cascading effect on national security. Excessive cost growth in the country's major weapon system procurement programs is reducing the number of units of these systems being delivered well below the number originally planned, and the reprogramming actions taken to cover these overruns frequently disrupt well run programs. Moreover, since the defense program as a whole is keyed to the number of units originally planned, reduction of that number disrupts supporting programs all down the line. This disruption is perhaps the largest single cause of waste in the Defense Department.

What is missing is enforced discipline in the procurement and budgetary process and in implementation. For example, budgeting is often based on planning estimates supplied by industry, but in the absence of binding contracts, industry is not held accountable for the accuracy of those estimates. Unless the procurement plans submitted to Congress for inclusion in the force structure budget are based on firm, accurate, and binding cost quotations, they carry little validity, and cannot contribute to budgetary integrity.

Decisions to purchase hardware for force structure should be made in the presence of competing alternatives, and only if each competing company has made a firm and binding contractual commitment that it is prepared to meet. Adherence to this sound procurement practice requires that military needs be sufficiently defined so that a binding fixed price type contract can be written with a qualified industrial supplier. If either party is unwilling to undertake such a commitment it is clear evidence that not enough is known to procure for force structure, and we should use whatever contracting form is most efficient to develop the knowledge and confidence necessary to enter into a firm contract. When a particular system is considered of importance to national defense, then a program should be formulated for gaining the necessary knowledge through research and development or prototyping contracts. Proceeding on a major system acquisition program with the hope of gaining knowledge along the way has proved to be a very costly approach. To qualify for force structure procurements, a defense contractor should have demonstrated capability in plant, equipment, organization, and experience, and must have the financial strength to accept responsibility for any risks inherent in its bid.

There has been a tendency in-defense procurements to consider all major defense companies as though they were pretty much alike. This is a fundamentally unsound way of approaching a procurement evaluation. The purpose of source selection is to understand the differences between contractors as well as their proposals. Bankers, investors, and employees, among others, have no trouble recognizing distinctions between companies. Government, in the discharge of its responsibilities for weapon system procurement, should be no less discerning. It is now practical to expect firm commitments of both government and industry because of this country's current acceptance of the need to provide for national defense on a long term, continuing basis. This was not always so. Throughout most of our history, defense was provided in response to a national emergency without question and without regard to cost. Now, however, the environment is quite different.

Today, we include defense as a continuing element of our national planning, and provide for it together with economic and social progress—not one instead of the other. Thus we have the basis for long-term stability in defense procurement, within defense budgets that are reasonably predictable. Where once we mobilized for defense, we now budget for it, and there is a profound difference between the two.

Unfortunately, the significance of this change and the accompanying opportunity to improve effectiveness in the budgetary and procurement process have been largely overlooked. There seems to be a tendency to consider cost overruns, schedule delays, and technical disappointments part of the price we must pay for national security. Nothing could be further from the truth. If Government, the public, the investment community, and the defense industry itself abandon the notion that defense is somehow different, then it can be confined within the same standards of performance by which we measure the rest of our market economy.

The sound practices of the competitive environment that have worked so well to achieve the social and economic standards that we enjoy today can then be used to contribute to meeting our defense requirements efficiently.

With budgetary stability and the opportunity for long range planning, the military services can better foresee their long term requirements. Hence, contrac

tors can plan in advance for the kind of plant and equipment that will be needed to do the job, and can finance that plant and equipment out of their own resources. Companies will be willing to undertake these risks in force structure contracts since with binding commitments they can have confidence in the potential return on the investments they may choose to make.

A question has been raised about productivity and capacity in the defense industrial base. Productivity is a product of the private sector that actually performs the work. It is achieved through the efforts of innovative and experienced people operating modern and efficient plants and equipment.

As such, it is one of the resources that private industry should supply and the Government should buy.

The industrial capacity is made up of all types of plant and equipment, much of it inefficient. What is important to the U.S. is not the capacity of the industry, but its capability. And that is best measured by product performance, schedule and price-not by the mere existence of equipment and plant space. The question is asked about what to do with the present Government defense plant and equipment. It should be put up for sale. If it is efficient, industry will buy it. If it is not, it should be dismantled as an unnecessary burden on defense production.

Whatever type of threat to national security is envisioned, efficient producers will be indispensable if our armed forces are to get the quantities of defense equipment and supplies they need within the budget available. Surge capacity to meet emergencies is best achieved by multiple shift operations in an efficiently operating facility, not by reactivation of an old and inefficient plant.

It is important to recognize the differences between the ways government and industry approach decisions on investing in plant and equipment. When the Defense Department invests in equipment, it generally makes its decision to do so on the basis of only one particular program. In industry, the decision to invest is made on the basis of all the programs a company has which would benefit from the use of the equipment. By forcing industry to make its own investments, the Defense Department would realize the advantages of wider application of more productive equipment whose expense might be hard to justify on a single contract or program.

It must be kept in mind that it is price to the government, not some particular element of cost, that counts. Cost elements are inputs to price. Efforts to create incentives by allowing cost recovery for certain elements of cost will tend to increase those costs, while the price the government pays may be unchanged or even increased.

Contractor incentives should be based on product performance, schedule, and price. If programs were awarded solely on this basis, then inefficient plant and equipment would soon be phased out by industry itself.

The disciplined and businesslike approach that I have described can control overruns, waste of defense funds, and the resulting loss in force effectiveness. But it will take strong and uncompromising direction from the top to change the situation. It is in the nature of institutions to avoid such commitments. But when it is understood that the government stands behind its commitments and insists that industry do the same, a profound change will occur in the attitude toward defense procurement. When defense procurement is conducted according to sound business practices, the business and financial community will not be hesitant to make long term investments.

Some businessmen and investors have tended to regard defense business as risky. Properly disciplined, it represents a potentially stable marketplace with no greater risks than many other industries experience.

It is the inconsistencies and arbitrariness of the defense procurement process that make it risky. In international defense sales, assuring the contractual responsibility of the manufacturer is doubly important; it is necessary to avoid risks to the American taxpayer and it is also necessary to avoid harming our relationships with those friendly countries that are depending on us for their defense systems. It has clearly been the intent of Congress that financial responsibility for contractual arrangements regarding foreign military sales should be borne by the exporter, and not by the Government. When the Government does enter into such arrangements, the business agreements it makes with foreign governments take on the character of de facto treaties superseding the body of international commercial law. The interests of the purchasing nation and the United States should be protected under U.S. and international law, not by any financial or other commitment made by the U.S. Government.

Military exports demand strong policy control by the Government to assure that a potential sale serves the broad foreign policy and security interests of the United States and not merely some secondary or short-term advantage. In those cases where it is determined to be in our national interest to permit another country to purchase a category of weapon systems here, then the policy should be strictly and even-handedly implemented. The foreign government should be allowed to choose from among various appropriate systems produced by individual manufacturers on the basis of product performance, management experience, and the ability and willingness of the company to make financial commitments and stand behind them. A manufacturer that is unable to stand behind financial commitments inherent in its proposal should not be granted an export license. Too often in the past the United States has exported its overrun programs rather than the programs that might better serve the security interests of the recipient country and hence the security interests of the United States.

Adherence to the sound business practices which have served our private sector so effectively can strengthen the defense industry, can increase the effectiveness or our armed forces, and in so doing, will eliminate the waste of past procurement practices.

I compliment the Committee for addressing these vital issues.

I would be happy to answer any questions you may have.

The CHAIRMAN. Thank you very much, Mr. Jones. I want to thank you for a most refreshing and impressive statement and analysis; especially it is helpful coming from a man with your demonstrated record of success.

You were very modest in your overall presentation. You did not tell us about the success stories of Northrop, which, I think, would have been helpful to give us an insight as to how we can succeed, where you were on time, under cost, and produced excellent weapons-the T-38's, F-5E's, the 747 fuselage and so forth. Will you take a minute or two to put that in the record orally? We would like to have it.

Mr. JONES. Yes. I think the credit for those successes must be given both to the customers who did the buying as well as to the company producing. Both faced the problem of defining what was intended and then didn't proceed until they were put into the form of a binding relationship in the contract. When that happened we knew what we had to do and the customer, the Government and, in some cases, governments of other countries knew exactly what they were buying and what to expect.

The CHAIRMAN. You say that is so important that whenever you have that, you are able to do a successful job, that whenever you have a clear, specific notion of exactly what is wanted and when the schedule is realistic, you can produce? Is that the core of the problem or just one of the problems?

Mr. JONES. It is one of the reasons. It is the beginning. Without that sound beginning, even a good organization has a hard time bringing to bear its talents to serve the needs of the customer in the absence of a clearly defined statement of need in terms of numbers, dates, schedules, and costs.

It is very difficult for us to bring all of our complex resources to bear on that one objective. When it is done we can act as good managers-which includes modernizing our own plant and equipment. We can do that only when we have control of that plant and equipment. We cannot modernize it if it belongs to the Government. That is another important component of this program.

The CHAIRMAN. Mr. Jones, you emphasize a very interesting distinction between the defense capability we have now and that which we

have had throughout most of our history. As you point out, we have viewed defense as something we mobilized for. I recall very well, when I went in the military in early 1941 before Pearl Harbor, we had no equipment of any kind to speak of. Then there was a colossal, immensely successful mobilization.

Now, you say we have a continuing need for a very large defense establishment, compared to what we have had in the past certainly. You also say we need a surge capability. By that I take it you mean that we should have the capacity to expand that large production greatly in the event of hostilities. Is that correct?

Mr. JONES. Yes.

The CHAIRMAN. So you are really asking for both; you want a large defense establishment-you don't want it but you say the Nation calls for it and I should say the military situation calls for it, the kind of world we live in calls for it, with the threat of nuclear war, which could happen in a matter of minutes and hours at the most, not in a matter of months or years. So you are saying that we have to be prepared with a very large defense establishment and then have the capability of expanding it rapidly. Is that right?

Mr. JONES. Yes; we need the capability of expanding the production of items rapidly. I have stated that that can best be done by having an efficient, steady-state industry on a single-shift basis, which is usually what comes out as being the most economic in the first place. Then you have really automatically built in the kind of machine tools, the kind of organization you would need.

The CHAIRMAN. Looking at it from your standpoint as a contractor, I can understand why you would want a stable defense demand, military demand, but at the same time. I think, whether we do that or not depends on how international conditions change. Of course, we cannot predict that any more than we can predict most of what can happen a year, 2 years, or 10 years from now.

So it seems to me that we have to temper that desire that would give us a greater degree of efficiency with a realistic understanding that we should be flexible enough to adapt our military establishment not to the needs of contractors but to the realities of the world. Isn't that right?

Mr. JONES. Yes.

The CHAIRMAN. You would not expect, for instance, if we somehow should have a more stable, peaceful international situation, that we would necessarily have to maintain the same size of defense establishment; would you?

Mr. JONES. There obviously is a relation between the perceived threat and the size of our defense capability. But because of the long-term nature of defense requirements, the long leadtime between conceiving and developing weapons systems, I do believe that the Nation has learned that it can no longer dismantle its efforts in apparent peace and then suddenly create a massive defense effort.

The CHAIRMAN. That is right. If we dismantle, we have to be sure that whatever potential adversary we face also does not have an instant capability.

Mr. JONES. That is right. Because of that long-term nature, there will be modulations. But there is a fundamental national resolve not to get into the no-defense effort and maximum defense effort without

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regard to cost that we have had for so many years, which led to the dismantling of the huge effort that we had mounted during World War II.

The CHAIRMAN. Whatever we do we have to do with our eyes wide open. We have to understand if we do cut down our military production and military efforts, that we should recognize that we can do that only in the event we perceive a great diminution in the potential threat.

Mr. JONES. Exactly. We cannot respond in short periods of time now in a meaningful way. It is a long-term proposition.

The CHAIRMAN. One of the most controversial aspects-there are very deep emotional feelings about this-is the foreign military sale. approach. As I said in my remarks and as you indicated, of course, there is an element of efficiency and advantage in being able to have large military sales and continuing military sales.

At the same time, here again you have a very strong feeling on the pårt of the American people and people throughout the world that military sales are mischievous, that the presence of military power in many parts of the world is destabilizing, enormously burdensome and we should do everything we can not to export it. We exported more arms in 1974, 1975, and 1976 than all of the other nations combined. We dwarfed the rest of the free world and we exported twice as much as the Soviet Union.

Under the circumstances, it seems to me another part we should not overlook is the desirability of doing all we can to reduce international arms sales as much as we can. President Carter came to office professing he would do this to the best of his ability and do it promptly. He has not been able to succeed in that regard.

Again I just want to put this in an overall perspective so that we don't get tunnel vision here. While, of course, it is desirable to follow foreign policy objectives of our country that would give us stability, yet we have to recognize that those foreign policy objectives take paramount precedence.

That is not inconsistent with the drive to try to create an international situation where we can sharply reduce military sales, although that would be painful for defense contractors and would mean sacrifice on the part of this country's military capability. Is that fair?

Mr. JONES. Absolutely. As a matter of fact, we all serve the national interest as is stated under law and reflected in the budgets. What I am addressing here is how we efficiently serve that stated requirement. It is not up to us to say whether we should or should not have foreign sales or at what level they should be. But the question I am addressing is. How do you efficiently respond?

As far as military sales, I think they can be helpful to the industrial base if they are properly managed. I will say, on the other side, if they are not properly managed, they could end up not helping our industrial base. In that respect, the industry must accept responsibility for contractual performance. The U.S. Government should not. The discipline of that alone will insure a reduction of what might be called programs that could negatively affect our defense establishment.

But on the question of the level of foreign military sales, I have stated several times publicly I endorse the President's efforts to reduce