Foundation Forum

General George T. Babbitt
Commander, AFMC

November 13, 1998

"Transforming Space Business Partnerships"

It is a real honor to be asked to participate in this symposium. Many AFA members have spent most of their careers on the industry side of this team, while others have served on the military side. Regardless of which part of the team you have been on, everyone agrees that great opportunities have burst upon us because of the advances in space technologies. This growth has forced us all to rethink both our mission and how best to accomplish it. On the military side, we are at the crossroads. Rhetoric alone will no longer suffice to move us along the path from air power to aerospace power. Real action and real change is required.

General Dick Myers has already described that transition in operational thinking and how it is progressing today in our Air Force. But there is also another change that we in the military must address. Our industry partners are no longer only a segment of the Defense industry dedicated to the creation and fielding of ballistic missile and reconnaissance satellites. Neither are they just a segment pursuing a national goal of manned space flight. Today space is a business. The number of commercial launches per year has surpassed military launches. No one believes this trend will reverse.

A cost conscious industry worries about launch costs and on-orbit costs. That concern will drive action and therein lies the need for change on the military side of this partnership. If we in the military are to be good partners with an industry driven by the pressure of business, then we must become better businessmen. In AFMC [Air Force Materiel Command], we have been struggling with this transition and so I thought it would be appropriate for me to focus my remarks in this area.

Space is certainly an exciting arena that is filled with boundless opportunities. The progress we’ve made over the past 40 years is incredible. We have not only gained routine access to space, but we’ve made an extension of the battlefield. Last week, Senator John Glenn’s mission on Discovery caused us as a nation to stop and reflect on how far we’ve come since the first space mission. In the 1960s, we considered space the final frontier. Today we call it the sixth AOR. In the 1960s, the government led the charge into space. Today we are a participant while industry has taken over the driver’s seat. One thing remains as constant today as it did 30 years ago: We are completely committed to pursuing the most advanced space technologies for the greatest aerospace force in the world.

By 2005, the Air Force Research Lab will double its investment in space-related technologies by shifting a portion of the funds currently devoted purely to aircraft-related research. Just as the military has become dependent on space for Defense, the private sector has identified space as a growth industry that will produce significant economic benefit for the American people.

In the last two decades we’ve seen phenomenal growth in that business. While the government proved we could gain access to space in the 1960s, private industry now leverages that access to increase our field of view and ability to globally communicate. Some experts predict that over the next five years, 80 percent of space launches will be commercial. According to the “State of the Space Industry Outlook 1998,” commercial space revenues will grow from $79 billion last year to over $117 billion by 2001. Throughout the global marketplace, space is the newest economic frontier.

Like with any business, today we in the Air Force are paying closer attention to the tremendous cost associated with advances in technology. While our quest for greater space-based capabilities increases, a more cost conscious, cost effective approach is warranted. One approach has been to form partnerships that take advantage of complementary skills and leverage financial resources. But the business approach to partnering is an unfamiliar concept to many of us in the military. Unfortunately, when one party to an agreement is unfamiliar with the terms, it may prove difficult to establish an effective partnership. But partnerships may be so important to our relationships in the future that I believe it is worth spending a little time to get it right.

One form of partnership is the type usually formed by lawyers. The partners become individually and jointly liable for the actions of the others. But I doubt this is the form of partnership that has great utility for us in the space business. Another form of partnership is frequently referred to as a joint venture. The party’s pool their resources and share proportionately in the benefits. And we’ve seen some move in this direction. The EELV [Evolved Expendable Launch Vehicle] is an example. The government and private sector partners are sharing in the investment for the EELV. The Air Force’s contribution ensures that its requirement for military launch is adequately considered in the design. But the Air Force does not intend to buy launch vehicles. Instead, we will buy launch services from the same companies that will provide launch services for commercial customers. Because of our up-front investment, the EELV family of vehicles will meet Air Force performance requirements and pressure from commercial customers will continue to ensure that launch costs are kept as low as possible.

In addition to these formal arrangements, the term partnership is also used to mean the establishment of more open relationships between government and industry, a relationship in which information flows more easily and fewer misunderstandings occur. This is the stuff of acquisition reform and I believe a great deal of progress has been made. But even here, we on the military side have got some learning to do.

More often than not, real savings and performance improvement come when we leave to industry the efficient and effective use of the tools of production. When we state our requirement and stay away from telling industry how to do the job. Increasingly, in the future we need to buy services and not hardware. We need to buy launch services, not launch vehicles.

In AFMC over the past 18 months, we’ve focused our attention on understanding and measuring outputs of our efforts and the costs associated with those outputs. We believe that only through understanding the total costs of our outputs can we make smart business decisions for the Air Force, decisions like many of you in industry make every day for your corporations.

As we in AFMC progress down this road of identifying outputs, determining total costs per unit of output and measuring performance in relation to output, we are naturally discovering areas where we can reduce costs and become more efficient.

One particular area I have been recently focused attention on is understanding the value of our capital assets and understanding how these assets contribute to our mission. For example, we are looking closely at our real property assets and the many major equipment assets that support our depot maintenance, test and evaluation and research laboratory missions. The hard part comes when we find excess capacity. We have and we will continue to in the future. We must divest that capacity if we really intend to increase performance and reduce cost. This is a major change in thinking for those of us in the military. We have always viewed capital assets as a gift from Congress or free resources or at best, sunk costs. But seldom have we viewed capital assets as a part of our annual cost of operation.

For those of you on the industry side of this aerospace team, you don’t think like that. For you, capital assets must be made productive, every day and every year. The stockholders demand a return on their investment. Excess or unused capital cannot be tolerated. That brings me back to my original premise. If we in the military are to be good partners with an industry driven by the pressure of business, we must become better businessmen. If we don’t, our relationships will continue to be confused and filled with misunderstanding.

Good partnerships require the partners to be equals. The interests of each party must be fully understood by both and the partnerships should focus on their mutual interests. I believe our partnerships in space must go through this transition. We on the military side must learn to think like businessmen. Those of you on the industry side will have to learn to deal with us in a different way once we’ve learned these new skills.

How we partner for launch support could be an example of where change is needed. Our military interests emphasize timely, assured access to space. Commercial interests emphasize cost. Partnership that has been formed under the Commercial Space Launch Act allows the Air Force to recoup direct costs for commercial launch services, but prohibits total cost recovery. Cost of capital assets, for example, are excluded. This act was crafted in a time when commercial space launch was in its infancy. It had great merit. Will it serve the interests of the Air Force in the future? I don’t know.

Certainly military readiness will come at a premium. Some may argue that military readiness, especially in space is so important that we as a nation should pay any cost. I would argue that fortunately we need not make that choice. When we on the military side begin to look at our total costs, it should be possible to find appropriate cost sharing arrangements without compromising readiness. In 1939, the Army Air Corps began rearming in anticipation of the war in Europe. We had very little equipment and no modern planes. The Depression had wiped out much of the aircraft industry. Government investment primed the pumps that started the greatest industrial mobilization in history.

In January of 1940, aircraft industry floor space was just over 13 million square feet. By the end of 1944, it had grown to more than 167 million square feet. Annual aircraft production grew from 25 thousand aircraft in 1941 to about 110 thousand in 1944. Although military production may have been the early driving force, today’s aircraft industry is a large, thriving and influential commercial segment. There is a clear parallel in the transition of the space industry. Early government funding for military missions and manned space flight planted the seed. These missions still exist but are rapidly being matched by commercial interests in space.

As this happens, our business relationships must also change. Let me return to my original premise. Great and new opportunities have burst upon as a result of space technology. We in the military have been challenged to rethink the concepts and doctrine of warfare in order to take full advantage of these new technologies. I believe we will also face a second challenge: to rethink how we manage our Air Force business. This is a foreign concept to many of us, but we must master the concepts of business if we are to be effective business partners with industry. We must be partners in order to fully exploit space technologies for national defense.

I frequently make the following challenge to the members of my AFMC team: Every day you must search for ways to improve mission performance and reduce unit costs. And you must do both at the same time. It is not acceptable to accomplish the mission but ignore costs. I extend that challenge to all members of the Air Force team. There is an old saying in Washington that war is too important to be left to generals. I believe a corollary may be, management of resources is too important to be left to comptrollers.

Let me close with this thought. I am very proud of the men and women of AFMC. We are all committed to transform our Air Force into an aerospace force. I am particularly proud of the contributions of the Air Force Research Labs, the Space and Missile Center and the Electronic Systems Center. They are key players in this technology revolution and in the necessary business revolution. We pledge to General Myers and all of you, we won’t lose our focus. I thank you for the invitation to be here. I am proud and honored you invited an old aircraft maintenance officer to address a symposium on space and make no mistake, I know the mission comes first. My message is simply this: mission focus does not preclude good cost management. We can do both at the same time. We on the military side need to improve our skills. When we do, I believe we will be better partners with you in industry.

Gen. Shaud: There is a lot of demand for the talented engineers and technicians that are part of AFMC. Recently, the national research labs are working very hard to attract new people. Are you experiencing similar challenges finding new people for the Air Force S&T and lab world?

Gen. Babbitt: I am going to answer that in two parts. Right now, I don’t believe we have a serious problem. Second part, is we could have very shortly a serious problem. Evidence for why we don’t have a problem right now is that we do continue to attract highly qualified people - scientists and engineers - with established reputations. We recently hired a new chief scientist for AFRL who has an entire career of outstanding academic and industry experience in research. He is doing a great job for us already. His contacts with university research have already been of great benefit.

Last week, I also had a chance to present awards to the three top scientists for their contributions in the last year within AFRL. If you had been at that ceremony, you would have been absolutely amazed to hear their resumes and their contributions over the last 30 years and to research in general. We do have top quality people.

The issue for the second part is the aging workforce. Because we have downsized over the last 10 or so years, we have handled that through attrition. As a result, we have cut off much of our accessions. We don’t bring as many new people into the research lab as we had before. It is not completely cut off. We still do bring young people into the Air Force research lab. But we have trimmed that down. I think there is a risk both in the research lab and the rest of AFMC, especially in the professional ranks that we might get to some point in the next 10 years, where we see a massive exodus because people are just ready for retirement. At that point in time, we are going to be faced with a challenge to replace them.

Gen. Shaud: The acquisition process has put a great emphasis on cost as an independent variable. What type of systems decisions does this cause?

Gen. Babbitt: You can look at it in several ways. Has it produced any useful results? That might be one way to look at it. The answer to that could be that it hasn’t produced any useful results and that still wouldn’t be a criticism of the initiative. We’ve had cost as an independent variable or focusing on design to production costs or focusing on design to lifecycle costs or cost management of the EMV program and tradeoffs with requirements for years. In fact, from when I first got into the acquisition business. Those are things that industry does regularly. Nobody building a commercial product would dream of designing that product without consideration for how it might be used, who the customers were and how much they’d be willing to pay for that product. Certainly, it has to be part of what we do.

Do we do a very good job of it? My impression is no. We don’t. I think we should do a better job of it. I have told this story in groups before that when I was in that mechanical engineering class, I once had a design course, many of you probably had a similar one. We came in at the beginning of the quarter to get instructions on what the design requirements were and then theoretically we were let loose for the next quarter. We had to come back with a design project tested. At the end of the first day, the toughest requirement was given to us and that was it couldn’t cost more than a certain amount of money. I think every university teaches engineering that way. We need to practice it more that way in the Air Force. There are alternatives out there that might be less costly. We can’t quit in the design process when we found the first solution that works.

Gen. Shaud: How far should privatization of military services to the private sector go? Will we eventually have gone too far with regard to our core competencies?

Gen. Babbitt: In the case of support services, the kinds of services where people go forward with combat units, the limit is to define what is the most economical way that we can send combat units safely forward to do their mission. The number of people that requires is how many people need to be in uniform with those skills. After that, in my business in AFMC, we ask how much could also be contracted out? It depends on how we look at the problem. If we look at the problem as buying hardware and buying capital assets, then I think we have to have some hand in understanding and managing those capital assets. If, on the other hand, we buy a service from industry, we have to let them buy the capital assets, manage the capital assets and do the job and deliver the service to our needs. That is where contracting out needs to go.

Gen. Shaud: What kind of concerns do you have about technology transfer in light of the need for greater partnership with industry?

Gen. Babbitt: I have no idea how to answer this question. We had a CEO conference that Ms. Druyun sponsored a couple of weeks ago. As we got into this issue of mergers within the Defense industry and then one of our briefings was on controlling technology and keeping what is important to be part of U.S. technology only in the U.S. I said, what is the Air Force policy on mergers between Defense industries across national boundaries and then how does this problem become more difficult? I have no idea. I don’t know even how to give a recommendation here. That might be a good topic for a seminar.

Gen. Shaud: What has happened to the acquisition workforce demonstration project. It was supposed to change the way government employees were rewarded for contribution to the Air Force mission? Is this still operable? Where is it operable?

Gen. Babbitt: There is one operable program and that is in the Air Force research lab. That has gone on for a little over a year. Next year we will finish up our second year and it appears to be successful so far. There are some long-term impacts to this, which I think we still have to work our way through and fully understand, but so far, that is optimistic. The second one, the one that went under that name, the acquisition workforce demonstration project, was supposed to start at the beginning of fiscal year 1999. Right now, we are on schedule to start that at the Air Force Flight Test Center. The issues that have been difficult to work have to do with negotiations with our principal unions.

The policy that was published in the Federal Register, the DoD policy, said that we would not just unilaterally roll past the unions without their support and concurrence and partnering in this. Several of the largest unions supporting government employees have said, at the national level, that they felt this policy was ill conceived. There are two principle issues from the union’s point of view. One is that the every other year pay raise that the Congress might vote for government employees would not be shared equally by everybody under this kind of arrangement. In other words, the Congress could pass a three percent pay raise, but only a portion of the people under this scheme would get it. The unions have resisted that. The other thing is that the system for rating people and comparing one to the other is a rather complicated process. The argument from the union’s point of view is that process is so complicated that members of their unions won’t understand it, and therefore, it won’t have the proper influence on their behavior.

Nevertheless, we are negotiating with the unions and in fact I have a meeting next week with the president of AFGE, Bobby Harnage to try to talk through these issues and we will continue to try to get as many of our centers into this as we can.

Gen.Shaud: DoD has a big initiative with developing an electronic, paperless management system. How is Materiel Command doing in this process? Are you becoming actually paperless and are you integrating data bases or are there some big time problems?

Gen. Babbitt: We are certainly not paperless. You can take evidence of that as my in basket and probably the in basket of all these folks. Solicitations are certainly not paperless. They require tremendous amounts of documentation. That is still a reasonable goal. The thing we need to put into place is more than just talk about paperless. We need to put into place the network infrastructure that allows us to actually implement these commercial network-based tools. We are trying to make that investment right now in a way that is common so we have a common private network, if you will, within AFMC, that can communicate with our business partners and can communicate with our fellow major commands and with the other services. But we need to have an intranet or a private network that is built to standards, is commercially based and with that network we have the potential to become more paperless. I don’t know that any major transition happens with a sharp clip.

Today we use paper; tomorrow we don’t. It would be unreasonable to have that expectation. The clear issue here is we have to make better use of commercial network tools and we are moving in that direction.

Gen. Shaud: As a last question, we have a logistics problem now with regard to spare parts. How does this impact expeditionary air forces, which call for split ops and close to a 10-fold increase in contingency readiness?

Gen. Babbitt: I don’t think it is fair to say that we expect a 10-fold increase in op tempo as a result of air expeditionary forces. In fact, we expect to manage better the op tempo that we are currently at. We neither expect a reduction or an increase, but we expect to be able to manage it better with this. We already live with this op tempo of split operations. That won’t come because of expeditionary air forces, it is already upon us. And it is part of the spare parts problem.

Our concepts of providing spare parts and doing logistics support for deployed aircraft have always been based on a model like the 4102 Plan for the war in Europe and the Cold War. Squadrons fought as squadrons. Wings fought as wings. They fell in on bases that had similar aircraft and we built our spare parts inventory around that concept. Now we are sending people to a lot of different places all the time. It requires possibly more spare parts. The possibly is because with better supply chain management techniques, we may be able to increase the velocity of the parts that we already own and thereby provide that added service without really making any more capital investment in spare parts. Obviously, we are struggling with that. But it is certainly not a lost cause and it is one we need to continue to look at.

Gen. Shaud: So the point would be that the organization in our expeditionary air force in an organizational way, delivery way, may in fact help us manage a spare parts problem that we have?

Gen. Babbitt: That is right.

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