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VAT Is Where It’s At Is Where It’s At2019-01-01T17:00:00Z,<div class="ExternalClass7765F9B050564884BA8DB023B92AF058">On military support purchases abroad, should the Department of Defense (DoD) or its industry partners pay extra money that provides no value to the United States? U.S. taxpayers ultimately spend lots of money in foreign countries on products and services that support international acquisition efforts, perhaps including costs that they could save or avoid.<br> <br> Value added tax (VAT), a consumption-based tax charged by foreign countries on purchases, could represent a major cost element for such acquisitions. Opportunities exist for DoD and its industry partners to receive VAT exemption. DoD’s acquisition workforce members in program management, financial management, contracting, logistics and engineering can execute sound VAT exemption activities that support international acquisition efforts. The most effective application of VAT exemption includes applying a team-based approach while sharing information, pursuing VAT exemption approval prior to purchases, streamlining processes with defined areas of responsibility and maintaining documentation.<br> <br> <img alt="" src="/library/defense-atl/DATLFiles/Jan-Feb2019/DefAcq_Jan19_article5_table1.jpg" style="margin-left:3px;margin-right:3px;float:left;width:523px;height:399px;" />DoD’s current strategy largely centers around strong alliances and partnerships with foreign nations. Specifically, the 2018 National Defense Strategy (NDS), published in November 2017, stated that “Mutually beneficial alliances and partnerships are crucial to our strategy, providing a durable, asymmetric strategic advantage that no competitor or rival can match. We will strengthen and evolve our alliances and partnerships into an extended network capable of deterring or decisively acting to meet the shared challenges of our time.” Therefore, it is highly likely that the United States will continue and expand its acquisitions abroad with allies to accomplish the NDS objectives.<br> While supporting multiple DoD major missile defense projects in Eastern European countries from 2015 to 2018, I encountered process inefficiencies that prevented consistent application and maximum cost savings or avoidances. I created and implemented streamlined business processes affecting many stakeholders that produced successful operations. This article provides information and lessons learned from actual experiences with VAT exemption on international acquisitions for increased understanding and application.<br> <br> As the United States carries out international acquisition efforts, it is imperative that we seek VAT exemption from foreign countries in order to save or avoid unnecessary costs. For the purposes of this article, international acquisition efforts include international deployments, international cooperative efforts, foreign military sales (FMS) and any other major effort where the DoD could spend abundant resources within a foreign country. <h4>VAT in Brief</h4> VAT rates are determined by the country where a customer makes purchases, and vary per country and type of good or service. For instance, the standard VAT rate for Finland is 24 percent, while the standard VAT rate in Japan is 8 percent. Table 1 provides the current standard VAT rates for certain countries around the world.<br> <br> VAT exemption explained. Such an exemption is a customer’s ability to complete purchases without paying VAT. Exemption can take place at the time of purchase or allow the customer to recoup VAT through reimbursement after the purchase. Authorization for VAT exemption is required from a foreign country’s government. DoD typically receives VAT exemption authority through a Status of Forces Agreement (SOFA) or FMS case. A SOFA is a high-level agreement between governments outlining a major effort where DoD will operate in or with a foreign country. SOFAs are a responsibility of the Department of State (DoS) and are an integral part of DoD’s international efforts that define the legal status of U.S. personnel, property and activities outside the United States. On the other hand, all FMS cases are required to include a provision that prohibits taxation (including VAT) by foreign countries on purchases supporting U.S. assistance efforts. The Defense Security Cooperation Agency (DSCA) released guidance in 2004 specific to tax prohibition on FMS cases.<br> <br> Applicability of VAT exemption. The exemption applies to purchases made by the DoD or industry partners so long as appropriate authority and documentation support them. Common purchases include, but are not limited to, materials, equipment, services (construction, engineering, base operations support, utilities, communications, administrative, rental vehicles, leases) and fuel.<br> <br> Methods for receiving VAT exemption. There typically are two methods of receiving a VAT exemption: time of sale or reimbursement. <ul> <li>The time-of-sale method allows a customer to receive VAT exemption at the point of purchase. For this method, the customer has exemption approval prior to purchase and does not pay the VAT for the purchase amount.</li> <li>The reimbursement method results in a customer completing a purchases (including VAT), but recapturing VAT through reimbursement after purchase.</li> </ul> In addition, a foreign country may allow VAT exemption on entire contracts that support an effort covered by a SOFA or FMS case. VAT exemption for entire contracts can apply to both fixed-price and cost-plus type contracts. This ­option allows DoD and its industry partners to complete VAT-exempt purchases in a foreign country without required foreign country approval for each purchase.<br> <br> VAT exemption is important. It can produce significant cost savings or avoidances for the DoD on international acquisition efforts and reduce the overall cost of deployments, weapon systems, facilities, etc. It also can provide the means to use taxpayer funds for other needs. For example, if the DoD has an international deployment that will require purchases totaling $100 million in Hungary, the DoD could save up to $27 million (based on a standard VAT rate of 27 percent) if VAT exemption is authorized and properly completed by the stakeholders executing purchases for that international deployment. Table 2 provides another example of potential cost savings from a $500,000 VAT-exempt purchase within three countries and the resulting final purchase amount.<br> <br> Although Bahrain does not charge a VAT, Finland and Japan do. DAU has an online job support tool (Value Added Tax Exemption Calculation Tool) that can help users evaluate VAT exemption on purchases or contracts within specific countries and potential cost savings or avoidances. Given the latest NDS, the VAT exemption is important now more than ever when DoD teams formulate acquisition strategies and conduct operations overseas.<br> <br> Major stakeholders involved. Many stakeholders perform various functions within and between countries in support of VAT exemption activities. The major U.S. stakeholders include the DoS, Combatant Commands (COCOMs), DoD acquisition teams, DSCA and industry partners. A foreign country’s major stakeholders include the country’s DoS equivalent (such as its Foreign Ministry), DoD equivalent (such as its Ministry of Defense), tax office, and vendors selling goods and services. Table 3 provides a synopsis of key responsibilities per major stakeholder. <h4>Best Practices and Lessons Learned<img alt="" src="/library/defense-atl/DATLFiles/Jan-Feb2019/DefAcq_Jan19_article5_table2.jpg" style="width:767px;height:172px;float:right;margin-left:3px;margin-right:3px;" /></h4> The following are some examples of best practices and lessons learned from actual experiences that can assist the DoD and other U.S. personnel with current or future international acquisition efforts where VAT exemption applies. The italicized sections detail my real-world experiences when supporting Missile Defense projects in Eastern Europe.<br> <br> <strong>Apply “Team” Approach and Share Information</strong><br> Two sayings relate to VAT exemption activities: “If you fail to plan, you are planning to fail” and “knowledge is power.” As seen in Table 3, stakeholders and responsibilities are widespread. Since initial planning between countries can begin well in advance of an effort beginning, it is a best practice to maintain a “team” approach throughout the effort and regularly share information with necessary stakeholders. These actions can enable all stakeholders to overcome the barriers (language, time zones or cultural) that may arise on international acquisitions.<br> <br> <img alt="" src="/library/defense-atl/DATLFiles/Jan-Feb2019/DefAcq_Jan19_article5_table3.jpg" style="margin-left:3px;margin-right:3px;float:left;" />After inheriting VAT exemption duties in the middle of an international deployment, it was immediately apparent that a “team” approach did not exist and that crucial information was not appropriately shared among stakeholders. DoD entities ineffectively coordinated with one another, their industry partners and the foreign country’s various entities. As a result, DoD entities and industry partners applied inconsistent VAT exemption processes that were noncompliant with foreign country requirements. This resulted in strained business relations with the foreign country and untimely processed VAT exemption requests.<br> Applying an alternative approach to a new and separate international deployment produced much different outcomes. Consistent coordination and information sharing among DoD entities, their industry partners, and the foreign country’s various entities created a highly effective environment. Initiatives included interacting with stakeholders, sharing procedural documents and required VAT forms, and providing regular training. This resulted in successful business relations and timely processing of VAT exemption requests.<br> <br> The benefits of a team approach and information sharing cannot be overstated. These efforts must be applied to ensure successful VAT exemption activities.<br> <br> <strong>Pursue VAT Exemption Approval Prior to Purchases</strong><br> <br> The time-of-sale method is the preferred method to receive VAT exemption since the customer never pays VAT on purchases and it places the majority of the administrative responsibilities on the foreign country vendor. The reimbursement method is not preferred since it places the majority of administrative responsibilities on the DoD or industry partner and can take significant time for that entity to receive reimbursement from the foreign country’s tax office. Also, pursuing VAT exemption for entire contracts is a best practice, when applicable, since it eliminates the need for the foreign country to approve each purchase for VAT exemption.<br> <br> While working multiple international deployments, some industry partners did not pursue the VAT time-of-sale exemption method on purchases nor seek VAT exemption approval for their entire contract (even though the foreign country was willing to approve an exemption). Rather, the industry partners completed purchases including VAT, with plans to pursue VAT exemption later. As a result, the industry partners struggled to submit timely and compliant VAT reimbursement documentation per the foreign country’s requirements and did not receive reimbursement until more than a year after the original purchase date. In one instance, the foreign country’s tax office affirmed it could not provide VAT reimbursement to the industry partner since the country lacked sufficient resources to do so. In another case, an industry partner spent months circulating VAT exemption documents back and forth to the foreign country’s tax office without correct forms and required information. Such situations created financial hardships for the industry partners and difficult relations between the various stakeholders. The entities that pursued VAT exemption through the time-of-sale method and approval for their entire contracts experienced more favorable operations than those that pursued VAT exemption through the reimbursement method.<br> <br> The DoD and its industry partners should default to using the time-of-sale method and seek VAT exemption approval for entire contracts associated with international acquisitions (if the foreign country is willing to approve). If they default to the reimbursement method for VAT exemption, the process will not be as efficient since that could impose additional administrative burdens and result in an untimely recapture of VAT.<br> <br> <strong>Streamline Processes and Define Areas of Responsibility </strong><br> It is highly likely that VAT exemption processes and responsibilities will differ for each international acquisition simply because each international acquisition with a foreign country is unique. However, since VAT exemption activities are similar in nature to other administrative activities, processes and responsibilities should be documented and available to involved stakeholders. Procedural documents, such as standard operating procedures, should include input from individuals of the foreign country and industry partners on that specific international acquisition. This will support the creation of streamlined processes that are efficient, simple to complete, and understood by all.<br> During an international deployment, there were no VAT exemption-related resources available that identified general processes, stakeholders involved in the process, or areas of responsibility. Current and new personnel on the deployment could not easily identify nor complete VAT exemption efforts. It was also evident that the DoD and its industry partners had different understandings of the VAT exemption process than that of the foreign country. This caused inconsistent and inefficient processes for all stakeholders. During another international deployment, processes were created and documented with involvement from major stakeholders (including the foreign country) involved in the VAT exemption process. This resulted in processes being documented, consistent and efficient.<br> <br> VAT exemption success directly ties back to the established processes. Streamlined processes and defined responsibilities are critical as they define who, what, when, where and why.<br> <br> <strong>Maintain Documentation and Report Often </strong><br> Documentation applies to more than processes or procedures, as numerous parts of VAT exemption activities should be documented. This includes VAT exemption requests, VAT exemption approvals, contract documents, and vendor quotes or invoices. The documentation responsibilities apply to both DoD entities and industry partners. Documents are critical as the majority are translated into multiple languages, to meet each country’s requirements, and have signatures from designated authorities. It is a best practice to maintain documentation if it supports VAT-exempt purchases or contracts. In addition, it is recommended that the DoD entity managing VAT activities for a specific program or site maintain records to document VAT exemption metrics and report as needed.<br> <br> During an international deployment, no DoD entity assumed responsibility to maintain documentation supporting the VAT exemption activity. As a result, critical supporting documents, including reference materials and reports relative to VAT exemption activity, were unavailable. This caused significant problems when industry partners and the foreign country’s tax office requested specific VAT exemption information. It also caused problems when the DoD entities could not provide VAT exemption metrics (such as total cost savings) to senior DoD officials. During another international deployment, a DoD entity created an electronic filing system to maintain supporting documents for all DoD and industry partner VAT exemption activities. Furthermore, the same DoD entity maintained a report that generated timely VAT exemption data and metrics upon request.<br> Documents supporting VAT exemption activities are incredibly important to DoD entities, industry partners and foreign country entities. Implementing a document and reporting system can only strengthen the overall VAT exemption process. <h4>Conclusion</h4> The DoD will likely continue and expand its international acquisition efforts in conjunction with allied nations to maintain its competitive advantage. As such, it is imperative that we pursue VAT exemption authorization, to the greatest extent possible, from foreign nations on all international acquisitions. VAT exemption can yield significant cost savings or avoidances for U.S. taxpayers and eliminate unnecessary administrative burdens during operations for the DoD and their industry partners. Successful VAT exemption efforts require a team approach, information sharing, streamlined processes, defined responsibilities and appropriate documentation. DAU is able to assist DoD acquisition teams with VAT exemption efforts on international acquisition efforts. <hr />Speciale, currently a professor of Financial Management at the Defense Acquisition University’s South Region in Huntsville, Alabama, worked at the Missile Defense Agency and performed financial management and program management functions supporting NATO’s European Phased Adaptive Approach in Romania and Poland. Speciale implemented and managed value added tax (VAT) exemption activities among multiple Department of Defense entities, industry partners and foreign government entities. His efforts produced significant cost savings for the U.S. Government and process efficiencies to be utilized for other international acquisitions.<br> <br> The author can be contacted at <a class="ak-cke-href" href=""></a>.<br></div>string;#/library/defense-atl/blog/VAT-Is-Where-It’s-At
Simulation and Scenario-Based Training and Scenario-Based Training2019-01-01T12:00:00Z,<div class="ExternalClass440829F20F2A4049BC43898374A13BD0">An unnamed acquisition sage once said, “We wouldn’t put a new pilot into a $100 million aircraft without first having him put in some time in a flight simulator; so why does it make sense to put a new acquisition team on to a $100 million Source Selection without the same degree of attentiveness?” As we look to create meaningful real-time training, the need to add simulation to the mix is important. For many, it is easy to visualize a training simulator, but it is less easy to see simulation or scenario-based acquisition training. Simulation, as differentiated from an exercise or a workshop, seeks to train on a specific subject and infuse meaningful experience to those participating in the simulation. Using scenario-based acquisition models focuses on team building, gaining a process familiarity through use, and creating a common core of experience shared by the intact team. The result provides for greater team confidence by building team competence.<br> <br> (Editor’s Note: Also see <a href="/library/defense-atl/blog/Acquisition—-Practice-Like-You-Play">“Acquisition—Practice Like You Play; Simulated Learning as the Key,” </a>by Chad Millette, Defense Acquisition magazine, September-October 2018, pp. 28-32.) <h4>Some Terminology Explained</h4> It is not uncommon to hear the phrase “attention to detail” bandied about an acquisition office. What does attention to detail mean? It generally means you must focus or pay attention or you will miss something important. So what does something important mean? In order for acquisition professionals to know if something is important, they need to know something about something. For instance, in creating requirements, there may be parts of the requirement that are so critical that failing to include them will exclude a contractor from the competition. A common term for these critical parts is “salient characteristics.” But how are you to know if the characteristic is salient? The answer is by paying attention, learning from experience, and knowing the goods or service and the requirement.<br> Members of the acquisition team, particularly contracting professionals, are not ordained experts in their discipline merely because they took the course and received a certificate. Highly functioning teams work together on common projects to achieve positive results. Simulation is used to achieve that end. <h4>History</h4> In 1990, the passage of the Defense Acquisition Workforce Improvement Act (DAWIA) ushered in an aggregated and consolidated understanding of how to manage and train the Defense Acquisition Workforce. Prior to 1990, each Service component had its own acquisition training system with each following the Federal Acquisition Regulation (FAR) through agency supplements. As a result, this consolidation was seen as necessary to support the jointness as identified in the 1980s’ Packard Commission on defense management. <br> <br> Training was consolidated and standardized for the workforce under DAWIA through the establishment of the Defense Acquisition University (DAU) system. DAU was set up to provide not only standardization, but rigor, to the acquisition system, and serve as a think tank to support senior decision makers.<br> It is important to note that action taken by the Department of Defense (DoD) has reverberated across the entire federal government, as in training for nonmilitary agencies’ acquisition professionals. This affected the training industry and had allowed development of uniformity in essential basic training in the field. <br> <br> As the goods and services change, so too must the training of the acquisition workforce. It is no longer acceptable to suggest that delays are just part of the system. The acquisition workforce now is expected to work smarter and find solutions using creative and critical thinking. Concepts such as other transaction authority (OTA) and agile were essentially unheard of 10 to 20 years ago and now are part of today’s acquisition vernacular. The integration and cross-pollination from other allied disciplines (lean, project management, supply chain, etc.) have become more important as the system seeks a more vibrant and robust performance from its acquisition workforce. <br> Customer engagement becomes a meaningful component of assessing a systems performance. The system that cannot deliver the goods or services to the location where needed is not satisfying the customer’s requirements. Accordingly, the acquisition system must not only teach what the tools are and how to use them; it must also teach when it is appropriate to use the tools and when alternative tools would be a better choice. <h4>DAU Learning Types</h4> DAU is the premier corporate learning center for DoD. DAU is charged with teaching and researching in support of the defense acquisition system and uses three main learning methodologies to support its charter: Foundational, Workflow, and Performance Learning. <br> <br> Foundational Learning occurs as a result of initial training by an employer. This type of training creates the foundation on which all other training will be built. Foundational Learning is classroom or computer-driven and content focused, and aims to deliver content. Foundational learning is highly structured. Yet Foundation Learning is necessary because it allows for more challenging and difficult concepts to be introduced later. <br> <br> Workflow Learning is designed to improve what is—i.e., how we operate now. Workflow Learning is unstructured and is different than Foundational Learning. Workflow Learning engages the natural inclination of the workforce to improve and standardize. Common training might be lean, six sigma or project management to expand the workforce’s thinking as related to its environment. Here the creation of work aids such as check lists and flow charts help the acquisition professionals better tackle their work using more refined tools and techniques. A good tool for this is the Instruction, Direction and Correction model. <br> <br> (Editor’s Note: Also see “Instruction, Direction and Correction: Improving the Acquisition Culture” by James N. Phillips Jr., Defense AT&L magazine, March-April 2018, pp. 26-28.)<br> Performance Learning, for the purpose of this article, will focus on what is commonly referred to as Mission ­Assistance (MA), which is not training but, rather, facilitated learning. Performance Learning has an eye on a future result or outcome. While Foundational and Workflow Learning both focus on the current status, Performance Learning aggregates and synthesizes learning toward what ought to be. This forward-leaning learning is consistent with consulting so that MA facilitators are considered consultants. <br> <br> Performance Learning focuses the higher levels of Benjamin Bloom’s Taxonomy, the DIKW Model, and Donald Kirkpatrick’s Four Levels of Training Evaluation. <br> <br> Bloom’s Taxonomy: This hierarchical model classifies particular types of learning into categories, each of which has a graduated and increased degree of complexity. For instance, the learning required for remembering is different and less complex compared to what is required for application. <br> <br> The model, in descending order of importance include six activities: <ul> <li>Create</li> <li>Evaluate</li> <li>Analyze</li> <li>Apply</li> <li>Understand</li> <li>Remember</li> </ul> When Bloom’s categories are compared with the three learning types (Table 1), it becomes clear that certain learning types are reflected in specific Bloom’s categories. For instance, Bloom’s remember and understand are consistent with the Foundational Learning, while analyze and evaluate are aligned with Performance Learning.<br> <br> For simulation, the use of the higher ordered Bloom’s categories are required.<br> <br> DIKW Model: Data, Information, Knowledge and Wisdom or DIKW is a useful model as it applies to Performance Learning and particularly to simulation. The DIKW model, like Bloom’s, is a hierarchical model, not of learning objective categorization but of knowledge management (KM) categorization. The four objectives here (again, from highest to lowest) are: <ul> <li>Wisdom</li> <li>Knowledge</li> <li>Information</li> <li>Data</li> </ul> <img alt="" src="/library/defense-atl/DATLFiles/Jan-Feb2019/DefAcq_Jan19_article1_table1.jpg" style="margin-left:3px;margin-right:3px;float:right;width:546px;height:205px;" />It is particularly beneficial to draw from this model its inference toward the future; while data relate to past or historic events, wisdom focuses on the future—or, said differently, wisdom is applied knowledge. <br> <br> When compared to the three learning types, it becomes evident that, similar to Bloom’s, the higher-ordered DIKW is consistent with Performance Learning (Table 2). <br> Kirkpatrick’s Four Levels of Training Evaluation: This model does not focus on content like Bloom’s, or KM categories like DIKW, but it addresses the effectiveness of training through training evaluation.<br> <br> In the Kirkpatrick model, training is measured by its output. Foundational Training is designed to initiate and invite (Levels 1 and 2) the new contracting professional into the environment. Later, when the professional learns “the ropes,” they start into Level 3, Behavior, and then on to Level 4, Results and contribute to the team (Table 3). <br> Following the Kirkpatrick Table 4, the higher level of performance is attributed to Performance Learning. This measure is particularly important as it reflects the return on investment (ROI) or return on expectations (ROE). In Foundational Learning—i.e., a classroom—do you expect the student to change, or make a difference, in the profession? No, not really. However, in Performance Learning, the student is empowered to take what is learned, apply it in the future and make a difference. Simulation is an ideal method to use in Performance Learning, as simulation suggests applied knowledge for a beneficial outcome, such as participating in a Source Selection Simulation (or a Service Acquisition Workshop) for future opportunities. <br> <br> <img alt="" src="/library/defense-atl/DATLFiles/Jan-Feb2019/DefAcq_Jan19_article1_table2.jpg" style="margin-left:3px;margin-right:3px;float:left;width:436px;height:194px;" />Summary of models: Each model had something to offer as related to the three learning types. Foundational Learning focuses on the simple acquisition of information needed to enter the profession of ideas; whereas Performance Learning is elevated to the point of reflective and anticipatory planning (critical thinking) with an eye on results. <h4>What Is a Simulation and What Are Its Benefits?</h4> A simulation is an attempt to model a real-life or a hypothetical situation. Simulation is not, however, a workshop. A simulation uses real-life or hypothetical situations and builds upon them with an intact team; a workshop teaches a particular outcome or outcomes and may or may not use an actual requirement or include an intact team. <br> <br> Perhaps the most important benefit of simulation as a means of Performance Learning is the development of “muscle memory,” i.e., experience—or as some would say, developing scars or calluses that represent learning tough lessons. It is no mystery why pilots, tank commanders, surgeons and many others are trained using simulations. Tough lessons are costly when someone is experiencing a real-life quandary or problem. Simulation allows the student to take chances and explor<img alt="" src="/library/defense-atl/DATLFiles/Jan-Feb2019/DefAcq_Jan19_article1_table3-4.jpg" style="margin-left:3px;margin-right:3px;float:right;width:389px;height:573px;" />e alternatives. For instance, in the movie “Space Cowboys,” Tommy Lee Jones plays an older space shuttle commander who is recalled for a special mission. He and his three fellow older shuttle crew members are mocked by the younger crew members. Jones’ character is in the space shuttle simulator where he encounters a glitch in the shuttle’s aviation system. Rather than follow the prescribed response, he uses his experience and critical thinking to land the shuttle, thereby saving the mission and showing the younger crew the value of experience. Some of the other benefits of simulation are that: <ul> <li>It is relatively inexpensive when compared to what could have been.</li> <li>It improves individual and team critical thinking by allowing a safe environment to openly discuss alternatives.</li> <li>It enhances team performance by building team cohesion.</li> <li>It uses reasonable analogs to convey the learning points of the simulation.</li> <li>It is performed in a non-attribution environment. </li> <li>There are no schoolhouse answers.</li> </ul> Simulations allow us the freedom to pay attention not just to detail, but through understanding one’s situation. The German term is sitz im Leben, which means situation in life. So paying attention is not just merely focusing but understanding the surroundings, the context, the sitz im Leben! No procurement action comes without context! Performance Learning through simulations helps to develop attentiveness to the situation and to its context—because context matters. <h4>Conclusion</h4> Every learning type has its venue, method and desired outcomes. Foundational Learning involves classroom learning and Workflow Learning involves task aids and flow charts. Performance Learning is the mode that best focuses on sustained positive performance over time, as defined by Kirkpatrick’s Levels 3 and 4. Also as demonstrated above, Performance Learning is the only learning type that uses both the higher-order Bloom’s and DIKW categories. This also suggests a higher level of critical thinking and team cohesion. <br> <br> Simulation is in the Performance Learning tool kit that helps an intact team effectively conduct its mission. Using a reality based scenario in training prepares the workforce member so that, when the real thing occurs, there will be less of a learning curve on process knowledge and less team strife during the forming, storming, norming and performing stages of team building. The result will be, from the get-go, a more highly functioning team supporting the organization’s mission. <hr />Phillips is an acquisition professional and managing consultant with Phillips Training and Consulting Inc., has more than 25 years of acquisition experience and has frequently published articles in Contract Management and The Federal Manager magazines. He holds a Doctorate in Business Administration from the American Meridian University in Florida, and a Master’s in Public Administration from Troy University in Alabama. He is a certified Program Management Professional and a Certified Federal Contracts Manager. This article reflects the author’s personal opinion; it is not to be construed as endorsement by the Department of Defense or the Defense Acquisition University. The author thanks Wendy Kirkpatrick, founder and president of Kirkpatrick Partners, for her advice and contribution to this article.<br> <br> The author can be contacted at <a class="ak-cke-href" href=""></a>.</div>string;#/library/defense-atl/blog/Simulation-and-Scenario-Based-Training
“Better, Faster, Cheaper”— Possible but Unlikely“Better, Faster, Cheaper”— Possible but Unlikely2019-01-01T12:00:00Z,<div class="ExternalClassDC3F2F6E311D4CACA2A6EDFCF03B4BA8">Late, over budget, difficult integration, loads of rework, and project “Death March” (or a sense of inevitable failure)—those terms have provided often-used headlines in defense contracting for decades.<br> <br> Why is that so often the case? How do we get high quality, on time and within budget (better, faster, cheaper)? Is there something wrong with the contracting methodology—e.g., Cost Plus Incentive Fee, Firm Fixed Price, Portfolio Management, Performance Based Logistics, etc.? There are many known acquisition methods documented in the Defense Acquisition Guidebook, but they all seem to have these outcomes—late, over budget, not the best quality.<br> <br> There is a great deal of detail available in which to get lost. If one begins by examining leaves with a microscope, one might not develop a clear understanding of the forest. Perhaps the issue is structural and can be understood by looking at the overall context. This article applies Nash Equilibrium Theory to provide such insight. (The late John Forbes Nash won the 1994 Nobel Prize in Economics for what was essentially his Ph.D. thesis from 1950.)<br> <br> I once took an introductory course in business finance from a retired U.S. Navy finance officer who had spent 30 years investigating contract failures. On the first day of class, the instructor prominently displayed a few items on the table at the front of class: a double-brimmed hat, a magnifying glass, a Meerschaum pipe and a thick valise full of case studies. He challenged the class to say why those items were present.<br> <br> Several students correctly identified them as having something to do with Sherlock Holmes. The instructor then asked what they had to do with his class. Only one student knew why, because he had read the same collection of Arthur Conan Doyle stories as the instructor. When Sherlock had graduated from school, he spent serious time looking for a way to distinguish himself, given that he was the second-born son of an aristocrat.<br> <br> Sherlock spent 3 years studying 1,000 criminal cases from the Scotland Yard archives. He came up with a very efficient investigative method. Both he and Inspector Lestrade used the MOM approach: method, opportunity and motive. The inspector had to use them in that order to create properly documented court cases. Holmes discovered that they were in inverted order and that looking at motive first was the best choice because it provided the best filter. Using motive first left him with far less work to do to eliminate all but a few suspects, and then he only needed to collect a small set of evidence to identify the perpetrator of the crime. Holmes always got to the answer before Lestrade, for he had far less work to do because he was solving crimes, not building court cases.<br> <br> The business finance instructor let the class know that he had spent 3 decades investigating contract failure and had used the Holmes method to great success. His charge to the class was to look always for motivation first, then arrange the rest of the data collection in descending order by filter effectiveness. Per the instructor, looking at a balance sheet first will nearly always lead an investigator down too many rabbit holes and exhaust both his time and budget before the investigation is concluded. Looking first for motivation and then opportunity to shape policy opens the investigation to the few policy decisions that craft the necessary conditions for contract failure. Looking at the balance sheet last then results in a clear case of what happened with a firm basis in causality.<br> <br> Since those days, I have had an opportunity to think about an event at Princeton University during the early 1980s in which some graduate students and I were debating how to divvy up proceeds of a Dungeons and Dragons campaign in which we were about to compete. In the middle of the discussion, an elderly gentleman appearing very much like a faculty member walked in, looked at us, then quietly and simply wrote a few equations on a whiteboard, smiled at us and left. <br> <br> The economics students immediately became very excited. They explained to the rest of us that these were the equations for a Nash Equilibrium and showed the rest of us how to apply them to our game. The model worked very well! We had a great evening and a successful campaign. (In a personal communication with me in November 2006, the late Professor Nash disavowed any memory of the event, but I thanked him for the insight he had created anyway. The identity of our consulting angel remains uncertain.) <br> The Nash theorem demonstrates that, in many situations, there is always a stable equilibrium for non-cooperative games with two or more players. At the time of Nash’s thesis (1950), there were many fixed-point theorems in systems dynamics, but this one guaranteed that there was at least one stable fixed point.<br> <br> A fixed-point is an equilibrium in system dynamics. If a system is in that configuration, it will stay there. If there is a small deviation from that point, the system will evolve. If the fixed point is stable, the system will return to the fixed point. Otherwise, the system will evolve away from the fixed point.<br> <br> What does that have to do with defense contracting and the introductory finance course? As with the usual Nash Equilibrium examples such as the Prisoners Dilemma (given two individuals, each is individually better off confessing and, as a result, both are unwilling to cooperate with each other) and Tragedy of the Commons (the failure of individual users of a common resource to take care of that resource), it is useful first to identify the players (stakeholders) and what decisions they can make. Then list the ramifications of those decisions.<br> <br> For purposes of simplification consider five stakeholders: <ul> <li>Elected representatives in Congress </li> <li>Department of Defense (DoD) policy makers </li> <li>Defense contractor executives of publicly traded </li> <li>companies </li> <li>Taxpayers </li> <li>Uniformed military Service personnel who use contracted deliverables</li> </ul> One should note that neither the taxpayer nor the end user directly participates in important policy decisions but that the elected representatives, DoD policy makers, and defense contractor executives do. We will focus on those three below to reduce the complexity of the reasoning.<br> <br> Why would we expect the system to deliver products “better, faster and cheaper”? That or a similar outcome is always the publicly advertised goal. Project management exhorts the engineering staff to make it so. Engineers are trained to do so in their college and other training.<br> <br> That goal is certain to be mentioned when large Acquisition Category (ACAT)-I and ACAT-IA contracts get into the “late and over budget” regime and get excoriated as “troubled programs.” The press often seems to use a well-developed script in its reporting. Given the frequency of that outcome, the press doesn’t have to look far for well-practiced stock phrases. There always is significant discussion about the details of what goes wrong and what might be done to fix it—but few, if any, articles mention the motives of stakeholders. Instead, they highlight a virtual forest of project trials and tribulations. Please recall Inspector Lestrade’s usual outcome.<br> <br> It is my thesis that this late and over budget (usually with poor quality) outcome is a Nash Equilibrium. The basis for the analogy is as follows: <ul> <li>There are two or more participants.</li> <li>There is an interaction between the participants.</li> <li>Each applies a strategy for self-benefit.</li> <li>The game is played in a way that the reward functions and the domain of the game are continuous, closed and bounded (i.e., easily understood by the participants).</li> <li>If these propositions are true, a Nash Equilibrium (stable optimum) is guaranteed under most circumstances.</li> </ul> To build on the analogy, a behavioral motivation is like a force in physics, and the response curve is like a potential function. The force is proportional to the slope of the potential and determines the dynamics. At a peak of a potential function, every step away from that point is downhill. At the bottom (minimum) of a potential function surface, every step away from that point is uphill. The forces that govern the dynamics are proportional to the slope. To interchange maximum and minimum, it is necessary to flip the sign of the curvature and slope. This is equivalent to reversing the motivations in an economic model.<br> <br> Let’s consider the motivation of the policy makers. They are the key players in the game because their policy decisions shape the dynamics of the game. An executive of a publicly traded company necessarily has a responsibility to increase shareholder value—e.g., increased profit, increased revenue, increased market share. “Over budget” for a contract equates to increased revenue. “Late” sustains revenue for longer and preserves market share. If the customer pays for rework, that rework becomes a valuable revenue stream that delays delivery. If integration must deal with poor quality, it will take longer and be more expensive, again providing increased revenue sustained longer. If integration planning is lightly done or late to need, it will run into more unexpected issues and take longer, and the associated rework will create more revenue.<br> <br> If a DoD acquisition executive is incentivized for success and cash flow in his portfolio of contracts and possibly disincentivized for contract failures, again, eventual declaration of success serves well. The executive will be likely to pick an acquisition method that ensures known behavior that meets needs for executive career advancement. Managing a larger cash flow that eventually results in a “successful” outcome can do that even if late and over budget. The policies crafted by this executive will likely help keep programs “sold” and away from “failure.”<br> <br> If a large enough defense contractor picks where to source the work, certain congressional districts stand out as very important because those elected officials participate in key congressional committees. Those members of Congress will value money spent in their districts if it creates jobs, because those jobs generate votes toward their re-election. Spending more money longer has value in re-election campaigns. Favorable funding and approval votes are likely forthcoming. Having a substantial political action committee can also help by making well-targeted campaign donations. <br> <br> If any one of these players changes strategy while the others remain the same, there will be a clear negative consequence. This is the essence of a Nash Equilibrium: It is stable. It takes a change of motivation for all three players to reverse the character of the equilibrium state. To align with what the engineers often are asked to do, all three motivations must align with “better, faster, cheaper.” Per process stability analysis, the primary focus must be “better.” Otherwise, the project will be unstable against schedule or cost challenges leading to process non-compliance with resulting chaos and attendant schedule slips and cost overruns. (See my article, “Identifying Good Independent Variables for Program Control,” Crosstalk Magazine, May-June 2014.) In that case, if schedule is reduced too far, costs increase; and, if cost is reduced too far, schedule slips. In both cases, quality is likely to take a substantial hit.<br> <br> Using more than 3 decades of documented cases, the business finance professor demonstrated that this rather toxic inverted motivation permeated all major defense contracting methods that had been in place for 15 years or more as of 2004. The details change, but the motives don’t. The equilibrium remains the opposite of “better, faster, cheaper.”<br> It takes a major external consideration to overcome the stabilizing forces. Two examples come to mind: the World War II Manhattan Project that develooped the atom bomb; and the first Satellite Early Warning System. Both involved potential threats to human survival. <br> <br> Before the advent of electronic computers, it was not possible to prove that the first atom bomb would not ignite the atmosphere and blow it off the planet unless a state of nearly perfect symmetry applied to the bomb components. Quality was a critical enabler for species survival, and it won every confrontation with other motivations. The bomb was developed, delivered, tested and succeeded in about 4 years without being a decade late and a factor of 2 to 4 over budget.<br> <br> Similarly, a failure of the first satellite early warning system due to a quality defect could ignite a third world war and lead to a Nuclear Winter with the prompt death of 120 million Americans and half of the world’s population at risk for a generation or more, if recovery of civilization as we know it would even be possible. Again, quality focus won all policy debates and the system was delivered on time, within budget, and it worked flawlessly for several decades. This was not a simple project. The total system development (function points equivalent to 60 million lines of code) could not use anything that wasn’t developed from scratch with less than perfection in mind. (See Robert T. McCann, “Cost-Benefit Analysis of Quality Practices,” IEEE Ready Note, 2012, Dedication.) Commercial off-the-shelf components simply were not a credible choice.<br> <br> Here’s some advice to those who would recraft defense contracting: better, faster, cheaper can work—but first deal with the motivations of all three stakeholders together, make quality the primary objective for project management, then ensure that the customer does not pay for rework (either explicitly or implicitly). Otherwise, success will be unlikely, and—because they will take much too long to deliver—we will have fewer working tools for the money spent.<br> <br> It may be possible to create a quantitative predictive three-party Nash model to demonstrate what it takes to switch equilibria. Biochemist and science fiction author Isaac Asimov described this kind of mathematical sociology modeling in his Foundation Series; it is not a simple project to consider. It is well beyond the scope of this article, but we can describe general characteristics such a model would have to display.<br> <br> In two and three dimensions, there are only two possible dynamics near a stable equilibrium. Either the flow is directly downhill, or it spirals down like water near a sink drain—or air and debris near a tornado. Per Nash, the response curve will have at least one stable equilibrium point. Flipping the motivations flips the sign of the curvature, changing the topography from hill to basin. If the response curve has one bowl and one mountain, flipping the motivation of all three stakeholders will switch between mountain and valley. Instead of poor quality driving late and over budget as the stable equilibrium, we get high quality driving early delivery at lower cost. (See again McCann, IEEE Ready Note, 2012) To do that, all three motivations must switch sign. Clearly, a concern about the end of civilization as we know it would provide sufficient motivation. The challenge to defense contracting is to find other less severe and risky motivations that also suffice to change the strategies of all three primary participants in the policy game.<br> Realistically, defense contracting has many more stakeholders—e.g., the taxpayer, and voters and the military end users of such contracted systems, among many others. A more complete and thorough analysis of motivations may reveal other less extreme strategies to achieve better, faster, cheaper. The other major risk to the model is the possibility of cooperative gaming of the system, although many of these possibilities are excluded by law—e.g., the Sherman Act of 1890, Clayton Antitrust Act of 1914, Robinson-Patman Act of 1936, and the Celler-Kefauver Act of 1950, and by related regulation—as being anti-competitive and in restraint of trade. I suggest that creating and validating such a predictive model would be worthy of at least one Ph.D. thesis in defense contracting economics or social dynamics.<br> <br> Note: This article is dedicated to the memories of Professor John Forbes Nash of Princeton University and Professor Carl Clavadetscher of the Information Resources Management College, National Defense University—the two nicest geniuses with whom this author has ever had the opportunity to discuss challenging ideas. <hr />McCann is a field support systems engineer at Lockheed Martin Aeronautics in Fort Worth, Texas. He is an Institute of Electrical and Electronics Engineers Certified Software Development Professional and has nearly 20 years of experience in computational physics and high-performance computing, including 9 years at Princeton Plasma Physics Laboratory working in the Department of Energy-controlled fusion program, as well 10 years in design and development of various relational databases of various kinds. He has a bachelor’s degree in physics with a concentration in mathematics from Shippensburg University, a master of science (MS) in physics from the University of Maryland, an MS in computer science from Southwest Texas State University and an MS in computer systems management/software development management from the University of Maryland University College.<br> <br> The author can be contacted at <a class="ak-cke-href" href=""></a>.<br></div>string;#/library/defense-atl/blog/-“Better,-Faster,-Cheaper”—-Possible-but-Unlikely
Shift Test Planning Left Test Planning Left2019-01-01T12:00:00Z,<div class="ExternalClassA9A15817B5004B7BB0E18C4C373601D3">In today’s acquisition environment, there is an ever-present focus on reducing timelines without incurring unacceptable risk. After formal program initiation, the weapon development process of the chosen approach begins in earnest. This typically involves development of prototypes that are subject to a plethora of developmental tests. This part of the acquisition life cycle, specifically system-level developmental test planning, is the subject of this article.<br> <br> A best practice for consideration and discussion is to require that all system-level developmental test plans be completed prior to delivery of the first test article. While conceptually this might appear to be too difficult given the immaturity of the design, the advantages of doing so will be discussed along with some of the challenges. <h4>Concept Benefits</h4> Major benefits can be achieved when all system-level developmental test plans, including required supportability tests, are in place prior to the start of test. First, having detailed test plans early will enable meaningful Earned Value Management (EVM) tracking throughout the developmental test phase. Test points are a much better determinant of earned value than other typical metrics (flight hours, operating hours, etc.) and provide a much more accurate indication of test schedule status. And, with test points as the earned value metric, the test program is motivated toward efficient test execution. <br> <br> Another benefit of early test plan development is the identification of detailed test requirements for each of the test blocks. This allows for identification of what can be done concurrently and what tests can be substituted during any time block on the schedule if an unexpected constraint surfaces (hardware failure, range availability, etc.). Moreover, maintenance demonstrations and design for supportability tests historically are relegated to unplanned windows of opportunity that often occur late in the program execution and result in more costly redesign and retest activities. <br> <br> The inclusion of these requirements in early test plan development permits early identification of the required infrastructure to support. The knowledge gained, coupled with the application of meaningful EVM measures described above, allows the program office to seek opportunities for concurrent testing and strategies for increased test intervals after confidence is achieved. As a result, credit is gained for multiple test points that improve cost and schedules. And, in the event a planned test cannot be conducted, information is available to enable other required tests that are supported by test article, infrastructure, and instrument configurations. These efficiencies can allow programs to develop testing should-cost initiatives during execution and enable earlier reduction in planned test overhead and infrastructure costs.<br> <br> Another significant benefit in requiring that all test plans be written prior to first test article delivery, is that it forces a detailed determination of the scope of testing, the number and configuration of test articles, the instrumentation requirements and details, test infrastructure requirements such as Software Integration Labs, environmental test facilities, and the many other unique requirements to ensure design configuration of advanced systems. By thinking through detailed test planning, test article configuration can be optimized, instrumentation refined, and early range scheduled, avoiding schedule and cost problems. Determination of test schedules becomes considerably easier, and a more accurate estimate can be obtained of requirements, duration and costs. <h4>Concept Challenges</h4> In order for early test planning to take hold as a best practice, a cultural shift is needed within the Department of Defense acquisition community. All too often the planning focus is at the perceived time of need versus the time that will most mitigate the cost and schedule risk and provide for the greatest flexibility in test execution. Traditional planning timelines must be adjusted to reflect the need for earlier delivery, review and approval of test plans. This requires the earlier assignment of personnel who write and review test plans and earlier availability of funding to support that effort. Manpower assignments to support the test planning phase and programmatic funds to execute it must be brought to the left and occur earlier on the schedule. While it is easier to affect those shifts in an acquisition scenario that imposes test plan development and execution responsibilities on the contractor as part of the Request for Proposal, it can be implemented under any scenario if upfront planning and resources are committed. <h4>Overcoming the Challenges</h4> Two obvious options can be used to mitigate manpower constraints and shortages in subject-matter expertise. The first option applies if government personnel are to write the detailed plans of the acquisition strategy. Acquisition commands can temporarily assign experienced personnel from other programs to write the detailed test plans in close collaboration with permanent program test and engineering experts. Once these people complete the test plans, they can return to other assigned duties.<br> <br> The second option is to assign the test planning responsibility to the contractor in the development contract. In doing so, the detailed test plans would be contract deliverables. The contractor would know its staffing requirements in advance and could effectively plan to support the workload. The government would still need to approve the planned personnel assignments and develop any additional documentation, such as support plans, that would require personnel earlier than historically needed. <br> <br> Each option has advantages and disadvantages, and the decision to select one over the other really depends on the government’s desired level of involvement in writing the detailed test plans. There is a third alternative, a hybrid of the two aforementioned options, in which the government is the lead test-plan author but the contractor assists by providing subject-matter expertise. This option may be more challenging for the contractor in writing up its bid as it would not convey a clear understanding of the depth and breadth of the required resources. Any option pursued would require an earlier-than-usual shift in funding resources. <br> <br> These considerations obviously will drive the program’s acquisition strategy. Contract type may favor one test-plan-writing option over another. The development schedule may favor different options. If early developmental test planning is desired, the decision needs to be made early during the acquisition strategy development and not after the contract award. <br> <br> How programs choose to execute early test plan development will depend on the chosen acquisition strategy, including the level of involvement and role the contractor will play in the test program. <h4>Conclusions</h4> Weapons system developments continue increasing in complexity while there is an ever-present expectation of more rapid fielding. A significant portion of the development effort involves testing. Testing efficiencies will have a positive proportional effect on the fielding timeline and the programmatic cost; improved accuracy in assessing the status of testing allows for proactive management of issues before they arise. <hr />Caram is a professor of Systems Engineering Management in the Mid-Atlantic Region of the Defense Acquisition University (DAU) in California, Maryland. Earlier, he was assistant program manager for Test and Evaluation for the V-22 Osprey (tiltrotor) Program Office (PMA 275) at Naval Air Systems Command. Smith for the last 5 years has been project lead for the Assistant Secretary of Defense for Acquisition’s Workforce Qualification Initiative. She is the former dean of DAU’s Mid-Atlantic Region.<br> <br> The authors may be contacted at <a class="ak-cke-href" href=""></a> and <a class="ak-cke-href" href=""></a>.</div>string;#/library/defense-atl/blog/Shift-Test-Planning-Left