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Grand Challenges for M&SA Business Perspective

Warren KatzChairman, Executive Committee

Simulation Interoperability Standards Organization (SISO)

Chief Operating Officer, MAK Technologies Inc.

January 30, 2002

wkatz@mak.com

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Technical Grand Challengevs.

Business Grand ChallengeTechnical 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

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Ergo:

“Fixing the DoD business model is the greatest Grand Challenge facing M&S”

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Analysis of Two Business Models

“Capitalism” vs. “Communism”

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Fundamentals of Capitalism

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.

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Fundamentals of Capitalism

Investors Investors Investors Investors Investors

$

Entrepreneur Entrepreneur Entrepreneur

$ $ $ $$

Failed Product NewProduct

NewProduct

Customer Customer Customer Customer Customer

$$ $

$ $

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Benefits of Capitalist Model

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.

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Fundamentals of Communist Centralized Economy

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.

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Fundamentals of Communism

Tax Collectors

Politburo

$

Central Production

Facility

Customer Customer Customer Customer

$ $ $ $ $

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Problems with Communist Model

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.

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DoD Contracting Model

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.

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Fundamentals of DoD Acquisition Model

Tax Collectors

DoD

$

Contractor

Customer Customer Customer Customer

$ $ $ $ $

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Problems with DoD Acquisition Model

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.

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Empirical Observations on CPFF Contracting

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.

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Justification for Remaking

“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.

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Notable Facts from MAK

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

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Marketplace Evolution

1980 1990 2000 2010

$50M

HWHW

HW

OS

OS

OSVR-Link

VEGA

Custom Layers

Mostly COTS,minimal Custom

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Ideal Commercialization Path for DoD Acquisition$$$

COTS - DoD Market Only

100% development cost

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COTS - Broader Markets

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What Actually Happens$$$

COTS - DoD Market Only

100% development costA

ircr

aft C

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Subm

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Figh

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COTS - Broader Markets

WASTE

HumiliationPoint

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Firm Fixed Price Helps

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

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Additional Suggestions to Promote Reuse

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.

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Conclusions from COTS Vendor

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.