One for the Price of Three!

Only in the DoD acquisition world would this sound like a good deal!  But before we cast too many arrows at the acquisition community, I must admit the idea is mine.  I developed this idea over the course of years of working in the Bizarro World of DoD ship financing.   You remember Bizarro? Bizarro It’s the world where everything is backwards….the name of the bizarro world planet is Htrae (so clever!) and the world is square.  As I recall, it was featured occasionally in Superman comics in the 1960’s. One of the mottos in Bizarro World was ” Us do opposite of all earthly things.”  Bizarro bonds were a hot item on Htrae because they were “guaranteed to lose money.”  So I don’t think it’s a huge stretch to make the analogy here.

As I learned during my time as Chief Resources and Requirements Officer for the Navy, the normal things you learned about economics don’t necessarily hold true when it comes to buying ships.  My initial experience was during my first year on the job.  We were working on balancing the budget and were about $400 Million off.  The staff proposed that we slide the purchase of a ship we were buying for the Army called the LMSR (contrary to popular belief, the Army moves primarily by sea, not air).  The price tag was about $400 Million and the staff had determined that we could stand to slide it a year.  “Sounds good to me!” I answered, happy at the prospect of putting a bow on the $130 Billion Navy budget and delivering it to OSD just in time for Thanksgiving.  By the way, that’s how you make sure that you don’t get rejected right away…..Submit something just prior to a big holiday so no one is around to grade your work.  This rule works in a variety of scenarios:

  • DoD generally drops significant RFPs just before holidays to force contractors to work feverishly at the expense of their families to get the proposal complete by some arbitrary deadline (which generally gets extended anyway).
  • The Congress always passes bills at the eleventh hour before big holidays, in hopes that the particulars will escape the media.  What’s more interesting? The details of the CR passed the day before Thanksgiving or the press conference where the President pardons the turkey?  Or maybe the 3 minute spot on the evening news which shows the neighbor’s Christmas lights display of 100,000 watts, synchronized to “All About That Bass.” I vote for the turkey pardon and the light show!!!!!(and sadly, so do most)
  • Controversial changes to Federal Register seem to always drop the day before a holiday in hopes that no one will notice.
  • My favorite, RFP’s released with 5 days to respond…(a favorite way to make sure the desired contractor wins)

Anyway, I’m sure you have your own sea story that would make mine look minor.  But back to the LMSR caper……

USNS Bob HopeA few days after the decision was made, the staff came back and noted that since we slid the ship a year, it’s going to cost more…..I don’t remember how much, but it was around $100 Million or so.  “Really?” I commented.  ‘Oh, yes,” came the reply, ” money will cost more the next year, we have shipyard loading issues that we will have to pay for, the cost of steel is going up, blah, blah blah.”  So I began to understand that the economics of shipbuilding were different.  I formulated The Shipbuilding Entropy Rule: “Nothing ever costs less.  NO matter what you do, it will always cost more.”  You buy less, they cost more.  You cancel the buy, you still have to pay the overhead.  You remove capability, it costs more to redo drawings.  Its all very counter-intuitive.  This became very clear to me during the following year’s budget build when the staff came back and said “We made a mistake.  We have to move the LMSR back to the original purchase year.”  “Fine,” I replied, “No harm, no foul.”  Sensing it wasn’t “Fine“, based on the furtive glances between the staffers (an admiral sees a lot of those looks in the Pentagon) I asked “What’s wrong?”  Turns out, if we moved the ship back into the original purchase year, it added another $100 Million to the cost!  Whadakknow?  We essentially did nothing and paid $200 Million not to do it!  That, my friends, is Bizarro accounting!

Anyway I could go on and on about this, but I want to get to the reason I chose the title of this article, One for the Price of Three.

The DDG-1000 (AKA CG(X), Arsenal Ship, Zumwalt Destroyer, DD21, DD(X), etc) was originally intended to have a buy of around 32 ships or so.  USS ZumwaltThey became so expensive and the requirements bounced around so much, we began advertising it as a fire support ship vital to the survival of the Marines during amphibious assaults.  As such, we only needed about 10-12, just enough to support the number of amphibious ready groups (ARGS) we had at the time.  The Marines were happy about that, even though they preferred to have 2 per ARG.  I even went over to the Hill with my Marine counterpart extolling the virtues of the DDG-21 as the perfect fire support ship for the Marines.  But once the Marines realized that the cost of the ship was so high that it would probably limit the amount of other stuff they could buy, they dropped it like a hot potato…..they would much rather have the 360 V-22’s than 24 DD(X)’s.  So in the space of about a month we changed our tune from”vital” to “not so vital.”  Now that they are $3 Billion a copy, we are only building 3 of them and I’m not sure there’s a real requirement out there.  As my Grandmother said when she got her first taste of champagne in one of those dinky champagne flutes at my son’s baptism, “That’s not enough to wet my whistle.”  So it is with DDG-1000 IMHO.  The real requirement as far as I can tell is to have something for Bath Iron Works to build ( they will build all three) so they can stay in business in order to address industrial base concerns.  Hence the title of the article.

I propose instead of spending $9 Billion for 3 ships we don’t need, why not pay the shipyard to build it, take it apart and then build it again?  It keeps them busy. The Navy doesn’t have to shoulder the Operations and Maintenance costs necessary to support a ship class of 3 ships, and we don’t have rustle up the personnel and training facilities which must be specially developed on this one-of-a-kind weapons systems.  Heck, we will save money by doing that!  Of course, this idea only works on Bizarro World.

That, by the way, is how Bizarro JosBanks works too.  You pick out one suit and pay for three!

What a world, what a world!

 

   Send article as PDF   

Plugging the DFAS Dam

I saw a reprint of an article done by Reuters the other day entitled “Special Report: The Pentagon’s doctored ledgers conceal epic waste” and even though it’s almost a year old, I think it still applies.  DFAS Leak height= In just a few days, all the big accounting firms that do business with DoD will be submitting proposals to conduct audits of the the Army, Navy and Air Force Statements of Budgetary Activity (SBA)……that’s a high level balance sheet that has little applicability to the actual management of anything.  Experience in auditing the Marine Corps proved that trying to do anything else was futile.  One just has to read the Reuters article on “Plugs” to see just how daunting a task auditing any of the services really is.  Inventing phantom ledger entries or “plugs” to explain away imbalances in the “goes-intas” and the “goes-outtas” is apparently the norm at the Defense Finance and Accounting Service.  What’s a little disturbing about this whole audit thing, is that many of these sins will go unexamined because they do not necessarily impact the SBA. See my article “DoD Audit:  Is the cure worse than the disease?” for the details about just what the SBA is all about.

In fairness, I think the article’s title is misleading in that I doubt if the motivation behind plugging in numbers is a desire to conceal waste, but rather it’s the normal way of balancing the books in order to satisfy the Treasury Department.  The real motivation is to keep the heat off oneself ……does that sound familiar?  Think about recent VA scandal…..I doubt if the real motivation was to  make sure deserving veterans didn’t get appointments, but it was done to keep the front office happy.  Never mind that the green eye shades at Treasury are apparently more interested in balancing the numbers as opposed to the reliability of the numbers used to balance (a la VA!).  It’s been going on for years, so that’s a good indication that nobody cares.  Unlike the VA however, the DFAS guys were caught and still nobody cares!

But we do care these days about getting the DoD auditable.  And the Pentagon’s efforts to get to auditability have been extensive and expensive, with some modest results.  Take a look at the USMC……their SBA has passed audit scrutiny for two years running now.  Some months ago I wrote an article on the USMC audit, “Hall of Heroes and Auditors“, which is worth reviewing for context for what follows.

I support the efforts of DoD to get auditable, but only in so far as those efforts are done for the right reasons….not to keep the front office happy, but to make sure DoD is properly accounting for dollars….When they say “We don’t have money for pay raises”, or “Retiree health care is costing us too much,” or “We have to furlough employees,” are they using data from the system that “plugs” in nonexistent dollars to satisfy the front office?  Who knows if the numbers they are quoting are accurate, given the evidence that the numbers are inherently inaccurate!  My point is DoD audits are only interesting science projects for green eyeshades if we are only auditing things that don’t matter.  SBA audits are interesting, but not compelling. We must follow on and audit all the other aspects of DoD financial accounting and property, plant and equipment inventories. That’s the plan (I think), but after DoD has spent collectively over $200 Million just to get to SBA audit, will they have the fortitude to go further into the things that really matter? Will Congress let them? Will the operational pressures in an very unstable, terrorist filled world trump mundane administrative exercises like audits? Roulette height=Stay tuned, but I think with sequestration about to raise its head once again, the President under pressure to mount military responses to multiple spots around the globe, and political stalemate in the Congress, betting on continued funding for DoD audits is at best like wagering on red or black at the roulette wheel at Trump Towers in Atlantic City (ooppppsss, it’s out of business, so how about The Nugget in Las Vegas?).

So don’t get too worked up and break out the champagne  if it turns out the the service SBA’s pass audit ( they are likely to do so because of the limited scope and usefulness).  Instead remember:

  1. It’s only the SBA, a very limited look into DoD finances.
  2. No one uses the SBA to manage anything.
  3. It only looks at one year…Past sins are ignored.
  4. DFAS is still using plugs to balance the books.
  5. It may be done by the cheapest bidder (As a stockholder, would you want the firm you have your life savings in to use the cheapest auditor?).
  6. Because all the audits are being done at the same time, chances are all the firms will be battling for manpower and may not be hiring the most competent auditors (assuming they hire auditors).  We may even have to open up an auditor refugee camp to handle the influx of auditors to the Beltway.

So to sum it all up, I wholeheartedly support ensuring the DoD manages it funds effectively, efficiently and accurately.  I’m not sure an audit of the SBA does any of those things. Victory is not a clean opinion on the SBA, it’s a clean opinion on the whole enchilada.

PS: Please do not reverse the order of this article’s title, no matter how applicable it may seem 😉

 

 

   Send article as PDF   

A Day Younger

I was honored to be on the waterfront last week and had an opportunity to meet officers and Sailors on a soon-to-deploy ship and boy did I leave feeling good about our Navy.  Everyone I talked to, from seaman to the Captain, were excited about their ship, their contribution to national security and the upcoming deployment.  Their enthusiasm was genuine as it was a weekend and I’m sure they would have rather been with their families.  It reminded me of a saying I used to share with my audiences when I was important (at least in my own mind): Every day I spent at sea I got a day younger, and every day I spent in the Pentagon I got ten days older!  That certainly explains why I look so old now–too many days in the Pentagon and not enough days at sea.  It’s probably not intuitive to you land-lubbers, but being at sea and on deployment is the easiest part of the whole cycle.  Before deployment there are endless exercises, training and long hours preparing for the task ahead.  Many would say that’s the hardest part of being in the Navy.  That’s not to lessen the impact of being away from family and friends…there’s always that.  But Navy leaders have done a lot to lessen the distance between families during deployments.  Sailors are generally well connected to their loved ones by internet, email and instantaneous telephone connectivity.  During my first deployment in 1975, the lovely Mrs. Crenshaw and myself exchanged daily letters, sequentially numbered on the back flap so we could read them in chronological order.  Nothing’s worse than reading about your son being released from the hospital when you didn’t even know he was in the hospital to begin with.  I wish we could establish a program that gets all Pentagon confines out in the field a couple of time a year so they could recharge their batteries.  I felt even better when I had the opportunity to meet with Soldiers this morning, many just returned from Afghanistan and many more looking to go back in less than a year.  I didn’t hear one sour note.  They were all ready and willing to go back, despite the hardships on their families.   As I read the news about the possibility of us pulling our of Afghanistan, I can’t help but think about the 2176 brave Americans who gave their lives for this cause.  We could argue all day about rather or not Afghanistan is a critical aspect of protecting America’s freedom and I frankly don’t care which side of the argument you are on…..The fact is 2176 have died for the cause.  To pull out lock, stock and barrel would be a dishonor to them and the families who remain behind.

And I can’t imagine how anyone can look them in the eye and tell them that they are pulling the plug on their Commissary benefits, or telling them that their health care is too expensive so when they retire, they will have to pay more.  I would rather see us spend all the money and effort people are spending on marginal costs on homeless veterans and jobs for veterans and other programs which honors their service, not puts a price tag on it.

   Send article as PDF   

Too Big To Fail

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.

 

   Send article as PDF   

Hall of Heroes and Auditors

USMC_Audit_AwardIt’s like pushing a heavy block across sandpaper.”  That’s what DoD Comptroller Bob Hale said yesterday in the Pentagon’s Hall of Heroes  at a ceremony celebrating a significant milestone– the USMC’s clean audit opinion on the current year Statement of Budgetary Resources.  For those in the federal financial world, that is BIG news!  In typical USMC “Out in Front” style, the Corps took on the task of being the first Service to declare audit readiness  and complete the process to prove they are ready.  It was an effort like no other seen in DoD financial management.  I’m hoping that over the next two years there will be three more ceremonies celebrating audit completion of the remaining Services.  The DoD IG is skeptical given the wording in their recent report to Congress for good reason. These audits are complex, large and little understood by most in the DoD.  The USMC audit involved hundreds, if not thousands, of Marines, civilians and auditors from Grant Thornton LLP (GT)  (lead by audit partner Tracy Greene) and its subcontractors and involved combing through terabytes of data and tons of paperwork around the globe!  One can imagine how much more complex it will be to audit the Army, Navy and Air Force.

So what can the Services learn from the USMC accomplishment?  As the Partner at GT responsible for the DoD account when this journey began I have a few observations from a non-CPA:

  • All senior leaders need to be united in their support of the audit and not just those in  financial management.  In other words, this has to be a priority for the Service Secretary, the  Service chief and every commander in the field.  Most of the transactions take place in individual commands, far removed from the Pentagon. They have far more impact on a successful audit that those in the Pentagon.
  • Don’t let the audit become a bill payer.  Given that there’s well over a trillion dollars  involved, the costs of an audit are immaterial.
  • Fix problems as they arise.  Don’t play “Stump the Monkey” and protect rice bowls. Make it a cooperative effort.
  • Have a dedicated team devoted to accomplishing the audit (a Task Force AUDIT) whose sole purpose is audit.  You can’t be successful by dumping yet another task on an already stressed workforce.
  • Don’t rely on IT systems.  In the end, most problems are people-related.

When I was in uniform I thought audits were just “science projects for the green eyeshades.”  After all, the Congress continued giving us money and rarely questioned our accounting.  If we told Congress we spent $800 for a toilet seat, they believed us!  No one ever said, “Surely there was just a bookkeeping error.”  They believed us.  But I was wrong then because I have come to realize that audits are not about making sure the credits and debits balance.  They are about ensuring the DoD can manage its money, not by figuring out how much money they have after the fiscal year is over, but knowing how much they have today and every day.  DoD is so unsure about balances that it maintains huge cushions of cash in many accounts just to make sure they do not violate the Anti Deficiency Act.  Imagine not looking at your checkbook for six months and writing checks anyway because you know you have put way more money in your account than you could ever spend.  That’s basically what happens.  But the budget environment has changed and money is getting tight.  That cushion is not likely to be around for long.  In order to still accomplish their missions, the Services must have an accurate accounting of their money day-by-day.  Audits allow the services to have confidence in their accounting procedures and thereby allow them the ability to efficiently obligate and track money.

Let’s stop planning and start doing the Service audits and in doing so become even better stewards of the nation’s treasure.

   Send article as PDF