Index

Defense Acquisitions: Higher Priority Needed for Army Operating and
Support Cost Reduction Efforts (Letter Report, 09/29/2000,
GAO/NSIAD-00-197).

Pursuant to a congressional request, GAO provided information on the
Department of Defense's (DOD) efforts to reduce weapon system operating
and support costs, focusing on the Army's efforts to reduce: (1)
projected operating and support costs for weapon systems under
development; and (2) operating and support costs of fielded weapon
systems.

GAO noted that: (1) the Army is unlikely to be effective in
significantly reducing the projected operating and support costs of its
weapon systems under development because it has not established a
sufficiently high priority for operating and support costs and has not
put the needed mechanisms in place to achieve such reductions; (2)
specifically, the Army: (a) has not assigned accountability for
operating and support cost reductions nor established a requirement that
each weapon system achieve a specific level of cost reductions; and (b)
lacks complete and reliable data on the actual operating and support
costs of the weapon systems that are being replaced; (3) without a
requirement to achieve a specific level of operating and support cost
reductions, program managers have little incentive or priority to trade
off acquisition cost, schedule, and performance requirements during
development to achieve long-term operating and support cost savings; (4)
for the two developmental systems in GAO's review--the Comanche
Helicopter and the Crusader Self-Propelled Howitzer--efforts are
underway to improve the systems' supportability, reliability, and
maintainability; (5) while these efforts should have an impact on the
systems' operating and support costs, GAO was unable to link any actions
or tradeoffs to specific reductions in operating and support costs; (6)
further, the Army does not have complete and reliable data on the
operating and support costs for systems that are being replaced; as a
result, program managers lack the data needed to accurately project
operating and support costs and to determine whether they can achieve
DOD's goal of reducing new systems' life-cycle costs by 20 to 50 percent
over those of the systems they are replacing; (7) in addition, because
the Army has not historically budgeted or managed in this way, it has
not collected and maintained data on all elements of each weapon
system's operating and support costs; and (8) although the Army has
identified some potential reductions, its operating and support cost
reduction efforts for fielded systems lack the priority they need to be
effective in meeting DOD's goals.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-00-197
     TITLE:  Defense Acquisitions: Higher Priority Needed for Army
	     Operating and Support Cost Reduction Efforts
      DATE:  09/29/2000
   SUBJECT:  Weapons systems
	     Military cost control
	     Army procurement
	     Life cycle costs
	     Military aircraft
	     Weapons research and development
IDENTIFIER:  Apache Helicopter
	     Abrams Tank
	     Comanche Helicopter
	     Crusader Self Propelled Howitzer

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GAO/NSIAD-00-197

Appendix I: Details of Operating and Support Cost Reduction
Initiatives for Fielded System Pilot Programs

22

Appendix II: Comments From the Department of Defense

25

Appendix III: GAO Contacts and Acknowledgments

28

Table 1: Army Pilot Programs 8

Figure 1: Trend in Army Funding for Acquisition and Operation and
Maintenance, Fiscal Years 1998-2000 (then-year dollars in billions) 7

DOD Department of Defense

National Security and
International Affairs Division

B-284696

September 29, 2000

The Honorable James M. Inhofe
Chairman
The Honorable Charles S. Robb
Ranking Minority Member
Subcommittee on Readiness
and Management Support
Committee on Armed Services
United States Senate

The high cost of operating and supporting the Army's weapon systems is
absorbing an increasing share of its budget and is reducing funds available
for buying new systems. This, according to Department of Defense (DOD)
officials, results in older weapons being kept in the inventory longer,
further increasing their costs and thereby further reducing funds available
for modernization. Operating and support costs include costs for fuel,
repair parts, maintenance, and contract and support services, as well as for
all civilian and military personnel associated with a weapon system.

In April 1998, DOD established an initiative that expanded the purview of
program managers involved in designing and producing new weapon systems to
include more responsibility for the total life-cycle costs1 of these
systems. Under this initiative, each of the services was directed to
designate 10 pilot programs to test innovative approaches to reduce
operating and support costs. To monitor the effectiveness of this approach,
Congress, in Section 816 (a) of the Strom Thurman National Defense
Authorization Act for Fiscal Year 1999, directed DOD to designate and report
to Congress on 10 of the 30 pilot programs. DOD has designated the 10 pilot
programs for section 816 (a) purposes but has not yet assessed or reported
on their effectiveness. In conjunction with these initiatives, and to free
up funding for its modernization efforts, in January 1999, DOD set broad
goals for each service to lower the operating and support costs of weapon
systems. By fiscal year 2000, systems under development are expected to have
projected life-cycle costs 20 to 50 percent lower than the actual costs of
the systems they are replacing. Fielded systems are expected to reduce their
actual operating and support costs by 20 percent by fiscal year 2005.

Concerned about the degree to which DOD has focused on reducing weapon
system operating and support costs, you asked us to evaluate DOD's efforts
in this area. This is our second report responding to your request. Our
first report discussed the Air Force's efforts to reduce operating and
support costs of its weapon systems.2 This report addresses the
effectiveness of (1) the Army's efforts to reduce projected operating and
support costs for weapon systems under development and (2) the Army's
efforts to reduce operating and support costs of fielded weapon systems. We
examined seven of the Army's pilot programs. Details on the programs we
reviewed are discussed in appendix I.

The Army is unlikely to be effective in significantly reducing the projected
operating and support costs of its weapon systems under development because
it has not established a sufficiently high priority for operating and
support costs and has not put the needed mechanisms in place to achieve such
reductions. Specifically, the Army (1) has not assigned accountability for
operating and support cost reductions nor established a requirement that
each weapon system achieve a specific level of cost reductions and
(2) lacks complete and reliable data on the actual operating and support
costs of the weapon systems that are being replaced. Without a requirement
to achieve a specific level of operating and support cost reductions,
program managers have little incentive or priority to trade off acquisition
cost, schedule, and performance requirements during development to achieve
long-term operating and support cost savings. For the two developmental
systems in our review--the Comanche helicopter and the Crusader
Self-Propelled Howitzer--efforts are underway to improve the systems'
supportability, reliability, and maintainability. While these efforts should
have an impact on the systems' operating and support costs, we were unable
to link any actions or tradeoffs to specific reductions in operating and
support costs. The program managers for the Comanche and the Crusader
focused mostly on meeting acquisition cost, schedule, and performance
requirements. Further, the Army does not have complete and reliable data on
the operating and support costs for systems that are being replaced; as a
result, program managers lack the data needed to accurately project
operating and support costs and to determine whether they can achieve DOD's
goal of reducing new systems' life-cycle costs by
20 to 50 percent over those of the systems they are replacing. In addition,
because the Army has not historically budgeted or managed in this way, it
has not collected and maintained data on all elements of each weapon
system's operating and support costs. For example, the Army's cost
information system does not include data on several cost elements--including
the costs of supply maintenance or software support--for each weapon system
because the Army does not budget for these cost elements at the individual
weapon system level. Although the Army was unable to estimate their exact
magnitude, the absence of these cost elements may have a material impact on
a weapon system's overall operating and support cost.

Although the Army has identified some potential reductions, its operating
and support cost reduction efforts for fielded systems lack the priority
they need to be effective in meeting DOD's goals. As with developmental
systems, the Army (1) has not assigned accountability for operating and
support cost reductions nor established a requirement that each fielded
system maintain these costs at or below a specific level and (2) lacks
complete and reliable data on each system's operating and support costs.
Without a requirement to limit operating and support costs by individual
weapon system, there is little incentive or priority for program managers or
other parties influencing funding decisions to make up-front investments to
achieve long-term operating and support cost savings, particularly if such
investments are in lieu of near-term readiness or performance improvements.
As a result, operating and support cost reduction efforts prior to the
establishment of the pilot programs were limited. The pilot programs have
initiatives that may impact operating and support costs but that are funded
primarily to improve system performance, reliability, or
maintainability--their impact on operating and support costs is secondary.
For example, the Army plans to replace the engine in the Abrams tank
primarily because reliability problems are affecting the tank's operations.
The improved engine is expected to save about $13 billion in operating and
support costs over a 30-year period. However, the first of the Abrams tanks
to be outfitted with a more reliable engine will not be fielded until 2004,
and the amount of operating and support cost savings resulting by 2005--the
target date for achieving DOD's cost reduction goals--will be limited.
Further, some pilot program managers are pursuing initiatives, such as
contracting out logistics support, as a way to achieve cost reductions
without an up-front investment. However, the overall Army-wide savings from
contracting out logistics support activities have not been clearly
demonstrated. For example, we have reported that the projected savings from
contracting out the Apache helicopter's logistics support activities are
questionable.3 In addition to the absence of operating and support cost
requirements, accountability for achieving the cost reduction has not been
established. Currently, a number of officials, including the program
manager, have some influence over decisions impacting operating and support
costs. A new directorate has been established to bring an
Army-wide focus to operating and support cost reduction efforts, but it has
not been fully funded or staffed. Also, as with systems under development,
the lack of complete and reliable operating and support cost data for
fielded systems limits program managers' ability to assess cost trends and
drivers as well as to identify cost reduction initiatives.

We are recommending that the Army take steps to improve the management of
operating and support costs for systems under development and fielded
systems. In commenting on this report, DOD agreed with the general thrust of
this report and that significant steps remain to be taken to reduce
operating and support costs and generally agreed with our recommended
actions.

According to DOD, operating and support costs of fielded weapon systems are
increasing and are reducing the funds available for modernization. Reduced
funding for new weapons is requiring the Army to keep fielded weapon systems
in its inventory longer; this increases operating and support costs and
further decreases funds available for modernization. The Under Secretary of
Defense (Acquisition, Technology, and Logistics) has characterized this as a
"death spiral."

Currently, DOD budgets over $40 billion a year for acquisition and operation
and maintenance of Army weapon systems. In fiscal years 1998-2000, the
operation and maintenance4 portion of the Army' s budget averaged about $27
billion a year. Included in this amount were funds for civilian pay,
contract services for maintenance of equipment and facilities, fuel,
supplies, and repair parts for weapons and equipment. As shown in figure 1,
acquisition funds (i.e., procurement and research and development funds)
allocated to the Army over the 3-year period decreased about 5 percent, from
$15.3 billion to $14.5 billion, while funding for operation and maintenance
activities increased about 19 percent, from
$25 billion to $29.8 billion. (All funding and cost data presented in this
report are in then-year dollars.)

Source: Our analysis of DOD appropriation data.

Historically, Army weapon system program managers have been responsible for
development and acquisition. Their primary goals are to develop and produce
systems (1) with the performance required by users, (2) on schedule, and (3)
at an acceptable cost. While some attention has been given to the cost of
operating and supporting a weapon system after it is fielded, responsibility
for these functions after systems are fielded generally shifts to other Army
agencies such as maintenance depots, software support facilities, and
operating bases. DOD has long identified this division of responsibility as
a key cause of higher weapon system operating and support costs, which are
generally estimated to account for about 60 to 70 percent of a system's
total life-cycle costs.

In April 1998, DOD established an initiative that expanded the purview of
program managers involved in designing and producing new weapon systems to
include more responsibilities for the total life-cycle costs of these
systems. This initiative directed each of the services to designate 10
weapon system programs as pilot programs to test innovative approaches to
reduce operating and support costs. To monitor the effectiveness of this
approach, Congress, in Section 816 (a) of the Strom Thurman National Defense
Authorization Act for Fiscal Year 1999, directed DOD to designate and report
to Congress on 10 of these pilot programs. Subsequently, in a 1999 report to
Congress, DOD designated three Army pilot programs, three Navy pilot
programs, and four Air Force pilot programs. However, DOD has not yet
assessed or reported on the effectiveness of the pilot programs. Table 1
lists all of the Army pilot programs.5

 Systems in development        Fielded systems
 Comanche helicopter           Abrams tanka
 Crusader Self-Propelled
 Howitzer                      Apache helicoptera

                               Advanced Fielded Artillery Tactical Data
                               Systema
                               Cargo helicopter

                               Improved Target Acquisition System for the
                               Tube Launched, Optically Wire Guided Missile
                               Heavy Expanded Mobility Tactical Truckb

                               Multiple Launch Rocket System, High Mobility
                               Artillery Rocket Systemb

aReported to Congress under the Fiscal Year 1999 Strom Thurmond National
Defense Authorization Act.

bNot included in our review.

The pilot programs are expected to examine all aspects of their operating
and support costs and to identify innovative ways to reduce these costs
without impacting operational readiness. Some of the actions being
considered are changes in operational and business practices, changing
maintenance processes, and improving the reliability and maintainability of
specific system components.

In conjunction with these initiatives, and to free up funding for its
modernization efforts, in January 1999 DOD set two broad goals for lowering
the operating and support costs of both fielded and developmental weapon
systems. First, by fiscal year 2000, developmental weapon systems are
expected to have total projected life-cycle costs 20 to 50 percent lower
than those of the systems they are replacing. For example, the Crusader
Howitzer program, which will replace the Paladin Howitzer, is expected to
have a projected life-cycle cost about $3 to $8 billion lower than that of
the Paladin. Since operating and support costs make up about 60-70 percent
of a weapon system's total life-cycle costs, the services would need to
reduce operating and support costs by 20-50 percent in order to reduce
overall life-cycle cost by 20-50 percent.

Second, the annual operating and support costs of fielded systems are to be
reduced by 20 percent by fiscal year 2005. Interim goals were also
established: a 7-percent reduction by fiscal year 2000 and a 10-percent
reduction by fiscal year 2001. This means that, using the fiscal year 1997
operation and maintenance appropriation of about $20 billion as the base
year, the Army is expected to reduce the annual operating and support costs
of its fielded weapon systems by about $4 billion by fiscal year 2005.

Operating and Support Costs of New Systems

Because the Army has not established specific operating and support cost
reduction requirements for each weapon system, and because complete and
reliable cost data is not readily available, the Army is unlikely to
significantly reduce the operating and support costs of its systems in
development and meet DOD's cost reduction goals. Without a specific
requirement, program managers are not accountable and have little incentive
to trade off acquisition cost, schedule, and performance requirements during
development to achieve long-term operating and support cost savings. Without
complete and reliable data, the Army lacks a means to measure progress in
meeting DOD's cost reduction goals.

Reduction Initiatives Lack Priority

The Army does not give the same level of priority to managing long-term
operating and support costs of developmental weapon systems as it gives to
acquisition cost, schedule, and performance. Although operating and support
cost estimates are required early in the acquisition process, and goals are
sometimes established, the two developmental systems in our review--the
Comanche and the Crusader--did not have a requirement to maintain their
operating and support costs at or below a specific level. According to DOD
acquisition officials, without a specific operating and support cost
requirement during program development, program managers are not accountable
for operating and support cost reductions and have little incentive or
priority to trade off acquisition cost, schedule, and performance
requirements for long-term operating and support cost savings. Without an
operating and support cost requirement for each weapon system under
development, the Army's efforts to achieve these cost reductions are less
likely to receive the priority needed to meet DOD's cost reduction goals.

An established requirement has a much greater impact on program priorities
and trade offs than a goal. DOD Regulation 5000.2-R calls for the
establishment of key baseline cost, schedule, and performance requirements
to be measured, tracked, and managed. Program success is measured by the
achievement of these requirements. Moreover, an operating and support cost
requirement would require the same level of management attention as the
cost, schedule, and performance parameters. Similarly, deviations from an
operating and support cost requirement would also require the same
senior-level review as other key requirements.

In the mid-1990s, DOD established an acquisition reform initiative to help
control weapon system cost during design and development. The Cost as an
Independent Variable initiative entails setting aggressive yet realistic
cost objectives when defining operational requirements, acquiring defense
systems, and managing achievement of objectives. This strategy is required
for all DOD developmental programs and establishes a structured way for all
developmental programs to consider trade offs in cost, schedule, and
performance. However, without a requirement to maintain operating and
support costs at or below a specific level, these trade-offs are focused
primarily on the program's near-term acquisition costs. DOD believes that
the best time to reduce long-term operating and support costs is in the
design phase of the acquisition process, but achieving such reductions often
involves higher acquisition costs or trade offs in schedule or performance.

The program managers of the two pilot programs involving developmental
systems--the Comanche helicopter and the Crusader Self-Propelled
Howitzer--are using Integrated Product Teams6 to address supportability,
reliability, and maintainability issues, including development of strategies
for acquisition and contracts, cost estimates, evaluation of alternatives,
logistic management, and cost-performance trade offs. The Teams also monitor
operating and support cost estimates and goals, organize and coordinate
efforts to reduce the major "drivers" of support costs, and provide
recommendations to the program manager. For example, the Comanche helicopter
and the Crusader Self-Propelled Howitzer Integrated Product Teams identified
the top operating and support cost drivers for their programs and are
developing plans to reduce them. Crusader expects to reduce the number of
personnel required to support and operate the weapon (support and crew
personnel account for about 60 percent of its operating and support costs).7
Comanche expects to improve the reliability and maintainability of specific
components; this should have an impact on operating and support costs.
However, without a specific operating and support cost requirement, program
managers have little or no incentive to make such trade offs. Program
managers for the Comanche and Crusader focused mostly on meeting acquisition
cost, schedule, and performance requirements. In both of these pilot
programs, we were unable to link any actions taken under Cost as an
Independent Variable with specific operating and support cost reductions.
The Crusader project office acknowledged that the only measurable effect of
using Cost as an Independent Variable would be on development and production
costs, not on operating and support costs.

A 1999 DOD study reported that about 80 percent of surveyed program
management officials8 believe that a complete estimate of a weapon system's
operating and support costs should be baselined early in the program and
updated regularly to ensure visibility and measurability at

decision-making milestones.9 The study noted that regularly updated
operating and support cost baselines would allow program managers to have
visibility over these costs as the development and testing process proceeds,
as well as before and after fielding. Although both the Crusader and
Comanche programs have life-cycle cost estimates that are updated at major
decision points--which are held every few years--neither program has
regularly updated the operating and support cost portion of those estimates.
As a result, the Comanche and Crusader program managers do not have good
visibility over these costs nor the means to determine whether their
operating and support cost reduction efforts are effective.

Complete and reliable operating and support cost data for each weapon system
is not readily available to Army program managers because the Army does not
collect and maintain data on all elements of a weapon system's operating and
support cost. In previous work on operation and maintenance funds, we noted
that DOD's financial management systems are not designed to capture the full
costs of weapon systems.10 Without complete and reliable operating and
support cost data for the systems being replaced--such as the Kiowa Warrior
helicopter and Paladin Howitzer--the Army does not have an adequate baseline
against which to measure progress in meeting DOD's cost reduction goals for
developmental systems such as the Comanche helicopter and Crusader Howitzer.

The Army's Operating and Support Management Information System provides
historical cost data on Army weapon systems and is the primary source of
operating and support data used by program managers to project costs of new
systems, forecast spare parts budgets, and generally manage their programs.
The Army uses this data system to develop its operating and support cost
budget for weapon systems for consumable items such as repair parts,
petroleum, oil, lubricant, fuel, and ammunition, as well as for intermediate
maintenance. However, the system does not (1) meet the Army's need for total
visibility of operating and support cost data,
(2) provide a basis for an accounting of all funds used for operation and
support, or (3) provide a complete and reliable basis for developing and
reporting the costs of weapon system support. An official responsible for
operating and support cost data at the Army's Cost and Economic Analysis
Center stated that the available operating and support cost data for each
weapon system is incomplete and often 12-18 months out-of-date. Several
operating and support cost elements that are used to establish the Army's
operating and support budget estimates, such as contractor logistics
support, supply maintenance, supply depot support, and software support, are
not included in the database. The Army was unable to estimate the exact
magnitude of these cost elements but their absence may have a material
impact on a weapon system's overall operating and support cost.

Army's Operating and Support Cost Reductions for Fielded Systems

The Army has not assigned accountability for nor established a requirement
for each fielded system to maintain its operating and support costs at or
below a specific level. Without such a requirement, the funding priority for
cost reduction initiatives is limited. According to Army program office
officials, the Apache helicopter, the Abrams tank, and the Cargo helicopter
are among the most costly Army systems to operate and support and offer many
opportunities for operating and support cost savings. Until these systems
were designated as pilot programs in 1999, initiatives specifically targeted
to reduce operating and support cost were limited or were not often
successful in competing for funding. Also, some ongoing initiatives were
aimed primarily at achieving performance improvements, while operating and
support cost impacts were of secondary importance. In some other cases,
pilot program managers are pursuing operating and support cost reduction
initiatives, such as contractor logistics support, that do not require
up-front funding.

Further, because cost reduction initiatives for the pilot programs are
relatively recent, they are not projected to have a significant savings
impact for a number of years; therefore, the Army will not likely meet the
DOD goal of a 20-percent cost reduction by 2005. For example, the first of
the Abrams tanks to be outfitted with a more reliable engine will not be
fielded until 2004, and the amount of savings achieved by 2005 will be
limited. Likewise, plans to upgrade the engine and reduce vibration in the
Cargo helicopter will result in only a limited number of refurbished
aircraft being fielded by fiscal year 2004, and any reduction in operating
and support costs by 2005 will be limited. Finally, the lack of complete and
reliable cost data makes it difficult for Army program managers to assess
and manage these costs. Better data is needed to assess operating and
support cost trends and cost drivers and to identify cost reduction
initiatives. Details of the fielded systems' cost reduction initiatives that
we reviewed are in appendix I.

Without a requirement that each system maintain its operating and support
costs at or below a specific level, there is little incentive for program
managers to request up-front investments to achieve long-term operating and
support cost savings, particularly if such investments are in lieu of
near-term readiness or performance improvements. Throughout much of the late
1990s, the Army has had three efforts in place to identify and implement
cost reduction projects, but due to other, higher funding priorities, these
efforts have not resulted in significant operating and support cost
reductions in fielded weapon systems. The three efforts are (1) supply
management, Army operating and support cost reductions;
(2) commercial operating and support savings initiative; and (3)
reliability, maintainability, and sustainability operating and support cost
reductions. Each of these efforts provides funding for cost reduction
projects involving the redesign of individual spare parts and certain
maintenance improvements. According to the program coordinator, these
projects are limited in scope and, due to their limited funding, have not
had a significant impact on operating and support costs. For example,
projected funding for the Army's reliability, maintainability, and
sustainability initiative totals only $14 million for fiscal years 2000-05.
This level of funding will support only a small portion of the proposed cost
reduction projects under the initiative. The latest list of proposed Army
reliability, maintainability, and sustainability cost reduction projects for
fiscal year 2002 alone contains 25 projects estimated to cost a total of
about $50 million. Overall, the program coordinator estimates that about
$200 million a year would be needed to fully fund all potential projects
under this initiative.

Operation and support cost reduction efforts require up-front investments
for long-term returns, and the Army has been reluctant to make a commitment
to these investments. However, it has been willing to invest in performance
enhancement initiatives with indirect operating and support cost savings. As
a result, projected reductions in operating and support costs for some pilot
programs are not the product of a separate initiative, but the by-product of
efforts to upgrade the system's performance capabilities. For example, the
Army plans to replace the engine in the Abrams tank primarily because
reliability problems are affecting the tank's operations. Secondarily, the
Army projects that the engine replacement, which will cost over $2 billion,
will save $13 billion in operating and support costs over 30 years.
Similarly, planned vibration reduction and engine upgrades to the Cargo
helicopter are primarily to improve operating performance, readiness, and
safety. Although the cost of the upgrades has not yet been determined, they
are projected to reduce operating and support costs by an estimated $2.6
billion over 20 years.

Reduce Operating and Support Cost

In the absence of a requirement for each system to maintain its operating
and support costs at or below a specific level and a lack of direct control
or influence over operating and support functions or funds, pilot program
managers have sought alternative ways of reducing system costs. For example,
some managers of pilot programs--such as the Apache helicopter--are pursuing
contractor logistic support initiatives, in which a contractor is
responsible for many system support functions. Through these initiatives,
program managers expect to achieve significant operating and support cost
savings, as well as more direct control over support activities and funding.
However, the overall Army-wide cost savings from these initiatives that
contract out logistics support have not been clearly demonstrated. For
example, we reported that the level of savings projected from contracting
out the Apache helicopter's logistics support activities is questionable.
Moreover, program managers can only influence, but cannot decide, whether to
rely on contractor support or on the Army's depot maintenance support
capability.

In addition, operating and support costs and functions for each weapon
system are managed by a variety of Army organizations, many of them outside
the program manager's office. Different organizations control daily
operations (such as training, tactical deployments, and day-to-day
maintenance) of the weapons, depot maintenance, transportation, supply, and
other activities. Program managers have little control or influence over
these organizations; as a result, they have limited control over major
operating and support costs drivers. For example, local commanders decide
the spending priority for all operation and maintenance funds received at
the command level. Program managers needing weapon system support funds must
compete annually with other weapon systems and other support activities at
the local command level and have no guarantee that support funding will be
available to them when they need it. To bring increased Army-wide
focus--beyond the program manager--to operating and support cost reduction
efforts, the Army established a Total Ownership Cost Directorate in 1999 to
(1) consolidate the management of the Army's operating and support cost
reduction initiatives and (2) provide leadership, guidance, and
implementation of weapon system cost reduction initiatives. The centralized
Directorate is expected to elevate weapon system cost reduction initiatives
to senior management level and to optimize the allocation of operating and
support cost reduction funding Army-wide. However, an official from the
Assistant Secretary of the Army (Acquisition, Logistics, and Technology)
office acknowledged that funding for the Directorate would most likely not
be available until at least fiscal year 2002. The Directorate is operating
with temporary personnel borrowed from other Army elements and with a
reserve officer.

Fielded Systems

The lack of complete data on each fielded system's operating and support
costs makes it difficult for Army managers to assess and manage these costs.
The Cargo helicopter program best illustrates the need for additional
operating and support cost data. The program manager awarded a contract to
have a new operating and support cost baseline developed by October 2000 to
gain more insight into the causes of the aircraft's high operating and
support costs and to collect data on maintenance events at the individual
aircraft level. The program manager did so because the Army's operating and
support cost data system can provide data on a weapon system's total spare
part consumption but cannot provide more specific data on which weapon
system used which parts and the costs to install each of the parts.
According to the program manager, it is impossible to assume management
responsibility for operating and support cost reduction initiatives if the
weapon system's total operating and support costs or the reasons for those
costs are unknown.

Cost data on individual maintenance events, such as removal and assessment
of part failures, are not available from the Army's operating and support
cost database. For example, the cost of removing and assessing a suspected
faulty component and replacing the same component is not available from the
database. Although the Army's Operating and Support Management Information
System was not designed to provide this sort of data, we believe it is this
kind of operating and support cost data that is needed by Army program
managers to assess cost trends and cost drivers and to identify cost
reduction initiatives.

The Army is not likely to significantly reduce the operating and support
costs of its weapon systems and, therefore, will not likely meet DOD's cost
reduction goals. Hence, the "death spiral" of increasing operating and
support costs and decreasing funds for modernization will likely continue.

The primary reason the Army is not likely to be successful is because it has
not granted a sufficiently high priority to operating and support cost
reductions nor put a mechanism in place to achieve cost reductions.
Specifically, without a requirement to achieve a specific level of operating
and support cost savings, program managers have little incentive or priority
to trade off acquisition costs, schedule, and performance requirements
during development to achieve long-term operating and support cost savings.
An operating and support cost requirement would have a much greater impact
on program priorities and would require the same level of management
attention as the cost, schedule, and performance parameters. Similarly,
deviations from an operating and support cost requirement would also require
the same senior-level review as other key requirements. In addition, program
managers do not have complete and reliable data needed to identify and track
operating and support costs. Without complete and accurate cost data,
program managers are unable to assess cost trends and cost drivers and to
identify cost reduction opportunities.

Further, there is no clear accountability for operating and support cost
reductions. A number of officials, including the program manager, have some
influence over decisions impacting operating and support costs. The Army
established the Total Ownership Cost Directorate to, among other things,
bring increased Army-wide focus to operating and support reduction efforts.
However, initial funding for the directorate was not expected to be
available until fiscal year 2002.

To increase the priority of and to provide the mechanisms needed to achieve
significant reductions in operating and support costs, we recommend that the
Secretary of Defense direct the Secretary of the Army to

 establish operating and support cost requirements for developmental and
fielded systems and regularly monitor each system's progress in meeting the
requirement,

 develop a more complete and accurate accounting of each weapon system's
operating and support costs by expanding the Army's current cost data system
to include additional cost elements such as software and supply system
support costs, and

 promptly provide the necessary funding and staffing to fully establish the
Total Ownership Cost Directorate.

In written comments on a draft of this report, DOD agreed that significant
steps remain to be taken to reduce operating and support costs and generally
agreed with our recommended actions. DOD also stated that it shares some of
our concerns about the pace, risk, and costs associated with reducing
operating costs and acknowledged the difficulty of devising a strategy that
allows meaningful cost reductions while focusing on its highest
priorities--improving safety, readiness, and combat capability. DOD noted
that pilot programs are investigating various cost reduction approaches, but
that it was too soon to determine which approaches would yield the best
results.

DOD generally agreed with our recommendation for establishing operating and
support cost requirements for developmental and fielded systems. For
developmental systems, DOD asserted that a newly established process has
already improved the Army's evaluation of operating and support costs by
establishing those costs as co-equals with schedule and performance
requirements. We found, however, that the Army's new policy makes
supportability, rather than operating and support costs, a co-equal with
cost, schedule, and performance. As a result, it does not specifically
increase the priority needed to reduce these costs. For fielded systems, DOD
believes that its efforts to track all operating and support costs elements
are still evolving and that it is premature to establish a cost reduction
requirement. While we agree that efforts to track all operating and support
cost elements is still evolving, we believe that the Army's Operating and
Support Management Information System can be modified to provide useful and
timely data to track and manage the operating and support costs of fielded
systems. As a result, we believe that our recommendation for an operating
and support cost requirement for both fielded and developmental systems is
still valid.

DOD generally agreed with our second recommendation that the Secretary of
the Army develop a more complete and accurate accounting of each weapon
system's operating and support costs. DOD stated that, as lessons and data
are gleaned from the pilot programs (which are intended to examine all
aspects of operating and support costs and identify innovative ways to
reduce those costs), an alternative operating and support cost data system
may be adopted. DOD also stated that it has several actions and activities
that are under way to accomplish the objective of more complete and accurate
accounting of operating and support costs but then went on only to mention
an information system already in use. We continue to believe that
improvements can and should be promptly made to the current information
system in order to improve operating and support cost information and
visibility.

DOD generally agreed with our third recommendation that the Secretary of the
Army promptly provide the necessary funding and staffing to fully establish
the Total Ownership Cost Directorate. DOD stated that the Army already has
ongoing efforts to support the Total Ownership Cost initiatives. In
discussion with an Army official from the Office of the Assistant Secretary
of the Army (Acquisition, Logistics, and Technology), we learned that the
Army has increased its staffing of the Total Ownership Cost Directorate from
three to seven permanent personnel and has slated additional staffing
increases for fiscal years 2001 and 2002. We are encouraged by the Army's
decision to provide additional staffing for the Directorate. However, the
appropriate staffing level needed by the Directorate to fulfill its
objective of bringing increased Army-wide focus to operating and support
cost reduction efforts is not yet known and will depend, in large part, on
the overall priority given to those efforts.

DOD's comments are reprinted in appendix II. DOD also provided some
technical comments, which we incorporated in the report where appropriate.

Although the Army originally designated 10 programs as pilots, it
subsequently reduced them to 9 because of duplication. We reviewed seven of
the pilot programs' implementation plans and their operating and support
cost reduction initiatives. Because of similarities in the pilot programs
and time constraints, we only selected seven of the programs for inclusion
in our review: Apache helicopter; Abrams tank; Cargo helicopter; Improved
Target Acquisition System for the Tube Launched, Optically Wire Guided
Missile; Advanced Field Artillery Tactical Data System; Comanche helicopter;
and Crusader Self-Propelled Howitzer.

To assess the effectiveness of the Army's efforts to reduce projected
operating and support costs for weapon systems under development, we
reviewed and evaluated the Comanche helicopter's and the Crusader
Self-Propelled Howitzer's cost reduction implementation plans and other
pertinent program office documentation. Additionally, we interviewed key
personnel in the program office and discussed the plans with cognizant DOD
and Army officials.

To assess the effectiveness of the Army's efforts to reduce operating and
support costs of fielded weapon systems, we reviewed and evaluated operating
and support cost reduction implementation plans for the Abrams tank, the
Apache helicopter, the Advanced Field Artillery Tactical Data System, the
Cargo helicopter, and the Improved Target Acquisition System for the Tube
Launched, Optical Wire Guided Missile. We also reviewed and evaluated
operating and support cost data in the Army's Operating and Support
Management Information System for fielded systems.

We also reviewed other pertinent documents and interviewed key personnel at
DOD, Army, Army Cost and Economic Analysis Center, and weapon system program
offices.

We obtained documents and interviewed officials from the offices of the
Secretary of Defense and the Army, Washington, D.C.; the U.S. Army Aviation
and Missile Command, Huntsville, Alabama; the National Guard Aviation
Support Facility, Birmingham, Alabama; the 101st Airborne Division, Fort
Campbell, Kentucky; and the Army Materiel Command, Alexandria, Virginia.
Additionally, we held video teleconferences with the Program Executive
Officer for Ground Combat Support Systems, Picatinny Arsenal, New Jersey;
the U.S. Army Tank and Automotive Command, Warren, Michigan; and the U.S.
Army Communication and Electronics Command, Fort Monmouth, New Jersey.

We conducted our review from July 1999 through July 2000 in accordance with
generally accepted government auditing standards.

We are sending copies of this report to other interested congressional
committees; the Honorable William Cohen, Secretary of Defense; the Honorable
Louis Caldera, Secretary of the Army; and the Honorable
Jacob Lew, Director, Office of Management and Budget. Copies will also be
made available to others on request.

If you have any questions regarding this report, please contact me on
(202) 512-4841. GAO contacts and major contributors to this report are
listed in appendix III.
James F. Wiggins
Director, Acquisition and Sourcing Management

Details of Operating and Support Cost Reduction Initiatives for Fielded
System Pilot Programs

The Apache helicopter is the most costly Army system in terms of annual
operating and support costs. To aid in reducing these costs, the Apache
program manager has created an Integrated Product Team as the primary tool
for identifying cost reduction opportunities. The team's focus has been on
addressing the Apache's top operating and support cost drivers. According to
the program manager, the team has been successful in identifying and
implementing many operating and support cost saving initiatives, at a cost
of $4.74 million.

The program office estimates that the ongoing initiatives will achieve over
$434 million in total projected operating and support cost savings over
10 years. For example, cost reduction efforts associated with the Apache's
tail and main rotor alone have potential cost reductions of about
$44 million. Under the pilot program, the Apache program manager plans to
manage operating and support cost reduction efforts through the Prime Vendor
Support concept, which uses a single contractor to provide all weapon system
support (support is currently being managed by several Army organizations).
The program office estimates that this concept will result in about $380
million in operating and support cost savings over
5 years. However, DOD has questioned the projected savings under this
concept, and the implementation plan is controversial because, among other
things, it would require the Army to give the entire Apache spare parts
inventory, estimated to be worth about $1 billion, to the contractor without
compensation. A decision on the Prime Vendor Support concept was pending at
the time we completed our review.

According to the program office, the Abrams tank is the second most costly
Army system in terms of annual operating and support costs and accounts for
half the repair parts costs by the Army's entire ground combat fleet.
According to the Abrams program manager, the tank engine is a major
contributor to the system's high operating and support costs. The Abrams
program has recently received about $1 billion in investment funds to begin
an initiative that will focus on replacing the current engine with an
improved one. While this initiative is designed to improve the tank engine's
performance, it will indirectly reduce operating and support costs. The
engine initiative is estimated to cost a total of about $2 billion and yield
a projected $13 billion in operating and support cost savings over 30 years.

The Cargo helicopter is the fourth most costly Army system in terms of
annual operating and support costs. The program manager has initiated two
initiatives designed to improve the performance and reduce the operating and
support costs of the helicopter by an estimated $2.6 billion over 20 years.
The first initiative is a vibration reduction effort, which will involve the
remanufacturing of the aircraft's airframe. The effort is based on analyses
of vibration studies conducted by the Army, the Navy, the Air Force, and
civilian institutions. According to the program manager, eliminating
excessive vibration, which causes the airframe to crack and other components
to break, will increase the aircraft's reliability by minimizing hardware
failures, thereby enhancing its performance and readiness. According to the
program manager, the effort will cost an estimated total of about $120
million and will yield long-term operating and support cost savings of about
$1 billion.

The second initiative involves converting the helicopter's engine to be more
fuel-efficient. This will involve the replacement of all magnesium
components with aluminum or stainless steel, which will significantly reduce
engine corrosion and are expected to reduce significantly operating and
support costs. The upgrade is estimated to cost about $1.2 billion.
Operating and support cost savings have not yet been determined.

In this pilot program, the program manager's approach to operating and
support cost reduction is different from others in our review. While other
pilot programs consider only system hardware or personnel cost drivers as
the sole basis when planning operating and support cost reductions, the
Cargo helicopter program manager also plans to consider non-hardware issues
such as the frequency of scheduled maintenance or training. The aircraft's
maintenance manual will be reviewed to determine whether it still requires
certain repairs, and computer-based maintenance training that can be
transported Army-wide has been developed to limit costly downtime.

Wire Guided Missile

The Improved Target Acquisition System for the Tube Launched, Optically Wire
Guided Missile was originally designed with reduced operating and support
costs in mind. According to a program office official, operating and support
costs were reduced because the number of reparable components was reduced by
over 60 percent, built-in testing was improved, and the need for additional
test equipment was eliminated. Further, the program manager plans to use
only contractor logistical support for the system. The official stated that
by implementing a contractor logistical support concept, rather than using
depot support, the Army expects to reduce operating and support costs by
$300 million over the life of the program.

The Advanced Field Artillery Tactical Data System is a heavily
software-oriented program. One operating and support cost reduction
initiative the project office plans will reduce the size of its computer
from 300 to
100 pounds. The new computer is expected to cost less to operate and
support. The program manager has not yet calculated the reduced operating
and support costs of the new computer.

Comments From the Department of Defense

GAO Contacts and Acknowledgments

James F. Wiggins (202) 512-4841
William Graveline (256) 650-1414

In addition to those named above, Leon S. Gill, William Petrick, and
Wendy Smythe made key contributions to this report.

(707445)

Table 1: Army Pilot Programs 8

Figure 1: Trend in Army Funding for Acquisition and Operation and
Maintenance, Fiscal Years 1998-2000 (then-year dollars in billions) 7
  

1. Life-cycle costs are the total costs of acquiring and owning a weapon or
materiel system over its full life, including development, procurement,
operation, support, and disposal.

2. Defense Acquisitions: Higher Air Force Priority Needed to Achieve
Operating and Support Cost Reductions (GAO/NSIAD-00-165 , Aug. 29, 2000).

3. Army Logistics: Status of Proposed Support Plan for Apache Helicopter
(GAO/NSIAD-99-140, July 1, 1999).

4. The operation and maintenance appropriation provides funds for most but
not all operating and support costs. For example, military personnel costs
are not funded by the operation and maintenance appropriation. The Army
could not provide an accurate estimate of its annual operating and support
costs for any of its weapon systems.

5. The Army originally designated 10 pilot programs. It subsequently reduced
them to nine because of duplication.

6. Integrated Product Teams include representatives from all appropriate
disciplines working together.

7. The Crusader is currently being redesigned to reduce its size and weight
significantly.

8. Program management officials include the program executive officer, who
is the management official responsible for providing overall direction and
guidance to program managers for development, acquisition, testing, systems
integration, product improvement, and fielding of assigned programs and who
reports directly to the Army Acquisition Executive.

9. Program Manager Oversight of Life-Cycle Support, DOD Program Manager
Oversight of Life-Cycle Support Study Group, Section 912 (c) (Oct. 1999).

10. Defense Budget: DOD Should Further Improve Visibility and Accountability
of O&M Fund Movement (GAO/NSIAD-00-18 , Feb. 9, 2000).
*** End of document. ***