Defense Acquisition: Use of Lead System Integrators (LSIs) - Background, Oversight Issues, and Options for Congress

^Pr^ep^ar^{ed f}^o^r^M^e^m^b^ers^an^d^Com^mⁱ^t^t^ees^of^C^ong^r^e^ss

Some in Congress have expressed concern about the government’s use of private-sector lead
system integrators (LSIs) for executing large, complex, defense-related acquisition programs.
LSIs are large, prime contractors hired to manage such programs. Supporters of the LSI concept
argue that it is needed to execute such complex acquisition efforts, and can promote better
technical oversight and innovation. Two LSI-managed programs—the U.S. Army’s Future
Combat System (FCS) and the U.S. Coast Guard’s Deepwater program—have been strongly
criticized by some observers because of cost and schedule overruns, and the potential for possible
conflicts of interest. The Duncan Hunter National Defense Authorization Act for 2009 (P.L. 110-
417) includes a provision that clarifies the status of the LSI function for the U.S. Army’s FCS
Program. On September 27, 2008, the House passed H.R. 6999, the Integrated Deepwater
Program Reform Act of 2008, and referred the measure to the Senate. The bill would prohibit the
Coast Guard from using a private sector entity as the LSI for Deepwater beginning 180 days after
bill enactment. This report will be updated.

Backgr ound ..................................................................................................................................... 1
LSI Concept..............................................................................................................................1
Examples Of LSIs.....................................................................................................................2
Rationale For Using LSIs..........................................................................................................2
Potential Oversight Issues for Congress..........................................................................................2
Tr ansparency ............................................................................................................................. 3
Potential Conflicts Of Interest...................................................................................................4
Self-certi fi ca ti on ............................................................................................................. ........... 4
Re-competing LSI Role.............................................................................................................4
Competition For Subsequent Programs.....................................................................................4
Potential Options for Congress........................................................................................................5
Legislative Activity.........................................................................................................................5
Author Contact Information............................................................................................................6

A lead systems integrator is a contractor, or team of contractors, hired by the federal government
to execute a large, complex, defense-related acquisition program, particularly a so-called system-¹
of-systems (SOS) acquisition program. LSIs can have broad responsibility for executing their
programs, and may perform some or all of the following functions: requirements generation;
technology development; source selection; construction or modification work; procurement of
systems or components from, and management of, supplier firms; testing; validation; and ²
administration.
Section 805 of the FY2006 National Defense Authorization Act³ defines two types of LSIs: (1)
“Lead system integrators with system responsibility”—prime contractors who develop major ⁴
systems that are not expected at the time of the contract award, as determined by the Secretary of
Defense, to perform a substantial portion of the work on the system and major subsystems; and
(2) “Lead system integrators without system responsibility”—contractors who perform
acquisition functions that are closely associated with inherently governmental functions in the
development of a major system. LSIs, regardless of type, are subject to the same rules as other ⁵
federal contractors.

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Examples of programs being executed with LSIs include the Army’s Future Combat System
(FCS) and the Coast Guard’s Deepwater acquisition program, both of which are multibillion-⁶
dollar SOS acquisition programs. The LSI for the FCS program is a partnership between Boeing
and Science Applications International Corporation (SAIC); the LSI for the Deepwater program is
Integrated Coast Guard Systems (ICGS), a joint venture between Northrop Grumman and
Lockheed Martin. Both of these programs have experienced problems, among them costs and
schedule overruns, and have been the subject of multiple congressional oversight hearings.
In recent years, federal agencies like the Department of Defense (DOD) have turned to the LSI
concept in large part because they have determined that they lack the in-house, technical, and
project-management expertise needed to execute large, complex acquisition programs. It is not
altogether clear what all of the reasons are for this insufficient expertise determination. Some
possible reasons for the lack of in-house expertise may include the downsizing of the DOD
acquisition workforce and the increase in the size and scope of DOD procurement activities.
DOD states that its acquisition workforce was reduced by more than 50 percent between 1994 ⁷
and 2005. The lack of sufficient in-house expertise could also result from the growing
complexity of the systems being acquired.
Supporters of LSIs argue that LSI arrangements can promote better technical innovation and
overall system optimization. This is largely because private-sector firms often have better
knowledge and expertise, when compared to federal government agencies, of rapidly developing
commercial technologies that can be used to achieve the government’s program mission and
objectives.

The House Armed Service Committee’s Subcommittee on Air and Land Forces heard recent
testimony from a GAO official on the Army’s decision to broaden the FCS LSI role from
development to production. He stated that:
^B^y^co^m^m^ittⁱⁿ^g^to^th^e^L^S^I^f^o^r^ear^l^y^p^r^o^d^u^ctioⁿ^,^t^h^e^A^r^m^y^e^f^f^ecti^v^el^y^{ceded a}^k^e^y^poin^t^of
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^O^’^R^our^k^e^.
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^Ex^e^c^u^tiv^e^Sum^m^a^r^y^{, p. v}^ii.
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⁽^c^onti^nue^d.^..)

On April 17, 2007 the Coast Guard announced that it would gradually assume the LSI role for the ⁹
Deepwater program. Media reports stated that the Department of Justice is investigating parts of ¹⁰
the Deepwater program.
Problems with the FCS and Deepwater programs have raised concerns regarding the use of
private-sector LSIs for executing large, complex defense acquisition programs. Given the size,
scope, and costs associated with the FCS program, Congress mandated that DOD hold an FCS
milestone review, following the preliminary design review (scheduled for 2009). Since the
inception of the FCS program, GAO has performed audits of the program’s cost, schedule, and
performance. One of GAO’s concerns was that the actual performance of the completely
integrated FCS will be demonstrated very late in the program, and could result in a significant
cost increase to the government.
Congressional hearings on the Deepwater program have raised a number of oversight issues. The
DOD Inspector General (IG) reported on the increased Deepwater costs due to design
deficiencies and mismanagement, and raised questions about a lack of accountability and
responsibility on the part of the LSI and Coast Guard management. Also, the Defense Acquisition
University has questioned the overall Deepwater LSI approach and recommended fundamental
changes to the program, including a revised acquisition strategy that “does not rely on a single
industry entity or contract to produce or support all or the majority of U.S. Coast Guard ¹¹
capabilities.”
Some observers have expressed concern that LSI arrangements can result in the government
having insufficient visibility into many program aspects such as program costs, optimization
studies conducted by LSIs for determining the mix of systems to be acquired, LSI source-
selection procedures, and overall system performance. In an LSI arrangement, the federal
government has a contractual relationship with the LSI prime contractor, not with any
subcontractors that report to the prime contractor. A lack of transparency in these areas can make
it more difficult for the federal agency or Congress to adequately manage and conduct effective
oversight of an acquisition program. Also, this lack of transparency could potentially increase the
risk of cost overruns, schedule slippage, poor product quality, and inadequate system
performance.
Given the three-year rotation cycle of most senior military officers, combined with DOD’s
decreased amount of in-house technical expertise, observers are concerned that the government’s
ability to make independent assessments of programs being executed by LSIs has been reduced.
Any difficulty in independently assessing an LSI’s performance in executing a program could

^(...c^on^tin^ue^d)
^GAO-0⁸^-⁶³⁸^T^,^A^p^{ril 10}^,²⁰⁰⁸^,^p^.⁹^.
⁹^M^e^rl^e,^Ren^{ae an}^d^Hs^u^,^S^p^en^cer.^Co^ast^G^u^ard^T^o^T^a^k^e^Over^“Dee^p^w^at^{er” M}^o^ve^W^r^est^l^e^{s Co}ⁿ^t^ro^l^F^r^o^m^Coⁿ^s^o^r^tⁱ^u^m
^of^C^ontr^a^c^t^or^s^.^Wa^s^hⁱⁿ^g^t^on^Po^st^,^A^p^r^{il 17,}²⁰⁰⁷^{, p}^.^D⁰^1.
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¹¹^H^ous^e^T^r^aⁿ^s^por^ta^ti^on^a^{nd I}ⁿ^f^r^a^s^tr^uc^tur^e^C^o^m^m^itte^e^He^a^r^ing^{on th}^e^C^o^a^s^{t G}^u^a^r^{d D}^e^e^p^w^a^te^r^P^r^og^r^a^m^,^A^p^r^{il 18,}
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also complicate the government’s ability to use a contractor’s past performance record in
weighing a future bid from a firm that acted as an LSI.
Some observers have expressed concern that LSI arrangements can create conflicts of interest for
an LSI in areas such as determining system requirements and soliciting, evaluating, and hiring
contractors. They are concerned that an LSI might tailor system requirements to fit the LSI’s own
products, or that in selecting a source for a system or component the LSI might favor one of its
own subsidiaries (or a favored supplier firm) over other potential suppliers. Favoring some
contractors over others could increase the government’s costs or reduce technical innovation,
particularly if a more innovative solution offered by another firm would compete with a core
business line of the LSI.
Some observers have expressed concern that LSI arrangements can result in LSIs certifying that
their own work has met contractual requirements for the program. Such self-certification, these
observers argue, can equate to no real certification. In particular, the self-certification issue has
been raised in connection with the Deepwater program. Earlier this year, Philip Teel, President of
Northrop Grumman Ship Systems testified that self-certification did not take place, except in ¹²
some foreign contracts.
Acquisition programs being executed with LSIs can span over many years. Although the role of
the LSI in such a program can be recompeted every few years, some observers are concerned that,
in practice, it would be very difficult for an outside firm to successfully challenge an incumbent
LSI that has managed a program for several years. The incumbent’s greater knowledge of the
program and the potential disruptions to the program that might be caused by switching to a new
LSI would likely pose a barrier to another contractor’s ability to take over the program. This
could make it difficult for the government to terminate a program. As a result, these observers
argue, the government may have little real ability or leverage to use periodic re-competition to
improve the performance of the LSI in a long-term acquisition program.
A related concern focuses on the potential for competing successor programs. Observers are
concerned that if an LSI-managed SOS program is central to the future capabilities of the military
service in question (as is the case for the FCS and Deepwater programs), the LSI might design the
SOS architecture so as to create a built-in advantage for products made by the LSI.

¹²^W^a^{lsh, Bill. “}^C^oa^{st G}^u^a^r^{d re}^p^o^rt^aⁿ^g^e^{rs pa}^ne^{l; Com}^m^a^nda^{nt is sc}^olde^d^f^o^{r la}^c^k^of^ov^e^r^sig^h^{t of}^w^o^rk^{on ne}^w
^fl^a^g^s^hⁱ^p^.^”^H^ous^t^oⁿ^C^h^r^o^nic^l^e^{, Ja}ⁿ^u^a^r^y^{31, 20}⁰⁷^{, p}^.^A⁶^{. W}^a^{lsh, Bill.}^“^H^ouse^m^e^m^b^e^r^{s re}^a^c^t^aⁿ^g^r^il^y^{to pa}^trol^b^o^a^t
^pr^o^b^le^m^s^.”^N^e^w^hous^e^N^e^w^s^Se^r^v^ic^e^{, J}^a^nua^r^y^{30, 20}⁰⁷^.

Potential options, in addition to maintenance of the status quo, regarding how and when LSIs
might be used in acquisition programs are listed below. Some of these options could be
combined.
• reduce the possible need for LSIs by pursuing separate procurement programs
rather than SOS programs;
• require that certain conditions be met before a private-sector LSI can be used on
an acquisition program (analogous to conditions set for use of the multi-year
procurement program);
• require that LSI arrangements include features to ensure transparency, prevent
conflicts of interest, prohibit self-certification, require independent assessments, ¹³
and facilitate meaningful periodic competitions of the LSI role;
• institute additional or stricter reporting requirements for programs being executed
by LSIs;
• require DOD and other federal agencies to share lessons learned regarding
programs executed with private-sector LSIs;
• prohibit the use of private-sector LSI’s in future acquisition programs;
• reduce the possible need for private-sector LSIs by building back up the defense
civilian and military acquisition workforces, and have DOD assume the role of ¹⁴
the LSI, and require that DOD manage all SOS programs; and
• implement the recommendations of the recent Gansler Commission on improving
the acquisition workforce.

P.L. 110-417, the Duncan Hunter National Defense Authorization Act for 2009, includes a
provision that amends existing public law by clarifying the status of the Lead System Integrator ¹⁵
function for the U.S. Army’s FCS Program. Section 112 of the bill provides a provision that
clarifies the length of time that the contractor can remain the LSI. The provision requires the
Secretary of the Army to certify to congressional defense committees when the prime contractor
is no longer ser0ving as the lead systems integrator, and notes that any modification to the
existing FCS contract, when expressly for the purpose of commencing full-rate production of any ¹⁶
major systems or subsystems, shall be considered a new contract.

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On September 27, 2008, the House passed H.R. 6999, the Integrated Deepwater Program Reform
Act of 2008, and referred the measure to the Senate. The bill would prohibit the Coast Guard
from using a private sector entity as the LSI for Deepwater beginning 180 days after bill
enactment. Other provisions include a requirement that the Coast Guard enter into full and open ¹⁷
competition for all Deepwater contracts and subcontracts; establish a Chief Acquisition Officer
position; and include reporting requirements on Deepwater asset costs, deliveries and contracts,
as well as the implementation of changes to the Deepwater Program. The bill would provide for
additional provisions, including the elimination of self-certification by the contractor or the
subcontractor.
A similar bill, H.R. 2722, the “Integrated Deepwater Program Reform Act,” was passed by the
House on July 31, 2007, while a companion bill by the same name (S. 924) was passed by the
Senate. These two bills would have prohibited the use of a private LSI beginning two years after
enactment of the legislation, require that acquisitions for Deepwater contracts are made under full
and open competitions, add new requirements for technical reviews and operational assessments,
and other provisions.
^Valerⁱ^{e B}^a^ile^y^Gr^asso
^Sp^{ecialist i}ⁿ^Def^eⁿ^s^e^A^c^q^u^is^it^ioⁿ
^v^g^r^a^s^s^o^@^c^r^s^.l^oc.g^ov^{, 7-}⁷⁶¹⁷

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