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The Risk Management Imperative for Government Weapon Systems

In the 1960s film The Graduate the protagonist Benjamin Braddock is a recent college graduate who does not yet have a job. One of his parents’ friends, Mr. Maguire, gives him some advice, telling him that he has just one word for him: “plastics.” In the context of this post, if you want to associate just one word with it, it is hypersonics .

After winning the Cold War, the United States was the world’s only superpower. We had far and away the best armed forces in the world and we still spend far more than any other country on defense. The United States spent over $700 billion last year, which is more than three times than the defense budgets of China and Russia combined. Despite this, other countries are gaining on us and even outpacing us on the development and fielding of critical technologies. One of the most important of these is hypersonics. Hypersonic weapons travel at low altitude at speeds at least five times faster than the speed of sound. We do not yet have a way to defend against them, and we are falling behind China and Russia in the development of these weapons. In 2018, Undersecretary of Defense for Research and Engineering Dr. Michael Griffin stated that China had tested more hypersonic weapons in the previous year than the United States had in a decade. Russia fielded a hypersonic nuclear weapon in 2019. China unveiled a non-nuclear mobile hypersonics weapon in a military parade in 2019. The United States has yet to field such a capability.

One reason why the United States is lagging in hypersonics is a lack of financial risk management. Regardless of how programs are managed, the government will not go bankrupt (at least for the foreseeable future). However, poor financial risk practices will cause it to take longer to develop, build, and field critical technologies. Programs do not have sufficient risk reserves, and sometimes no reserves. When the cost for these systems increase over what was planned, the result is schedule delays and sometimes program cancellations. The government does almost no quantitative risk planning at the portfolio level, which results in starting more new programs than it can afford.

Fortunately, quantitative financial risk management is relatively cheap – most government agencies have civil servants and contractor staff who can do this work. A little bit of effort in this regard, done well, will go a long way to making optimal use of resources. Even though we have much bigger budgets than competing nations, the Department of Defense cannot afford to continue its poor financial risk practices.