By Michael Biorn
Sustainment, Lockheed Martin
During my discussions with various government and military service representatives, I receive many questions related to the various aspects and value of estimating Life Cycle Cost (LCC). Additionally, they want to discuss how Performance-Based Logistics (PBL) can be used to support unique sovereign requirements. Some questions and concerns that my team and I have received are discussed below.
Q. What are some examples of major defence procurements that successfully included LCC as part of the competitive evaluation process? At what part of the acquisition process was it considered and why?
Ans: Just recently, Norway, Switzerland and Finland announced the F-35 as their choice to replace their ageing fighter fleets and be their next-generation fighter. In their announcements and competition explanations, it is clear that each of them used a comprehensive evaluation process that included LCC, technical performance, capabilities, industrial participation, and sovereignty as factors in their selection. Each country had a unique acquisition process and evaluated LCC within their particular paradigm, but all for the same reason. They knew that if they couldn’t afford to operate their chosen fighter over its lifecycle, then any capability benefits were severely diminished, if not negated. Slovakia also was clear in their selection decision when they chose the F-16. They laid out a similar process of evaluation that demonstrated they had included long-term sustainment.
Q. Some stakeholders within the Indian defence community have concerns that projecting Operations & Support (O&S) costs out to 30+ years of the platform’s lifecycle has too many variables and unknowns that would likely result in arbitrary numbers. Is there a model you can point to which the Indian services could adopt to ensure all platform offerings are measured on the basis of a level playing field?
Ans: Projecting costs 30 years, or even 20 years or more, into the future does indeed have its challenges. Certainly, there’s potential for it to result in the arbitrary numbers mentioned. The International Cost Estimating and Analysis Association agrees that such a long and futuristic prediction is difficult and the fidelity of the estimate increases when actual costs are available, rather than estimated data. However, if a service needs to undertake such an effort, there are a few approaches that would be key to improve the result. These include ensuring the technical baseline is understood, setting clear ground rules and assumptions, and ensuring the risk and estimate sensitivity are understood. Under this construct, each original equipment manufacturer (OEM) could provide the requested data for the total air system. Using those common ground rules and assumptions, founded in India’s sovereign acquisition processes and priorities, evaluation of LCC should enable a direct comparison using an American colloquialism, an apples-to-apples comparison if you will of each OEM’s offer. There are several commercially available modelling programs such as Monterey Activity-based Analytical Platform (MAAP), OPUS 10 Suite, and VMetric. The accuracy of the outcome is dependent on the accuracy of the inputs and the type of data used to estimate. Actual costs introduce the most accuracy, but often estimates are dependent on parametric data or analogous data derived from other efforts. Also, it should seem reasonable that the area of uncertainty becomes broader in the out years when estimates cover long periods of time. It’s definitely not easy to produce an accurate prediction so far into the future, which probably explains the need for continuously revisiting such estimates on large programs, whether military or otherwise.
Q. Fuel costs are one of the largest drivers of Total Cost of Ownership (TOC) for major defence platforms. How should this be accounted for in LCC modelling?
Ans: Well, comparing projected fuel costs is always an interesting topic for me. First, I would mention that warfighter requirements have to be considered. Specific operational scenarios should be prescribed to evaluate the projected fuel required. Those scenarios naturally include expected weapons load-outs, external pods (FLIR, EW, etc), and flight profiles required to successfully prosecute the mission. Having flown a two-engine F-15E for much of my U.S. military career, I can attest to the differences in fuel usage based on how the jet is equipped for a given mission, the weight and drag that creates, and the logistics tail it demands. Of course, depending on unique sovereign requirements, different scenarios can be evaluated. Then, using information from OEMs, the service can calculate the annual fuel required for each platform and create long term forecasts presuming a certain degree of stability and normalcy in the pricing escalation. As we’ve seen surrounding recent world events, that may not always be so predictable.
Q. Are mid-life or other capability upgrades accounted for as part of the LCC?
Ans: When I was flying fighters, we used to say that the answer to nearly every question is ‘it depends’. Certainly, all scheduled depot maintenance for the air system throughout the intended service life should be included in the LCC evaluation. In reverse, aircraft should be given credit if they have no requirement for Programmed Depot Maintenance (PDM). Where it gets a little murkier is beyond depot maintenance in the modernisation arena, including capability upgrades. Those are not typically included in an OEM proposal. On the technology side, that’s because it is often hard to predict what that capability increase will look like on a ten to 20, or even 30 years, time horizon. Some advancements I’ve seen since I stopped flying were predictable; others were not. However, modernisation estimates can and should be accounted for as part of managing the lifecycle, often using historical empirical evidence from similar platforms to create those parametric or analogous estimates I mentioned earlier.
As a former warfighter, I think this is where the experience and past performance of the OEM, or whomever a service chooses to partner with for through life sustenance, is incredibly important. How does one use parametric and analogous estimates without that experience? That is one of the strengths of Lockheed Martin. We have large F-16 and C-130 fleets with the F-35 fleet growing every day.
We all know that collecting and evaluating through life sustenance costs, especially for military aircraft, is a complicated and time-consuming process. But the ultimate benefit of accuracy in those efforts is a warfighter’s combat effectiveness. That is particularly important in this modernisation arena. An experienced OEM has the ability to understand how to upgrade their platform to remain relevant in the battlespace.
Q. There has been a major push under the Government of India’s ‘Atmanirbhar Bharat’ initiative for self-reliance. Wouldn’t dependence on an OEM be contrary to self-reliance?
Ans: I don’t see that it has to be contrary. Let me qualify that statement by mentioning that with the technologies required on today’s advanced fighters, I think self-reliance is applicable to operations and mission execution. However, I don’t see how self-reliance can apply in totality. That is where the structure of a through life sustenance approach can be powerful. Done right, it creates a partnership focused on warfighter success where the best of breed for each stakeholder is utilised.
Once warfighter-defined requirements are determined, services normally appoint a program manager (PM) and a product support manager (PSM). Both the PM and PSM are normally assigned within a Defence Ministry of Defence Department and can be uniformed military or civilian personnel.
A PM is singularly responsible for accomplishing program objectives, including sustainment. The PSM is responsible to the PM to develop and execute a product support strategy. PSMs often appoint a product support integrator (PSI), usually a major defence industry company. Certainly, under a Performance-Based Logistics (PBL) contract, the PSI plays a significant role. It’s hard to overstate the value of a good, experienced integrator. PSIs select and manage product support providers (PSPs). In the best of breed approach that I just referenced, managing supply chains and sub-tier suppliers is what OEMs do. They also know the design of the aircraft. This arrangement allows for the PSI and PSPs to collectively deliver sustainment products and services to warfighters. Selecting a qualified PSI is critical. Careful consideration and evaluation should be given to their proven, long-term successes in supporting complex military aircraft and associated equipment.
Q. What is Lockheed Martin’s experience in executing international PBLs where sovereignty is of utmost importance?
Ans: Lockheed Martin supports PBLs around the world. Since our largest customer is the U.S. Department of Defense, obviously we have the most experience with them. Lockheed Martin has won 14 PBL awards from the U.S. Secretary of Defense. However, the question’s focus is on the international PBL experience. Just in the Aeronautics business area where I work, we support 28 global F-16 fleets, 18 countries with C-130Js and 11 F-35 fleets, all of which continue to increase each year. Not all of those are PBLs, but we have PBL arrangements on F-16 and C-130 with multiple nations. One benefit of a PBL contracting vehicle is that it can be tailored. It can focus on the low end of the PBL spectrum or address metrics on the high end that affect the availability of the entire air system based on the sovereign stakeholder’s desires. In some countries, we have PBL arrangements in support of an indigenous company to enhance that sovereign approach. India has a C-130J PBL that, from our Indian customer’s feedback, has been quite successful in delivering desired outcomes. That’s the kind of track record I was alluding to earlier.
Q. What is the ideal duration of a PBL contract to be most effective for both the services and contractor?
Ans: Typically, 10 years is viewed as optimal for a PBL with five years being considered the minimum. Several countries have adopted PBL structures where a base period is awarded and then extension intervals are subsequently awarded as long as the contractor successfully executes their responsibilities. We have a particular C-130J PBL, for example, with a five-year base period and then annual extensions that ensure a minimum of five years of coverage for that country’s air force. With some other customers contract renewals occur in year three for an additional five-year period. This rolling horizon incentivises contractors to invest in improvements while providing a level of sustainment performance that meets warfighter requirements. All for a known price over the entire contract period of performance.
Q. How will the Indian services hold foreign OEMs accountable for meeting the LCC it commits to during the proposal evaluation stage?
Ans: If the question is how to hold an OEM accountable 20-30 years from now, I’m not sure that’s possible. Most of the leaders and decisions makers who are discussing holding the OEM accountable will be gone. One approach would be to solicit a PBL arrangement in the RFP. That is one way to make it clear to all OEMs that claims made in their responses will become a contractual obligation should the OEM be selected for award. Even if the solicitation is only for LCC costs, it should be clear that OEMs will be held accountable for their claims. However, I think that not including the request for a PBL makes it easier on competitors to introduce the arbitrary numbers discussed earlier. I don’t know of a good way to put an LCC estimate on contract; but I do know that if an OEM can expect to be put on contract for a PBL value they submitted, it will cause more serious consideration of that input.
Q. Historically, Indian defence contracting has enforced contractual provisions through penalties rather than incentives. The latter would result in cost variation upwards which has been a harder sell to the Government of India. What is your view?
Ans: I think the focus needs to be on the overarching objective – to provide warfighter-defined outcomes at a reasonable price. In order for that to be effective, any arrangement must also provide a win-win situation for both parties. From a business perspective, there is a penalising quality to losing incentives. In another American colloquialism, I would say it’s not a question of a carrot or a stick. It’s a question of what motivates each side to form the partnership needed to maximise performance. Typically, that has been the time, or period of performance, of the contract and the ability to earn more time. It has included an ability to earn more scope. Both of these lead to sufficient opportunities for the integrator to invest in and implement improvement to achieve the return on investment necessary for the health of the company. These aspects of a PBL act as both incentive and penalty to create the behaviour necessary for success.
Q. The current Defence Acquisition Procedure (DAP) 2020 does not explicitly state that LCC and follow-on sustenance be accounted as part of the L1 evaluation. Are you proposing they should be?
Ans: I would not presume that necessarily. Our Lockheed Martin experience is that the best acquisition practices use all available information to select the best overall solution to meet warfighter requirements. Lowest priced OEMs may satisfy initial acquisition objectives, but often leave services with sub-standard readiness requiring significant additional unplanned investments to meet national security objectives. All I would suggest is that however the decision is made, including all pertinent and available information, including LCC and perhaps a PBL, is to the advantage of the warfighter. Having been in the shoes of current and future warfighters, I want to see their capability requirements met to achieve operational readiness… and, even though I never thought about it in the cockpit, those needs have to be met within a budget.
About The Author
Following 21 years of service in the U.S. Air Force, Michael Biorn joined Lockheed Martin Aeronautics in 2014. He is the Director of Sustainment Campaigns for the Americas, Africa, Middle East and Indo-Pacific. Prior to his current role, Michael led the team executing Lockheed Martin’s long-term foundational F-16 sustainment contract, Falcon 2020, serving 20+ nations.
