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FAR Case 2008-020: Public Comments to the Proposed Rule

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MosesWe previously posted our opinion of the FAR Councils’ proposed rule whose intent was ostensibly to “improve” the contract closeout process. As we noted at the time, the proposed FAR revisions would “significantly expand the powers of DCAA, and will force contractors to comply with arbitrary DCAA demands or risk monetary penalties.”

 

The public comment period closed October 19, 2009. The comments received by the FAR Councils were published on the Federal rulemaking site (www.regulations.gov). What did the commenters think about the proposed rule?

 

From LeGacy Resource Corporation (a Woman-owned 8(a) business currently under contract with NASA to perform contract close-outs):

 

Overall evaluation: The proposed changes may facilitate closeout in that additional guidance may reduce the number of inadequate indirect cost proposals. However, procurement regulations only address one side of the problem. To significantly improve the closeout process, government need to emphasize its role in closeout including the timely finalization of indirect rates which include that DCAA completing audits of indirect cost proposals and administrative contracting officers settling rates, signing off on reports, doing plant clearances, etc. etc.

 

From Mildred Klee (private citizen):

 

Adding the term ‘adequate’ to ‘the contractor shall submit …an adequate indirect cost rate proposal’ is inappropriate because DCAA has assigned a unique meaning to the term, a meaning inconsistent with other sections of the provision. DCAA has historically interpreted the term ‘adequate’ to mean identical to DCAA’s incurred cost model regardless of need, risk, or materiality. DCAA typically ignores provision requirements for flexibility, for considering business size and type and working ‘together’ to make the process as efficient as possible. As presented, the DCAA incurred cost model is an example; the model was never intended to dictate information content.

 

*****

 

The provision requires the cognizant auditor to make a written determination of adequacy but does not state a time limitation for doing so, nor does the provision require the auditor to explain determinations of inadequacy. Time limitations are required for the same reason limitations are placed on contractors; timely close-out reduces cost and risk. Moreover, time limitations should be established for completing audits.

 

*****

 

The proposed statement that ‘The proposal must be supported with adequate supporting data, which may be required subsequent to proposal submission’ is repetitious and unnecessary. The need for supporting data is well understood; there is little need to state the obvious. Moreover, the statement adds a level of subjectivity as contractors guess at what information ‘may be required’ subsequent to submission.

 

From Beason & Nalley (a regional accounting firm):

 

Although the proposed rule is ostensibly to streamline contract closeout, it appears to be a regulation to legitimize DCAA’s long standing insistence that an adequate final indirect cost rate proposal be inclusive of several mandatory schedules and supplemental information as represented by DCAA within its Model Incurred Cost Proposal (ICP), as stipulated in the DCAA Pamphlet No. 7641.90.

 

Subsequent to the FAR Council’s publication of FAC 97-03, which rejected DCAA’s suggestion for a number of mandatory schedules, DCAA has made numerous revisions to the Model ICP with such revisions operating outside the bounds of the rulemaking process. Nonetheless, DCAA field auditors and field offices continue to assert that its Model ICP is a contractual requirement based upon the current wording in FAR 42.705 and the then current Model ICPpublished in a DCAA document. Given DCAA’s track record of misinterpreting existing regulations, it is inconceivable that FAR 42.705-1 would also be revised to solely assign DCAA the responsibility of determining the adequacy of contractor ICPs. In fact, assigning DCAA sole responsibility will be in direct conflict with FAR 42.705-1(b)(1) which states ‘The contractor, contracting officer and auditor must work together to make the proposal, audit, and negotiation process as efficient as possible’. As currently interpreted by DCAA and as stated in FAR Case 2008-020, the definition of an adequate final indirect cost rate proposal is designed almost exclusively for audit efficiency regardless of the administrative cost and inefficiencies for a contractor to develop certain schedules and regardless of the lack of any demonstrated connection to streamlining contract closeout.

 

*****

 

Although the Model ICP requirements have long been asserted by DCAA as a key component in solving contract close-out issues, there is little empirical evidence supporting that assertion. There has been success in closing out large numbers of contracts; however, the single factor in achieving such success had little or nothing to do with the expansive ‘requirements’ for extensive cost schedules identified within the DCAA Model ICP. In fact, the most noteworthysuccess was merely the application of common sense in closing out huge numbers of task orders (individually a contract); specifically, the use of audit sampling applied to batch processing of final vouchers as opposed to audits of 100% of the task orders. Similarly, quick close-out rates appropriately used have facilitated contract close-outs.

 

*****

 

… access to records and the associated audit(s) should be of the contractor’s ‘books and records’ as was the case for years before DCAA created and continuously modified the Model ICP to primarily achieve audit efficiencies with no regard for the hidden costs for contractors faced with constantly changing definitions of adequate ICPs.

 

*****

 

… the Model ICP (the required and the supplemental schedules) should be recognized for its primary purpose which has only a tangential connection to facilitating contract closeouts. The majority of the schedules were designed or otherwise evolved to shift resource costs from DCAA to the contractor at a time when DCAA was faced with declining resources. The strategy is to require the contractor to complete a schedule(s) in a very specific DCAA format, thus reducing or eliminating DCAA auditor time to perform an audit step.

 

From Rockwell Collins (a mid-size defense contractor):

 

The Performance Standards published at FAR 1.102-2 list (a) minimizing administrative operating costs, (b) risk avoidance versus risk management, (c) the exercise of discretion and sound business judgment, and (d) the desire to maximize efficiencies by promulgating rules, regulations and policies only when their benefits clearly exceed the costs of their development, implementation, administration and enforcement. The volume of information required, and the level of detail required by the proposed rule is unprecedented, unreasonable, far beyond that required to protect the interests of the Government, and clearly does not comply with the intent and spirit of FAR Part 1 in general and FAR Subpart 1.102-2 …

 

*****

 

FAR 1.102-2(c)(3) provides that all contractors will be treated fairly but need not be treated the same. FAR 1.102-4(d) provides that the FAR system will foster cooperative relationships between the Government and its contractors. Using the regulatory process to mandate over-reaching, intrusive audit guidance violates these overarching principles.

 

From the National Defense Industrial Association (NDIA):

 

The approach taken fails to improve the process and unnecessarily creates additional and very significant process and administrative problems. It:

  1. Creates a review process within which there is little latitude for contracting officers to resolve administrative disagreements between auditors and contractors,
  2. Does not define time requirements which all parties, not just contractors, must meet,
  3. Establishes excessive and unnecessary data requirements, and
  4. Creates a punitive set of penalties which appear to be based on the predetermined assumption that only one party, the contractor, is delaying the process.

 

 

*****

 

The Councils state that these changes do not impose additional information collection requirements to the paperwork burden. We do not concur. The specific requirement that the myriad of schedules must be completed in order to receive a determination of adequacy, the specificity of each schedule requirement and the lack of flexibility for the contracting officer to mitigate a requirement which is even greater than what is currently only a suggested format will result in significant additional effort to produce reports that contractors, in part, do not now produce.

 

*****

 

We believe that the proposed rule will result in a significant reduction in the number of contracts that can be closed out using this procedure and thus, instead of improving the contract closeout process, will achieve the opposite effect.

 

From the Council of Defense and Space Industry Associations (CODSIA):

 

… the proposed rule is disappointing because it fails to balance the shared contractor, contracting officer, and auditor responsibility for the contract closeout process. Instead, the proposed rule shifts contract closeout from a collaborative process to a confrontational one by mandating fee withholds, allowing auditors to make unilateral determinations and imposing submission of unrelated data requirements for final indirect cost rate proposals, which go beyond the definition of a ‘record’ necessary to support those proposals.

 

*****

 

Preparing and providing unnecessary information would be a costly and counterproductive distraction and would likely degrade the timeliness of indirect rate settlement agreements.

 

*****

 

The Federal Register notice states that ‘The Councils do not expect this proposed rule to have a significant economic impact on a substantial number of small entities … because the rule does not impose any additional requirements on small businesses.’ We disagree strongly with this conclusion. By requiring preparation and submittal of DCAA’s Model Incurred Cost Proposal and by withholding fees this proposed rule will have a significant economic impact on a substantial number of small entities.

 

From Darrell Oyer & Co (Government contract accounting consulting firm):

 

Some of the information proposed to be required for an adequate submission is not necessary … The purpose of the Indirect Cost Submission is not to prepare work papers for the cognizant auditor. Preparation of work papers is the purview of the auditor, whose independence could be challenged if a contractor is required or permitted to prepare the work papers.

 

From the Defense Contract Audit Agency (DCAA):

 

We do not believe that the proposed revision … to the Quick-closeout limitation relating to unsettled costs protects the Government’s interests. The current FAR limitation states that the unsettled indirect costs allocated to the contract cannot exceed 15% of the total contractor unsettled indirect costs. The proposed rule states that unsettled direct and indirect costs cannot exceed 20% of the total contract costs. DCAA believes that setting the limitation at 20% of contract costs violates the intent of the quick-closeout provision and places the Government in a position of unacceptable risk. … Although we concur that the base for determining the significance of costs should be revised to contract costs in lieu of the contractor’s total costs, we believe the percentage is too high. We recommend a percentage of 10 percent or less. … The Government should not sacrifice due diligence in protecting the taxpayers from potential overcharges with the need for contract closeout. [Emphasis in original.]

 

Based on the foregoing, it seems clear that the majority of commenters opposed the proposed FAR revisions. We can only hope that the FAR Councils are listening to the public input, and that they make significant revisions to the proposed rules before finalization. Better the current molasses-like state than the prescriptive, restrictive, and wholly unworkable structure outlined in the initial rulemaking effort.

 

See all the public comments here.

 

 


 

 

Augustine Commission Releases Final Report: “It really is rocket science”

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On October 22, 2009 the “Augustine Commission” (aka The Review of U.S. Human Spaceflight Plans Committee) released its final report entitled, “Seeking a Human Spaceflight Program Worthy of a Great Nation.” We have previously reported on the Commission’s interim discussions and findings, here and here. Capping a nine month effort by a prestigious group of 10 members, the report painted a bleak picture. The Commission concluded—

 

The U.S. human spaceflight program appears to be on an unsustainable trajectory.  It is perpetuating the perilous practice of pursuing goals that do not match allocated resources.  Space operations are among the most demanding and unforgiving pursuits ever undertaken by humans. … Space operations become all the more difficult when means do not match aspirations.  Such is the case today.

 

*****

 

Once the Shuttle is retired, there will be a gap in the capability of the United States itself to launch humans into space.  That gap will extend until the next U.S. human-rated launch system becomes available.  The Committee estimates that, under the current plan, this gap will be at least seven years.  There has not been this long a gap in U.S. human launch capability since the U.S. human space program began. … The Committee did not identify any credible approach employing new capabilities that could shorten the gap to less than six years.  The only way to significantly close the gap is to extend the life of the Shuttle Program.  The Committee did not identify any credible approach employing new capabilities that could shorten the gap to less than six years.  The only way to significantly close the gap is to extend the life of the Shuttle Program.

 

One of the key findings of the report was that NASA’s funding is insufficient to accomplish its mission.  The table below illustrates that NASA”s budget, as a percentage of Federal spending, has declined from a high of 4.5% (in 1965) to approximately 0.5% today.

As the Commission stated, “Within the current structure of the budget, NASA essentially has the resources either to build a major new system or to operate one, but not to do both. This is the root cause of the gap in capability of launching crew to low-Earth orbit under the current budget and will likely be the source of other gaps in the future.”

 

Another key aspect of the report was that the path to Mars goes through the Moon.  In other words, the Commission endorsed a “moon-first” strategy, followed by what it called the “flexible path” to Mars strategy, which is illustrated below.

 

Another view of the “flexible path” strategy is illustrated below.

The Commission concluded:  “Mars is the ultimate destination for human exploration of the inner solar system; but it is not the best first destination.  Both visiting the Moon First and following the Flexible Path are viable exploration strategies.  The two are not necessarily mutually exclusive; before traveling to Mars, we might be well served to both extend our presence in free space and gain experience working on the lunar surface.”

 

The Augustine Commission reported the following conclusions:

 

  • Human exploration beyond low-Earth orbit is not viable under the FY 2010 budget guideline.
  • Meaningful human exploration is possible under a less-constrained budget, ramping up to approximately $3 billion per year in real purchasing power above the FY 2010 guidance in total resources.
  • Funding at the increased level would allow either an exploration program to explore the Moon First or one that follows a Flexible Path of exploration. Either could produce results in a reasonable timeframe.

 

See the entire, impressive, report here.

 

We can only hope that the Obama Administration considers the report, and its findings and recommendations, with the same care that was put into it.

 

Another CAS 413 Case Helps Unravel the Gordian Knot of CAS Compliance

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Gordian KnotAs we have previously opined, complying with the requirements of CAS 413’s segment-closing pension adjustment requirements (codified at 48 C.F.R. § 9904.413-50(c)(12) for those interested) is just about the hardest thing to attempt in the world of government contract cost accounting.  Adding to the inherent difficulty is the ambiguity of the requirements:  trying to figure out how to apply the complex and arcane rules to fit individual facts and circumstances is challenging in the best of circumstances, but is made more so when the parties (Government and contractor) disagree on how the calculations should be made.  Protracted litigation is almost always the outcome when CAS 413 is involved.

 

We have also noted that the Court of Federal Claims almost always gets it right, at least when Judge Nancy Firestone is presiding. She has a tendency to cut through the tangled knot of adversarial arguments to reach decisions with the Wisdom of Solomon, in our view.  And once again, another recent Firestone decision helps us to better understand how CAS 413 is supposed to operate, so that contractors have a better chance of complying with its requirements.  We’re talking about her decision in DIRECTV Group, Inc. v. The United States (Fed. Cl. 04-1414C, Oct. 14, 2009), in which, as part of a divestiture, the seller (DIRECTV, formerly Hughes Electronics Company, formerly Hughes Aircraft Company) transferred to the buyers (Raytheon Company and The Boeing Company) more pension assets than pension liabilities.  The question before Judge Firestone was how to calculate the benefit that the U.S. Government received in such circumstances, and whether that benefit could be used by the seller (DIRECTV) to offset monies it would otherwise owe the Government by operation of the CAS requirements, as well as the Allowable Cost and Payment contract clause (52.216-7), and the Credits Cost Principle (31.201-5).

 

In a previous case—General Electric Co. v. United States, 84 Fed. Cl. 129 (2008) (aka “GE II”)—Judge Firestone ruled that—

 

… the government must consider the surplus pension assets that GE transferred to the buyer when settling up GE’s CAS 413 payment obligation to the government. … [W]here the government was aware of the transfer of the pension asset surplus and approved the transaction through an advance agreement or novation agreement, the seller may count the value of the surplus pension assets it transferred to the buyer toward meeting its CAS 413 segment closing payment obligation to the government. … [S]atisfaction of the [seller’s] CAS 413 segment closing adjustment obligation may be achieved through the cost reductions the government will receive from its contracts with the buyer.

 

In the current DIRECTV case, DIRECTV divested two segments:  in December 1997 it sold its Defense business to Raytheon, and in October 2000 it sold its satellite business to Boeing.  At the time of the sales, DIRECTV had a pension surplus (as measured by the fair market value of pension plan assets exceeding projected actuarial pension liabilities at the time of the segment closing, i.e., the date of the sale).  In connection with the Raytheon transaction, DirectTV transferred nearly $2.5 billion more in pension assets than pension liabilities; while in the Boeing transaction, it transferred nearly $807 million of “surplus pension assets”.  Using the Teledyne and GE II methodologies together, the litigating parties stipulated that the amount DIRECTV owed the Government at the time of the sales was (in aggregate) $273.4 million—a value far less than the surplus pension assets it had transferred to the two buyers.

 

The Government argued that the Court’s previous holding in GE II was in error, and thus summary judgment in the DIRECTV case was not appropriate.  The Government conceded, however, that “[i]f the GE[ II] case is the law of this case, then we do not dispute that the cost reduction to the Government was [more] than DIRECTV’s CAS 413 segment closing obligation to the Government under the GE[ II] decision, and the Court need not spend its time resolving the extent, if any, by which DIRECTV’s calculation overstates the cost reduction to the Government resulting from the transferred surplus.”

 

Judge Firestone also summarized the other prong of the Government’s argument as follows: “if the government does not expressly agree to accept a cost reduction from the buyer in satisfaction of the seller’s CAS 413 payment obligation, then it is entitled to receive both (1) cash from the seller and (2) a cost reduction from the buyer that equals or exceeds that same amount. The choice, the government contends, belongs to the government.” Unsurprisingly, DirectTV’s counsel argued that the Government’s arguments were without merit and, in particular, that the Government was not entitled to a “double payment” by operation of the Credits Cost Principle.

 

(We note that the parties consistently describe the Cost Principle as a “clause”—which it is not.  In one of Judge Firestone’s rare errors, she writes “... the Allowable Cost and Payment Clause is implemented through the Credits clause …” which is exactly the converse of the actual situation, which is that the Allowable Cost and Payment Clause invokes the FAR Part 31.2 Cost Principles, which include, inter alia, the Credits Cost Principle.)

 

Judge Firestone was not persuaded by the Government’s arguments. In her decision, Judge Firestone wrote:

 

[t]he court agrees with DIRECTV that the government’s reading of the Credits clause is too narrow and that the Credits clause does not require double payment where the evidence establishes that the seller’s segment closing payment obligation was satisfied by the cost reduction the government received under its contracts with the buyer due to the pension asset surplus transferred by the segment seller. The court also finds that none of the other FAR provisions cited by the government require the court to reconsider the GE II decision.

 

In addition, Judge Firestone held that “The government has conceded in this case that it has received more in pension cost savings from Raytheon and Boeing because of the transfer of a pension asset surplus from DIRECTV than DIRECTV would owe the government under any proper CAS 413 calculation. ...  As such, the government has acknowledged that it would receive a windfall if it were to collect cash from DIRECTV after it has received cost reductions from Boeing and Raytheon.  The CAS authorizing legislation does not allow this result.”

 

Finally, Judge Firestone addressed the Government’s argument that DIRECTV must have received express permission from the Government in order to reap the benefit of the pension surplus transfer.  She held that—

 

The court agrees with DIRECTV that in this case, where the undisputed evidence demonstrates that the government received the value of DIRECTV’s CAS 413 segment closing obligation through a cost reduction from the successor contractors, the existence of a government agreement in which the government protected its interest in the pension asset surplus through a novation agreement or other means is not material.  The government concedes that under any CAS 413 calculation, it has received cost reductions that exceed DIRECTV’s CAS 413 payment obligation to the government. The government is not entitled to an additional “cash” payment of an equal amount. DIRECTV has satisfied its CAS 413 payment obligation to the government and is entitled to summary judgment.

 

So the “state of the art” of understanding the operation of the CAS 413 segment-closing pension adjustment is advanced a bit more.  It is perhaps a small victory in the eyes of some, but in the world of government contract cost accounting, it’s a hardfought and meaningful step forward. Unless, of course, it is subsequently reversed by the Court of Appeals, Federal Circuit. See the entire decision here.


 

 

Looking for Fraud in All the Wrong Places

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glasshouses

Mr. Gregory Garrett, CPCM, C.P.M., PMP, and NCMA Fellow, wrote an article entitled “Risk Management in Government Contracting: Common Myths and Best Practices” in the October 2009 edition of Contract Management magazine.  The article was a “modified extract” from his book Risk Management for Complex U.S. Government Contracts (NCMA, 2009).  While there was much to commend (and some areas to nitpick), we thought one of his “common myths” was interesting enough to write about.

 

Myth #8:  All government contractors are crooks!

 

According to Mr. Garrett, “Most government contractors are honest, reliable, and dedicated companies … [u]nfortunately, there is a relatively small percentage of government contractors who do act illegally and their bad actions are frequently and widely publicized … creating a very negative perception of the industry as a whole.”

 

We think Mr. Garrett is spot-on.  Moreover, we think too much Government time, resources and money have been devoted to detecting contractor misdeeds, while not enough time, resources and money have been devoted to detecting misdeeds on the part of government officials.  Our perception is that there are nearly as many bad actors in the ranks of the military and civil servants as there are in the contractors that support them.  Two recent stories are offered as evidence for our position.

 

In the first story, on October 20, 2009 the Department of Justice (DoJ) announced that an Army Sergeant who had been deployed at Bagram Airfield in Afghanistan had pleaded guilty to charges of “bribery and a money-laundering conspiracy arising out of her work administering transportation services.”

 

According to the charges, Ana C. Chavez accepted $90,000 in cash and wire transfers as a bribe from an unnamed DOD contractor in return for Chavez exercising her influence at the Transportation Operations Support Office in the award of contracts and work orders to that contractor’s company.  “Chavez gave a portion of the bribe proceeds to another DOD contractor working at Bagram Airfield, with whom she conspired to launder the money through various bank accounts held by Chavez’s associates in the United States. According to the court documents, the alleged conduct began at least in or about February 2005 and continued until September 2006.”

 

Chavez agreed to pay the $90,000 to the U.S. Government as restitution, and faces up to 35 years in prison, plus a potential fine that could range up to $770,000, depending on circumstances.

 

In the second story, GovExec.com posted on October 21, 2009 an AP wire story reporting that a State Department program manager was arrested for allegedly “taking tens of thousands of dollars in bribes and kickbacks on contracts for Iraq reconstruction work.” According to the article, Mr. Richard Razo began taking bribes from a subcontractor (Hayder Al Batat starting in 2005 while Mr. Razo worked as a security and logistics manager in Iraq for Innovative Technical Solutions, Inc., (ITSI) a government contractor headquartered in Walnut Creek, Calif. An affidavit filed with the court revealed that "Razo provided H. Al Batat with contract documents, assisted H. Al Batat in preparing his company's bids and shared competitors' bid information with H. Al Batat thereby enabling H. Al Batat to underbid competitors.”  Mr. Razo joined the State Department in August 2008, where "continued his scheme to obtain bribes in return for the award of U.S. government contracts to Iraqi contractors,” according to the affidavit.

 

The article reports that, according to the affidavit:

 

[Razo] used his new authority to pressure Al Batat's brother, Yahya, who also owned a construction and did work in the area Razo had been assigned to…. In numerous e-mails, Razo told Yahya Al Batat he wanted the $22,500 his brother allegedly owed him ‘prior to his award of any future business.’ The court records also allege that Razo targeted seven contracts worth $2.7 million that would go to Yahya Al Batat's company and another firm. Razo would take a total of $144,000 in fees for the arrangement. The contracts were awarded in that order. It's not clear how much Razo received, however. The affidavit states that while home in the U.S. on leave in late 2008, he made three separate cash deposits into his bank account totaling $13,500.

 

How was Mr. Razo caught?  According to the article, Al Batat “was the subject of a previous federal investigation into alleged kickbacks on construction contracts.  That inquiry led investigators to e-mails between Al Batat and Razo.”  So it wasn’t any management oversight or internal controls that identified Razo’s wrongdoings; it was old-fashioned detective work.

 

As savvy readers know, the FAR was recently revised to mandate that contractors have codes of ethics/business conduct, have effective control systems that detect violations, and (when criminal violations related to a contract are detected) mandate reporting of those violations.  The Defense Contract Audit Agency (DCAA) recently revised its audit guidance to focus on evaluations of those contractor systems.  The Government Accountability Office (GAO) issued a report in which it opined that DOD wasn’t doing enough to verify the effectiveness of those systems.  The Commission on Wartime Contracting blasted everybody in sight for ineffective contractor “business systems” that allegedly permitted “millions of dollars” of Iraq/Afghanistan battlefield support contractor overbillings to the DOD. It’s a rare week when somebody (usually a politician) is not attacking DOD contractors for fraud, waste, and/or abuse.

 

Which brings us back to our original point: Where is a similar focus on Governmental wrongdoing?  Why does the spotlight only point at contractors, and not those who manage them?  For every stone cast at a contractor, it seems that another one could be thrown at the Federal government’s house of glass.  Yet the magnifying glass of scrutiny and accompanying outrage seems directed solely in one direction.  We think that situation needs to change.  We think the Federal government needs to get serious about cleaning its own house, by implementing and enforcing strong internal controls designed to detect and deter wrongdoing committed by its employees.  When both contractor and Government manager are subject to the same level of scrutiny and outrage, we might see a real reduction in procurement corruption.


 

 

Lockheed Martin and EADS Add to Executive Ranks While Boeing and Honeywell Shuffle Deck Chairs

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titanicWe have previously reported on recent executive departures at both Boeing and Honeywell.  In those articles, we questioned the wisdom of letting seasoned veterans depart while the aerospace and defense industry was facing significant challenges.  Now comes word that, while some companies were reducing executive ranks of their defense subsidiaries, both EADS and Lockheed Martin were augmenting their executive leadership teams to prepare for the upcoming challenges.

In Boeing’s case, the company moved the head of its defense business (IDS) over to its commercial aircraft business (BCA) in order to cover the early departure of Scott Carson—leaving a vacancy that was filled by Jim Albaugh, who transferred over to BCA from his previous role leading Boeing’s IDS business.  Replacing Mr. Albaugh was Dennis Muilenberg (who was promoted after leading IDS’ global after-market services unit). In Honeywell’s case, it lost both the CEO and CFO of its aerospace business in the same week, as each left to pursue other (potentially more lucrative?) opportunities. The Honeywell Aerospace CEO was replaced by Mr. Tim Mahoney, the unit’s former Chief Technology Officer.

Now we are not saying that the executive replacements named above are any less competent than the men they replaced. What we are saying that the new leaders don’t have the deep experience and strong customer relationships that their predecessors had built up over time. Given the current economic pressures facing the industry, and likely near-term downturn, those relationships would seem to be more important than ever.  The executive departures would seem to impact the ability to win new work and to provide program execution assurance.

 

In contrast to those two entities, Lockheed Martin and EADS are adding to their executive leadership teams.  On October 15, 2009 Lockheed Martin announced the creation of a Chief Operating Officer (COO) position, to be filled by Chris Kubasik, who will also be given the title of President.  Effective January 1, 2010 Lockheed Martin will also reorganize its management structure.  Currently, the top six highest leadership positions all report to Bob Stevens (CEO).  After the reorganization, they will all report to Mr. Kubasik, enabling Mr. Stevens to “devote greater attention to high-level customers and partners and to shape domestic and international business strategies. I also intend to increase my efforts to strengthen the corporation strategically, operationally and financially." According to Lockheed Martin, the new COO position and management structure is being created to “strengthen oversight of program performance across the corporation and take operational excellence to an even higher level as we support our customers in their global security missions. … [C]onsidering the budget climate and priorities of the administration and the need to pay really close attention to what our customers are saying, that we need at this time in history to have a COO again.  … [The change] is going to enable Bob [Stevens] to focus at a higher level to the needs of the customers, and it would mean that Chris would then be able to oversee the business operations, day to day."

 

On October 20, 2009 the European Aeronautic Defence and Space Company (EADS) announced it was making former GE Aviation Vice President Sean O’Keefe the CEO of its North American subsidiary, replacing Ralph Crosby. Importantly, Mr. Crosby “will retain his position as Chairman of EADS North America” and will “devote the ‘lion's share’ of his time to winning the competition for the next U.S. Air Force refueling tanker.”  EADS Global CEO Louis Gallois stated “"It's not only continuity, because Ralph is staying with us. It's more than that. It's reinforcement of EADS North America, because we have big ambitions in the U.S."

 

What makes the hiring of Mr. O’Keefe interesting is his background, and what that background tells us about EADS’ intentions.  At GE Aviation, Mr. O’Keefe was head of the company’s Washington operations. As astute readers realize, such a position is generally a euphemism for lobbyist.  Indeed, one report calls him GE Aviation’s “top lobbyist.”  Mr. O’Keefe also served as NASA Administrator during President George W. Bush’s first term.  Before that, he “served as a top deputy at the White House Office of Management of Budget in 2001 and Secretary of the Navy from 1992-93.”  In other words, he is the epitome of a Washington insider.

 

EAD’s strategy is fairly clear:  adding O’Keefe to the executive leadership team positions the company to build on his deep Washington relationships as it attempts to win the next US Air Force tanker competition.  This was confirmed by Mr. Crosby, who commented—

The expansion of our senior team and the assumption of leadership of our activities in the United States by Sean does mark another key milestone in the development of the company. He obviously brings the kinds of experience, capability, strategic mindset and focus that will add materially to taking us forward. I have the leadership on the tanker campaign, and that's the leadership of the tanker activity. That's an expansion of the team.

According to an article on www.defensenews.com, Mr. O’Keefe commented: "Ralph's task is to win this. … My task is to make sure that we perform when that is accomplished."

To sum up, we have tried to present a contrast between several companies in transition.  All four companies are entering into rough waters containing potential storms and icebergs.  While entering these risky waters, two companies have thinned their executive ranks while two other companies have augmented theirs.  Time will tell who has made the correct strategic choice, but our money is on the companies focusing on deepening the experience of their executive leadership teams and enhancing their customer relationships.

 

 

 

 
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Newsflash

Effective January 1, 2019, Nick Sanders has been named as Editor of two reference books published by LexisNexis. The first book is Matthew Bender’s Accounting for Government Contracts: The Federal Acquisition Regulation. The second book is Matthew Bender’s Accounting for Government Contracts: The Cost Accounting Standards. Nick replaces Darrell Oyer, who has edited those books for many years.