The Phase III Report Of
The U.S.Commission On
National Security/21st Century
Part 3

III. Institutional Redesign
Beyond the pressing matter of organizing homeland security, and of recapitalizing core U.S. domestic strengths in science and education, this Commissions recommends significant organizational redesign for the Executive Branch. This redesign has been conceived with one overriding purpose in mind: to permit the U.S. government to integrate more effectively the many diverse strands of policy that underpin U.S. national security in a new era-not only the traditional agenda of defense, diplomacy, and intelligence, but also economics, counter-terrorism, combating organized crime, protecting the environment, fighting pandemic diseases, and promoting international human rights.
The key component of any Executive Branch organizational design is the President. As one of only two elected members of the Executive Branch, the President is responsible for ensuring that U.S. strategies are designed to seize opportunities and not just to respond to crises. He must find ways to obtain significantly more resources for foreign affairs, and in particular those resources needed for anticipating threats and preventing the emergence of dangers. Without a major increase in resources, the United States will not be able to conduct its national security policies effectively in the 21st century.
To that end, the nation must redesign not just individual departments and agencies but its national security apparatus as a whole. Serious deficiencies exist that cannot be solved by a piecemeal approach.
· Most critically, no overarching strategic framework guides U.S. national security policymaking or resource allocation. Budgets are still prepared and appropriated as they were during the Cold War.
· The power to determine national security policy has migrated toward the National Security Council (NSC) staff. The staff now assumes policymaking and operational roles, with the result that its ability to act as an honest broker and policy coordinator has suffered.
· Difficulties persist in ensuring that international political and security perspectives are considered in the making of global economic policy, and that economic goals are given proper attention in national security policymaking.
· The Department of State is a crippled institution that is starved for resources by Congress because of its inadequacies and is thereby weakened further. The department suffers in particular from an ineffective organizational structure in which regional and functional goals compete, and in which sound management, accountability, and leadership are lacking.
· America's overseas presence has not been adjusted to the new economic, social, political, and security realities of the 21st century. The broad statutory authority of U.S. Ambassadors is undermined in practice by their lack of control over resources and personnel.
· The Department of Defense has serious organizational deficiencies. The growth in staff and staff activities creates confusion and delay. The failure to outsource or privatize many defense support activities wastes huge sums of money. The programming and budgeting process is not guided by effective strategic planning. The weapons acquisition process is so hobbled by excessive laws, regulations, and oversight strictures that it can neither recognize nor seize opportunities for major innovation, and it stifles a defense industry already in financial crisis. Finally, the force structure development process is not currently aligned with the needs of today's global security environment.
· National security policymaking does not manage space policy in a serious and integrated way.
· The U.S. intelligence community is adjusting only slowly to the changed circumstances of the post-Cold War era. While the economic and political components of statecraft have assumed greater prominence, military imperatives still largely drive the collection and analysis of intelligence.
We offer recommendations in several areas: strategic planning and budgeting; the National Security Council; the Department of State; the Department of Defense; space policy; and the intelligence community. We take these areas in turn.
Strategic planning is largely absent within the U.S. government. The planning that does occur is ad hoc and specific to Executive departments and agencies. No overarching strategic framework guides U.S. national security policy or the allocation of resources.
Each national security department and agency currently prepares its own budget. No effort is made to define an overall national security budget or to show how the allocation of resources in the individual budgets serves the nation's overall national security goals. The Office of Management and Budget (OMB) does on occasion consider tradeoffs in the allocation of resources among the various national security departments and agencies, but this is not done systematically. Nor are department budgets presented in a way that Congress can make these tradeoffs as it fulfills its responsibilities in the budgeting process.
There is an increasing awareness of this deficiency throughout the national security community but, so far, only very preliminary steps have been taken to produce crosscutting budgets. These preliminary steps have been limited to special transnational issues such as counter-terrorism. At present, therefore, neither the Congress nor the American people can assess the relative value of various national security programs over the full range of Executive Branch activities in this area.
To remedy these problems, the Commission's initial recommendation is that strategy should once again drive the design and implementation of U.S. national security policies:
· 14: The President should personally guide a top-down strategic planning process and delegate authority to the National Security Advisor to coordinate that process.
Such a top-down process is critical to designing a coherent and effective U.S. national security policy. In carrying out his strategic planning responsibilities on the President's behalf, the National Security Advisor must enlist the active participation of the members and advisors of the National Security Council. This group should translate the President's overall vision into a set of strategic goals and priorities, and then provide specific guidance on the most important national security policies. Their product would become the basis for the writing of the annual, legislatively-mandated U.S. National Security Strategy.
Carrying out this guidance would rest with the senior-level deputies in the departments and agencies, facilitated by the NSC staff. They would be specifically responsible for designing preventive strategies, overseeing how the departments carry forward the President's strategic goals, and reviewing contingency planning for critical military and humanitarian operations.
The Commission believes that overall strategic goals and priorities should also guide the allocation of national security resources, and therefore recommends the following:
· 15: The President should prepare and present to the Congress an overall national security budget to serve the critical goals that emerge from the NSC strategic planning process. Separately, the President should continue to submit budgets for the individual national security departments and agencies for Congressional review and appropriation.
The OMB, with the support of the NSC staff, should undertake the task of formulating this national security budget. Initially, it should focus on a few of the nation's most critical strategic goals, involving only some programs in the departmental budgets. Over time, however, it could evolve into a more comprehensive document. Homeland security, counter-terrorism, nonproliferation, nuclear threat reduction, and science and technology should be included in the initial national security budget. This process should also serve as a basis for defining the funds to be allocated for preventive strategies.
Such goal-oriented budgets would help both the administration and Congress identify the total level of government effort as well as its composition. Gaps and duplication could be more readily identified. Such budgets would also enable the Congress to prioritize the most critical national security goals when they appropriate funds to departments and agencies.
The President would be able to implement these recommendations on his own authority as they involve White House staff activities. As far as the budgetary implications go, this reform would not cost money but, by rationalizing the strategy and budgeting process, go far toward assuring that money is spent more efficiently and wisely.

In exercising his Constitutional power, the President's personal style and managerial preferences will be critical in how he relates to his Cabinet secretaries and in how he structures his White House staff. But the organization and the characteristics of the national security apparatus will importantly affect the policies that emerge.
The National Security Council was created as part of the 1947 National Security Act to advise the President on the integration of domestic, foreign, and military policies, and to help coordinate the activities of the national security departments and agencies. Its statutory members currently include the Vice President, the Secretary of State, and the Secretary of Defense. The Director of Central Intelligence and the Chairman of the Joint Chiefs of Staff are statutory advisers. The NSC staff authorized by the 1947 Act has evolved over time into a major instrument of Presidential governance, wielded by the Assistant to the President for National Security Affairs (the National Security Advisor or NSC Advisor), not specified in any statute, who has become increasingly powerful.
Obviously, this evolution has been affected by the degree of Presidential involvement in foreign and national security policy as well as by their various personalities and leadership styles. Over the past decade, Presidents have increasingly centralized power with the NSC staff for the making and execution of national security policy. In many ways, the NSC staff has become more like a government agency than a Presidential staff. It has its own views and perspectives on the myriad of national security issues confronting the government. It has its own press, legislative, communication, and speechmaking "shops" to enable it to conduct ongoing relations with the media, Congress, the American public, and foreign governments. Aside from staffing the President, the NSC staff's primary focus has become the day-to-day management of the nation's foreign and national security policy.
Why has this centralization of power occurred? First, with the end of the Cold War, national security issues now involve even more policy dimensions-financial and trade issues, environmental issues, international legal issues, for example-and each dimension has proponents within the Executive Branch. It has become harder, therefore, to assign any one department as the leading actor for a given policy area. The traditional dividing lines between foreign and domestic policy have also blurred further. Of all the players, only the NSC staff, in the name of the President, is in a position to coordinate these disparate interests effectively.
Second, foreign policy is also now very politicized. Few, if any, issues are easily separated from domestic political debate: not military intervention, not diplomatic relations, and certainly not trade and economic interactions with the outside world. Political oversight of these policies naturally falls to the White House, with the NSC staff acting as its foreign policy arm.
Finally and most importantly, the State Department over the past few decades has been seriously weakened and its resources significantly reduced. Foreign aid programs, as well as representational responsibilities, are now dispersed throughout the government. It therefore has fallen to the NSC staff to manage the conduct of America's foreign policy that was once the prerogative of the Department of State.
This description of the origin of the problem clearly illustrates a key principle in any attempt to set it aright; namely, that the NSC Advisor and staff cannot be redirected unless the Department of State is also set aright.
The Commission views with alarm the expansion of the role of the NSC staff and recommends the following:
· 16: The National Security Council (NSC) should be responsible for advising the President and for coordinating the multiplicity of national security activities, broadly defined to include economic and domestic law enforcement activities as well as the traditional national security agenda. The NSC Advisor and staff should resist the temptation to assume a central policymaking and operational role.
The National Security Advisor and NSC staff should give priority to their traditional and unique roles, namely coordinating the policymaking process, so that all those with stakes are involved, and all realistic policy options are considered and analyzed.49 The NSC Advisor and staff should provide advice privately to the President and oversee the implementation of Presidential decisions. They should also assume those roles that are unique to the President's staff, such as preparations for overseas trips and communications with foreign leaders.
At the same time, the NSC advisor and staff should resist pressures toward the centralization of power, avoid duplicating the responsibilities of the departments, and forego operational control of any aspect of U.S. policy. Assuming a central policymaking role seriously detracts from the NSC staff's primary roles of honest broker and policy coordinator.
The National Security Advisor should also keep a low public profile. Legislative, press, communications, and speech writing functions should reside in the White House staff. These functions should not be duplicated separately in the NSC staff as they are today.
The President, not his personal staff or advisors, is publicly accountable to the American people. To the degree that the role of the National Security Advisor continues to be one of public spokesman, policymaker, and operator, the Commission wishes the President to understand that pressure is growing in the Congress for making the National Security Advisor accountable to the American people through Senate confirmation and through formal and public appearances before Congressional committees. Returning to a lower-profile National Security Advisor will be difficult, but such an approach will produce the best policy results and deflate this pressure.
Every President in the last 30 years has devised some organizational approach to integrating international economic policies with both domestic economic policies and national security considerations. Many methods have been tried. Most recently, in 1993 the Clinton Administration created the National Economic Council (NEC) as a parallel coordinating institution to the NSC.
The NEC experiment has been a disappointment. The Treasury Department dominates global financial policy, and its decisions have often neglected broader national security considerations-most critically, for example, in the early stages of the recent Asian economic crisis. Meanwhile, the United States Trade Representative (USTR)-and not the NEC-retains responsibility for coordinating trade policies and negotiations. The small NEC staff, as well, finds itself bureaucratically weaker than the NSC staff and (even when the staffers are dual-hatted) the NSC perspective has predominated.
The policy process should ensure that the coordination of national security activities reflects the new centrality of economics. This Commission therefore offers the following two recommendations:
· 17: The President should propose to the Congress that the Secretary of Treasury be made a statutory member of the National Security Council.
Consistent with our strong preference for Cabinet government, this Commission believes the Secretary of the Treasury should be the President's right arm for international economic policy. But the Treasury's actions should be coordinated within the National Security Council process. In the NSC system of supporting subcommittees, Treasury should chair an interagency working group that manages international economic and financial policies (including managing financial crises), but it is a Presidential interest that decisions be fully coordinated with other relevant national security agencies. We understand that Secretaries of the Treasury have been routinely invited to National Security Council meetings. But designation as a statutory member of the NSC would signify the importance of truly integrating economic policy into national security policy.
· 18: The President should abolish the National Economic Council, distributing its domestic economic policy responsibilities to the Domestic Policy Council and its international economic responsibilities to the National Security Council.
The NSC staff should assume the same coordinating role for international economic policy as for other national security policies. To emphasize its importance, the Commission recommends the appointment of a Deputy National Security Advisor with responsibility for international economics. We also believe that to integrate properly the economic component of statecraft in the NSC staff system, more experts in international economics need to be recruited and placed in offices throughout the NSC staff. To ensure the integration of domestic and international economic policies, the staffs of the Domestic Policy Council, the Council of Economic Advisers, and the NSC will need to work together very closely.
Over the past few decades, the Department of State has been seriously weakened as many of its core functions were parceled out to other agencies. The Agency for International Development, Treasury, and Defense assumed responsibility for foreign assistance programs, the USTR took over trade negotiations, and the Commerce Department began to conduct foreign commercial activities. For many years, too, arms control and public diplomacy were managed by separate agencies. Other departments, as well as the NSC staff, have also acquired foreign policy expertise and regularly pursue representational activities all around the world.
The State Department's own effort to cover all the various aspects of national security policy-economic, transnational, regional, security-has produced an exceedingly complex organizational structure. Developing a distinct "State" point of view is now extremely difficult and this, in turn, has reduced the department's ability to exercise any leadership.
Over the past decade, the impulse to create individual functional bureaus was useful substantively and politically; e.g., in the cases of human rights, democracy, law enforcement, refugees, political-military affairs, and nonproliferation. The problem is that overall organizational efficiency and effectiveness have been lost in the process.
More fundamentally, the State Department's present organizational structure works at cross-purposes with its Foreign Service culture. The Foreign Service thinks in terms of countries, and therein lies its invaluable expertise. But the most senior officials have functional responsibilities. The department's matrix organization makes it unclear who is responsible for policies with both regional and functional elements. The department rarely speaks with one voice, thus reducing its influence and credibility in its interactions with the Congress and in its representation abroad.
As a result of these many deficiencies, confidence in the department is at an all-time low. A spiral of decay has unfolded over many years in which the Congress, reacting to inefficiencies within the department, has consistently underfunded the nation's needs in the areas of representation overseas and foreign assistance. That underfunding, in turn, has deepened the State Department's inadequacies. This spiral must be reversed.
Foreign assistance is a valuable instrument of U.S. foreign policy, but its present organizational structure, too, is a bureaucratic morass. Congress has larded the Foreign Assistance Act with so many earmarks and tasks for the U.S. Agency for International Development (AID) that it lacks a coherent purpose. Responsibility today for crisis prevention and responses is dispersed in multiple AID and State bureaus, and among State's Under Secretaries and the AID Administrator. In practice, therefore, no one is in charge.
Over $4 billion is spent on the State Department's bilateral assistance programs (Economic Support Funds) and AID's sustainable development programs. Neither the Secretary of State nor the AID Administrator is able to coordinate these foreign assistance activities or avoid duplication among them. More important, no one is responsible for integrating these programs into broader preventive strategies or for redeploying them quickly in response to crises. The Congress, too, has no single person to hold accountable for how the monies it appropriates are spent. Moreover, the majority of AID funding is expended through contracts with non- governmental organizations (NGOs) who often lobby Congress over various AID programs, further undermining the coherence of the nation's assistance programs.
Take the case of a potential response to a humanitarian disaster in Africa, similar in nature and scale to the 1999 floods in Mozambique. Today, should some such disaster recur, three AID bureaus would be involved: those dealing with Africa, Global Programs, and Humanitarian Response. Responsibility would be dispersed among at least three Under Secretaries of State (Global Affairs, Political Affairs, and International Security Affairs), and four State bureaus (Africa; Democracy, Human Rights, and Labor; Population, Refugees, and Migration; and Political-Military). Neither the Secretary of State nor the AID Administrator would be in a position to commit the resources found to be necessary, or to direct related humanitarian and refugee assistance operations. As Figure 3 on page 57 suggests, other government agencies, and especially the Defense Department, would be at a loss to know where and how to coordinate their activities with those of the State Department.
This Commission believes that the Secretary of State should be primarily responsible for the making and implementation of foreign policy, under the direction of the President. The State Department needs to be fundamentally restructured so that responsibility and accountability are clearly established, regional and functional activities are closely integrated, foreign assistance programs are centrally planned and implemented, and strategic planning is emphasized and linked to the allocation of resources. While we believe that our NSC and State Department recommendations make maximal sense when taken together, the reform of the State Department must be pursued whether or not the President adopts the Commission's recommendations with respect to the NSC Advisor and staff.
Significant improvements in its effectiveness and competency would provide the rationale for the significant increase in State Department resources necessary to carry out the nation's foreign policy in the coming quarter century. In our view, additional resources are clearly needed to foster the nation's critical goals: promoting economic growth and democracy, undertaking preventive diplomacy, providing for the security of American officials abroad, funding the shortfalls in personnel and operating expenses, and installing the information technologies necessary for the U.S. national security apparatus to operate effectively in the 21st century. The United States will be unable to conduct its foreign policy in all its dimensions without the commitment of such new resources. A failure to provide these funds will be far more costly to the United States in the long term.
More specifically, then, this Commission strongly recommends the following State Department redesign:
· 19: The President should propose to the Congress a plan to reorganize the State Department, creating five Under Secretaries, with responsibility for overseeing the regions of Africa, Asia, Europe, Inter-America, and Near East/South Asia, and redefining the responsibilities of the Under Secretary for Global Affairs. These new Under Secretaries would operate in conjunction with the existing Under Secretary for Management.
The new Under Secretaries, through the Secretary of State, would be accountable to the President and the Congress for all foreign policy activities in their areas of responsibility. Someone would actually be in charge.
On behalf of the Secretary, the new Under Secretaries would formulate a "State" view and represent the department in NSC meetings. They would appear before Congressional committees. They would be positioned to orchestrate preventive diplomatic strategies as well as crisis responses. They would oversee the implementation of all the various assistance programs (development aid, democracy building, and security assistance) and explain them coherently before Congress. They would assemble the various political and security considerations that need to be factored into U.S. government decisions on global financial crises and other international economic policies. They would be able to tailor public diplomacy to policy goals and integrate these activities with other aspects of America's diplomacy. They would be able to liaise effectively with the growing number of NGOs engaged in national security activities. (To show how this would work, we have provided below illustrative responsibilities for a regional Under Secretary and for the Under Secretary for Global Affairs.)

Figure 3

Figure 4
As Figure 4 on page 58 shows, each Under Secretary would have a Deputy, so as to provide depth in crisis situations, or to take on critical diplomatic assignments. Three bureaus would support the Under Secretaries, each organized to achieve functional goals (political affairs, security affairs, and economic and transnational affairs). The new Under Secretary for Global Affairs would be designated as the third-ranking official in the department to emphasize the importance of global issues and activities. Consistent with past practice, this designation would not represent another organizational layer; the Under Secretary for Global Affairs would simply be the one designated as Acting Secretary when the Secretary and Deputy Secretary were away. The functions of the Under Secretary for Management would need to be redefined in light of the responsibility being given for programs and budgets to the other Under Secretaries.
This reorganization should be accompanied by, and will be strengthened by, the full integration of the nation's foreign assistance activities into the overall framework of U.S. national security. We therefore recommend strongly that:
· 20: The President should propose to the Congress that the U.S. Agency for International Development be consolidated into the State Department. Development aid is not an end in itself, nor can it be successful if pursued independently of other U.S. programs and activities. It is part of the nation's overall effort to eradicate poverty, encourage the adoption of democratic norms, and dampen ethnic and religious rivalries. To be effective, U.S. development assistance must be coordinated with various other diplomatic activities, such as challenging corrupt government practices or persuading governments to adopt more sensible land-use policies. Only a coordinated diplomatic and assistance effort will advance the nation's goals abroad, whether they be economic growth and stability, democracy, human rights, or environmental protection.
Such a fundamental organizational redesign must have a strategic planning and budgetary process aligned with it. We therefore recommend the following:
· 21: The Secretary of State should give greater emphasis to strategic planning in the State Department and link it directly to the allocation of resources through the establishment of a Strategic Planning, Assistance, and Budget Office. This office would work directly for the Secretary of State and represent the department in NSC-led government-wide strategic planning efforts. Within that framework, the office would define the department's overall foreign policy goals and priorities. It would plan and prioritize all the department's assistance programs. It would be responsible for coordinating the budget planning process and adjudicating any differences among the Under Secretaries.
Take the case of a Congressional appropriation involving worldwide population programs. This new office would ask the Under Secretary for Global Affairs to make the initial recommendation as to how the funds would be distributed. The regional Under Secretaries would then have an opportunity to appeal. Once the Secretary decided, the Under Secretary for Global Affairs would have line responsibility for implementing those programs destined for international organizations, and the other Under Secretaries for programs within their regions.
By integrating strategic and resource planning, the Secretary of State would have a more effective means for managing the activities of the department as well as U.S. embassies abroad.
This office would essentially combine the offices of Resources, Plans & Policy, and Policy Planning in the current organizational set-up, eliminating the major design flaw of segregating planning from resource allocation. But it would retain the responsibility for housing and encouraging a small group of officers to do longer-range and strategic thinking, as has been the principal task of the Policy Planning Staff for half a century.

Figure 3. Current Organization of Department of State*50

Figure 4: Proposed Organization of Department of State

It follows from a reform that integrates many of the nation's foreign policy activities under the Secretary of State that a similar logic should be applied to the State Department budget as a whole. We therefore recommend the following:
· 22: The President should ask Congress to appropriate funds to the State Department in a single integrated Foreign Operations budget, which would include all foreign assistance programs and activities as well as all expenses for personnel and operations.
The State Department's International Affairs (Function 150) Budget Request would no longer be divided into separate appropriations by the Foreign Operations subcommittee on the one hand, and by a subcommittee on the Commerce, State, and Justice Departments on the other. The Congressional leadership would need to alter the current jurisdictional lines of the Appropriations subcommittees so that the Foreign Operations subcommittee would handle the entire State Department budget. Such a reform would give the administration the opportunity to:
-Allocate all the State Department's resources in a way to carry out the President's overall strategic goals;
-Ensure that the various assistance programs are integrated, rather than simply a collection of administrations' political commitments and Congressional earmarks; and
-Replace the existing budget categories with purposeful goals.*51
We cannot emphasize strongly enough how critical it is to change the Department of State from the demoralized and relatively ineffective body it has become into the President's critical foreign policymaking instrument. The restructuring we propose would position the State Department to play a leadership role in the making and implementation of U.S. foreign policy, as well as to harness the department's organizational culture to the benefit of the U.S. government as a whole. Perhaps most important, the Secretary of State would be free to focus on the most important policies and negotiations, having delegated responsibility for integrating regional and functional issues to the Under Secretaries.
Accountability would be matched with responsibility in senior policymakers, who in serving the Secretary would be able to speak for the State Department both within the interagency process and before Congress. No longer would competing regional and functional perspectives immobilize the department. At the same time, those functional perspectives, whether human rights, arms control, or the environment, would not disappear. The Under Secretaries would be clearly accountable to the Secretary of State, the President, and the Congress for ensuring that the appropriate priority was given to these functional tasks.
By making work on functional matters a career path through the regional hierarchy, the new organization would give Foreign Service officers an incentive to develop functional expertise in such areas as the environment, arms control, and drug trafficking. Civil servants in the State Department would have new opportunities to apply their technical expertise in regional settings. The ability to formulate and integrate U.S. foreign policies in a regional context, too, will give them greater coherence and improve their effectiveness.
The Under Secretary for Global Affairs, as redefined, would give priority and high-level attention to working with international organizations. In particular, it would consolidate humanitarian and refugee assistance programs, thereby remedying the lack of leadership and coordination in past operations. This new organization would bring together all the department's crisis management operations: counter-terrorism Foreign Emergency Support Teams (FEST) teams, humanitarian assistance Disaster Assistance Response Teams (DART) teams, and military over-flight clearances.
The overall restructuring of the State Department would vastly improve its management. It would rationalize the Secretary's span of control through a significant reduction in the number of individuals reporting directly to the Secretary, and it would abolish Special Coordinators and Envoys. The duplication that exists today in the regional and functional bureaus would be eliminated. The number of bureaus would be reduced significantly. One new Under Secretary would be created, but the AID Administrator position would be eliminated.
We are aware that our proposed restructuring of the State Department will give rise to the concern that such functional goals as nonproliferation and human rights will be diminished in importance. Indeed, the primary motivation for establishing the functional Under Secretaries and their bureaus was to counter the prevailing culture of the department, which tends to give priority to maintaining good bilateral relations rather than pressing foreign governments on these contentious matters.
But in the restructuring reform offered here, proponents for these functional goals will still exist. Indeed, they will be in a better position to affect policies by being involved in their formulation early on in the process, and not at the last moment by intercession with the Secretary. The Under Secretaries will be responsible for ensuring that the priorities of the President, Secretary, and Congress are being achieved. If these involve counter-terrorism, refugees, the environment, or some other functional goal, it is hard to imagine that they would be neglected.
Another possible concern is that organizing in terms of regional Under Secretaries is inconsistent with globalizing trends. The Commission's Phase I Report forecasts that global forces, especially economic ones, will continue to challenge the role and efficacy of states. More important, however, it affirms that "the principle of national sovereignty will endure."*52 States will remain the main venue for diplomatic activity for a long time. This restructuring proposal is based on the reality that the United States will need to continue to deal with states around the world while being able, as well, to integrate policies in both regional and global contexts. The new Strategic Planning, Assistance, and Budget Office, along with the Global Affairs Under Secretary and Assistant Secretaries, will also be available to ensure that global perspectives are given sufficient attention.
Defining the geographical coverage of the regions will necessarily be somewhat arbitrary, but the same problem exists under any arrangement. Russia will be integrated again into Europe and South Asia joined again with the Middle East. The most difficult decisions will involve where to place Turkey; whether to keep India and Pakistan in the same region or separate them; how to divide up the newly independent states of the former Soviet Union; and whether northern Africa is part of the Middle East or Africa. Setting up the new organization will provide an opportunity to make these decisions anew in light of prospective developments in the coming decades, and, if at all possible, to build in some degree of flexibility for the years ahead.
Issues will certainly arise that span regions or require the integration of regional and global perspectives. Planning for G-8 meetings, for example, will have to involve all the Under Secretaries. The Under Secretaries of Global Affairs, Europe, the Americas, and Asia would have a role in policies bearing on national missile defense. Global financial crises would almost certainly engage more than one Under Secretary. Jurisdictional disputes may well arise that the Secretary (or the Deputy Secretary) will have to address. What the restructuring will have done, however, is to make the number of those cases requiring intervention far fewer than today. That is how senior management is most effectively employed in any successful private corporate organization; so why not in the U.S. Department of State?
Another concern that some may have is that development programs will be neglected if AID is integrated into the State Department. Some may worry, as well, that the State Department will direct foreign assistance to programs promising immediate political returns. This is not so. In the new organization, the Secretary of State could directly instruct the Strategic Planning, Assistance, and Budget Office to ensure that priority is given to development aid-if that is the wish of the President and the Congress. The demise of AID would also mean that no single person, apart from the Secretary of State, would be accountable for the implementation of development programs. It is true that each Under Secretary would oversee development aid for only their area of responsibility. But they would be able to integrate these activities with all the other regional or global assistance programs far more effectively than is the case today. Indeed, AID's current decentralized structure would fit well with the overall State restructuring. AID's regional and global offices would become part of the new Economic and Transnational Bureaus. AID regional and global planning and budgeting offices would be retained as part of the Under Secretaries' staffs. AID's budget officials would join the Strategic Planning, Assistance, and Budget Office, and their procurement and contracting officials would be integrated into State Department offices with similar responsibilities. The actual planning and administration of AID programs would be very similar to current practices.
The United States is represented overseas in 160 countries, with over 250 embassies, consulates, and missions. Over 14,000 Americans and about 30,000 foreign nationals are employed in these posts. More than 30 U.S. government agencies operate overseas. This Commission believes that the U.S. overseas presence has been badly short-changed by shortsighted budget cuts to the point where the security and prosperity of the American people are ill-served. But it also believes that the U.S. presence must be adjusted to new and prospective economic, social, political, and security realities. Only with such changes will Congressional confidence be restored, and the necessary funding provided, to support these critical activities.
We also believe that in order for the State Department to run efficiently in an increasingly "wired world," its worldwide information technology assets must be updated. There has been progress in this area, but more could be done. This Commission urges Congress to provide sufficient funding to ensure the full completion of this effort.*53
U.S. Ambassadors and embassies play critical roles in promoting U.S. national security goals overseas. We therefore recommend that all other Ambassadors, including the U.S. Permanent Representative to the United Nations, be brought under the authority of the Secretary of State for policymaking and implementation, without altering their representational role on behalf of the President.
The President should also take steps to reinforce the authorities of all U.S. Ambassadors. Ambassadors should be responsible for planning and coordinating the activities of all the agencies at each mission, including U.S. assistance and law enforcement activities. The Ambassadors should formulate a comprehensive, integrated mission plan and recommend to the Cabinet secretaries an integrated country budget. The new State Department Under Secretaries should be advocates for their Ambassadors' budget priorities in Washington's interagency budget deliberations. We further recommend the following:
· 23:The President should ensure that Ambassadors have the requisite area knowledge as well as leadership and management skills to function effectively. He should therefore appoint an independent, bipartisan advisory panel to the Secretary of State to vet ambassadorial appointees, career and non-career alike.
This Commission also believes that the Secretary of State, on behalf of the President, should pursue urgently the process of "right-sizing" all American posts overseas. The process must ensure that embassy activities are responsive to emerging challenges and encourage greater flexibility in the size and concept of embassies and consulates to serve specialized needs.*54 Embassies should also be reorganized into sections reflecting the new State Department organization: political, security, and economic/transnational affairs.
Regions will become more important in the emerging world of the 21st century. State borders no longer contain the flow of refugees, the outbreak of ethnic violence, the spread of deadly diseases, or environmental disasters. Humanitarian and military operations will often depend on access rights in many different countries. As regional political and economic organizations gradually evolve outside Europe, they may begin to take on roles in fighting such transnational dangers as crime, drugs, and money laundering. The United States needs flexible ways to deal with these regional problems.
Today, U.S. Ambassadors are accredited to individual states. No mechanism exists for them to coordinate their activities regionally. The unified military commands are regionally based, but their planning and operations are focused primarily on military contingencies. Every regional Commander-in-Chief (CINC) does have a Political Adviser from the State Department, but there is no systematic civilian foreign policy input into military planning. When a crisis occurs, coordinating the various civilian activities (humanitarian assistance and police forces) with military activities (transport or peacekeeping operations) remains very uneven. More fundamentally, a gap exists between the CINC, who operates on a regional basis, and the Ambassador, who is responsible for activities within one country.
In light of these circumstances, and fully mindful of the need to reinforce the goals of the new State Department organization proposed above, the Commission encourages the departments and agencies involved in foreign operations-State, Defense, Treasury, Commerce, and Justice- to cooperate more fully in regional planning. Specifically the President should:
· Establish NSC interagency working groups for each major region, chaired by the respective regional Under Secretary of State, to develop regional strategies and coordinated government-wide plans for their implementation;
· Direct the Secretary of Defense to have regional CINCs institute a process through their Political Advisers to involve the Ambassadors in their region in their military planning; and
· Direct the Secretary of State to instruct the regional Under Secretaries to meet at least semi-annually with the ambassadors located in their region (with one such meeting each year being held in the same general location as the regional CINCs).
The implementation of these recommendations concerning the Department of State in all its various aspects, and their budgetary implications, is a complex undertaking. As noted, the Commission's recommendations involving the NSC processes and staff could be implemented immediately. The problem will be that, to have any chance of returning to the NSC's more traditional roles, the State Department needs to be strengthened well beyond the designation of a strong Secretary of State. Congressional action will be required to implement the proposed reorganization. With respect to the U.S. overseas presence, the President has the authority to carry out the Commission's recommendations. We urge him to use that authority forthwith.

The Department of Defense (DoD) protects the American people and advances the nation's interests and values worldwide. It also plays a critical role in maintaining global peace. And it stands in dire need of serious reform.
DoD's current organization, infrastructure, business practices, and legal and regulatory structure evolved during the Cold War in ad hoc and incremental ways. Many commissions have addressed DoD structure over the years and offered recommendations for reform. Some have been implemented, but this Commission believes that much still needs to be done. In particular:
· DoD's policy organization is outdated and overly complex;
· Major staff roles and responsibilities are ill-defined, with duplication and redundancy the rule not the exception;
· Supporting infrastructure is highly inefficient and consumes a major portion of the DoD budget;
· The present process for programming and budgeting military forces generates strategic postures not very different from those of the Cold War despite vastly changed strategic realities;
· The weapons acquisition process, which is slow, inefficient, and burdened by excessive regulation and politicization, has become a burden on a defense industry is already in the midst of a financial crisis; and
· The process by which force structure planning occurs is not appropriately aligned with the current global security realities.
The key to success will be direct, sustained involvement and commitment to defense reform on the part of the President, Secretary of Defense, and Congressional leadership. The new Secretary of Defense will need to be personally engaged. The challenges are too great to delegate responsibility to others. His central task will be to persuade Congress to accord him the flexibility he needs to carry out the Commission's recommendations, and to contain Congress' desire to micro-manage DoD processes through crippling laws and regulations.
Resource issues are also at stake in Defense Department reform. America's global commitments are so extensive, and the costs of future preparedness are so high, that significantly more resources will be required to match means to ends. The potential mismatch ahead between strategy and resources can be mitigated in the longer run by generating savings from within the Defense Department through extensive management reform. Not only will the Defense Department save money that it needs for its core responsibilities, it may also increase Congress' willingness to shrink the mismatch between means and ends in the nearer term.
Policy Reform
The Under Secretary of Defense for Policy supports the Secretary of Defense in his role as a member of the National Security Council, and helps him to ensure that the multiplicity of DoD's defense and military activities are guided by the President's overall national security policies. The structure of the Policy staff has evolved over many years as a result of the wishes of individual Secretaries and various Congressional mandates. Today, the office retains its traditional focus on security assistance and alliance relations. It has also expanded its mandate to foster defense relationships throughout the world as well as to participate in such functional activities as nuclear threat reduction, humanitarian assistance, and counter-drug efforts. At the same time, such policy activities as export controls and arms control verification have been given to the recently consolidated Defense Threat Reduction Agency.
The most recent reorganization gives little emphasis to strategic planning, though the Strategy and Threat Reduction office is involved to some extent in defense strategy and contingency planning. Regional and functional responsibilities are dispersed among Policy's three offices. The office of International Security Affairs covers Europe, Asia, Middle East, and Africa. A Congressionally-mandated assistant secretary deals with Special Operations and Low- Intensity Conflict (SOLIC) as well as Inter-American affairs, terrorism, drugs, peacekeeping, and humanitarian operations. The Strategy and Threat Reduction office focuses on the functional areas of nuclear weapons and missile defense, counter-proliferation and threat reduction, and the regional areas of Russia, Ukraine, and Eurasia. The result is a very complex structure that makes coordination difficult within the Defense Department and with other government agencies.
This Commission therefore recommends some modest but important reforms, as follows:
· 24: The Secretary of Defense should propose to Congress a restructuring plan for the Office of the Under Secretary of Defense for Policy, which would abolish the office of the Assistant Secretary for Special Operations and Low-Intensity Conflict (SOLIC), and create a new office of an Assistant Secretary dedicated to Strategy and Planning (S/P).
We believe that a separate Assistant Secretary of Defense for Special Operations and Low Intensity Conflict is no longer needed, for these activities are now widely integrated into our strategy, plans, and forces. Special operations can and should be addressed like all other mature missions within the department's Major Force Program process. The other regional activities of SOLIC would be transferred to other parts of the policy office. But a new office of Strategy and Planning (S/P) should be created, with responsibility for leading and coordinating DoD planning processes. This office would also support the Secretary of Defense in the NSC-led strategic planning process as well as the Joint Staff's military contingency planning process.
Structural Reform
Past efforts to reform the Defense Department have emphasized the following three general principles.*55 DoD civilian and military staffs need to focus on their core roles and responsibilities. The department should eliminate unnecessary layers, avoid duplication of activities, and encourage the delegation of authority. Many defense support activities should be outsourced to the private sector and others fully privatized. The Commission supports these overall goals and, more specifically, recommends the following:
· 25: Based on a review of the core roles and responsibilities of the staffs of the Office of the Secretary of Defense (OSD), the Joint Staff, the military services, and the CINCs, the Secretary of Defense should reorganize and reduce those staffs by ten to fifteen percent.*56
A comprehensive review of staff sizes and structures must follow from clear definitions of each staff's mission, and core competencies should be established around those missions. All activities peripheral to a staff's main missions should be curtailed or eliminated.*57 In the Commission's view, mandatory reductions will force the staffs to eliminate redundancies among them and unnecessary layers within them. Staff activities that can be downsized include:
-OSD program management involving special operations, humanitarian assistance, and counter-drug programs;
-Joint Staff regional and manpower offices, as well as their use of the Joint Requirements Oversight Council (JROC) and the Joint Warfighting Capability Assessment (JWCA) processes, to evaluate infrastructure and service support programs;
-Service regional planning offices, some acquisition oversight, as well as the duplicate manpower activities of the military and OSD staffs;
-CINC program analysis activities and some sub-unified and component command headquarters.
In the case of Joint Forces Command (JFCOM), the Commission strongly urges that its responsibilities be carefully defined and limited. Many Joint Staff activities have been divested to JFCOM and new missions have been added, including homeland security, joint training, and joint experimentation. Some have suggested further that JFCOM represent the CINCs in the requirements definition process. Since the JFCOM commander is already dual-hatted as NATO's Supreme Allied Commander-Atlantic (SACLANT), a span of control problem looms with the steady expansion of his duties.
But realigning these staffs is not enough. DoD's supporting infrastructure needs to be reduced as well, both because it holds the promise of giving better support to the nation's military forces and because it will free up significant resources for modernization.*58
Roughly half of DoD's infrastructure falls into two categories: central logistics and installation support. More than 75 percent of DoD's infrastructure resides within the military services and, in this fiscal year, will consume $134 billion. This system consists of approximately two-dozen defense agencies and field activities whose accounts are scattered across various program and budgeting elements.
Since these infrastructure activities do not operate according to market forces, it should come as no surprise that business costs and practices are not competitive with the civilian sector. Most defense agencies place little emphasis on achieving performance goals based on measurable outputs. Many also suffer from conflicting supervision from OSD and the military services, while at the same time receiving strong advocacy from the Congress bent on protecting local constituent jobs and installations. Several defense agencies and field activities have a combat support role, which adds the difficulty of having to harmonize business efficiency with military effectiveness.
Efforts over the years to reduce DoD's infrastructure have focused in part on outsourcing various activities to the private sector. Outsourcing guidelines are found in OMB Circular A-76, but the process is cumbersome and bureaucratic, often taking two to four years to complete for each major initiative. Moreover, the Circular A-76 process involves competition between the private sector and an ongoing government activity. The "competition" is inherently biased against private business because the government's "bid" deflates true operating costs and hides overhead expenses. This sharply limits the applicability of the Circular A-76 process.
Given the significant obstacles to reducing, consolidating, and restructuring the Defense Department's supporting infrastructure, the Commission recommends the following:
· 26: The Secretary of Defense should establish a ten-year goal of reducing infrastructure costs by 20 to 25 percent through outsourcing and privatizing as many DoD support agencies and activities as possible.
Given the political sensitivities surrounding such steps, an independent and bipartisan commission should be established to produce a plan to achieve this goal. We propose that implementation of the plan rely on a joint Executive-Legislative Branch mechanism similar to the Base Realignment and Closures (BRAC) process.
In putting together such a plan, this new commission will need to explain to Congress what the process will entail. This plan should develop common definitions of what constitutes a "support activity." It should include all the various categories of supporting infrastructure, including both Service and civilian DoD agencies. It should then define in general terms what should remain as government owned and operated, what should be outsourced, and what should be privatized.*59 In principle, it would seem that intelligence, acquisition, and criminal investigation should be consolidated, but remain government owned and operated. Some aspects of health, personnel, and many support functions on local installations should be outsourced. Logistics, accounting, auditing, aspects of defense communications, military exchanges and commissaries should be privatized.*60 Finally, the plan should lay out a five-year road map for accomplishing the outsourcing, and a ten-year road map for privatization-recognizing that outsourcing can be a useful step toward privatization.
In the meantime, DoD and the Office of Management and Budget need to revamp the Circular A-76 guidelines in ways to make the selection process quicker and the competition more equitable. This will require working with Congress, because steps to privatize substantial portions of the DoD infrastructure will invite intense Congressional scrutiny.
The failure to significantly reduce DoD's infrastructure could prove very injurious in the long run. Attempts to save money merely by squeezing savings from the current system-but without fundamentally restructuring that system-will eventually jeopardize the provision of adequate funding for core needs such as modernization and personnel. If the Congress will not provide the funding needed to compensate for departmental inefficiencies, then it will need to explain why it also hamstrings the department's own efforts to become more efficient.

Process Reform
Three major areas of DoD responsibility cry out for particular scrutiny: the programming and budgeting process, the acquisition process, and the force planning process. We take these in turn.
For the past thirty years, the Defense Department has produced its budget through its Planning, Programming, and Budgeting System (PPBS) process. Theoretically, the PPBS process is top-down in design, beginning with the National Security Strategy (NSS) as guidance for both the National Military Strategy (NMS) and the Defense Planning Guidance (DPG).*61 In reality, however, the PPBS process is predominantly a "bottom-up" system driven by existing programs and budgets.
The problems of the PPBS process are well known. The PPBS phases operate semi- autonomously rather than supportively, creating unnecessary turbulence and encouraging the repeated revisiting of prior decisions. Guidance to the Services and other DoD components for program and budget development tends to be both vague and late. Major program decisions are often delayed until the end of the budget development phase, in turn causing hurried and often inaccurate adjustments to budgets and to the Future Years Defense Program (FYDP). Frequently, long-term modernization plans are disrupted during annual budget cycles. Minor details receive inordinate attention. As a result, the PPBS process fails to provide the Secretary with the means to guide the budget process strategically. It has contributed much to the department's tendency to replicate existing force structure and its inability to advance the transformation of U.S. forces to deal with a post-Cold War environment.
The PPBS must be restructured to link it directly to strategic goals and to reduce its obsession with mundane program and budgeting details. The department's planning should be informed by the strategic guidance emanating from the President and NSC principals, as specified above in Section III.A, and then the Secretary of Defense should translate that guidance into the various internal DoD processes that produce Defense programs and budgets.
The most critical step is for the Secretary of Defense to produce defense policy and planning guidance that defines specific goals and establishes relative priorities. He would need to do this through a departmental process that involves serious analysis and debate of the most critical issues. Real strategic choices must be defined and decisions made. The program review phase of the PPBS could then measure progress in achieving his policy and planning objectives. This Secretarial guidance would also provide the basis for defining the National Military Strategy and for conducting the Quadrennial Defense Review (QDR).
The Commission believes that the QDR should then become the foundation of the PPBS. To be truly effective, we recommend:
· 27: The Congress and the Secretary of Defense should move the Quadrennial Defense Review to the second year of a Presidential term.
By statute, the QDR is to be completed in the first year of a new administration. Such a deadline, however, does not allow the time or the means for an incoming administration to influence the QDR's outcome. The Presidential appointment process now extends six to nine months.*62 The new President's overall vision and strategic goals also take time to develop and so cannot inform the review. Meanwhile, the new team inherits the supporting analysis from the previous administration and Joint Staff. Past practice suggests that the DoD bureaucracy has figured out how to use the QDR process to preserve the status quo, while outgoing senior officials have rarely taken any stake in the process. Postponing the QDR until the second year would remedy these problems, and would still be available in time to influence the second of four budgets that an administration develops entirely on its own.
For the department to be able to develop true strategic alternatives, it will need to focus on resources. We therefore recommend a second change in the QDR.
Despite the end of the Cold War and the emergence of a newer, less certain strategic environment, the percentage of budget resources that is allotted to the Services and defense agencies-called Total Obligation Authority (TOA) in the Defense budget-has not changed appreciably over the last ten years. Only minor force structure alternatives have been generated; defense programs remain essentially unchanged, and modernization funding keeps getting pushed into the future. Therefore, we recommend the following:
· 28: The Secretary of Defense should introduce a new process that would require the Services and defense agencies to compete for the allocation of some resources within the overall Defense budget.
A structured process of competition for resources, moored within the QDR process and focused on the allocation of TOA, can change this. One way this competition could be accomplished is for OSD to retain five to ten percent of the TOA and then reallocate it during the QDR to promising systems and initiatives-be they those of the Services, DARPA, or Joint programs. The Secretary and his OSD staff must accompany the TOA holdback with the identification of high priority programs that fill key strategic requirements. This is necessary to insure funding for strategic lift and space programs as well as joint interoperability programs, such as C4ISR. In this process, the Services and defense agencies would be required to identify their highest and lowest priority programs.*63 This would give the Secretary a vehicle to stretch or kill low-priority programs and begin the process of reallocating funds to more promising areas during subsequent PPBS cycles.
For any TOA reallocation process to be viable, two things must happen. First, the Secretary will need to rely on his OSD staff, and not rely only on the Service and Joint Staffs. The OSD staff will also need to coordinate the analysis that will inform the discussion of the alternatives. OSD internal reforms will be key to their ability to carry out these tasks.
The Commission proposes a final change to improve the QDR process. The QDR should be restructured so that it defines defense modernization requirements for two distinct planning horizons: near-term (one to three years) and long-term (four to fifteen years). The CINCs should have primary influence on readiness in the near-term execution horizon. The Services should focus on modernization, personnel, and infrastructure throughout the long-term planning horizon. The Joint Staff should focus on joint issues and force interoperability planning. The OSD staff would exercise broad oversight and ensure that QDR planning followed the President's and the Secretary's strategic guidance and was based on realistic political and resource assumptions.
Flowing from the QDR process, the PPBS process must be reoriented in ways to conform to political reality and achieve better coordination among the civilian and military staffs. To do this, the calendar should be revamped. Policy and planning guidance should be issued biennially and prior to when the Services start building their initial programs and budgets. The Joint Staff and OSD would then develop the most critical issues for review by the Secretary in the April to August time frame. Final decisions would then be postponed until after Congress had done its markup of the previous year's budget, so as to integrate their decisions into the upcoming budget. Final Presidential approval would occur by the end of the year. High-speed computers now allow the programming and budgeting phases to be compressed and to take account of Congressional action. The PPBS need not be wholly linear in execution.
The United States equips its military forces through a complex process that depends to a large degree on the private sector, but also involves an enormous number of laws and regulations that compose a thick web of government oversight. The acquisition process is a hybrid process, with characteristics of both a free enterprise system and a government arsenal system. Operating within this environment is a small group of primarily defense-oriented companies, a larger number of basically commercial companies with some involvement in defense procurement, and a growing number of companies, particularly high-tech companies, to which dealing with the Department of Defense is an anathema. Importantly, all of these companies must compete in the open marketplace for both financial capital and skilled workers and managers.
A worrisome number of studies in recent years have pointed to the precarious health of many of the nation's most critical defense suppliers.64 Many businesses are unable to work profitably with DoD under the weight of its auditing, contracting, profitability, investment, and inspection regulations. These regulations also impair DoD's ability to keep abreast of the current pace of technological innovation. Weapons development cycles today average nine years in an environment where technology changes markedly every twelve to eighteen months in Silicon Valley-and the trend lines continue to diverge.
Competition is essential within the defense sector to achieve both affordability and innovation. Yet the current low level of modernization activity often makes competition impractical. In addition, competition is affected adversely by the exacting social and ethical standards to which DoD is held. Such standards impose restrictions that make it virtually impossible for DoD to be efficient and aggressive in achieving cost savings.
Despite some recent improvements, the trends of the last decade are very troubling and, if they continue, could severely endanger America's long-term military capability. A strategy of standing back and totally relying on the forces of the marketplace will likely fail. The United States must look to the health of the U.S. defense industrial base just as it takes responsibility for the viability of its Army, Navy, Air Force, Marine Corps, and Coast Guard. This does not mean government management of the defense industrial base. It does mean creating an environment where good performers can succeed and prosper.
In place of a specialized "defense industrial base," the nation needs a national industrial base for defense composed of a broad cross-section of commercial firms as well as the more traditional defense firms. The "new technology" sectors must be attracted to work with the government on sound business and professional grounds; the more traditional defense suppliers, who fill important needs unavailable in the commercial sector, must be given incentives to innovate and operate more efficiently.
If this is to be accomplished, the defense acquisition process will need fundamental reform. To guide this reform, the Commission offers these overarching principles.
· The nation needs to restore the balance of funding among modernization, readiness, and force structure. The procurement "holiday" affecting modernization has produced a highly unbalanced force for the future.
· The government should encourage small, agile, high-tech companies to enter defense competitions, as they represent both a source of innovation and an inspiration to new efficiencies.
· The department's overall modernization strategy should give priority to fundamental research; substantially increase prototyping; stress the evolutionary upgrading of platforms throughout their life; and keep commitments to long-term, stable production.
· To the extent practicable, the acquisition system needs to be open to continuous competition, and open to new ideas from companies of all sizes. It should focus on "outputs"-i.e., measurable products, time, and cost-as opposed to "process."
· The weapons development process should rely on competition to solve performance problems and keep down costs, with commensurate rewards for those who succeed.
· The acquisition system should use the market to decrease system costs and improve schedule and system performance. The current system of centralized planning, the inappropriate use of government agencies to perform commercial tasks, and the lack of managerial accountability stifles efficiency.
· The government, not the private sector, should pay the costs that result from explicit government demands and requirements in the acquisition process. At the same time, companies deserve no proprietary entitlement to publicly-financed designs and technology.
Turning to more specific recommendations, this Commission is concerned that the current acquisition system does not support the timely introduction of new technologies. Developing and producing weapon systems takes too long.65 Some major systems are not even completed before the parts they depend on from the commercial sector are outmoded and no longer available. Worse, while the commercial world is shortening cycle times, DoD is not-so the gap between commercial and government practice continues to widen. This is the case in large part because of the inflexibility built into federal regulations. We therefore recommend the following:

· 29: The Secretary of Defense should establish and employ a two-track acquisition system, one for major acquisitions and a second, "fast track" for a limited number of potential breakthrough systems, especially in the area of command and control.
The two-track system would accept an accelerated, higher-risk approach to the development of breakthrough capabilities, especially in areas undergoing rapid change in the state of the art. Simultaneously, a more conservative approach is appropriate for more conventional programs. One size does not fit all.
The Commission also believes that the development of new technologies must be emphasized and properly financed. Development programs should generally be administered through contracts that pay for the costs plus a fee, with the fee being tied not only to system performance but also to meeting the schedule within costs. We must eliminate the pressures whereby firms need to recover R&D costs and losses during the production phase. Full funding of R&D programs is an essential part of the acquisition process. Correspondingly, fixed-price contracts are appropriate for programs whose scope and risk are well understood and manageable. As we have already suggested in Section II above, the nation must also invest heavily in basic research in university, corporate, and government laboratories.
Prototyping of a weapon system, which allows the possibility that some attempts will fail, and then developing and producing the most promising concepts, will get the "kinks" out of systems early and shorten the development cycle time. The initial costs would be higher to the Services, which is why prototyping is often resisted, but the total program costs promise to be lower. In addition, it will help create and maintain viable defense suppliers and their critical design teams, even in a low-production environment. We therefore recommend the following:
· 30: The Secretary of Defense should foster innovation by directing a return to the pattern of increased prototyping and testing of selected weapons and support systems.
Prototyping should be paired with incremental delivery and evolutionary upgrades of existing operational systems. This will allow the product to remain current with continuing technological developments. It has the further advantages of reducing the time to deliver a new capability to the war fighter and of decreasing production risks significantly.
The Defense Department cannot depend entirely on speeding up its integration with the commercial sector. The nation also needs to invest in selected research programs where military systems have no commercial counterparts. Unfortunately, large and complex DoD research and development projects generally suffer from a distortion of cost competition since companies often underbid the R&D phase in hopes of securing funding in more profitable production phases. The Commission thus recommends that the laws prohibiting the use of Independent R&D (IR&D) funding for program support be more broadly interpreted and more strictly enforced.
Program turbulence, often stemming from lack of funds or from budgetary instability, is the primary cause of inefficiencies and cost overruns in DoD programs. This budgetary instability has several sources. One is the current reality of the resource allocation process itself within DoD, which unfortunately often takes all resources into account during budget reductions-including acquisition programs. This normally results in a known and deliberate underfunding of previously approved programs. Another problem is the acquisition system itself, which suffers from cost overruns and program extensions. Lastly, the Congress often uses small "takes" from large programs to reallocate funds to other priorities without realizing or understanding the problems this creates in having to reprogram funds, write new contracts, and establish new schedules.
We realize that many commissions, and ever more studies, over the past several years have recommended two-year budgeting and multiyear procurement as a way of limiting program turbulence. If these forms of budgeting were introduced, the disincentive to disrupt acquisition programs would appropriately be very high. We also know that Congress has doggedly refused to take such proposals seriously. Congress lacks confidence in DoD's ability to execute such a budget given past weapons cost overruns. Furthermore, appropriating funds on a yearly basis gives Congress a greater ability to influence the Defense Department's policies and programs. Therefore, rather than propose two-year budgeting across the entire Department of Defense, we focus on the single area where two-year budgeting makes the most sense and stands to do the most good. We recommend the following:
· 31: Congress should implement two-year defense budgeting solely for the modernization element of the DoD budget (R&D/procurement) because of its long-term character, and it should expand the use of multiyear procurement.
Such steps would markedly increase the stability of weapons development programs and result in budgetary savings in the billions of dollars. For this to happen, however, the Secretary of Defense must impose discipline in the decision-making process. It is already difficult to start new engineering development programs. It should be made even more demanding, ensuring that the military requirements are understood and enduring, and that the technology, concepts, and funding are all well in hand. Once a program is approved, it should be equally difficult to change it. The Commission also notes that it is sometimes better to eliminate some programs early than to absorb the costs of constantly extending programs and procuring limited numbers of weapons at high unit costs. To accomplish this, Congress will need to let decisions to kill programs stand as well as support DoD budgeting and procurement reforms.
If the government will not take the measures to improve program stability by introducing two-year budgeting in modernization and R&D accounts, and more broadly adopt multiyear funding, it cannot expect private industry to obligate itself to suppliers, or to assume risks on its own investments with little prospect of long-term returns.
Estimating costs is very difficult, especially in the early stages of weapons development. As a result, costs often escalate significantly. Introducing immature technologies and concepts into engineering development can lead to a major waste of resources. Constant modifications in program specifications can significantly drive up costs. The acquisition system today is characterized by underfunding, turbulence, occasional lack of competition, and a propensity to follow routine processes rather than focus on producing on-time results. In addition, the current system gives incentives to program offices to spend all their annual appropriation regardless of need. We therefore recommend that the Defense Department allocate resources for weapon development programs by phase rather than in annual increments.
This approach to resource allocation within DoD should include the provision of financial reserves to resolve unanticipated problems, as is common commercial practice. This can be accomplished by providing contingency funds in advance to deal with program uncertainties. To ensure their proper use, such funds should be placed not in the program office, but under the control of the Service acquisition official. Fully funding programs during each phase-and especially the early phases-will decrease program turbulence and provide a basis for more reliable budget and schedule forecasting. It will also allow better program management and produce significant cost savings.
Robust experimentation and exploration of innovative technologies are essential, but there must also be an effective screening process for the selection of mature, affordable technologies before entering full-scale development. DoD currently uses a complex acquisition schedule, where problems associated with technology generation, prototyping, and engineering development often migrate into production. The acquisition system inadequately addresses concurrent risk. Worst of all, testing procedures are generally viewed (and feared) as report cards in the weapon development process. This discourages program managers from using tests to attain knowledge, demonstrate technology maturity, and assure the viability of key manufacturing processes.
We therefore recommend that the recently adopted three-phase acquisition process be institutionalized. Those three phases are technology development, product development, and production. Testing should be a key part of the technology development process as well as the last two phases.
A three-phase system would focus on maturing robust technologies prior to decisions on development, and then on identifying problems earlier in engineering development to minimize risk and cost in production. Some overlap between phases is inevitable, but steps can be taken to control the concurrent risk. This will require that DoD adopt a "knowledge-based" evaluation and testing procedure to establish technology maturity, to evaluate risks, costs and operational limitations. Testing should follow commercial practices, which test early, hard, and often to identify problems, to generate "knowledge," and to guide subsequent program development. Commercial testing is also more systematic. Subcomponents are thoroughly tested before they are combined into components, components are thoroughly tested before they are combined into subsystems, and so forth.
We believe that a clear three-phrase process-with bright red stop signs erected to prevent premature entry into subsequent phases-will help in every respect, and we applaud DoD's recent move in this direction. More importantly, this Commission recommends that program reviews focus on the need, merit, and maturity of the program, and not be used by individuals to reopen past debates about the wisdom of the original program approval.
Congress and others have put in place an accumulation of laws and regulations to protect against fraud, waste, and abuse, the net effect of which is to create a system of requirements and acquisition oversight that creates the very waste it was intended to prevent.
The "regulation cost" in DoD and the defense industry has been estimated by various observers to be on the order of 30 percent of the acquisition budget, while the indirect management and oversight burden in the nation's commercial sector ranges from 5 to 15 percent-and is falling. The Defense Contract Audit Agency (DCAA) and the Defense Contract Management Command (DCMC) employ a "division equivalent" of auditors, and these are complemented by multitudes of various Service auditing organizations. They create costly inefficiencies and often lead to inferior products.
Moreover, the DoD oversight process, by engendering an adversarial system, encourages timid decision-making and forces industry to go to extremes in accounting and business procedures. This system, which is based on institutional and individual distrust, needs to be replaced with one that conforms better to normal business practices. The Defense Department needs to mimic the nation's private sector-again, to the extent possible-in reducing costs, improving product development cycles, and adapting rapidly to new technologies.
Specifically, federal acquisition regulations must no longer weigh down business with so much gratuitous paperwork and regulation that they discourage firms from doing business with the government. While the requirement for public accountability can never allow the defense acquisition system to mirror image the private sector completely, excess regulation can and should be significantly reduced. We therefore recommend the following:
· 32: Congress should modernize Defense Department auditing and oversight requirements by rewriting relevant sections of U.S. Code, Title 10, and the Federal Acquisition Regulations (FARs).
The goal should be to reduce the numbers of auditors and inspectors for the DoD weapons acquisition system to a level commensurate with the marginal benefits produced by such auditing and inspection. Compared to leading companies in the commercial sector, this would entail an approximate reduction within DoD of 50 to 60 percent.
Rewriting the FARs should be premised on two principles. First, the government must pay for the legitimate costs that it causes to be incurred for what it demands in the acquisition process. The government must reimburse legitimate costs so that contractors may invest in new technology. The government must also share cost savings to create incentives for efficiency. Progress payments, covering a legitimate cost of business, should be automatically indexed to interest rates. Second, FARs must encourage competition and give incentives for timely production. The rewritten FARs must have the flexibility that promote a profit policy under which firms that perform well are rewarded well-and firms that perform poorly are penalized or terminated, or both.*66
To make this recommendation work, DoD will have to exercise significant leadership and work with Congress and industry to change the existing culture throughout the acquisition and procurement infrastructure. But that is not the only problem. Both industry and government officials often fail to take advantage of flexibilities in government regulations because it is less risky for them to follow old procedures. Positive actions taken in the past decade have paid off only when both DoD program managers and industry changed their way of doing business.
DoD's goal to expand participation in the defense industrial base will be helped significantly by introducing competition, placing emphasis on timely output versus process, increasing the funding for technology experimentation, transitioning more quickly from technology development into production, fostering program stability, reducing the oversight burden, changing regulations, and revamping the penalty focus of today's system.*66

It might be appropriate for the revised FARs to test a modified version of the award fee process tied to schedule, cost, and performance. This discretionary award could range from a higher-than-present level to a moderately negative level. The determining evaluation would be based upon separate periodic input from the program manager, the contractor, and outside auditors who would advise either the Service acquisition official or an independent board with authority to determine the fee.
Finally, amidst the other structure and process recommendations, this Commission would offer its suggestions on the force structure process. As the Commission indicated in its Phase Two report, the concept of fighting two major theater wars (2MTW) near- simultaneously, the current threat basis for U.S. military force planning, is not producing the capabilities this nation requires.*67 It is difficult to envision, at this period in history, two opponents capable of challenging the United States at the theater level of conflict, although we see the value in maintaining the capability to deter opportunists who might seek advantage while the United States was otherwise engaged. Indeed, the commitment for concurrent, all-out engagement in two regions of the world, without strategic prioritizing and sequencing of campaigns, is in itself an extraordinary notion. We believe it more useful to plan and retain readiness for a major conflict, while also securing the homeland and responding to small or medium-scale conflicts, international terrorism, peacekeeping, humanitarian actions, and other commitments requiring U.S. support.
We conclude that the concept of two major, coincident wars is a remote possibility supported neither by actual intelligence estimates nor by this Commission's view of the likely future.Thus, it is no longer an appropriate basis for our force structure planning and should be replaced by a new approach that accelerates the transformation to capabilities and forces better suited to the security environment that predominantly exists today.
The Commission believes that the world of the next ten to twenty years will be much like that of the last decade. While the United States has no peer competitor, it faces threats to its homeland from a widening array of actors on the global stage with access to weapons of mass destruction and disruption. The likelihood of interstate conflict threatening to U.S. interests is diminished, while intrastate conflict in areas important to U.S. security is on the rise.
This Commission believes the United States should maintain full capabilities of the kind it now possesses to prevail against the possible emergence of a theater-level opponent. The United States, however, must further improve its ability to deal with small to medium violent conflicts, often occurring simultaneously, which require very rapid, forced entry response capabilities, as well as long term stability operations in tense, post-conflict scenarios. We should thus strive to achieve land, sea and air capabilities suitable to this security environment that possess speed, agility, lethality, ease of deployment and sustainment, and highly networked connectivity. Demand for peacekeeping and humanitarian duties will likely continue, with their inherent constabulary requirements, and the United States must organize and train for these missions. Finally, new emphasis must be placed on the special needs of homeland security. Accordingly, the Commission recommends that:
· 33: The Secretary of Defense should direct the DoD to shift from the threat-based, 2MTW force sizing process to one which measures requirements against recent operational activity trends, actual intelligence estimates of potential adversaries' capabilities, and national security objectives as defined in the new administration's national security strategy-once formulated.
In such a capability-based sizing process, force structure planning would proceed from a strategic vision of the current and projected security environment and the national security objectives the new administration seeks to achieve. Sizing would take into account intelligence projections of potential adversary's capabilities plus actual operational activity trends, reflecting recent demands. Finally, adoption of updated modeling techniques, which this Commission recommends, would value the synergistic effects of Joint forces with modern weapons that are employable in a networked environment.
It would be inappropriate for the Commission to dictate the exact number and type of divisions, wings, and naval battle groups that this nation needs to execute its strategy. We can, however, provide guidance and a mechanism to help the Department move in the necessary direction. Accordingly, the Commission recommends that the Secretary should revise the current categories of Major Force Programs (MFPs) used in the Defense Program Review to focus on providing a different mix of military capabilities. Given the need for transformation, the Major Force Programs should be updated, and new ones created corresponding to the five military capabilities the Commission prescribed in its Phase II report. We expand on those capabilities below.
Strategic nuclear forces must retain the capability to perform the classic role of nuclear deterrence. The future security environment and probable strategic nuclear arms reduction efforts, however, likely will call for appropriately smaller numbers of nuclear weapons and delivery systems. Homeland security forces must possess the ability to deter, protect, and respond to threats to the American homeland. Homeland security is not just a military function; it requires the capabilities and expertise of numerous government agencies, best integrated by this Commission's proposed National Homeland Security Agency. For DoD's contribution to this vital mission, the Commission recommends that reserve component forces should be assigned a primary role. They should be trained and equipped to respond as deployable forces to natural, manmade, and/or WMD-triggered disasters. Active duty military forces should be trained to perform these missions in augmenting the reserve component forces.
Conventional forces must be sized and tailored to threats defined by realistic needs and updated force modeling. For the near future, conventional forces of the types now possessed can provide this capability. Fewer such forces, however, will be required to dominate potential threats than have been previously required by current assumptions and models. Given likely limitations on strategic air mobility assets, fast sealift and pre-positioned equipment in regions at risk should receive higher funding priority.
Expeditionary capabilities should be distinguished from "current conventional capabilities" insofar as they are designed to respond to crises very rapidly, operate with much lower logistic requirements in a network-centric environment, and possess technological superiority to dominate any potential adversary in the foreseeable future. Rapid power projection with forced entry ability, from forward locations and afar, must characterize these capabilities which, in the Commission's view, describes few of the forces the U.S. now possesses.
Humanitarian relief and constabulary operations will involve all the military services, including the support that has been customarily provided by naval, air, and ground forces. Other government and non-government organizations will undoubtedly be involved, and this should be anticipated in preparing for such missions. The constabulary capabilities should be vested primarily in Army and Marine Corps elements trained and equipped with weapons and mobility resources that will enhance the conduct of such missions, which should be additive to other force structure requirements.
This Commission recognizes the transformation process will produce these five capabilities over time, yet some must mature at a faster rate. Ultimately, the transformation process will blur the distinction between expeditionary and conventional forces, as both types of capabilities will eventually possess enhanced mobility. For the near term, however, those we call expeditionary capabilities require the most emphasis. Consequently, we recommend that:
· 34: The Defense Department should devote its highest priority to improving and further developing its expeditionary capabilities.
This Commission has identified what our military needs to achieve for the future-how to get there is best left to the responsible experts. We may discover that a transformed U.S. force structure will require a resource and capabilities baseline that is actually higher than that derived through the current 2MTW construct. Moreover, these transformed forces will be the ones this nation uses to fight all its conflicts, large and small, one at a time or simultaneously. Clearly, the transformation process will require a reprioritization of current resources. Ultimately, the result may be a larger force, or a smaller one, but we are confident that it will be a better force, appropriate to the environment in which it must serve.
The President and the Secretary of Defense can accomplish many of these structural reforms within and among the DoD staffs as well as reform of the budgeting and force planning processes. The structural reforms recommended for the defense infrastructure will require Congressional support and enabling legislation. Acquisition reform will require both DoD policy and statutory changes.
In its earlier work, this Commission has recognized space as a critical national security environment.68 In so doing, it affirms current U.S. National Security Strategy, which considers "unimpeded access to and use of space" a vital national interest.*69
The United States relies on space for the viability of both its economy and its national defense. Space technologies, such as the Global Positioning System, are already revolutionizing several major industries. The nation's military and intelligence activities, too, depend increasingly on space. U.S. superiority in space makes possible a military doctrine based on information superiority. U.S. military forces exploit space as the "high ground" for command, control, computers, communications, intelligence, surveillance, and reconnaissance (C4ISR) activities. The U.S. military cannot undertake any major operation, anywhere in the world, without relying on systems in space. Key elements of the U.S. strategic deterrent posture will be maintained in space as will the nation's ISR systems critical to avoiding strategic surprise. Space will be a crucial component to any layered defense the United States may construct in the next quarter century against ballistic missiles.
That is why the nation's space architecture-the infrastructure required to conduct space activities-must serve a multiplicity of commercial, civil, military, and intelligence purposes. Its protection must also be assured against threats that are clearly on the horizon.
Unfortunately, the superiority the United States enjoys today in space is unlikely to persist. Many countries have space capability or access to space. A few states already have the satellite and weapons technology to threaten U.S. space assets, and more will acquire such technology in due course.
In terms of defining its space strategy, the United States must balance two related goals. On the one hand, it seems prudent for the United States to seek space superiority, defined by the Defense Department as "that degree of dominance in space of one force over another, which permits the conduct of operations by the former and its related land, sea and air forces at a given time and place without prohibitive interference by the opposing force."*70 On the other hand, the United States should continue to support general international norms that protect space as an international domain where all participants are free to pursue peaceful activities. The problem is that unilateral U.S. steps taken to assure military superiority in space may be seen by others as implying an ability to deny access to space and freedom of action there. Even if that ability is never used, it could complicate the ability of the United States to shape a benign international environment. The United States recognizes space as a global commons, but if it does so without qualification, it risks being surprised and overtaken militarily in a crucial environment by some future adversary.
At the very least, this Commission believes that the United States should pursue a robust ground- and space-based C4ISR capability.*71 Because space capabilities take a long time to develop, the United States must also take, in the near- and middle-term, the steps necessary to protect its space assets within the current international legal framework should the need arise.*72
In our view, now is the time to reevaluate how both space activities and assets serve broader U.S. national security needs, and then how the U.S. government is organized to manage these. The first is required because science and technology are generating a rapid rate of innovation, and that innovation has both commercial and military implications the interplay of which we do not yet fully comprehend. The second is required because, frankly, the current state of affairs is inadequate.
As it happens, other commissions or boards have recently addressed or are currently addressing space issues, and they are doing so in a more comprehensive way than this Commission.*73 We endorse their work and offer recommendations that bear, in particular, on issues of structure and process.
This Commission finds serious problems with the way the existing interagency procedures in the U.S. government deal with space. No standing interagency process for space exists. Neither the NSC staff nor the White House Office of Science and Technology Policy is adequately manned to coordinate space issues. This means that space issues are addressed as they arise on an ad hoc basis. Neither the NSC, the National Science and Technology Council (NSTC), or the National Economic Council (NEC) integrates U.S. space activities. Hence, the Commission recommends the following:
· 35: The President should establish an Interagency Working Group on Space (IWGS) at the National Security Council to coordinate all aspects of the nation's space policy, and place on the NSC staff those with the necessary expertise in this area.
Such a working group would include key representatives from the Executive Office of the President (NSC, OSTP, OMB) and stakeholder representatives: the Departments of Defense, State, Transportation, and Commerce, the Director of Central Intelligence, and the Chairman of the Joint Chiefs of Staff.*74 The creation of the IWGS would allow space to be considered systematically and consistently as a critical element of U.S. national security policy.
The global presence and responsibilities of the United States, and the demands of the information age, have placed enormous new requirements for space and information infrastructures. These will create major demands for resources in both the Defense Department and the intelligence community. The problem is that the nation has not developed the concept of a comprehensive national space architecture to guide the allocation of resources.*75
A national intelligence Future Imagery Architecture (FIA) does exist, but it has been given woefully inadequate means either to fully process or to disseminate the information collected for its clients in the intelligence community, DoD, and other agencies.*76 Rectifying these problems is estimated to cost several billion dollars and no funds have so far been earmarked for this purpose. At present, then, the system for national intelligence imagery collection, processing, and dissemination is not fully integrated. The National Reconnaissance Office (NRO) and the National Imagery and Mapping Agency (NIMA) have failed to provide imagery capability that meets U.S. security needs.*77 As currently envisioned, too, the National Missile Defense (NMD) architecture focuses solely on engagement, not on an architecture that integrates the entire spectrum of national and defense-related intelligence, or that covers pre- engagement and post-strike assessments and reconstitution activities. Other space activities, such as those of NASA and NOAA, have been given little attention in thinking about the nation's space architecture. This is also the case for commercial space activities.
There is within the Defense Department a National Security Space Architect (NSSA) with responsibility for the design and oversight of the nation's defense and intelligence space infrastructure.*78 But this official lacks the means to affect the non-DoD/intelligence space architecture, much less influence decisions in other departments and agencies. The NSSA does not directly influence programs and budgets and, hence, cannot influence the allocation of resources. This Commission therefore recommends that the existing National Security Space Architect (NSSA) should be transferred from DoD to the NSC staff and take the lead in this effort.
Moreover, the problem of organizing for space policy must also be addressed at levels below the interagency. In the Department of Defense, responsibility for space policy and oversight is dispersed among various elements of the Office of the Secretary of Defense's (OSD) staff. We recommend establishing one office responsible for oversight of the department's R&D, acquisition, and launch/operation of its space assets. Coordination of military intelligence activities and long-range intelligence requirements, both within the department and with the intelligence community, should reside in this office. This official would therefore develop all defense-specific space, intelligence, and space architecture policy for DoD, and coordinate these issues at the interagency level. Accordingly, we recommend the Department of Defense create an Under Secretary of Defense for Space, Intelligence, and Information by consolidating current functions on the OSD staff.*79
One of the nation's most valuable forms of critical infrastructure is its space-based satellite constellation and ground support facilities. It is also our most vulnerable. Nowhere else does our defense capability rest on such an insecure firmament, even though warning and imagery are unquestionably critical. The concept of critical infrastructure protection highlighted in Section I must be extended to U.S. space networks as well. In light of U.S. reliance on these assets and the present dearth of means to protect them, the Commission endorses the conclusions of the recent Commission to Assess U.S National Security Space Management and Organization, and recommends increased investment in the protection of U.S. space assets, including deployment of a space-based surveillance network.
Such a network will require, first, that the United States be able to detect when its systems are being attacked and then respond. Protective methods must be developed and fielded. Second, the nation's access to space must be expanded in ways that are more cost-effective. The more robust U.S. space launch capability, the more able the United States will be to retain its space superiority, reconstitute systems after attack, and reduce its vulnerabilities. The Commission strongly recommends that the modernization of the nation's space-launch capability be accelerated.

The basic structure of the U.S. intelligence community does not require change. The community has implemented many of the recommendations for reform made by other studies. This Commission's focus is on those changes in intelligence policy, operations, and resources needed for the full implementation of recommendations found elsewhere within this report.
While the intelligence community is generally given high marks for timely and useful contributions to policymaking and crisis management, it failed to warn of Indian nuclear tests or to anticipate the rapidity of missile developments in Iran and North Korea. U.S. intelligence has, at times, been unable to respond to the burgeoning requirements levied by more demanding consumers trying to cope with a more complex array of problems. Steep declines in human intelligence resources over the last decade have been forcing dangerous tradeoffs between coverage of important countries, regions, and functional challenges. Warfighters in theater are often frustrated because the granulated detail of intelligence that they need rarely gets to them, even though they know that it exists somewhere in the intelligence system.
It is a commonplace that the intelligence community lost its focus when the Berlin Wall fell. Since then, three other problems have compounded its challenges. First, the world is a more complex place, with more diffuse dangers requiring different kinds of intelligence and new means of acquiring them. Second, its resources-personnel and monetary-have been reduced. Third, the dangers of terrorism and proliferation, as well as ethnic conflicts and humanitarian emergencies, have led to a focus on providing warning and crisis management, rather than on long-term analysis.
The result of these three developments is an intelligence community that is more demand-driven than it was two decades ago. That demand is also more driven by military consumers and, therefore, what the intelligence community is doing is narrower and more short- term than it was two decades ago. Given the paucity of resources, this means that important regions and trends are not receiving adequate attention and that the more comprehensive analytical tasks that everyone agrees the intelligence community should be performing simply cannot be done properly.
This Commission has emphasized that strategic planning needs to be introduced throughout the national security institutions of the U.S. government. We have also emphasized the critical importance of preventive diplomacy. Both require an intelligence community that can support such innovations, but current trends are leading in the opposite direction.
This Commission has also stressed the increasing importance of diplomatic and especially economic components in U.S. statecraft. The intelligence community as a whole needs to maintain its level of effort in military domains, but also to do much more in economic domains. In a world where proprietary science and technology developments are increasingly the sinews of national power, the intelligence community needs to be concerned more than ever with U.S. technological security, not least in cyberspace. And here, too, the trends within the intelligence community point not toward, but away from, the country's essential needs. Resources devoted to handling such economic and technical issues are not increasing, but declining.
To respond to these challenges, some have recommended strengthening the Director of Central Intelligence (DCI) through organizational changes, such as vesting greater budgetary authority in him and giving him greater control over personnel throughout the community. We believe, however, that current efforts to strengthen community management while maintaining the ongoing relationship between the DCI and the Secretary of Defense are bearing fruit. We recommend no major structural changes, but offer certain recommendations to strengthen the DCI's role and the efficiency of the process.
The National Security Act of 1947 gave the National Security Council responsibility for providing guidance with respect to intelligence functions. In practice, however, administrations have varied widely in their approach to this function-sometimes actively setting priorities for intelligence collection and analysis and sometimes focusing simply on coordinating intelligence response in times of crisis.
To achieve the strategy envisioned in our Phase II report, and to make the budgetary recommendations of this section most effective, more consistent attention must be paid to the setting of national intelligence priorities. To do this, we recommend the following:
· 36: The President should order the setting of national intelligence priorities through National Security Council guidance to the Director of Central Intelligence. In recommending this, we echo the conclusion of the Commission on the Roles and Capabilities of the United States Intelligence Community (the Brown-Rudman Commission).
While we do not want to dictate how future Presidents might use the National Security Council, we believe this is a crucial function that must be filled in some way. The President's authority to set strategic intelligence priorities should be exercised through continuous NSC engagement with the DCI, from which the DCI can establish appropriate collection and analysis priorities. Such an approach would ensure consistent policymaker input into the intelligence effort and, if policymakers come to feel a part of the intelligence process, it should enable greater support for the intelligence community, as well. We believe that this function would be best fulfilled by a true strategic planning staff at the NSC-as per our recommendation 14. The point is that policy and strategic guidance for intelligence should be formulated in tandem.
We have emphasized the importance of securing the homeland in this new century and have urged, specifically in recommendation 4, that it be a higher intelligence priority. Making it so means greatly strengthening U.S. human intelligence (HUMINT) capability. This involves ensuring the quality of those entering the community's clandestine service, as well as the recruitment of foreign nationals as agents with the best chance of providing crucial information about terrorism and other threats to the homeland.
Along with the National Commission on Terrorism, we believe that guidelines for the recruitment of foreign nationals should be reviewed to ensure that, while respecting legal and human rights concerns, they maximize the intelligence community's ability to collect intelligence on terrorist plans and methods. We recognize the need to observe basic moral standards in all U.S. government conduct, but the people who can best help U.S. agents penetrate effectively into terrorist organizations, for example, are not liable to be model citizens of spotless virtue. Operative regulations in this respect must balance national security interests with concern for American values and principles. We therefore recommend the following:
· 37: The Director of Central Intelligence should emphasize the recruitment of human intelligence sources on terrorism as one of the intelligence community's highest priorities, and ensure that operational guidelines are balanced between security needs and respect for American values and principles.
The DCI must also give greater priority to the analysis of economic and science and technology trends where the U.S. intelligence community's capabilities are inadequate. While improvements have been made, especially in the wake of the Asian financial crisis, the global economic and scientific environments are changing so rapidly and dramatically that the United States needs to develop new tools merely to understand what is happening in the world. The Treasury Department has made important strides in this regard, but it has a long way to go. Treasury and CIA also need to coordinate better efforts in this critical area. We therefore recommend the following:
· 38: The intelligence community should place new emphasis on collection and analysis of economic and science/technology security concerns, and incorporate more open- source intelligence into analytical products. Congress should support this new emphasis by increasing significantly the National Foreign Intelligence Program (NFIP) budget for collection and analysis.
In order to maintain U.S. strength in traditional areas while building new capabilities, the President and the Congress should give priority to economic and science/technology intelligence. We need to increase overall funding in these areas significantly and the DCI needs to emphasize improvement in the collection and analysis of this intelligence. This will require, in turn, a major investment in the community's long-term analytical capacities, but these capacities are crucial in any event to supporting the strategic planning that we have emphasized throughout this report.
Better analysis in non-military areas also means ensuring that open-source intelligence is a vital part of all-source analysis. Many new challenges, but especially economic, scientific, and technological ones, call for greater attention to the wealth of openly available information. Analyses of the failure of the community to anticipate India's nuclear tests, when clear indications were available in open-source publications, demonstrate that this capability has relevance for traditional security issues as well.
We thus urge the strengthening of HUMINT capabilities, the broadening of analytical efforts across a range of issues, and the incorporation of more open-source information into all-source analysis. Meeting the nation's future intelligence needs, however, will also require changes in the community's technological capabilities.
Technological superiority has long been a hallmark of U.S. intelligence. Yet some agencies within the National Foreign Intelligence Program spend as little as three to four percent of their budget on all aspects of research and development, and as little as one percent on advanced research and development. This reflects a decline in overall intelligence expenditures in real terms, while salaries and benefits for intelligence personnel have been on the rise. Concerted effort is needed to ensure that research and development receive greater funding.
At the same time, the intelligence community must think about its technological capabilities in new ways. During the Cold War, the National Security Agency (NSA) and other agencies derived a great wealth of information through signals and communications intelligence. In today's Internet age, global networks, cable, and wireless communications are increasingly ubiquitous, with attendant improvements in encryption technologies. Together these trends make signal intelligence collection increasingly difficult. The United States must possess the best platforms and capabilities to ensure that it can collect necessary information consistent with respecting Americans' privacy. It must also have high-quality technical and scientific personnel able to respond to future challenges. To these ends, we recommend that the DCI should provide the President a strategic assessment of the effectiveness of current technical intelligence capabilities to ensure the fullest range of collection across all intelligence domains, particularly as they relate to cyberspace and new communications technologies.
Should the U.S. intelligence community lack a full-spectrum capability either in collection or analysis, the United States would forfeit the depth of intelligence coverage it enjoyed during the Cold War. Maintaining this edge will require greater funding and expertise in the information and communication sciences. We must also pursue innovative approaches with the private sector to establish access to new technologies as they become available.
This Commission, in sum, urges an overall increase in the NFIP budget to accommodate greater priority placed on non-military intelligence challenges. Military intelligence needs also remain critical, however, so a simple reallocation of existing resources will not suffice. To ensure the continuing technological strength of the community, and to build cutting-edge intelligence platforms, there is no escaping the need for an increase in overall resources for the intelligence community.

Continued in Part 4
Appendix & Footnotes
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