Economic Currents

1. Dr. Nayantara Hensel Chief Economist Department of the Navy The Role of Open System Architecture in Promoting Competition and Improving Efficiencies Economic Currents

2. Evolution of the Defense Sector • The defense sector in the US has witnessed many changes over the past twenty years. • Cycles of growth and shrinkage in the budgets • Globalization of the defense sector • Substantive consolidation of defense contractors during the 1990’s in the wake of excess capacity, • An evolution in the demand for certain types of weapons systems in the post 9 /11 era • The economy continues to face high unemployment and slow growth, as well as increasing fiscal pressure with the burgeoning debt and deficit. • The ratio of gross federal debt to GDP rose from 57.3% in 2000 to 69.2% in 2008 to 83.4% in 2009. Projections suggest that it will continue to rise. • The US deficit for FY 2009 was $1.4 trillion, which was 9.9% of GDP. • The deficit has only climbed to 5% or more of GDP four times since the end of World War II.

3. US Debt as a Percent of GDP Underlying raw data from Office of Management and Budget (OMB)

4. US Government Expenditures as a Percent of GDP, 1948-2009 Underlying raw data from Office of Management and Budget (OMB)

5. CBO Projections of Defense Outlays and Interest on Debt: 2010-2020 Source of underlying data: the Congressional Budget Office’s Budget and Economic Outlook: Fiscal Years 2010 to 2020, Table 3-1, p.48

6. DoD Initiatives to Promote Efficiency • In the context of significant broader economic and fiscal pressures, Secretary Gates has encouraged saving $100 billion over the next 5 years • Dr. Carter, USD (AT&L), issued a Memorandum on September 14, 2010, which focused on “doing more without more.” • The guidance affects the $400 billion of the $700 billion defense budget that is spent annually on contracts for goods and services. • “Require open systems architectures and set rules for acquisition of technical data rights” • “At Milestone B, I will require that a business case analysis be conducted in concert with engineering trade analysis that would outline an approach for using open systems architectures and acquiring technical data rights to ensure sustained consideration of competition in the acquisition of weapons systems” (p. 10)

7. Maximize Use of Open Systems Approach (OSA) for System Design Can Reduce Costs and Enable Greater Competition • Helps to establish an environment that reduces total ownership cost of systems • Prevents vendor lock-in • Use of Commercial-off-the-Shelf (COTS) technologies provides an expanded universe of sources for hardware and software components while leveraging the rapid advances in technologies • Facilitates increasedcompetition to enhance innovation, improve component quality, and decrease acquisition and life cycle costs. . • Acquiring capabilities in smaller modules rather than through complex, integrated systems that can only be built by a small number of large systems providers creates a market that supports a greater number of potential competitors

8. Examples of Potential Actions to Assist in Implementation • ACAT I through III programs could formally report to the Defense Acquisition Executive / Service Acquisition Executive on incorporation of a modular open systems approach in their systems architectures, including how they will control the overall architecture, key interface mechanisms and system design. • ACAT I through III programs could also report on the implementation of their Data Management Strategy, including how the Government will enforce its intellectual product rights at each phase of the acquisition process.

9. Examples of Potential Actions to Assist in Implementation • Milestone reviews could verify that the technical data packages that the Government is receiving include the correct artifacts in the appropriate formats. Reviews could assess the associated development process information and tools to validate their adequacy. • These reviews could describe how design data is being disclosed to appropriate parties as part of the Program’s efforts to use competitive sourcing at appropriate sublevels for both software and hardware system components. • Programs can provide an economic justification in any cases where major subsystems are not being implemented using a modular open systems approach

10. Impact of Greater Use of OSA • Can lead to increased design flexibility, improve interoperability, and provide opportunities for cost reductions and performance enhancements through expanded competition/re-competition of subsystems that require smaller integration efforts with lower associated costs. • Industry may experience less long-term certainty of involvement in a given program due to competing continuously for the work. • BUT, vendors would have an increased opportunity to compete for work that they have been historically locked out of due to previous award to competitors. • Sharing of intellectual property for which the Government has appropriate data rights can increase collaborative capability with industry on development and acquisition. • It can also reduce duplicative spending by leveraging DoD investments through selective reuse of components across systems, programs and services.

11. Impact of Greater Use of OSA • Initial program costs may grow in the short-run • Due to the increased Government-led design effort necessary to develop component designs and associated specifications that are modular and that possess well-defined interfaces. • Due to costs associated with developing the acquisition infrastructure needed to support an increased contracting workload (e.g. possibly more contracts required at the government level, performing more technical oversight and control). • Investments would also need to be made in tools and mechanisms for cross-program management and governance related to reuse of components. • Designing components for broad application across multiple programs might cost more than designs targeted for limited or specific applications due to the need to accommodate a wider range of environmental considerations and other design factors. • BUT, integration costs associated with common components are lower than creating a new component for the system. • The earlier these design practices are incorporated in a program, the lower the cost to implement. • Over the longer term, significant cost savings at the enterprise level will be obtained from increased competition for and reuse of subsystems during both acquisition and sustainment phases.

12. Examples of How OSA Has Led to Efficiencies • US Navy Acoustic Rapid COTS Insertion (A-RCI) Program • The Navy’s PEO Submarines adopted an acoustic rapid COTS insertion (A-RCI) process for submarine sonar support based on open architecture principles. • Comparing data from the traditional DoD MILSPEC acquisition model versus an OA COTS model, PEO Submarines demonstrated significant cost savings over a ten-year period. • The development costs expended for the traditional development model were five times that of the RDT&E expended for the A-RCI model • The production costs associated with the acoustic system developed using the traditional model would have been almost six times that of the Ship Construction Navy (SCN) funds expended for A-RCI Model • US Navy E-2 Hawkeye Mission Computing Environment Open Architecture Program • NAVAIR led the transition to a commercial computing environment, restructured software to achieve modularity (consistent with MOSA), and adopted Model Driven Architecture to enhance software reuse. This resulted in reductions of: • Acquisition cycle time from 7 years to 2.5 years, • Cost fell from more than $200M to less than $11M • Central Processing Unit utilization from 80% to 25% with the Single Board Computer, providing room to expand the mission support software packages as new requirements emerged.

13. Other Examples of OSA • Littoral Combat Ship (LCS) uses open systems at several levels. • One example is the seaframe-mission package concept of an open system. • This seaframe-mission package concept allows the Navy to build seaframes independent of the specific missions to be conducted during the life of the ship. • As new mission requirements are identified, new mission packages can be assembled, consistent with the limits of the ICD, and put aboard the ship with confidence that the systems will be compatible. • Combat management (software) systems used by the seaframes are also designed with open systems architectures. • Allows new software components to be developed independently (allowing for competition) as mission upgrades are identified.

14. Other Examples of OSA • The VIRGINIA Class SSN program • Most of the non-propulsion systems (communications, weapons, fire control, sonar, etc) are common across the entire submarine fleet and managed as separate programs within the Navy. • As these systems improve, the updated system is installed in the latest VIRGINIA or backfit into existing ships. • There is robust competition within these subsystem programs, especially at the component supplier level. • Even the masts/antennas for the VIRGINIA are modular – the "slots" in the sail structure are common, and masts/antennas can be "dropped in" to any position. • They are ready to operate with minimal time and effort – demonstrating how modularity can reduce platform lifecycle costs and enhance mission flexibility.

15. Path Going Forward • Continued interaction and cooperation across Services in finding mechanisms to further implement these concepts. Examples: • Updating DoD 5101.12M • Developing a DoD OA Guidebook for Program Managers • Working with DAU and educational facilities for training, etc. • Hopefully, we will see greater efficiencies, more competition, and increased innovation in this area, as well as in other areas within DoD, as we meet the challenges of “doing more without more.”