Government Contract Math: False Timesheets Equal False Statement Equals Prison Time Plus Fine
For
some of us, Algebra was our Waterloo. Others had trouble with
Geometry. Still others made it to Trigonometry, Statistics, Calculus,
and/or other college and graduate-level courses. The point is, almost
everybody struggles with math at some point in their lives. Most of us
get just so far, but no further. At point, we hit the math wall and we
give up.
For
Donna Mitchell, her moment of surrender came at age 69, when she
encountered Government Contract Math. Her sad story can be found here.
Ms.
Mitchell was employed by Dragon Development Company, a government
contractor. Dragon Development was acquired by CACI, International,
Inc.—another government contractor—in November, 2007. At the time of
acquisition, Dragon Development was a subcontractor to the Titan
Corporation, who had a prime contract with the National Security Agency
(NSA) for “document delivery services.”
From the period January, 2006 through December 28, 2007 (a full two years), Ms. Mitchell—
--submitted
timesheets to Dragon and CACI falsely claiming that she had worked 752
hours more than she had actually worked on the Services Contract.
Mitchell represented in some of the timesheets that on 24 days she
worked an average of eight hours, when in fact, she did not work at all
on those days.
So over a two-year period, Ms. Mitchell over-reported her time by about 20 percent (752 / 4,360 = 17.25%, to be exact).
Dragon/CACI
invoiced Titan for Ms. Mitchell’s inflated labor costs. In turn, Titan
invoiced NSA. NSA paid the contractors “approximately $81,859” for the
unworked hours.
On
July 21, 2010, Ms. Mitchell pleaded guilty to “making false statements
arising from the number of hours she claimed she worked.” According to
the DoJ press release (link above), “Mitchell faces a maximum sentence
of five years in prison and a $250,000 fine.”
We call that learning math the hard way.
Post-script—
In August, 2009, we posted
a point of view regarding the necessary due diligence to be performed
during a merger/acquisition between two government contractors. At that
time, we said—
When
contemplating the acquisition of any business that sells goods and/or
services to the Federal government, it is important to evaluate the
probability of contingent liabilities, and factor them into the deal. Government contracts, by their very nature, have long tails. … Thus,
after an acquisition an allegation of wrongdoing can surface that
relates to actions that took place literally years before. Records can be missing, personnel may have departed, but the acquiring company still has to deal with the issue(s). It is critical to structure the deal so as to protect the acquiring entity from such contingent liabilities. Typically this is done either through purchase price adjustment, establishment of an escrow fund, or both.
During the due diligence phase of the acquisition,
it is critical to evaluate existing internal and operational controls,
administrative attention to detail, and to try to assess the probability
that a contingent liability will surface after acquisition. …
We
see no reason to change our point of view on this topic. We don’t know
the depth and/or rigor of CACI’s due diligence efforts during its
acquisition of Dragon Development. We don’t know whether CACI was held
liable in a separate proceeding, or if the company was able to negotiate
its way out of trouble. But we do know that if Ms. Mitchell’s “math
difficulty” had been identified as a potential contingent liability
prior to the acquisition, CACI could have taken steps to protect itself.
Organizational Conflicts of Interest – A Success Story!
The Federal
Acquisition Regulations (FAR) define an organizational conflict of
interest as a conflict that may occur when “because of other activities
or relationships with other persons, a person is unable or potentially
unable to render impartial assistance or advice to the Government, or
the person’s objectivity in performing the contract work is or might be
otherwise impaired, or a person has an unfair competitive advantage.”
Accountants don’t care very much about organizational
conflicts of interest (OCIs). OCIs have nothing to do with debits or
credits or dollar signs. But companies who want to successfully capture
government work need to care about OCIs—quite a bit, actually. We’ve
previously discussed OCIs here and also
here, and also over here, noting that—
Savvy readers will understand
that the regulations are just words, and that the words are given
meaning and come alive via interpretations provided by the Courts. So it is, with respect to OCIs, that
the Government Accountability Office (GAO) and the U.S. Court of Federal
Claims (CoFC) have interpreted various aspects of OCI rules in their
bid protest decisions.
OCIs are intractable little problems, both vague and complex
by their very nature. Normally, one hears about OCIs when somebody protests
an award. Sometimes OCIs arise in the
context of testing products for acceptance
and/or suitability. Here’s a story about an OCI in the context of a bid
protest. What makes this story different is that the Court found the
elimination of a bidder, based solely on an alleged OCI, to be
unreasonable. We think it’s worth exploring a little.
On July 16, 2010, the U.S. Court of Federal Claims issued a decision in the matter of Turner Construction Co., Inc. v. United
States, with McCarthy/Hunt, J.V. and B.L. Harbert-Brasfield & Gorrie, JV, as
intervenors. At stake was the contract to replace the Army Community
Hospital at Fort Benning, Georgia. The contract was originally awarded
to Turner in September, 2009, after 15 months of conducting the
procurement and evaluating offerors. Two competitors (the “intervenors”
in the current action) protested the award to the Government
Accountability Office (GAO). In February, 2010, GAO recommended that
the Army should “strip Turner of the contract” because of Turner’s
alleged OCIs, and “reprocure the contract.” In March, 2010, the Army
announced that it would “not waive” Turner’s OCIs, and follow the GAO
recommendation. Turner protested that
decision before the Court of Federal Claims.
Turner
argued that the GAO bid protest decision and subsequent recommendation
to the Army “lacked a rational basis.” In addition, Turner argued that
the Army accepted GAO’s recommendation without evaluating it, and did
not “reasonably evaluate” Turner’s request to waive its OCIs. Turner’s
alleged OCIs are rather complex so we’ll devote some space to discussing
them.
To develop its hospital design, the
Army obtained technical design assistance from a Joint Venture
consisting of Hayes, Seay, Mattern, & Mattern (HSMM) and Hellmuth,
Obata & Kassbaum, Inc. (HOK). HSMM was a wholly owned subsidiary of
AECOM. As part of its duties, HSMM assisted the Army’s Technical
Review Board in evaluating proposals received from bidders on the
hospital replacement project. Turner was not only the lowest price
offer, but the company also scored well in the technical evaluations.
Turner’s proposal anticipated awarding a subcontract to a
Joint Venture consisting of Ellerbe Becket (EB) and another firm. In
October, 2009, after a long courtship, EB was acquired by AECOM. In
July 2009 (during the courtship), it came to the attention of one the
HSMM participants that an OCI might exist, as AECOM was then in
negotiations to acquire EB. (Note that the OCI might be created because
AECOM would own a participant in the proposed project (EB) and a
participant in the project design (as well as a participant in the
technical evaluation) (HSMM). This “alignment of interests” might be
sufficient to create an OCI.) The HSMM employee immediately brought the
matter to the attention of the Contracting Officer and the Army’s legal
counsel. They decided that the one HSMM participant who knew of the
potential merger would recuse himself from further participation in the
proposal evaluations, but that the other HSMM participants, who were not
aware of the ongoing discussions between EB and AECOM, would be allowed
to continue their participation.
We have
discussed before the three “different flavors” of OCI. With respect to
the award of the hospital replacement contract to Turner, “both
protesters alleged the existence of ‘biased ground rules’ and ‘impaired
objectivity’ OCIs, and McCarthy/Hunt additionally alleged an ‘unequal
access to information’ OCI,” according to the Court.
During the protest proceedings before the GAO, the Contracting
Officer “addressed each possible type of OCI and found that no OCIs
existed prior to award of the contract.” However, GAO “disagreed” with
those conclusions, and “sustained the ‘unequal access to information’
and ‘biased ground rules’ protests.”
While the
protest was pending before the GAO, much discussion and debate ensued
regarding whether the Army would waive any OCIs. As the Judge Futey
(writing for the Court) reports, ultimately the Army decided not to
grant Turner a waiver.
After receiving the GAO’s
recommendation, the Army terminated Turner’s contract and Turner filed a
protest with the CoFC. Based on the protest grounds, the Court needed
to review the GAO’s decision, even though normally such decisions are
granted “a high degree of deference.” But the deference shown to GAO’s
decisions is not absolute, and executive agencies cannot simply rely on a
GAO decision to implement an unreasonable course of action. As the
Judge Futey wrote, “an Agency’s decision to follow the recommendation of
the GAO in a bid protest decision is arbitrary and capricious if the
GAO decision was irrational.” Judge Futey found—
According to Turner, the GAO conducted a de
novo review of the record that supplanted the
CO’s decision, which was based on ‘hard facts,’ with a decision based on
‘mere inference and suspicion.’ … plaintiff [Turner] argues that ‘the
assessment of OCIs is a fact-specific inquiry the CO must undertake, and
under the facts here, the CO reasonably concluded there was no OCI, and
GAO erred in substituting its judgment for that of the CO.’
Judge Futey concluded that, “it was irrational in this case to
depart from precedent and not consider the factually-based arguments of
Turner and the Army, especially when the GAO was tasked with looking
for ‘hard facts’ of an OCI.” Moreover, Judge Futey wrote that—
This Court thus finds that the GAO lacked a
rational basis because it overturned the CO’s determination without
highlighting any hard facts that indicate a sufficient alignment of
interests. Because the GAO lacked a rational basis, the Army was not
justified in following its recommendation. …
… the GAO failed to adhere to the proper standard of review.
The GAO’s task was to review the agency’s decision for reasonableness.
That agency decision, as described above, tracked the precise state of
negotiations between AECOM and EB, the exact dates upon which critical
changes to the RFP occurred, the exact employees that could have known
of the merger, and numerous other facts. Using this data, the CO
concluded that no OCI existed. The GAO failed to address this OCI
decision; in fact, the GAO decision on a biased ground rules OCI does
not even cite the agency decision that it was
tasked with reviewing. Instead, the GAO cites exactly one piece of
information—the text of AECOM’s contract with the agency—to support its
finding that the record ‘suggests’ that AECOM had ‘special knowledge’
that would have given Turner an unfair advantage.
(Emphasis in original.)
Turner was granted the permanent injunction it sought. The
Army was ordered by the Court to “restore” the original hospital
replacement contract to Turner and “not reprocure the contract to
another firm.”
Are there any lessons to be learned
here? We think so. When two Government contractors are considering a
merger/acquisition, it is important to review existing contractual
relationships to see if any actual, or potential, OCIs might exist. And
it is not only existing contracts that need to be reviewed, but also
future contracts and pending proposal submissions. Pipelines of
potential contract activity need to be reviewed with a discerning eye,
to see if a situation like that experienced by Turner might exist.
And please note that Turner itself did not have the alleged
OCI. It was Turner’s subcontractor, EB (who was actually one member of a
Joint Venture), that had the alleged OCI. This fact suggests that the
level of due diligence inquiry needs to be quite a bit more granular
than simply looking at the two prime contractors to see if a potential
OCI might exist. This is a demanding task, and one that time and
budgetary constraints might not always permit. But as this article
demonstrates, one ignores that level of inquiry at one’s own peril.
|
It’s Not Always Government Contractors …
We
write quite a bit about alleged and/or admitted fraud by Government
contractors. We have posted many articles about alleged and/or admitted
fraud by military and civilian government officials. We’d post links
but, frankly, there are already too many corruption stories here and all you have
to do is visit the News Archive to find them for yourselves.
But
today we take a different slant on things. Today we look at fraud,
alleged and/or admitted, outside the Governmental arena. Why do we do
that? We do that because we hope it will be instructive. Generally and
broadly speaking, internal controls are largely the same whether one is
a defense contractor or a manufacturer of consumer electronics. The
need for segregation of duties, for example, is largely the same—as is
the need for an involved senior management and board of directors.
So
let’s peek outside our box of government contracting; let’s look up
from perusing the FAR and trying to interpret CAS for just a few
minutes, and let’s see what the rest of the world is up to—in terms of
fraud and corruption—courtesy of daily Department of Justice press
releases.
First we look at two stories of international corruption.
Technip S.A. Resolves Foreign Corrupt Practices Act Investigation and Agrees to Pay $240 Million Criminal Penalty – There have been bigger FCPA penalties, but not very many. According to this DOD press release,
the Paris-based “global engineering, construction, and services
company” agreed to pay that ginormous penalty in order to resolve FCPA
charges related to “its
participation in a decade-long scheme to bribe Nigerian government
officials to obtain engineering, procurement and construction (EPC)
contracts.” The DOJ release stated, “At crucial junctures… a senior
executive of Technip, KBR’s former CEO, Albert "Jack" Stanley, and
others met with … the executive branch of the Nigerian government to …
designate a representative with whom the joint venture should negotiate
bribes to Nigerian government officials. The joint venture paid
approximately $132 million to a Gibraltar corporation controlled by
Tesler and more than $50 million to the Japanese trading company during
the course of the bribery scheme.”
Continuing our theme of international corruption, we offer the following.
Italian Executive Extradited from Germany to the United States to Face Foreign Bribery Charges – Another DOJ announcement stated, “Italian
citizen Flavio Ricotti, a former executive of Rancho Santa Margarita,
Calif.-based valve company Control Components Inc. (CCI), has been
extradited to the United States from Germany in connection with his
alleged participation in a conspiracy to secure contracts by paying
bribes to officials of foreign state-owned companies as well as officers
and employees of foreign and domestic private companies.” Allegedly, “Ricotti,
who served as CCI’s vice president and head of sales for Europe, Africa
and the Middle East from 2001 through 2007,” oversaw more than $1
million worth of “corrupt payments” that were allegedly designed to
secure work for his company. In addition, five other CCI executives
were charged in the 16-count indictment, including, “five former CCI
executives also charged are Stuart Carson, CCI’s former chief executive
officer; Hong (Rose) Carson, CCI’s former director of sales for China
and Taiwan; Paul Cosgrove, CCI’s former director of worldwide sales;
David Edmonds, CCI’s former vice president of worldwide customer
service; and Han Yong Kim, the former president of CCI’s Korean office.”
Next,
looking at the domestic U.S. commercial marketplace, we bring you the
final story of corruption, as abetted by stupidity and naïveté.
Former Koss VP of Finance Pleads Guilty to Embezzling Millions and Millions
-- We have been following the tale of Koss Corporation and its former
Vice President of Finance, Sujata Sachdeva, for some time. On July 17,
2010, Ms. Sachdeva pleaded guilty to six counts of
wire fraud for embezzling roughly $34 million from her employer over a
period of approximately 11 years. Ms. Sachdeva (or “S-Squared” as she’s
called on www.goingconcern.com, where one can find quite a few stories on this topic), faces anywhere from 6 to 20 years in prison. According to this story,
“she stole the money from the headphone maker to pay for extravagant
shopping sprees and lifestyle amenities that included using Koss funds
for clothes, cars, trips, china, statues and home furnishings.“
According
to the stories linked-to above, S-Squared admitted that, “During the
12-year span she authorized the issuance of more than 500 cashier's
checks costing Koss about $17.5 million. That figure includes $10
million to American Express, plus payments to high-end retailers,
including Neiman Marcus and Saks Fifth Avenue. Payments also went to
charitable groups.” In addition, “From February 2008 to December 2009,
she authorized 206 wire transfers totaling $16 million from Koss
accounts to American Express to cover items she bought with the credit
card.” The plea agreement stated that Koss employees worked ‘in concert
with Sachdeva or at her direction’ to make fraudulent entries to the
company's books to conceal the embezzlement. ‘These entries would
falsely overstate assets, understate liabilities, understate sales,
overstate cost of sales, and overstate expenses,’ and the false entries
‘concealed the actual receipts and profitability of Koss,’ allowing the
scheme to continue.
S-Squared
knew how the company’s auditors worked. According to the plea
agreement, “Sachdeva did not fraudulently take money from Koss accounts
at Park Bank during the month of June, because transactions during that
month were reviewed by outside accountants.”
According
to the news reports, the scheme “came to light in December when
American Express told Michael Koss - who at the time held five
high-level titles at the company, including CEO and chief financial
officer - that money was being transferred from company accounts to pay
for Sachdeva's luxury shopping bills.”
This blog post by Francine McKenna at www.retheauditors.com makes some good points about Sachdeva and Koss. Here are a few of Ms. McKenna’s comments—
- Listing standards for the NYSE require an internal audit function. NASDAQ, where Koss was listed, does not.
- Management
oversight of the financial reporting process is severely limited by Mr.
Koss Jr.’s lack of interest, aptitude, and appreciation for accounting
and finance. Koss Jr., the CEO and son of the founder, held the titles of COO and CFO, also. Ms. Sachdeva, the Vice President of Finance and Corporate Secretary who is accused of the fraud, has been in the same job since 1992 and during one ten year period worked remotely from Houston!
Despite
the foregoing, the Koss Corporation has filed suit against American
Express (contending that it should have alerted the company earlier),
against former auditors Grant Thornton (contending that it should have
detected the embezzlement during performance of audit procedures), and
against Ms. Sachdeva herself (d’oh).
Conclusion
Each
of the stories included herein describe unfortunate actions of a
corporate executive management team, actions that violated law as well
as ethical standards. In some instances, the executives colluded with
each other, or with executives of other companies, in order to carry out
their schemes. DCAA audit procedures direct that an assessment be made
of management integrity and “tone at the top.” We don’t know, exactly,
how one does that. But we do know that these stories reinforce the
importance of doing so.
DOD Contractors Look to Get “Affordable” While Pentagon Adds Bureaucracy
We’ve
previously discussed the latest fad amongst Pentagon leadership: the
notion that the DOD needs to focus on weapon system “affordability”—and
that the primary means for doing so is to focus on cutting contractor
overhead. In this article, we reported
that DOD intends to “identify and eliminate non-value-added overhead and
G&A charged to contracts” (among other actions), so that
affordability will be “restored” to defense goods and services. It’s as
if the entire national security leadership woke up one morning and
suddenly realized they all were overdrawn at the bank.
“Gosh! How could this have happened to such outstanding
managers?” they would have cried. “Our defense goods and services are
no longer affordable! Since it can’t be our fault, then obviously it must be the fault of all those greedy contractors!”
We reply to that hypothetical (yet all too real) assertion
using the immortal words of Cher Horowitz (played by Alicia Silverstone)
in the 1995 movie, “Clueless”—
“As
If!”
Lt. Gen. Larry
Farrell (USAF, Retired), recently used the
cliché “perfect storm” to describe the
situation facing the military services and their contractors. General
Farrell, who currently serves as President of the National Defense
Industrial Association (NDIA), wrote—
The
wars in Iraq and Afghanistan are now consuming in the neighborhood of
$200 billion a year, which despite a defense budget just north of $700
billion, have dragged funds away from needed modernization. Recall that
Congressional Budget Office projections from 2005 even then indicated
that Defense Department funding was running $100 billion a year short of
what it needed to fund the modernization programs planned at that time.
Then came the 2007 recession, now extending past
31 months, which is the most protracted since World War II. Along with
the downturn are unsustainable federal budgets and projections of more
than $1 trillion in annual deficits out through 2020. The national debt
is approaching $20 trillion and interest on the debt will be around $900
billion per year in 2020 — larger than the ‘projected’ defense budget
that year. The unsustainable nature of this budget projection has now
been recognized as a national problem that can no longer be ignored.
In response, President Obama this year appointed a
National Commission on Fiscal Responsibility and Reform. The so-called
Deficit Commission is due to report in December. In anticipation,
Congress has deferred action on the 2011 budget, which is normally
scheduled to become law Oct. 1. …
Senate
Finance Committee Chairman Max Baucus, D-Mont., said he sees three
areas of focus: ‘the tax gap, the spending gap and the productivity
gap.’ Since it’s fairly certain that government doesn’t directly
legislate productivity, it is a safe bet that specific tax and spending
recommendations will come from the Deficit Commission in December. …
All of these developments could begin to cause
turbulence around December.
The major unstoppable weather vector is the dire financial condition of
the United States. The other converging elements —
tax and spending reform and defense spending and reorganization — are
minor by comparison.
Recognizing the “turbulence” coming
their way, we’ve noted that defense
contractors have been moving and restructuring, and re-org’ing and
trimming, while nervously eyeing the Pentagon as if it was their
sugar-daddy who had recently found a brand-new—younger—mistress to
support. That trend continues unabated.
The
mega-sized provider of professional services, Accenture, recently reported that, “Pressures to reduce costs will be
the primary drivers of decisions by aerospace and defense (A&D)
companies to use external engineering services during the next
two-to-three years.” The firm issued a report entitled “Engineering
Services in Aerospace and Defense: Meeting the Sourcing Challenge,”
available here. The Accenture report
stated—
Ninety percent of the
executives interviewed cited cost reduction pressures as their top
challenge, followed by supplier consolidation (52 percent) and increased
competition from new players (36 percent). Consistent with these findings, the research revealed that 61
percent of these executives are buying engineering services to better
manage production costs; 65 percent of them cited the need for improved
efficiency and productivity.
Accenture’s
bottom-line conclusion was that A&D companies will move to source
engineering expertise and services from low-cost global providers—though
the report acknowledged that the strategy contained challenges that
would need to be overcome. The benefits include lowering costs,
shoring-up scarce skill sets, and more easily fulfilling offset
obligations, while challenges include concerns about potential
compromises of confidentiality and quality. To those concerns we would
add the worry about compliance with export controls. Nonetheless,
Accenture seems confident that A&D companies will embrace those
challenges in order to lower their program costs.
Meanwhile, Navistar, the hugely successful (formerly)
commercial manufacturer of Mine-Resistant Ambush-Protected (MRAP)
vehicles, has announced “another round” of
layoffs at its Mississippi production facility. The linked-to article
reports that—
John Munro, plant manager
for Navistar in West Point, said the plant has some contracts which will
last until 2013, but the high-volume MRAP production will end in 2011,
leading to an unknown number of layoffs. The plant currently employs 505
workers.
Not to be outdone, Northrop Grumman
issued a press release that announced
“consolidation” of its Louisiana and Mississippi shipyards, a “winddown”
of production at its Avondale, Louisiana shipyard, and closure of two more Louisiana yards. Any remaining work (i.e., that
related to the LPD-17 ships) will be performed at NGC’s Pascagoula,
Miss. shipyard, according to the linked-to article. The article reports
that—
Northrop Grumman is
considering a possible spinoff of its shipbuilding business, including a
yard at Newport News, Va., into a separate company. Credit Susse has
been hired as lead financial adviser on alternatives for the
shipbuilding unit.
What’s driving Northrop Grumman’s
decision-making? According to the NGC press release (link above)—
‘Our decision to consolidate the Gulf Coast
facilities is driven by the need for rationalization of the shipbuilding
industrial base to better align with the projected needs of our
customers. The consolidation will reduce future costs, increase
efficiency, and address shipbuilding overcapacity. This difficult, but necessary decision will ensure long-term
improvement in Gulf Coast program performance, cost competitiveness and
quality,’ said Wes Bush, chief executive officer and president.
The consolidation of Gulf Coast ship
construction is the next step in the company's efforts to improve
performance and efficiency at its Gulf Coast shipyards, which began with
the integration of its shipbuilding operations in early 2008.
As a result of the consolidation, the company
expects higher costs to complete ships currently under construction in
Avondale due to anticipated reductions in productivity and, as a result,
is increasing the estimates to complete LPDs 23 and 25 by approximately
$210 million. Of this
amount $113 million will be recognized as a one-time, pre-tax cumulative
charge to Shipbuilding's second quarter 2010 operating income. The balance will be recognized as lower
margin in future periods, principally on the LPD 25. The company also anticipates that it
will incur substantial restructuring and facilities shutdown-related
costs including, but not limited to, severance, relocation expense, and
asset write-downs. These
costs are expected to be allowable expenses under government accounting
standards and recoverable in future years under the company's contracts. The company estimates that these
restructuring costs will be more than offset by future savings expected
to be generated by the consolidation.
Obviously,
Northrop Grumman is willing to invest a significant fraction of a
billion dollars in order to trim future operating costs. As it notes in
its press release, it expects to recover much of its “investment”
against its current and future government contracts as “allowable
expenses.” We wonder what the Pentagon leadership thinks of that plan?
While industry is undertaking these significant cost-cutting
actions, the Pentagon is taking some of its own actions. On July 13,
2010, Brett Lambert (Director, Industrial Policy) issued a Memorandum to
the Defense Industrial Base. When last we discussed Mr. Lambert’s Directorate, he stated his focus was on early
identification of “points of failure” in the defense industrial base, so
that the Pentagon might avoid “costly rescues of failing companies.”
In addition, his Directorate was focused on
“the financial health of critical suppliers,” as well as the need to
preserve “skills necessary to support our war fighters in the near term
and long term.” How’s that going, Mr. Lambert?
Mr. Lambert’s Memorandum to the Defense Industrial Base of July 13 did not address any of those prior focus areas.
Instead his new focus is on learning “to do more without more”—i.e.,
implementing the DOD’s new “Efficiency Initiative.” Toward that end,
Mr. Lambert announced a strategy involving “interacting parallel tracks,
with close coordination.” The effort will “drive fact-based
recommendations” to Dr. Carter (USD,
AT&L) for consideration and action. Mr. Lambert’s plan involves
five “issue focus groups,” an Industry Working Group (IWG), various
Military Department Groups (MDGs), two Executive Directors, and a Senior
Integration Group (SIG), which will be chaired by Dr. Carter. In the
words of Mr. Lambert’s Memorandum to the Defense Industrial Base—
There will be five government focus groups
reporting to the Senior Integration Group (SIG) through two Executive
Directors; Military Department Groups for each
service will solicit ideas for the five Focus Groups to analyze; and I
will lead an Industry Working Group that will collect ideas from
industry and provide a feedback mechanism for industry to comment on the
ideas we are considering. The groups will be comprised of government
employees, although the Center for Strategic and International Studies
(CSIS) will assist in administrative functions.
The five Focus Groups will address the following areas:
- Affordability
- Sharpening Contract Terms
- Reward Productivity
Growth
- Measure Productivity Growth
- Create Tradecraft in Services Acquisition
Mr. Lambert’s Memorandum to the Defense Industrial Base
concludes with the following request for industry participation in the
Efficiency Initiative—
In order to reach the broadest
possible base and ensure that we are inclusive of those in our
industrial base willing to assist us in this effort, we will begin the
process by asking that a simple form be filled out, which will be
available on our website (http://www.acq.osd.mil/ip/). The form can be
submitted directly to our offices via email at
This e-mail address is being protected from spambots. You need JavaScript enabled to view it
.
Please note that this form is not a survey and participation by industry
is undertaken as a voluntary act, without direction by the Department.
So what is one to make of the foregoing? We have a couple of
thoughts to share with you, if you will.
- It is
clear, from this article and from others we’ve posted over the past year
or two, that the defense industrial base is already moving to cut
overhead and increase productivity. We don’t see what value the
Pentagon adds to the efforts that are already in process, and to those
that will be undertaken in the coming months.
- Note the new bureaucracy announced by Mr. Lambert. Were one
to read SECDEF Gates’ original remarks at
the Eisenhower Library, one might reasonably conclude that SECDEF Gates
was less concerned with contractors’ overhead and efficiency, than he
was with the overhead, bloated bureaucracy, and lack of efficiency within
the Pentagon. He said, “Another category
ripe for scrutiny should be overhead – all the activity and bureaucracy
that supports the military mission. According to an estimate by the Defense Business Board,
overhead, broadly defined, makes up roughly 40 percent of the
Department’s budget.” He also said, “The private sector has flattened
and streamlined the middle and upper echelons of its organization
charts, yet the Defense Department continues to maintain a top-heavy
hierarchy that more reflects 20th
Century headquarters superstructure than 21st Century realities.” That doesn’t sound to us as if he were overly concerned about
contractors’ overheads.
- Moreover,
SECDEF Gates wanted the Pentagon to clean-up its own house. He said—
Going forward, some questions to be considered
should be:
- How many of our headquarters and secretariats are primarily in
the business of reporting to or supervising other headquarters and
secretariats, as opposed to overseeing activity related to real-world
needs and missions?
- How many executive or
flag-officer billets could be converted to a lower grade, with a
cascading effect downward – where two-star deputies become one-star
deputies, assistant secretaries become deputy assistant secretaries – to
create a flatter, more effective, and less costly organization?
- How many commands or organizations are conducting repetitive or
overlapping functions – whether in logistics, intelligence, policy, or
anything else – and could be combined or eliminated altogether?
In considering these questions, we have to be
mindful of the iron law of bureaucracies – that the definition of
essential work expands proportionally with the seniority of the person
in charge and the quantity of time and staff available – with 50-page
power point briefings being one result.
So, instead of focusing on cutting bureaucracy, Mr. Lambert’s
Memorandum for the Defense Industrial Base announces the creation of
more bureaucracy. The action being taken is exactly
the opposite of what is being sought by the
SECDEF Gates, as if to prove by direct action his reference to the “iron
law of bureaucracies.”
We see quite
a bit of activity throughout the defense industrial base as contractors
prepare for the upcoming “turbulence” noted by General Farrell. We see
quite a bit of activity at the Pentagon, as the bureaucracy gears up to
assist the contractors do what they are going to do anyway. (In fact,
General Farrell wrote, “Carter has invited the defense industry to
participate in the coming decision-making and execution process. We
intend to do so.”) What we fail to see is any activity by the DOD
bureaucracy and military services to address the very issues that the
Secretary of Defense directed them to address.
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