and mutually identify areas of improvement. Better communication and a common understanding of the data and issues will improve trust and ensure fast, appropriate actions and strong business decisions into the future. Authors Steven Hurt, partner, Dallas steven.hurt@atkearney.com Christian Hagen, partner, Chicago christian.hagen@atkearney.com Jack Kobus, principal, Washington, D.C. jack.kobus@atkearney.com Kevin Cheung, consultant, Washington, D.C. kevin.cheung@atkearney.com Rajan Singh, consultant, Washington, D.C. rajan.singh@atkearney.com 8

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