Application of Transaction Cost Economics to Capabilities-based Acquisition: Exploring Single Service vs. Joint Service Programs and Single Systems vs. System-of-systems

Abstract : The US Department of Defense (DoD) is in the process of radical transformation -- transformation to a national security strategy predicated on joint Service purchases and complex System-of-Systems (SoS) capabilities. This paper contributes to a broader study that eventually needs to be conducted to evaluate the benefits and costs of increased reliance on joint Service SoS programs. The DoD's increasing emphasis on joint Service SoS capabilities has created both opportunities and challenges for materiel acquisition. In terms of improving the effectiveness of warfighting capabilities, the opportunity exists for joint, interoperable, multi-function, multimission systems that leverage information dominance and improve decisions and outcomes by making US and coalition forces not only better informed, but more coordinated, faster and more adaptive. In terms of efficiencies, multiple opportunities exist for joint programs to cut "economic production costs" for instance, by reducing duplication, by exploiting learning curves, and by achieving economies of scale and scope in manufacturing, and in operations and support activities (e.g., joint training and logistics). However, there is a dark side. A key barrier needs to be overcome for the DoD to achieve the promises of joint Service SoS programs. This involves the challenge of transaction (coordination and motivation) costs. These are the less visible, but nonetheless significant, costs of negotiating, managing and monitoring transactions.