David and Goliath

Over the past few weeks there has been a lot in the press about the larger defense contractors worries about “shrinking” (see DoD Budget Cuts: Less of More) defense budgets and the effects on their profitability. Bloomberg News had a piece today about deals dropping for Pentagon contractors. While it doesn’t appear any of the big guys will be going out of business any time soon, they are indeed under pressure to deliver the goods to their shareholders. I would guess that most everyone who has a 401(k) has some amount of money invested in the large defense-related corporations, although they may not realize it. We all want them to grow and prosper, but sometimes fail to realize that their “growing and prospering” all too often means ever increasing defense spending. But what about the small and medium-sized businesses that are in the defense industrial complex? How have they been affected by a slowdown in defense spending? To answer that question, consider how companies control their profits. In this non-MBA’s mind, there are two ways to ensure that profitability stays rosy: 1. Make more revenue and if that’s not possible then, 2.Cut overhead and costs. Alternative One doesn’t seem so probable if spending is down, so Number Two seems to be in vogue right now. The large companies generally have fairly large cash reserves and can weather the downturns in spending without having to do much of Number Two (Maybe slash an executive or two’s compensation by few million). They have the ability to spin off unprofitable business units, refocus defense units onto other areas and lay people off. The options are more limited for the small and medium-sized businesses. They tend to have much less in cash reserves and less flexibility to spin off unprofitable units (in fact, they probably don’t have but one business unit). So the smaller guys have to rely on reducing overhead by letting people go, cutting operating costs (generally seen in people-related programs). I liken it to flying an airplane. You can maintain altitude (profit) as you slow down by increasing your angle of attack (reducing costs). But you can only pull the nose back so far, and then you stall-often with very bad consequences. I think many small businesses are getting to that point. Over the last several years they have been cutting corners, letting their more expensive employees go and cutting back on people-related programs to the point that they have now where to go but down. They have no margin for error and when there are spending freezes (like during the government shutdown) they can’t recover. And when spending finally increases, they don’t have enough people to generate needed revenue. It’s a vicious circle for sure. The big guys muddle through, eat into reserves a little and go right on producing profits.

So what, you say? Just that I think that too often the press focuses on large defense contractors and their troubles to the detriment of those who are impacted the most: small and medium-sized businesses. They tend to be either veteran-owned or have large numbers of veterans employed in the aggregate. It seems to me that the Administration and Congress should be spending more time taking care of those problems than worrying so much about “the industrial base” (meaning big corporations). I just don’t see it coming out of DoD, the VA or the SBA. What’s up with that?

February 17, 2014February 17, 2014

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.

February 14, 2014February 14, 2014

Q•D•arrrrrrgh!

I saw a nice article in Politico’s Morning Defense this morning about the upcoming DoD Quadrennial Defense Review, commonly referred to as the QDR. I fondly remember my days in the Pentagon wrestling with the QDR gurus, the best and brightest thinkers of all the Services, getting together to figure out how their Service was going to get more money. The knives were out as the behind-the-scenes point papers on the vulnerability of aircraft carriers, the shear madness of fleets of supersonic, stealth airplanes, and the end of the need for “Boots on the Ground” proliferated like rabbits in a viagra factory. I suppose it was a useful exercise because it is good to sit back and evaluate future threats and the capabilities needed to counter them. The QDR overseen by Secretary Gates was a bit different in that the QDR was essentially written before the whole process began. The result was a QDR which didn’t make too much of a wake, maintained the status quo for the most part, and kept most everybody happy. For those interested in the upcoming QDR issues I recommend an outstanding report by CSIS on the results of a recent conference on the subject.

I predict this next QDR is likely to be more of the same. The biggest reason is that while the QDR is not supposed to be constrained by budgets and the taxpayers ability to continue to fund DoD at ever increasing levels, it is impossible to de-link strategy and money. The cute buzz word which gets around this issue is “informed.” We say that while the QDR is not budget constrained, it is “informed” by it. Informed is one of those words or phrases I call Pentagonisms. They emerge from time to time in an attempt to “be truthful without telling the truth.” Those of you who have spent anytime in the Pentagon can probably come up with several Pentagonisms. Some that come to mind are robust, littoral,operationalize, detainees, etc. There is a nice article by Kate Bateman in USNI Proceedings on this subject that I commend to your reading.

Back to QDR. The big debate is rather or not to be constrained by budgets. I’m not quite sure what difference there is between a QDR that “fiscally informed” and one that’s constrained by budgets. It’s all the same in my book. DoD should admit that and get on with it. But in developing a strategy that is either “constrained” or “informed” by budgetary realities, DoD must be careful to not develop a strategy against an unconstrained future. By that I mean that there has to be a dose of reality in the vision of the future security environment. There is a tendency to make the enemy ten feet tall, to give more credit than is due and generally overestimate the threat. Given the uncertainty of the future, that’s understandable and perhaps even necessary in some cases. But the Congress and American public should realize that in many cases our strategy is based on the worst case scenario. That’s good business in some areas, cyber security of instance, but not in all areas. In order to make the budgetary compromises necessary to adequately defend America there must be some wiggle room. If everything is important and absolutely critical to national defense how can one make compromises? So I hope the QDR avoids the end-fighting and back biting of past QDRs and focuses on a realistic threat environment with capabilities best suited to meet the threats. Given the past history however, I can’t help but thinking…… Q•D• arrrgh. I’ll be glad when it’s over!

February 10, 2014

Kids and the Grocery Store Checkout Aisle

There was an article in the news this morning that reminded of the days when I would go to the grocery store with the kids ( and now grandkids). It was a Defense News article on the White house pushing for higher DoD budget numbers- about $36 Billion higher than the sequester cap and just about in line with the Murray-Ryan budget deal. But they are also crafting at least $26 Billion in the “unfunded” wish list (See my previous comments about wish lists). It’s like getting to the checkout aisle at the grocery store with your kids in tow and they start picking up all the “kid-friendly” stuff strategically displayed there and explaining how they “NEED IT.” The stores know that you are more likely to give in when you are standing in line, with many other impatient shoppers behind you and have no time to deal with needy kids. As we know the President’s Budget is now in the checkout aisle, already overdue to Congress, but soon to be released in early March. And the “kids” are now trying to grab what they can before the groceries are scanned. What’s really interesting about this budget is that while they were in the shopping aisles, the Services (kids) and their parents (OSD) tried to put some of the stuff back on the shelf (an aircraft carrier battle group for example) but they weren’t allowed to do so by their grandparents (Congress). By the way, it’s always a bad idea to carry the grandparents along while shopping…We all know the kids get what they want when that happens, even if it’s not so good for them. A $26 Billion Wish List while standing in the checkout line is a pretty big pill to swallow. Logically one would assume that if it was really needed the Services would find a way to fund it, not wish for it, especially if they have received substantial relief from sequestration. So why the need for a list? Remember also that the $ 495 Billion budget request will be supplemented by another slug of $30 Billion or so to finance Afghanistan, so it can’t be for costs of war. It’s hard to imagine a wish list that nearly as large as the Supplemental request. I salute the DoD for attempting to make what they perceive to be “tough” decisions, but are they really the type of tough decisions that really need to be made? The article has a great quote from Gordon Adams, “You don’t take the pet rocks or big systems. It’s just not doable.” I agree with Gordon, but especially when the grandparents are along. By the way, when I was in charge of the Navy budget, it became obvious to me that in the end, everything turned out to be someone’s pet rock! I am not suggesting that the Congress should rubber stamp DoD budgets and blindly accept their funding requirements. One of our Nation’s fundamental founding principles is the civilian oversight of the military. What I am suggesting is that we need to take a step back and examine the entire process, so that wish lists are not necessary. Giving DoD a budget cap to deal with is tough enough, but then allowing no flexibility and discretion in where to absorb the cuts puts DoD in a position where they have to make wish lists in order to compensate for the senseless cuts demanded by sequestration. Take for instance the example of cutting a carrier battle group (CVBG). A CVBG consisting of roughly a dozen ships and submarines represents a capital investment of well over $50 Billion. At the end of the day, cutting that CVBG represents a real savings of maybe $1 Billion a year. That’s not good business, but given the constraints, it may be the only way for DoD to make up the budget deficit given the current process. I know this: Time spent developing, vetting and justifying wish lists is better spent focused on making the base budget reflect the real needs of DoD.

February 6, 2014February 24, 2015

DoD Budget Cuts {n.} 1. Less of more

I saw an article in Defense News this morning that said that the DoD is safe for now from budget cuts. For those outside the Beltway (and unfortunately many inside as well) that translates into the notion that the Defense Department will skate by again by avoiding the “cuts” threatened by the Budget Control Act of 2011 ( commonly referred to as Sequestration). But for those in the know, that just means the DoD can look for more of an increase in money than currently scheduled. For all of the hubbub about “cuts”, one must understand that in DoD budget parlance, cuts just means “less of more.” When I did the Navy budget, if we were expecting a $6 Billion increase in real spending dollars in the next year and we only got $4 Billion increase, we would say the Navy’s budget was “cut” by $2 Billion. It’s not the way Mr. and Mrs. America think about cuts…It’s simply less of more.

Look at this chart from a 2013 CBO report showing the FY 14 DoD budget. Notice that even with sequestration cuts in place, the DoD budget is more in 2014 dollars than it was in 2006. And that’s not counting Supplemental money intended to lessen the effect of the war in Afghanistan on the base budget. I think any reasonable person would conclude that there’s plenty of money in the DoD budget….and now there’s even more. Why does DoD say they need “more of more?” There are many reasons; increased costs of procurement, disproportionate growth in operating costs, too much infrastructure, etc.

There are two ways to get more spending power; 1. Get more money (not within DoD control), and 2. Spend what you have more efficiently (within DoD control). I contend that DoD should focus more on number 2. The country simply can’t afford giving DoD “more of more!”

Here are just a few examples:

Harvest the return on massive investments in ERPs (see DoD IG Report to Congress)
Make some hard decisions on expensive weapons programs where costs are out of control (yes, there will be winners and losers)
Convince the Congress that another BRAC round is needed
Spend more executive time on managing the big budget problems and less micro-managing the little problems
Know where every dollar is and what it’s doing (The real reason for auditability).

So beware “Crocodile Tears” of those who opine that DoD needs more money and instead ask them what are they doing to ensure the treasure they already have is being spent wisely.

February 4, 2014February 6, 2014

DoD IG Report to Congress

The DoD Inspector General released the semi-annual required report to Congress on its activities from April through September 2013. There are plenty of reports with bad news and some not-as-bad news (I don’t think IG reports ever are better than the not-as-bad category, hence the need for an IG, I suppose). I focused on the Financial Management section of the report. The first thing I found interesting is that in the introductory narrative, while acknowledging “some” progress towards audit readiness is being made by the Department, there was no mention of the audit readiness shining star, the US Marine Corps. Granted, the report doesn’t cover the period in which the announcement of a clean opinion on the 2012 USMC Statement of Budgetary Resources was made, but they were certainly “breathing heavy” and should have been acknowledged in the report. I guess it will be in the next report to Congress next September, almost a full year after it happened!

Enough of that! The other items mentioned in the financial section related to the Defense Agency Initiative (DAI), Navy Enterprise Resources Planning (ERP) system, Army General Fund Enterprise Business System (GFEBS), excess motor pool vehicles in the DC area, the DISA audit opinion and a few other cats and dogs. It’s interesting that the most significant problems all involve ERP systems: DAI, Navy ERP and GFEBS.

The costs of these three systems alone is pretty staggering: $426 Million for DAI, at least $2.4 Billion for first increment of Navy ERP and $1.4 Billion for GFEBS. That doesn’t count all the false starts, legacy phase-out costs, legacy sustainment costs, and the unknown costs of fixing all the problems being identified by the DoD IG and others. The upcoming audits of the Services Statements of Budgetary Resources (supposedly to be complete by 2014) will identify more problems and throw more costs onto the burgeoning price tag of these expensive systems.

One wonders if DoD will ever see a real return on the investments being made in ERP systems. Why not? I think there a several key reasons:

1. It is taking way too long to implement them. Navy ERP has been in implementation since 2003 and still has a way to go. That sort of snail’s pace exacerbates implementation issues, creates software refresh issues, increases reliance on legacy systems, and tends to make them a continually target for budget reductions. And with long implementation schedules, the systems will become obsolete before they reach FOC.

2. Failure to eliminate legacy systems. We all know they exist and individual fiefdoms throughout the DoD continue to fund them to the detriment of other, needed capabilities.

3. The leadership outside the Financial Management Community doesn’t understand ERPs and they are the ones who make the real budget decisions. Without a full understanding of what ERPs are and how, properly implemented, they will make more money available for people and weapons, the leadership is likely to defer funding, further compounding problem 1.

So what to do?

Make sure the leadership understands ERPs and what they can do for them. Unified support at the top is essential.
Don’t use ERPs as bill payers.
Be ruthless in the elimination of legacy systems, forcing users to rely on ERPs. Do it sooner rather than later. No excuses!
Put a priority on implementation with deadlines and make program offices accountable.

I admit DoD ERPs are complex. But no more so than those of major US companies. We should learn from them.

January 29, 2014

Promoting Abusive Leaders

Big blurb in the Post this morning, but I’m not sure it’s “news.” Some of our most legendary leaders could probably be characterized as “abusive”, but generally (pardon the pun!) they were abusive to knuckleheads and fiercely loyal to those who did their jobs. We can all name a few folks who seemed to have forgotten that they were promoted to senior ranks not by the sheer force of their personality, but by the deeds and actions of those who worked for them. When that happens the system almost always gets it right and fixes the problem. Usually the abusive leaders wind up stewing in their own juices. Maybe the real headline is not that there are more abusive leaders these days, but more knuckleheads!

On a serious note, there’s no room in our Armed Forces for abusive leaders who belittle their subordinates (for any reason), take advantage of their position for personal gratification or profit, or forget to acknowledge the sacrifice and hard work of others that enabled their promotion. I hope the take-away is not that the ranks of our Armed Forces are filled with abusive leaders, but that the system identifies and removes the limited number who exist. It’s a long article, so here’s the link. Let me know what you think!

Pentagon investigations point to military system that promotes abusive leaders