Appetite for Process Destruction

Hegseth's latest directive points to a desire to "blow up the boxes" and shift the paradigm to personalities over process

Wither cost plus?

Pete Hegseth (the newly rechristened Secretary of War) rolled out this week a dramatic revise and redraw of the nation’s military acquisition plumbing. Entitled “Transforming our warfighter acquisition system to accelerate fielding of capabilities” this memo directs the department to pursue a new paradigm of acquisition.

The acquisition reforms announced mark more than a bureaucratic tweak—they represent a tectonic shift in how the U.S. military will move from concept to combat. It recasts the acquisition enterprise as a “warfighting-first” engine, the architecture of procurement is being rebuilt around speed, flexibility and outcomes. It creates and empowers new Portfolio Acquisition Executives (PAEs) - who will now be expected to stay in there jobs for five years or more- with broader latitude to move money and cut the dead weight of programs, the entrenched hierarchies of the traditional system are being challenged. At its core the reform says: we will no longer tolerate a procurement system that erects process over performance; instead, we will expect field-ready capability—with contracts that reward rapid delivery, vendors who invest to scale, and an export regime designed not just to sell but to surge. It also puts legacy defense contractors on notice that the days of the government footing the bill for all their R&D are numbered.

Yet the long-term impact rests on whether culture and incentives align with these ambitions—or whether old habits simply rebrand themselves in a new structure. If acquisition officers are still rewarded for check-boxes rather than combat impact, and if industry treats this as yet another rework rather than a sea change, the promised value may slip through soft deadlines and softer accountability. Defenders of the status quo in both industry and the Pentagon’s “frozen middle” may choose to just burrow in and wait this out. After all, haven’t we heard this routine about reform from every other administration?

But if the reforms take root, the defense procurement ecosystem might finally pivot: becoming not just a buyer of equipment, but a builder of readiness and resilience. The question now is whether the system will move as fast as the threat demands—and whether reform will mean a real liberation of capability, or simply a new label on the same old machine?

A completely different operating system

Our existing DoD (now DoW) acquisition framework is the product of decades of band aids upon band aids to try and ameliorate the obvious structural problems of Cost Plus contracting and the poorly competitive defense ecosystem that Shyam Sankar calls a monopsony (basically a cartel of contractors known as the Big six primes that eat 98% of defense contracts). This administration spent about five minutes staring at this hot mess and decided it needed to be shot in the head.

As I’ve mentioned in previous posts here and here, the operating principle of this administration is a bias towards moving everything to personality driven systems (with strong relationships and accountability) rather than process driven ones. The guiding philosophy is an action bias (vs a caution bias) and that people are easier to hold accountable than processes. This new set of directives epitomizes this in many ways.

Juxtapose this with the Trump administration philosophy: they view external interests as an asset, not a liability in negotiations. Case in point: when attacked for having large conflicts of interest in negotiating the recent Israel/Iran proxy cease fire due to their substantial financial interests in the Middle East, Jared Kushner shot back on him and Middle East Envoy Steve Witkoff’s behalf: “What people call conflicts of interests, Steve (Witkoff) and I call experience and trusted relationships that we have throughout the world…If Steve and I didn’t have these deep relationships, the deal that we were able to help get done, that freed these hostages, would not have occurred.”

“Where there is no conflict, there is no interest” - Larry Sonsini, Silicon Valley Macher, patron saint of the Trump administration , founder of the law firm Wilson Sonsini Goodrich & Rosati.

Since I’m not attempting to judge but rather explain, I’ll leave out the editorializing on whether this is right or wrong. What is true is that this philosophy is 90 degrees orthogonal to how DC has been wired to think in the modern bureaucratic era, and is a mindset more in line with how entrepreneurs and business people think. That being said, expect some antibodies from the blob - the counterforce of bureaucratic inertia of the status quo.

For those that don’t know, no process is sufficient

The last administration (and most others before it all the way to Hoover) put their trust in creating complex processes with checks and balances that tried to idiot proof acquisitions great and small and prevent corruption. While they tried to create a perfect system that was incorruptible it had the drawback of slowing things down often to the pace of continental drift and as a rule left key functions in the hands of nameless “committees” with no sense of ownership. It also had the unintended consequence of creating a vacuum of accountability that created a huge amount of maneuvering room for shenanigans by those who wanted to use the system for their own agendas - whether that be keeping zombie programs going or frustrating efforts to uncover deficiencies, there were options galore to blunt or misdirect those trying to deliver a product on time and on budget. This hillarious skit from The Pentagon Wars (the greatest HBO movie of all time) brilliantly lampoons this from the real story of the Bradley Fighting Vehicle program, with a little Hollywood literary license:

In the over twenty years I’ve been in the industry, I’ve watched time and time again as decisions that should have been handled by accountable individuals were instead delegated to committees or slipped behind because there were too many stakeholders seeking unattainable consensus and no single person in charge who “owned it”. Another frequent occurrence was the procurement officers letting their SETA contractors (“ie the experts”) filibuster you with endless questions that were never satisfied because they got paid by the billable hour and the procurement officer was too afraid of being penalized for making the wrong decision.

Or take a cost control system like earned value management: intended to more accurately capture an estimate of costs of a project in completion. For those untrained in it however (most normal humans), it just creates a quagmire of accounting gobbledy gook that a witty cost account management can use to literally rebaseline his metrics every month and thereby obscure any cost growth under a mountain of planning packages until it becomes too hard to hide the lack of progress anymore. By the time that happens, he’s usually been promoted and on to his next role and the company made 12-14% fee the whole time!

There is an obvious misalignment of incentives in a system driven by the fact that making yourself personally accountable and then being wrong was a formula for career suicide, whereas kicking the can down the road, covering up the mess and not making a decision allows you to go the next role unscathed.

History of Acquisition Reform

Setting the stage for where we are today, the roots of today’s acquisition dysfunction trace back to the Robert McNamara era of the 1960s, when the Defense Department adopted “cost-plus-fixed-fee” contracting as the default model for major programs during the Vietnam War. McNamara’s Planning, Programming, and Budgeting System (PPBS) centralized control and tried to apply corporate rationalism to defense procurement, emphasizing quantitative analysis and “systems management.” (Defense Acquisition University – A Short History of Acquisition Reform) While intended to align incentives with performance, the cost-plus regime created perverse outcomes: contractors faced little penalty for overruns, and program managers optimized for compliance rather than capability. By the late 1960s, scandals in aircraft and ship procurement revealed ballooning costs hidden within opaque contracts. The system’s logic of bureaucratic control over market discipline set the stage for every reform that followed.

The first serious effort to break this pattern came with the President’s Blue Ribbon Commission on Defense Management, better known as the Packard Commission (1985–86). Chaired by Hewlett-Packard cofounder David Packard, the commission was convened amid a series of public procurement embarrassments like $600 toilet seats and $400 hammers that symbolized runaway waste. Its 1986 report found that defense acquisition was crippled by “diffuse authority and excessive oversight” and recommended empowering acquisition executives, consolidating accountability, and refocusing on performance rather than process. Many of these recommendations shaped the Goldwater–Nichols Department of Defense Reorganization Act (1986), which streamlined chains of command, strengthened joint operations, and institutionalized the Under Secretary of Defense for Acquisition as a central authority.

In the mid-1990s the next wave of reform arrived with the Clinger–Cohen Act of 1996 (also known as the Federal Acquisition Reform Act, among other titles). This law was aimed in part at modernizing Federal procurement, particularly information-technology acquisition, but its provisions also applied to broader agency acquisition policy. It established stronger roles for agency CIOs, linked investment to mission outcomes and pushed for commercial item procurement and streamlined procedures. These changes reflected the recognition that reforms to organization and oversight (from the Packard era) had to be matched by procedural reforms to contracting, evaluation, and vendor engagement if cost, schedule, and performance challenges were to be addressed.

Darlene Druyun - posterchild for procurement malpractice

Yet the reforms were overshadowed by one of the most consequential scandals in modern defense procurement: the Darleen Druyun affair. As the USAF’s acquisition executive, Druyun negotiated a large tanker contract while simultaneously arranging employment with the contractor, Boeing. She eventually pleaded guilty to conflict-of-interest violations, received a prison sentence, and Boeing paid a major settlement of $615 million. That scandal helped catalyze a renewed emphasis on ethics, conflict-of-interest safeguards, and contract transparency. The acquisition framework in place today reflects both the procedural reforms of the 1990s and the lessons learned from high-profile corruption cases like Druyun’s.

By the 2010s, with wars in Iraq and Afghanistan driving urgent operational needs, the pendulum swung once more toward speed. Programs like Ash Carter’s Lightning Initiatives and later Better Buying Power initiatives during the waning years of the Obama administration attempted to capture innovation without repeating past excesses, introducing agile contracting, cost caps, and “should-cost” management. Each reform wave oscillated between efficiency and control, urgency and oversight—always shaped by the ghosts of earlier scandals. The result is today’s acquisition framework: an uneasy compromise between the Packard Commission’s quest for managerial clarity, Goldwater-Nichols’ joint imperatives, and the Druyun-era vigilance against corruption. It is a system built as much by scandal as by design, perpetually trying to reconcile the competing demands of speed, accountability, and trust.

My take: if you want to understand the behavior, look at the incentives

The acquisition structure we have today was designed to put safeguards around the inherently flawed Cost Plus Incentive Fee (CPIF) contract model set up under McNamara: a perverse system which frankly privatizes profits and socializes losses. The system may have started as a way to encourage contractors to take on high risk projects by assuring them they won’t go bankrupt by doing so, but over time it has tweaked into the most nefarious form of corporate welfare with little incentive for large corporations to take on risk.

Because programs experiencing schedule delays effectively keep marching on at the same level of funding, there is no incentive to deliver anything on time. The joke we used to have when I worked at big primes was that “the satellite’s primary mission isn’t to do something in space; as far as accounting was concerned it’s to sit in the high bay and collect change orders until the customer can’t take the political heat anymore and demands you launch it.” Pretty much my whole time there I got to hear people bitch and moan about how it made no sense and everyone hated it. Hegseth’s office, for good or for bad, decided to flip the table on the incentives and take the first steps towards blowing them up.

Cost plus contracting in a nutshell

One example of a “band aid” Over the past 15 years (2011–2025), with roughly 70–80 active Major Defense Acquisition Programs (MDAPs) at any given time and about 25 Nunn–McCurdy breaches, roughly 30–35% of all major programs have triggered the statute’s cost-growth thresholds — a reflection of persistent overruns despite decades of reform. According to Congressional Research Service data (2012–2021) and recent DoD disclosures on the Sentinel ICBM program’s (the second largest acquisition program in history after the JSF) critical Nunn-McCurdy breach in 2024, this pattern has remained consistent.

By contrast, the “big six” primes are operating at record profitability: Northrop Grumman reported 12–14% operating margins in 2025 [Northrop Q3 2025 Earnings], while RTX (Raytheon Technologies) marked its sixth straight quarter of year-over-year segment-margin expansion [RTX Investor Update]. Lockheed Martin, General Dynamics, Boeing Defense, and BAE Systems all posted multi-year-high margins and backlogs exceeding $900 billion collectively. The contrast is striking: nearly a third of the Pentagon’s biggest programs breach cost limits, even as the firms delivering them enjoy their strongest financial performance in decades.

By moving to firm fixed price model as the rule rather than the exception and trying to follow commercial procurement models where ever possible, there is certainly more risk because contractors may miscalculate the cost of execution - meaning there a non-zero chance they may go bankrupt in the process of trying to deliver a critical system to you. However, procurement officials are already trained to look at these risks holistically when making a procurement decision and second sources can also help mitigate these risks. Creating a healthy defense ecosystem with many venture backed and private equity backed players who could take over in such an event is another mitigation. Indeed, today we have a robust group of investors specifically seeking high risk investments with high returns (called Venture Capitalists with trillions under management) which can help fulfill the demands of high risk projects- CPIF structures designed when government, not the private sector was the main driver for R&D spending in areas like aerospace and electronics are obsolete.

Conclusions

There is risk involved in shifting from an acquisition process that is primarily cost plus with many checks and balances and processes to one more reliant on individuals empowered to use their own judgment to move fast and break things. There is absolutely no way to deny that.

The reformers driving these changes are best to re-read the lessons of the past like the Druyun scandal to find ways to align incentives against such behaviors and make sure they don’t let them happen again under their watch. Pentagon Inspector General offices are going to need to be further resourced and given more power to police these newly empowers PAEs to ensure we don’t have a return to the dark days of past procurement corruption. Congress is also going to need to take action through pending legislation like the FORGE and SHIELD acts to take a lot of these administrative changes and write them more permanently into the US Code.

For those that know, no process is necessary

For those that don’t know, no process is sufficient

- Mantra on an Engineering Fellow’s white board, circa 2012

Today’s status quo is terminally unsustainable and our own tolerance for the monopsony of present defense contractors bears much of the blame. In a tremendous case study published by Bismarck Analysis Raytheon is Now Run Under the Portfolio Theory of the Firm Samo Burja unpacks the situation in one of the big six brilliantly. The salient quote: “The defense industry thus enjoys neither the benefits of vertical integration and scale nor the benefits of Darwinian free market competition. The resulting inefficiencies are excused and continually enabled by generous financing from Congress and little to no effective auditing of the Defense Department.” To change the defense industry requires changing the customer structure that it supplies and that may require a radical revise and redraw what Hegseth is proposing.

The present status quo is more designed for peace time political engineering than it is to rapidly field and adapt systems at a pace that the war in Ukraine has shown we are far from adequately set up to do. Something had to be done. 70 years of building companies in Silicon Valley have shown that small teams united behind a mission, cultures biased towards action rather than caution, and individual accountability as a cornerstone are the only way to achieve great things. Indeed, when government worked well like during the height of the Apollo program, it was exactly this same sort of virtues that existed in it in spades. So with that in mind, I am hopeful that we will see some dividends from these badly needed reforms, even if they are not risk free and represent a massive cultural paradigm shift from how we do procurement today. We need it if we are going to stand a fighting chance in a future near peer conflict.