Defense Acquisition: Use of Lead System
Integrators (LSIs)—Background, Oversight
Issues, and Options for Congress
Valerie Bailey Grasso
Specialist in Defense Acquisition
September 10, 2009
Congressional Research Service
7-5700
www.crs.gov
RS22631
CRS Report for Congress
P
repared for Members and Committees of Congress
Defense Acquisition: Use of Lead System Integrators (LSIs)
Summary
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. Secretary of Defense Robert Gates has announced that the FCS program will
be restructured into smaller weapons programs, and the role of the LSI will be eventually
assumed by the U.S. Army. P.L. 111-23, the Weapons System Acquisition Reform Act of 2009,
requires the Secretary of Defense to revise the Defense Federal Acquisition Regulation
Supplement (DFARS) to reflect any organizational conflicts of interest that may arise from the
use of private-sector LSIs. On March 23, 2009, the House introduced the Coast Guard
Acquisition Reform Act of 2009 (H.R. 1665), which would prohibit the use of an LSI
arrangement after the end of the 180-day period beginning on the date of the measure’s
enactment, and would require the use of full and open competition for any future acquisition
contract. On July 30, 2009, H.R. 1665 was passed by the House and forwarded to the Senate.
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Defense Acquisition: Use of Lead System Integrators (LSIs)
Contents
Background ................................................................................................................................ 1
LSI Concept.......................................................................................................................... 1
Examples Of LSIs................................................................................................................. 2
Rationale For Using LSIs ...................................................................................................... 2
Potential Oversight Issues for Congress....................................................................................... 2
Transparency ........................................................................................................................ 3
Potential Conflicts Of Interest ............................................................................................... 4
Self-certification ................................................................................................................... 4
Re-competing LSI Role......................................................................................................... 4
Competition For Subsequent Programs.................................................................................. 4
Potential Options for Congress .................................................................................................... 5
Legislative Activity..................................................................................................................... 5
Contacts
Author Contact Information ........................................................................................................ 6
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Defense Acquisition: Use of Lead System Integrators (LSIs)
Background
LSI Concept
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-
of-systems (SOS) acquisition program.1 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
administration.2
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
systems4 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
federal contractors.5
1 An SOS program is aimed at acquiring a collection of various platforms (i.e., ground vehicles, aircraft, and ships) that
are to be linked together by computer networking technology so as to create a larger, integrated overall system. Refer to
Lane, Joann and Boehm, Barry, System-of-System Cost Estimation: Analysis of Lead System Integrator Engineering
Activities, Inter-Symposium 2006, the International Institute for Advanced Studies in Systems Research and
Cybernetics, at http://sunset.usc.edu/publications/TECHRPTS/2006/2006_main.html.
2 Generating program requirements is an important process in defining the mission, scope, and direction of a major
defense acquisition program. Source selection means the solicitation, evaluation, and hiring of subcontractors to work
under the supervision of the LSI. LSIs manage the procurement of all systems and components including the
construction and modification of such systems; the testing of systems by validating their appropriateness and
interoperability; and by performing functions usually undertaken by contracting or other acquisition officials.
3 H.R. 1815/P.L. 109-163.
4 Major systems are defined in the act as systems for which the total expenditures for research, development, test and
evaluation (RDT&E) are estimated to be more than $155 million, or for which the total amount projected for
procurement is estimated to be more than $710 million.
5 Section 805 required DOD to submit a report to Congress on the use of LSIs for the acquisition of major systems. As
a result, DOD conducted a survey to determine how many contractors met the two definitions in Section 805. Of 60
contracts reviewed, DOD determined that 39 fell within the scope of some, but not all, of the requirements of the first
definition, and that 21 contractors met the requirements of the second definition. (Report to Congress, Section 805 of
the National Defense Authorization Act for FY2006, Use of Lead System Integrators in the Acquisition of Major
Systems. Office of the Under Secretary of Defense for Acquisition, Technology & Logistics, September 2006, 5 p.)
Also, Section 807 of the National Defense Authorization Act for 2007 (P.L. 109-364) required DOD to establish certain
limitations on contractors acting as LSIs. The Director of of Defense Procurement and Acquisition Policy has stated
that only contractors who have no direct financial interest in the development or production of an individual system or
element of an SOS will be eligible for a contract award as an LSI. (Report to Congress, Section 805 of the National
Defense Authorization Act for FY2007, Use of Lead System Integrators in the Acquisition of Major Systems. Office of
the Under Secretary of Defense for Acquisition, Technology & Logistics, April 30, 2007, 2 p.) Also, see Defense
Federal Acquisition Regulation Supplement, Part 252.209-7007, Prohibited Financial Interests for Lead System
Integrators.
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Examples Of LSIs
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-
dollar SOS acquisition programs.6 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.
Rationale For Using LSIs
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
and 2005.7 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.
Potential Oversight Issues for Congress
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:
By committing to the LSI for early production, the Army effectively ceded a key point of
leverage it had held—source selection—and is perhaps the final departure from the Army’s
initial efforts to keep the LSI’s focus solely on development.8
6 For more on the FCS program, see CRS Report RL32888, The Army’s Future Combat System (FCS): Background
and Issues for Congress, by Andrew Feickert. For more on the Deepwater program, see CRS Report RL33753, Coast
Guard Deepwater Acquisition Programs: Background, Oversight Issues, and Options for Congress, by Ronald
O’Rourke.
7 Defense Acquisition Organizations: Status of Workforce Reductions. Report to the Chairman, Committee on National
Security, House of Representatives. Government Accountability Office, GAO/NSIAD-98-161, June 1998, 20 pages.
Also see “Report on the Federal Acquisition Workforce, FY2003-2004,” Federal Acquisition Institute Report,
Executive Summary, p. vii.
8 Defense Acquisitions: 2009 Review of Future Combat System Is Critical to Program’s Direction. Statement of Paul L.
Francis, Director, Acquisition and Sourcing Management before the HASC Subcommittee on Air and Land Forces.
(continued...)
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On April 17, 2007 the Coast Guard announced that it would gradually assume the LSI role for the
Deepwater program.9 Media reports stated that the Department of Justice is investigating parts of
the Deepwater program.10 In addition, Secretary of Defense Robert Gates has announced that the
FCS program will be restructured into smaller weapons programs, and the role of the LSI will be
eventually assumed by the U.S. Army.11
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
capabilities.”12
Transparency
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.
(...continued)
GAO-08-638T, April 10, 2008, p. 9.
9 Merle, Renae and Hsu, Spencer. Coast Guard To Take Over “Deepwater” Move Wrestles Control From Consortium
of Contractors. Washington Post, April 17, 2007, p. D01.
10 DOJ Investigating Coast Guard’s Troubled Deepwater Program. Inside the Navy, April 23, 2007, Vol. 20, No. 16.
11 U.S. Department of Defense. Defense Budget Recommendation Statement. Robert M Gates, Secretary of Defense,
April 6, 2009; and Osborn, Kris. FCS is Dead: Program Lives On. Defense News, May 19, 2009.
12 House Transportation and Infrastructure Committee Hearing on the Coast Guard Deepwater Program, April 18,
2007; Senate Committee Hearing of the Ocean, Atmospheres, and Fisheries of the Coast Guard’s Subcommittee on
Commerce, Science, and Transportation Committee, February 14, 2007.
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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
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.
Potential Conflicts Of Interest
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.
Self-certification
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
some foreign contracts.13
Re-competing LSI Role
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.
Competition For Subsequent Programs
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
13 Walsh, Bill. “Coast Guard report angers panel; Commandant is scolded for lack of oversight of work on new
flagship.” Houston Chronicle, January 31, 2007, p. A6. Walsh, Bill. “House members react angrily to patrol boat
problems.” Newhouse News Service, January 30, 2007.
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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.
Potential Options for Congress
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,
and facilitate meaningful periodic competitions of the LSI role;14
• 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
the LSI, and require that DOD manage all SOS programs;15 and
• implement the recommendations of the recent Gansler Commission on improving
the acquisition workforce.
Legislative Activity
On March 23, 2009, the House introduced the Coast Guard Acquisition Reform Act of 2009 (H.R.
1665). On July 30, 2009, H.R. 1665 was passed by the House and forwarded to the Senate. The
bill would prohibit the use of a new LSI arrangement after the end of the 180-day period
beginning on the date of the bill’s enactment, and would require the use of full and open
competition for any future acquisition contract. The bill would permit the use of a private-sector
LSI for the completion of National Security Cutters 2 and 3, the National Distress and Response
System Modernization Program (known as Rescue 21), and other ongoing Coast Guard
14 Options for facilitating meaningful periodic competitions of the LSI role could include, among other things, requiring
the system being acquired to use open architecture standards and meet the same acquisition preferences as those
required for separate acquisition programs.
15 U.S. Army. Urgent Attention Required: Army Expeditionary Contracting, Report of the Commission on Army
Acquisition and Program Management, November 1, 2007, p. 10, at http://www.army.mil/docs/
Gansler_Commission_Report_Final_071031.pdf.
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acquisitions, but all LSI arrangements would end by September 30, 2011, provided that the
Commandant certifies that the Coast Guard has acquired the personnel and expertise within the
service, or through the use of contracts with private sector entities or agreements with other
federal agencies, to enable the Coast Guard to perform the LSI function itself.
P.L. 111-23, the Weapons System Acquisition Reform Act of 2009, requires the Secretary of
Defense to revise the DFARS to reflect any organizational conflicts of interest that may arise
from the use of private-sector LSIs.16
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
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 serving 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 major
systems or subsystems, shall be considered a new contract.17
Author Contact Information
Valerie Bailey Grasso
Specialist in Defense Acquisition
vgrasso@crs.loc.gov, 7-7617
16 Section 203. Organizational Conflicts of Interest in Major Defense Acquisition Programs.
17 Section 112. Clarification of the Status of the Future Combat Systems Program Lead System Integrator. Section 802
amends the FY2008 NDAA (P.L. 110-181).
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