I just finished plowing through the 2014 Performance of the Defense Acquisition report published by Office of the Under Secretary of Defense, Acquisition, Technology, and Logistics (AT&L). I was prompted to look at it when I saw this article in the Washington Post on what motivated contractors, according to the report. Pardon my suspicion at a report bragging about how well the current crowd at AT&L is doing, but I’m suspicious. First….there’s a lot of statistics included and my experience is that statisticians can twist the numbers to say anything. As evidence, I note there wasn’t much bad about the JSF (perhaps the worst performing program of all time) in the report. Oh sure, it appears, but if one were to just glance at the charts and graphs where JSF is mentioned, you get the impression that it’s just a middle-of-the pack program…..lots of programs perform worse, a few perform better. EXCUSE ME? This baby is already $160 Billion behind schedule and 10 years late in delivery (and still counting by the way, especially given the disastrous fire at Eglin Air Force Base last week). How DoD can publish a report on performance of the Acquisition system without including a chapter on why the JSF program is so gooned up is beyond me. It’s like the YouTube video when the gorilla walks through the basketball game. Am I the only one who noticed?
Another item I thought was interesting was the conclusion that although Firm Fixed Price (FFP) contracts do perform better and generally exhibit less cost growth, the report concludes it’s because most of those contracts are lower risk anyway. Oh by the way, the evil part of FFP contracts is that the vendors who do a good job of managing cost and performance of their programs are probably making more profit and therefore gouging the Government. I can hear the conversation in the Pentagon now, “That darn contractor actually delivered on-cost and on-time, so we must have given him too much money!” That substantiates my belief that the Pentagon has the uncanny ability to take from good performing programs to pay for the sins of poor performing programs, thereby dooming all programs to some level of common mediocrity.
One other point I thought was interesting….there’s no mention of contracts that were awarded on a lowest price, technically acceptable (LPTA) basis. Some in industry contend that DoD is so bent on doing things on the cheap, that quality has suffered when contracts are awarded on an LPTA basis. I don’t know if that is just sour grapes from the expensive losers or truth. No one seems to care…….about the quality any way.
Back to the title…..What were the conclusions?
- Not all incentives work. In order to work they have to be used, be “significant, stable and predictable,” and they must be tied to DoD objectives.
- Cost-Plus vs Fixed Price contract debate is a “red herring.” It’s incentive-based contracts that matter.
- Incentive Fee contracts work best. The big plus here is that using them allows the Government to limit contractor profits. (My personal opinion is that DoD should spend less time wringing their hands over profits and more time on getting the requirements right to begin with.)
- FFP contracting requires knowledge of costs. (Once again, this one refers to limiting contractor profits)
- Programs which realize better profits in production incentivize vendors to move quickly through the development phase (Of course, this implies that the Government does not change requirements in the development phase….Good luck with that!) and saves money in the end.
So there you have it. My little list of what incentivizes contractor to perform better goes like this:
- Well written Requests for Proposals which are clear on requirements.
- No requirements creep during the process.
- Regular and reliable funding streams…none of this Continuing Resolution, furlough, of OCO stuff (Oh, how I’m tempted to use a different word here).
- Full and Open competitions
- Procurement professionals who spend a lot of time on improving government processes and less on monkeying around with industry processes.
- A Government that honors multi-year procurement deals. No canceling in mid-stream.
To be fair, I think that there have been improvements in the acquisition process and those in the driver’s seat deserve a pat on the back. But in the end, the fundamental problem is that the requirements process never gets it right and we spend lots of time and money recovering. Congress doesn’t help things with its inability to pass a budget either.
First thing: Yesterday’s blog on Shared Services fell flat on the website with only a handful of hits. I take it the world of Shared Services is not so hot on the list of “interesting” topics. But there’s still a lot of money to be saved there. In fact, I would contend that there’s a lot of money floating around in areas that most people don’t find so interesting. It’s the uninteresting that ironically is the most interesting in terms of budget cutting. They escape scrutiny during the year-to-year budget battles, floundering in cash. The big programs which matter, act like a Black Hole, sucking up more and more money with less and less light escaping. On the other side of the coin, the programs with marginal dollars become the darling of the Pentagon budget cutters. It’s ooh so easy to cut a Billion or so from the commissary subsidy program, but try and take $10 Million from the JSF and the fan starts getting hit with “not-so-nice stuff.” With leaders unwilling to take on the issues that really matter and foolishly focusing instead on the margins, I would suggest that they take a look at the “stealth” portions of the budget, those areas with relatively large dollars, but never targeted for cuts. Forcing agencies into a shared service environment is one of those areas. (There, I said it and I promise never to write another word on Shared Services!). When looking at these stealthy programs, there’s virtually no risk of offending a large defense corporation, a Congressman or Senator, or even another Service because they have no constituency. When I did the budget for the Navy I used to think that out of the $130 Billion or so under my control, every Million had a evangelist waiting in the wings to mount the pulpit and extoll the value of their million over the remaining 129,999 million.
How about the family of Defense Working Capital Funds (WCF) and Revolving Funds? These funds exist in the shadows, out of public scrutiny, but with lots of dollars associated with them. For those of you not familiar with working capital funds I suppose you could relate them to petty cash, or “Walking Around” money. It’s the corpus of operating cash the Department uses to pay bills day-to-day. Here’s a link to short list of many of the DoD funds and what’s in them. In simple terms, when Organization A provides a service or item to Organization B, it uses the WCF funds to pay their costs and they bill Organization B, using rates set at the beginning of the year. A takes money from the WCF and B pays it back (at least in theory). How much money is in these accounts you ask? North of $100 Billion…..Yep, that’s correct…$100 Billion!! That’s roughly 20 per cent of the budget. One of the reasons there’s so much money in these funds is the requirement to carry 7-10 days of cash on-hand. In this age of electronic accounting, ERPs and near-perfect connectivity I can’t for the life of me figure out why it has to be so much. Most of these WCFs have their own accounting systems (Darn! I said I wasn’t going to mention Shared Services again). To be fair, these funds are as close to being run like a commercial business as anything in DoD, and individually they are generally well managed. But there’s not a lot of cross-talk, the rates don’t generally reflect the real costs of good and services and they are sometimes used as a cash cow to buy just about anything.
So the next time you hear the DoD poobahs whining about the cost of benefits, people, etc., why not ask them about the Working Capital Funds and what they are doing to trim them back. I’ll bet you they will have to take that question for the record! Not in their scan because it’s stealthy money, they don’t understand how it works and would rather slash the margins because of their inability to slash the big ticket items.
When I was a young, steely-eyed Naval Flight Officer attending the U.S. Naval Test Pilot School with no apparent fear of death, one of the classes I took was in project management. I have always remembered the day we talked about the phases of any project:
- Elation—“This is gonna be fun!”
- Concern—“This is turning out to be harder than I thought”
- Confusion–“I have no idea what I’m supposed to be doing”
- Terror–” If I don’t get this done, my career is over!”
- Laying Low –“Someone is gonna be blamed for this” (sometimes known as Search for the Guilty)
- Relief–“Too bad they blamed Joe…He was the only bright spot on the project. At least it’s not me.” (Blaming of the innocent)
- Dismay–“I can’t believe Fred got promoted as a result of this lousy project.” (Promotion of the uninvolved)
This little parable was triggered by a commercial I heard on the radio this morning. It was one of those commercials one only hears in DC, always during commute hours. You know them….It’s always one of the big defense hardware manufacturers extolling the virtues of their system. It’s especially prevalent right now since the budget is being rolled out. I don’t know about you, but do you think anyone who is in a position to make a decision really listens to that pablum? The big boys and girls that matter in the decision chain are all driven to work and are sitting in the back seat of the big black Town Car or Navigator trying to finish up all the paperwork they took home last night, but didn’t get to. The same thing is true on the Metro. Do you think any of them are riding the Metro? The closer you get to the Pentagon, the more you see all those very expensive posters about some plane, ship, tank, bomb, missile, …you name it! I just can’t figure out why they spend all that money on that stuff. My advice to clients is that if you hear one of those commercials or see one of those posters, the subject is likely in trouble either within DoD or on the Hill.
So take the example of Boeing advertising the F/A-18 and P-8 aircraft. Their claim is that they are both being delivered under budget and on-time. That may or may not be true, but in my opinion they are both among the best managed and best value weapons systems ever delivered to the DoD. One thing’s for sure, you don’t hear that claim for the JSF. Remember, that’s the program that is 6 years behind and $163 Billion over budget. Who was the big winner in the DoD budget for 2015? The JSF, of course. And who was the big loser? The F/A-18. Talk about rewarding the guilty and punishing the innocent!
So my recommendation to Boeing is change the commercial, stressing how much money the F/A-18 costs and how woefully behind schedule it is. Then people will take note and pour money into the program. There’s an old saying in my house: “The sick get sicker, and the healthy usually wind up catching whatever it is the sick have and get sick too!”
If you saw the Sixty Minutes piece on the JSF last night, you probably not a happy camper. The opening salvo was pretty staggering: The program is costing $400B for 2400 airplanes, or about twice as much as the US spent to put men on the moon! So how did we get here? When I was a squadron Commanding Officer in the 1991 timeframe I witnessed a rare occurrence at the Pentagon, The cancellation of the A-12 Avenger program by then Secretary of Defense Cheney. The A-12,intended to be the next generation aircraft for the US military, was scheduled for a buy of about 850 jets. But it was 18 months behind and already $1 Billion over budget, so SECDEF axed it! The JSF didn’t just wind up 7 years behind and $163 Billion over budget overnight, so one wonders why subsequent SECDEFs let it get this far. I think we got here in much the same way that the DoD ethics problem evolved……just a little at a time. Despite all the warning signs and poor performance, leadership allowed it to continue with the “hope” that with the proper amount of money and leadership, the problems would go away. They didn’t. All successful military officers and corporate executives know one fundamental tenet of leadership: Hope is not a good strategy. Yet it appears that was the main strategy at work with the JSF. I am reminded of the classic The Screwtape Letters, by C.S. Lewis in which a senior executive devil, Screwtape, provides advice to his nephew, Wormwood, an apprentice devil. When asked by Wormwood what big event he should use to cause his assigned mortal to turn to the dark side, Screwtape replies, “Indeed the safest road to Hell is the gradual one–the gentle slope, soft underfoot, without sudden turnings, without milestones, without signposts,…” Sound familiar?
Now the program has a gun to our heads. It’s the only TACAIR replacement on the books, not withstanding the excellent and under-rated F-18E/F, which, by the way, is a perfectly acceptable alternative well into the 21st century. It’s ironic that in order to pay for the ever increasing JSF price tag, DoD wound up taking money highly successful programs, like the F/A-18 . We now must resort to a strategy of hope to deliver the JSF. There’s a lot of similarity here with ERPs, don’t you think?
There’s a lesson to be learned here. Be vigilant early in procurement programs. Don’t let the little things get by without correction, lest one finds oneself on “the gentle slope, soft underfoot” of Too Big To Fail.