Grand Challenges for M&S A Business Perspective

1. Grand Challenges for M&SA Business Perspective Warren Katz Chairman, Executive Committee Simulation Interoperability Standards Organization (SISO) Chief Operating Officer, MAK Technologies Inc. January 30, 2002 wkatz@mak.com ©MAK Technologies, Inc.

2. Technical GCs which are solvable are not solved today because of lack of sufficient financial resources applied to the problem Well over 25% of all the money going into M&S in the DoD is wasted on duplicative efforts (over $1B per year waste) If the business model of DoD procurement was fixed, the Technical GCs could be rapidly obliterated Technical Grand Challengevs.Business Grand Challenge ©MAK Technologies, Inc.

3. “Fixing the DoD business model is the greatest Grand Challenge facing M&S” Ergo: ©MAK Technologies, Inc.

4. “Capitalism” vs. “Communism” Analysis of Two Business Models ©MAK Technologies, Inc.

5. Investors - Risk money out of their pockets to invest in new business ventures with intent of making a large return. Entrepreneurs - Take investment, create innovative new products, and offer them for sale to potential customers. Customers - “Vote with their wallets” for which product is best. Government Regulators - Try to keep competition as fair as possible, and generally don’t interfere with free market forces. Fundamentals of Capitalism ©MAK Technologies, Inc.

6. Fundamentals of Capitalism Investors Investors Investors Investors Investors $ $ $ $ $ $ Entrepreneur Entrepreneur Entrepreneur Failed Product New Product New Product $ $ $ $ $ Customer Customer Customer Customer Customer ©MAK Technologies, Inc.

7. Investors - spending money out of their own pockets. Won’t waste money on ideas which they don’t think will make a return. Entrepreneurs - accountable to investors. Vast wealth for entrepreneur if product is successful. Strong motivation to succeed. Customers - Purchase decisions are “apolitical”. Spending own money on best product. Collective marketplace determines winner Government Regulators - Don’t need to interfere with the will of free market in determining winner. Survival of the Fittest - Bad products die fast! Minimal drain on society to keep inferior products and companies around. Best ideas win and are rewarded. Multiple differentiated products can win. Price Pressure - If one product is making too much profit, competitors will enter the market and drive prices down. Benefits of Capitalist Model ©MAK Technologies, Inc.

8. Government Tax Collectors - Collect massive percentage of citizen’s income. Politburo - Decides what products should be made, who will run the factories, how much should be produced, and how much the end product will cost. Factory Managers - Make what their told. Have no incentive to make products better, faster, cheaper. Customers - Put their name on a waiting list for the product, which they get almost free, after a long wait. Fundamentals of Communist Centralized Economy ©MAK Technologies, Inc.

9. Fundamentals of Communism Tax Collectors $ Politburo $ $ $ $ $ Central Production Facility Customer Customer Customer Customer ©MAK Technologies, Inc.

10. Customers - Have no influence over the products in marketplace. Cannot determine quantity, quality, features, price feedback. Products may be very inexpensive, but the wait is often years, and the quality poor. Politburo - No direct accountability to taxpayers. Can distribute money to advance political goals. Massive favoritism and corruption. Blame can always be transferred. Factory Managers - Bad products can live forever! No accountability to customers. Incentivizes bribery and corruption to keep funds coming from Politburo. No incentive to innovate, take risk, or improve products. Customer is Politburo, not end user. No competition - Leaves no choices for consumers. No price pressure, no pressure to innovate, the weak survive forever. Problems with Communist Model ©MAK Technologies, Inc.

11. Government Tax Collectors - Collect percentage of citizen’s income. DoD - Decides what products should be made, run a competitive procurement amongst contractors, pay hourly consulting to develop the product, and give it away for free to users. Contractors - Write proposals to win contracts. Perform development work to make product. Hope for long-term contract to maintain product for as long as possible. Customers - Wait for product to be done, get it for free. DoD Contracting Model ©MAK Technologies, Inc.

12. Fundamentals of DoD Acquisition Model Tax Collectors $ DoD $ $ $ $ $ Contractor Customer Customer Customer Customer ©MAK Technologies, Inc.

13. Customers - Have little influence over products. Cannot influence quantity, quality, features. Products may be very inexpensive, but the wait is often years, quality poor, and follow-on support non-existent. Customers have no leverage with contractors. DoD - No direct accountability to taxpayers. Purported fair competition in proposal effort, however, 0% of proposals reflect actual end product or development cost. Contractors - All effort placed in proposal-writing. Bad products can live forever. No accountability to customers. No incentive to innovate, take risk, or improve products. Customer is Program Manager, not end-user. Financially incentivized to maximize cost. No competition - Leaves no choices for consumers. No price pressure, no pressure to innovate, the weak survive forever. Better products that cost money are frozen out of market. Problems with DoD Acquisition Model ©MAK Technologies, Inc.

14. Cost Plus Fixed Fee model financially rewards contractors for replicating what they could otherwise buy. Emotionally prefer to remake when contract money is available. Software talent hates buying software products from vendors. Personally insulting attack on their ego. Software talent often believes their time costs nothing In CPFF model, only parties motivated to save money are on the government policy side. This creates an adversarial tension between PM and contractors. Empirical Observations on CPFF Contracting ©MAK Technologies, Inc.

15. “COTS product doesn’t meet requirements” Fact that COTS product met >90% of requirements concealed Fact that vendor would have put remaining requirements in for free or fraction of development cost never investigated “COTS product too expensive in large quantities” Contractor will take unit price and multiply by maximum possible licenses to come up with a ridiculous number. Vendor never asked for a volume discount quote. “We can’t get the source code” Rarely have a legitimate need for it. Do they ask Microsoft for the source code to Word? Sometimes available if vendor is asked, but vendor never asked. Justification for Remaking ©MAK Technologies, Inc.

16. Rarely, if ever, have made a major sale to a CPFF program over $100M Vast majority of business comes from FFP contractors, and CPFF programs under $10M Most appreciative customers have FFP contracts Notable Facts from MAK ©MAK Technologies, Inc.

17. Marketplace Evolution $50M OS Custom Layers OS VEGA Mostly COTS, minimal Custom HW VR-Link HW OS HW 2010 1980 1990 2000 ©MAK Technologies, Inc.

18. Ideal Commercialization Path for DoD Acquisition $$$ 100% development cost Transition (SBIRs, CRADA…) Large Sim Programs Aircraft Carrier Submarine Fighter COTS - DoD Market Only COTS - Broader Markets ©MAK Technologies, Inc.

19. What Actually Happens $$$ WASTE 100% development cost Humiliation Point Large Sim Programs Aircraft Carrier Submarine Fighter COTS - DoD Market Only COTS - Broader Markets ©MAK Technologies, Inc.

20. Opportunity for increased profit puts cost-cutting motivation on contractor Software talent still hates buying software products from vendors, but now have to justify replication internally In bidding process, bidders are motivated to seek out and reuse existing products In FFP model, both parties motivated to save money adversarial tension is between internal software talent and corporate business interests. Risk of loss on vendor Firm Fixed Price Helps ©MAK Technologies, Inc.

21. Anything 6-4 or 6-5 should be bid FFP Put someone in the financial loop who is strongly motivated and rewarded for reuse. ORD developers should have some budgetary constraints on what they can ask for. Burden should be on contractor to justify replication when a reasonably close COTS product exists. DoD should stop buying proposals, and purchase finished end products. Size and scope of M&S programs should be limited to $10M and very constrained focus. Additional Suggestions to Promote Reuse ©MAK Technologies, Inc.

22. Current DoD acquisition economy is heavily stacked against reuse and COTS in M&S. Continuous replication of commoditized functionality diverts valuable resources from real M&S Grand Challenges. If government wants to change this behavior, a cultural and legislative shift within DoD procurement must occur. Industry will follow. Conclusions from COTS Vendor ©MAK Technologies, Inc.