Cost consciousness in defence procurements
Major General Mrinal Suman, AVSM, VSM, PhD
Although optimal utilisation of the allocated budgetary resources is one of the stated aims of Indian defence procurement procedure (DPP), scant attention is paid to it. It will not be incorrect to state that there is a total lack of cost consciousness in defence procurements. Sadly, there is a misconception in the minds of procurement functionaries that the whole concept of cost consciousness is limited to buying cheapest product that fulfills laid down Services Qualitative Requirements (SQR). Therefore, DPP-2008 lays considerable stress on identifying the lowest bidder amongst the technically acceptable vendors. Other aspects which are equally vital are totally neglected. It is quite a juvenile approach while dealing with defence purchases worth billions of dollars.
Cost consciousness in defence procurements is a multifaceted and all encompassing discipline, as discussed below:-
· Purchasing equipment for the sake of buying the latest in the world market is a very costly trap many nations have realised at a huge cost. Therefore, all procurements must be need based. They should either cover existing critical equipment gaps or enhance own operational capability for assigned role and assignments.
· While preparing SQR, performance capabilities sought should be exploitable. Equipment must dovetail in the overall equipment profile. There is no point in seeking a field gun with range for which matching target acquisition capabilities are lacking. Similarly, it is futile to ask for deep sea diving equipment capable of going to 120 feet depth if own troops are trained to go down to 40 feet depth only.
· Thorough knowledge of usability of projected equipment in own terrain and climatic conditions must be ascertained. Equipment developed for European plains and temperatures may fail to perform in the hot and dusty environment of Indian deserts. Similarly, bridging equipment suited for European rivers may prove unusable in Indian fast flowing rivers and canals with uneven beds. Procurement of portable piers with Medium Girder Bridges by
· For the armed forces, mission accomplishment is the central issue. All possible alternatives should be analysed to opt for the most cost effective option. For example, there are multiple ways of delivering ordnance on a hostile target at a given range to inflict required damage. Similarly, enemy mine fields can be breached in a number of ways. Comparative analysis of all methods that fulfill operational requirements should be carried out to identify the least expensive option.
· Efforts should be made by the services to explore all possibilities of making do with equipment which is commonly available off the shelf in the civil market. It is a highly cost-effective choice with assured back up support. Similarly, application of dual-use technology can save considerable resources through economies of scale by defraying cost of acquisition.
· Finally, it is life cycle cost (LCC) of equipment that should be considered. LCC takes into account total cost of owning equipment throughout its service life. In the case of major military equipment, sustenance costs are much higher than acquisition costs. Equipment purchased on the basis of initial cost may turn out to be more expensive in the long run. Therefore, it is essential to consider total cost of ownership.
Unfortunately, DPP neglects all above aspects. The services put up an acquisition proposal to Ministry of Defence (MoD) justifying its need. Once MoD approval is accorded, the Service Headquarters (SHQ) concerned is asked to formulate SQR. SQR are minimum performance parameters which reflect users’ requirements in a comprehensive, structured, concrete and unambiguous manner. In other words, SQR are minimum functional characteristics based
The services formulate SQR on the basis of what they consider to be essential military requirements corresponding to the tasks to be performed by the equipment. Financial impact while evolving parameters is never considered as budgetary support is provided on the basis of overall indicative outlay. SQR formulation is the prerogative of SHQ. No questions are asked by MoD and the procurement process is initiated by issuing Request for Proposals (RFP). As no deviation or moderation of SQR is allowed after the issuance of RFP, cost continues to be a non-issue.
The above arrangement, in which SHQ and MoD work in water tight compartments, is highly harmful to Indian interests. There is no dialogue between the two as regards SQR and related costs whereas minor moderation of a particular parameter, albeit within acceptable limits, may result in huge savings and better value for money. It is accepted that the final decision for any change in SQR must certainly rest with SHQ. For that, necessary cost related inputs need to be provided to them.
Performance-Cost Relationship
While formulating SQR, SHQ has to remember that every increase in parameters has associated cost penalty as cost is a function of performance. However, the relationship between performance attributes and cost is not in direct proportion to each other as defence equipment is highly technology-sensitive. With every technology jump, cost may escalate multifold. On the other hand, for stabilized technologies, cost accretion may be minimal. Therefore, while fixing parameters, it is essential to ascertain their inescapability with reference to cost penalty.
Weighted Aggregate Performance Index (WAPI)-Cost analysis provides an ideal tool to establish relationship between performance and cost to enable diligent decision making for obtaining best value for money. The process is carried out in four stages:-
(a) SHQ lists out all parameters and assigns inter-se weightage as regards their criticality for full operational exploitation of the equipment. It is a painstaking task requiring thorough knowledge of likely mission assignment and deployment of equipment. WAPI is evolved and index scores for different performance levels calculated.
(b) Detailed market survey of various types of technologies and their state of development is carried out to ascertain compatibility with parameters evolved.
(c) WAPI-Cost analysis is conducted to establish relationship between index score and cost. A detailed examination is carried out to determine index score at which best value for money is obtainable with all performance parameters being fully complied with. Additionally, the analysis helps in the identification of the most cost-effective technology.
(d) Finalised index score helps in the evolution of revised performance parameters which lay down minimum inescapable standards while rewarding superior performance, albeit within acceptable ranges. SHQ forwards procurement proposal to MoD to initiate procurement process.
Constant requirement for superior military systems results in demand for cutting edge technology. Therefore, technology upgradation takes place at regular periodicity. In the sample illustration of WAPI-Cost analysis below, every technology transition from one generation to the next has been shown in red. The period of technology maturing that follows every technology transition has been marked in blue. It is a stage of experimentation during which technology is mastered, its application explored and general road map of system development formulated. Finally, once technology gets stabilized as regards its application, serial production commences. During this phase, improvements in equipment continue to take place within the broad contours of the same generation of technology.
Technology Maturing Stage
Sample Illustration: WAPI-Cost Analysis
As can be seen in the graph, equipment having WAPI index Q will cost considerably more than equipment with WAPI index marginally lower at P. This is because of the technology jump involved. Therefore, most cost-effective zone for procurement is closer to the peaking of a technology, as marked on the graph. There are two reasons for the same. One, as a particular level of technology gets optimally developed, its developmental costs get defrayed and sheer economies of scale keep the costs down. Secondly, during the stabilisation period many other producers develop competing technologies, thereby generating competition and preventing monopoly. Thus, a buyer gets the benefit of matured, tested and in-production technology with multiple producers and assured technical support.
The Way Ahead
Even in day to day dealings, all buy decisions are taken after ascertaining costs involved. Many times specifications are moderated within acceptable limits to affect large savings. However, the Indian defence procurement system does not consider cost to be a material factor. SHQ formulate parameters seeking the best in the world without reference to outlay. No detailed technology scan and market survey are carried out to establish performance-cost linkages. Once MoD receives SQR from SHQ, it initiates procurement process accordingly. Cost continues to remain neglected whereas huge savings can be affected through minor acceptable moderation of SQR.
It is understandable that SQR cannot be diluted after the issuance of RFP as that would invite charges of partisanship. However, related costs should always be considered before finalising SQR. WAPI-Cost analysis is a valuable scientific tool that can prove immensely beneficial in the formulation of performance parameters to identify the most cost-effective option and technology. Cost consciousness must become a key factor in decision making. It must, however, be reiterated that SHQ ought to continue to have the final say on SQR and performance-cost trade off. Being the ultimate users, the services know their requirements best and there should be no compromise on this account.
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