Commission on Wartime Contracting: Well-Informed, Independent, Bipartisan—or Out of Touch with Reality?
 Our old friends at the self-described independent and bipartisan Commission on Wartime Contracting in Iraq and Afghanistan (“CWC”) were back in the news on September 21, 2009, issuing another report on Government oversight of contractors deployed in the battlefields of Southwest Asia, entitled “Defense Agencies Must Improve Their Oversight of Contractor Business Systems to Reduce Waste, Fraud, and Abuse.” We’ve posted several articles on the activities of the CWC, here, here and here. The first CWC report, entitled “At What Cost? Contingency Contracting in Iraq and Afghanistan," can be found here.
The latest report was a mostly a recap of testimony at prior hearings, summarized and spun to meet the needs of the CWC. The first report focused on Government oversight of contractors in the battlefield, only mentioning contractor “business systems” in passing. In contrast, the latest report focused almost exclusively on contractor internal control system adequacy, and used that subject to score points on all parties, from the Defense Contract Audit Agency (DCAA) and the Defense Contract Management Agency (DCMA) to the LOGCAP IV contractors supporting troops in the battlefield. According to the CWC, there are no heroes in the Department of Defense (DOD) oversight of contractors, only several dysfunctional players struggling to work a poorly designed regulatory regime with inadequate resources.
The report contained five findings, as discussed below.
- DCAA and DCMA “send mixed messages to contractors” through their “divergent and often contradictory behaviors.” The CWC discussed the advisory role of DCAA and the regulatory authority of DCMA to “enforce contract terms and conditions.” From this starting point, the CWC asserted that DCAA auditors “are recognized experts on accounting matters, internal controls, and business systems,” while DCMA contracting officers “are not typically trained in these complex audit and accounting procedures and sometimes make questionable decisions, seemingly ignoring DCAA recommendations.” According to the CWC, the dysfunctional relationship between the two DOD agencies “creates an environment in which contractors can exploit the agencies’ mixed messages and game the system to their advantage.”
- The separate lines of authority for each agency “contribute to a lack of interagency cooperation and collaboration, and make it difficult for the oversight process to work as well as it should.” Exacerbating the problem is the lack of any arbiter between DCAA and DCMA, since “their common point of resolution is the Office of the Secretary of Defense—a level too high in the organization structure to effectively resolve differences that continually occur.”
- DCAA audit reports “are not informative enough to help contracting officers make effective decisions.” The CWC noted the December 2008 changes to DCAA audit guidance, in which contractor internal control systems were only to be rated on a pass/fail basis (adequate or inadequate). According to the CWC—
Now, all deficiencies reported by DCAA will render the contractor’s system ‘inadequate,’ resulting in many more adverse audit opinions. But this does not improve matters. Rather than giving system deficiencies more importance, it seems to have the opposite effect—undermining the significance of the audit findings and weakening their effectiveness. Use of a binary system involving a pass/fail rating does not adequately depict relative degrees of impact. Without any reasonable provision for more accurately describing systems that are less than perfect, contractors and contracting officers find the ‘adequate/inadequate’ options too restrictive. Moreover, since only significant deficiencies are now reported, there is no provision to report and track recommendations for other desirableimprovements. Contracting officers need audit opinions with clear and quantifiable risk information. They need DCAA’s expert opinion about the relative impact or dollar value (or even an estimated range of risk) of the deficiency in order to consider making a contract award or a contract-incentive determination in the face of an ‘inadequate’ audit opinion.
- DCMA is not “aggressive in motivating contractors to improve business systems.” The CWC reported that “when confronted with significant audit findings, contractors generally promise to improve their business systems by providing corrective-action plans to contracting officers. These plans, as opposed to completed corrective actions, are often accepted by contracting officers, thus effectively rendering a[n inadequate] system adequate.”
- The two agencies “are under-resourced to respond effectively to wartime needs.” The CWC noted that “as a result of personnel shortfalls, DCAA system reviews and follow-ups are not always timely; therefore, the real-time status of contractor business systems cannot always be determined.” In addition to personnel shortages at both agencies, “the Commission believes that many of the untimely reviews are due to the failure of both DCAA and DCMA to prioritize their business-system workload in a wartime environment.” The CWC concluded, with the following (almost plaintive) statement—
… the wars in Iraq and Afghanistan have been going on for many years and the Commission is at a loss to understand why leadership has not aggressively pursued additional staffing until recently. In addition, it is the job of DCMA and DCAA leadership to reallocate existing, albeit limited resources in accordance with mission priorities. Timely oversight of contingency contractors’ business systems should be a priority for both agencies during wartime.
The CWC made several recommendations to remedy the findings reported above. Highlights are summarized below –
- DCAA and DCMA must work together to develop agreed-upon standards and processes that communicate the same message to both the individual contractor and the contracting community and help contractors achieve “adequate” systems. Ideally, the process should be defined in the FAR (in a way similar to the material-management and accounting system standards called out in the DFARS 252.242.7004) so they are visible to all stakeholders.
- The Department of Defense needs to re-establish control of the oversight process to the government by developing better internal-resolution processes. The DoD process should ensure that disagreements between DCAA and DCMA are rapidly resolved, with consideration for DCAA’s independent audit expertise as well as for the DCMA contracting officer’s decision-making authority and the operational mission.
- DCAA should revisit its policy with respect to its binary “adequate/inadequate” opinions for business system reports and provide a mechanism for reporting any deficiency that warrants formal notification and tracking. Also, whenever possible, audit reports should include an assessment of audit risk and cost impact associated with reported deficiencies. Further, DCAA should re-examine the need to express opinions on the overall adequacy of business system audits beyond those explicitly required by the FAR.
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DCMA, with DCAA advice, should develop a reliable and aggressive process for reaching consistent decisions on business systems and any corrective action needed. The process should recognize the contracting officer as the final authority but also acknowledge DCAA auditors as the business-system experts chartered to advise government contracting organizations, as noted in the DCAA mission statement. Disagreements with audit recommendations should be discussed at appropriate leadership levels within DCMA and DCAA and documented accordingly. As part of their decision process, DCMA contracting officers should also consider any risk analysis provided by DCAA and thoroughly address it in documenting their decisions. Finally, DCMA should ensure timely follow-up on contractor corrective-action plans and validate that the contractor actions actually correct the deficient business system. If not, the contracting officer should pursue such contractual remedies as withholds, and DCMA leadership should ensure that this occurs.
- The Commission strongly encourages each organization to aggressively pursue additional staff, but also to immediately prioritize its current workload to meet government oversight needs in the contingency-contracting arena. This is imperative to address the risks of waste, fraud, and abuse.
There is much that could be said about the latest CWC report. Some of the findings and recommendations—particularly those that would eliminate pass/fail internal control system DCAA audit reports—would be a big step in the right direction. Other matters seem less helpful. A future article will contrast the CWC characterization of DCAA auditors as “recognized experts on accounting matters, internal controls, and business systems” with recent testimony of GAO and other Government officials before the Senate Homeland Security and Governmental Affairs Committee, at which Senators heard that DCAA had to rescind 80 audit reports after GAO found significant faults with each of them. A GovExec.com article reported the following reactions from the Committee members—
‘In the world of auditing, what has been happen[ing] here [at DCAA] is a capital crime,’ said Sen. Claire McCaskill, D-Mo., a former state auditor for Missouri. ‘There can be no bigger indictment of an agency than this GAO report.’ Sen. Susan Collins, R-Maine, called GAO's findings ‘an epic failure by the agency and the [DCAA],’ while Sen. Tom Coburn, R-Okla., said he ‘got sick’ reading the report. ‘I can't understand why the management of [DCAA] hasn't been completely changed,’ Coburn said.
It seems that the Commission on Wartime Contracting is so independent, it is not in touch with GAO report findings or the perceptions of Senate Committee charged with oversight over the DOD oversight agency. Perhaps they ought to get together and collaborate with each other, before the CWC places too much faith in DCAA’s characterization of contractor internal control systems or forces DCMA to give undue weight to DCAA recommendations.
Wrestling with CAS and Pensions: The Court of Appeals Weighs In (Once Again) on Segment Closing Pension Adjustments
We’ve been known to tell audiences that preparing a CAS cost impact proposal and defending it through audit is the most difficult task to perform in the complex (and perhaps arcane) world of government contract cost accounting. It has recently come to our attention that we were wrong. Indeed, there is one calculation even more difficult to prepare and defend through audit, even less well-understood, and even more complex (and arcane) than a cost impact analysis—the segment closing pension adjustment calculation mandated by Cost Accounting Standard 413. When the second incarnation of the CAS Board revised Standards 412 and 413 in March, 1995 they took already ambiguous, complex and poorly understood Standards and made them even more onerous. In the words of former OFPP Administrator Angela Styles, the revisions “sparked an explosion of litigation” as the Government, contractors, and the Courts struggled to come to some understanding as to what the rules meant and how they could be executed in a practical sense by the contracting parties. One case, the matter of the General Electric Company’s pension adjustments related to sales of several of its businesses, celebrates this week its fourteenth year of litigation—rivaling the infamous A-12 termination case for length. The words of Cost Accounting Standard 413, at 48 C.F.R § 9904.413-50(c)(12), are relatively straight-forward, as is most of the CAS language. The Standard states (in part): If a segment is closed, if there is a pension plan termination, or if there is a curtailment of benefits, the contractor shall determine the difference between the actuarial accrued liability for the segment and the market value of the assets allocated to the segment, irrespective of whether or not the pension plan is terminated. The difference between the market value of the assets and the actuarial accrued liability for the segment represents an adjustment of previously determined pension costs. It is the interpretation of the foregoing words that has baffled for years the best minds in the business, as different parties litigate different aspects of the requirements. Most of what we know (or think) we know of how to comply with this requirement comes from Judge Nancy Firestone of the U.S. Court of Federal Claims, a special (non-Article III) court established by the Tucker Acts to hear contract-related suits against the U.S. Government. Judge Firestone has waded through motions and briefs, and counter-motions and sur reply briefs, and expert report after expert report, trying to establish what the CAS Board intended the parties to do when a Government contractor (a) had a defined benefit pension plan, and (b) sold one or more of its CAS “segments” (or business units) to another business. Generally speaking, we applaud Judge Firestone’s acuity, wisdom, and perseverance; and the Court of Appeals has also looked favorably on her decisions, often accepting her decisions as written and denying appeals by one (or both) parties. Other cases have been tried in the Armed Services Board of Contract Appeals (ASBCA), where several judges have tackled the messy problems associated with this Standard, with a somewhat greater variation in success. The latest guidance from the Courts concerns decisions made by this latter judicial body. On September 14, 2009 the U.S. Court of Appeals, Federal Circuit, issued one of its relatively rare CAS 413 reversals of a lower court decision, one that is worth mentioning for several reasons. First, it should be noted that Apogee Consulting, Inc. is not a law firm and nobody here has any formal legal training. So what follows is simply a layperson’s attempt to discuss several points found in the Appellate Court’s decision. Second, it should also be noted that one (or both of the parties) may decide to appeal this decision further, perhaps requesting certiorari from the U.S. Supreme Court. (That’s not likely, nor is SCOTUS likely to accept the appeal if made. Nonetheless, the Appellate decision should not be treated as final until all rights of appeal have been waived or exhausted.) Finally, let’s be clear that this article is the personal opinion of the author, Nick Sanders, and in no way represents the opinion of The Raytheon Corporation (a party to the litigation) or any Apogee Consulting, Inc. client. That being said, let’s look at a few aspects of the Appellate decision. - The segment-closing pension adjustment is a current period adjustment. In order to comply with the requirements of CAS 413-50(c)(12), the contractor must evaluate its pension plan assets and actuarial liabilities, and determine whether the plan is over- or under-funded. It must determine the U.S. Government’s participation in any over- or under-funding (using a representative sample of prior years’ contract activity), and apply that participation ratio to the amount of the calculated pension “surplus” or “deficit” (after making certain adjustments such as excluding employee contributions). The amount so determined is a current period adjustment—either a credit or debit—that then flows to Government contracts in the indirect cost rates of the current period. What is striking about the Court’s decision is that a failure to make the required calculation and determine the resulting credit or debit, and to reflect that entry in the current period’s indirect cost rates—is a noncompliance with the requirements of the Standard. Moreover, the Court declared that simply making “an accounting allocation to the current period” is insufficient; what is required is an actual contract price adjustment—a “payment in the current period”.
Those who have dealt with this series of actuarial analyses, contract participation reviews, and various calculations understand what the Court apparently did not. Calculating the requirement pension adjustment does not happen in a few hours or even days. It takes months to analyze the data and determine the status of the pension plan using the rules of CAS 413. It takes months to determine what years contributed to the pension plan over- or under-funding. It takes months to determine a representative sample of years, to determine the Government’s participation in pension plan expenses for those years, and to then calculate the Government’s overall percentage of current period pension surplus or deficit. If a contractor were to sell a business in the fourth quarter of its Fiscal Year, it would be near impossible to complete the required analyses and calculations by year-end. Even when one considers the six-month period after the books close (provided by the Allowable Cost and Payment clause, FAR 52.216-7) to be used for preparation of the year’s final indirect cost rate proposal, one is hard-pressed to believe nine months is sufficient time. Indeed, given how few contractors survive DCAA audit of its segment-closing pension adjustment by DCAA without a CAS 413 noncompliance (leading in almost every instance to a protracted legal dispute), even a full year might not be enough time to calculate the adjustment in a manner deemed by DCAA to be in full compliance with the Standard as written and as interpreted by the Courts. Yet, the Appellate Decision is clear: contractors who do not complete their efforts in time to adjust the final indirect cost rates—and contract billings—for the fiscal year in which the sale took place are in noncompliance with CAS 413. Accordingly, the Government is entitled to recover overpayments and interest on those overpayments in accordance with the CAS clauses and underlying statute. - The noncompliance is created when the fiscal year ends without the required adjustment being made, but compound interest starts accruing on the day the segment is sold. There was a school of thought that believed a contractor could not be in noncompliance with CAS until a contracting officer (variously called an “ACO” or “CFAO” in the regulations) issued a final decision officially determining that the contractor was in noncompliance. Generally, this would follow a DCAA audit report alleging noncompliance or recommending that the contractor be found to be in noncompliance, to which the contractor would have a chance to rebut or convince the contracting officer why DCAA was wrong in its audit finding(s). Given that interest on a contractor claim made under the Contract Disputes Act (CDA) does not start running until a contracting officer has issued (or is deemed to have issued) a final decision (and the contractor formally appeals that decision to the ASBCA or Court of Federal Claims), there was some sense of logic and inherent fairness that the Government should not be entitled to receive interest until the contracting officer had heard the stories of both DCAA and the contractor, and rendered a final decision. Another possible date could have been the contractor’s fiscal year-end, or six months after year-end (when the contractor was required to submit it final indirect cost rate proposal, unless given an extension by the contracting officer). The Court found none of these dates meaningful, choosing instead to declare that the CAS 413 noncompliance took place when the contractor failed to make the required segment closing adjustment in the current period, and its segment closing date started the interest clock ticking. The rationale for this position was that the contractor has active contracts in the period in which its segment is closed; therefore failure to adjust one or more of those active contracts in the current period creates the noncompliance and results in Government overpayments. Remembering that pension plan cases involve millions (or sometimes hundreds of millions) of dollars, and that at least one of these cases has run for fourteen years without complete resolution, one quickly sees that this decision has a huge impact on the amount of money at stake.
Disposing of a business unit by sale or other means is a difficult endeavor. Contractors often spend considerable sums hiring outside advisors, consultants, and/or subject matter experts to conduct due diligence reviews or to help shape the final deal. We have previously discussed the importance of a rigorous due diligence review when acquisition or divestiture of a government contractor is being considered. To this discussion we now add the following warning, based on this recent Federal Circuit decision: When considering acquisition or divestiture of a CAS-covered government contracting business unit (or segment) where a defined-benefit pension plan is involved, you must take into consideration the CAS 413 implications. This means that, in addition to parceling out the pension plan assets and liabilities between buyer and seller, the parties must agree to cooperate in developing the segment closing adjustment. Further, the buyer and seller must plan on considerable devoting time and resources—and funds—to completing the adjustment and processing any credits/debits before the end of the fiscal years of one (or both) of the parties. Obviously, the deal structure (e.g., which party retains responsibility for pension plan assets and liabilities, and which party retains ownership of physically completed contracts) will determine who has the most to gain (or lose) from any noncompliance with the requirements of CAS 413. All of which will lead to more expensive deals, and thus to fewer deals. While it is true that there are not many contractors who still maintain active defined benefit pension plans, there are still enough to warrant this cautionary note. Moreover, it is not necessarily the active plans that will lead to the most troublesome calculations, but the plans for inactive and active legacy employees which, although closed to new participants, still must be addressed when the affected government contactor businesses are bought and sold.
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DCAA Audit Guidance on Contractors Ethics Programs Attempts to Expand Audit Access
As we previously reported, the FAR was revised in December 2008 to require contractors to have (1) a written code of business ethics and conduct, (2) a business ethics and compliance training program, and (3) an internal control system that facilitates timely discovery and disclosure of improper conduct, and ensures corrective measures are promptly instituted and carried out. On July 23, 2009 DCAA revised its audit programs, audit guidance, and internal control matrices to address the impact of the revised requirements on the control environment and overall accounting system controls of Federal contractors. The revised DCAA audit guidance provides a good recap of some of the new requirements. Importantly, the audit guidance directs that a contractor's failure to disclose wrongdoing under the mandatory disclosure requirements should be treated as an internal control deficiency, calling into question the adequacy of the contractor's accounting system. In addition, the guidance claims that the new contract clause 52.203-13(c)(2)(ii)(G) requires "full cooperation with any Government agencies responsible for audits, investigations, or corrective actions" and implies that this cooperation should be extended to DCAA auditors. [Emphasis in original.] In fact, in the FAR revision promulgating comments, the FAR Councils stated-- The proposed rule was not intended to have any application or impact on the Government's exercise of its audit and access to records rights in the routine contract administration context except as the issue arises when a contractor discloses fraud or corruption or the Government independently has evidence sufficient to open an investigation of fraud and solicit the contractor's cooperation. The issue of contractor cooperation in this rule arises primarily in the context of Government investigation of contract fraud and corruption and any application of this rule in any other context by the Government would be clearly overreaching.
Another new aspect of the DCAA audit guidance is the direction to auditors to "verify that the business ethics awareness and compliance program includes an ethics training program for all principals and employees, and as appropriate, the contractor’s agents and subcontractors. Selectively test this control by evaluating training program materials and training records of completion." Moreover, the audit guidance directs auditors to "verify that the contractor performs periodic reviews (i.e., at least annually) of company business practices, procedures, and internal controls for compliance with the contractor’s code of business ethics and conduct and special requirements of Government contracting, including the specific requirements in FAR 52.203-13(c)(2)(ii)(C). Review the results of the recent reviews and assess any impact on this audit." The former requirement assumes individual auditors can evaluate contractor's training program materials without providing them any specific guidance on how to do so, while the latter requirement ignores well-settled case law that contractors' internal audit reports are protected from DCAA review. In summary, the new DCAA audit guidance addresses the new FAR requirements, but in such a way as to attempt to expand DCAA audit access beyond that contemplated by the FAR Councils or by the Courts. Contractors should establish their position(s) with respect to the new DCAA audit guidance, and be prepared to "push back" when it is in their interests to do so. On the other hand, many contractors will find that their position(s) lie on the path of least resistance, and will give in to DCAA demands in order to avoid "access to records" issues and potential litigation. An early internal discussion of these potential land mine issues will permit contractors to react timely and crisply to DCAA internal control evaluations of their accounting systems.
Strategy Like Peanut Butter? Consider a Radical Reorganization!
We are indebted to Scott Eblin and Govexec.com for bringing to our attention an amazing call for action--a internal memo leaked to the media and originally published by The Wall Street Journal on its front page in November, 2006. Although written for his leadership team colleagues at Yahoo!, Brad Garlinghouse's memo ought to ring true for many of those in the Aerospace/Defense industry, burdened by bureaucracy and a lack of accountability for results. But before the memo, a bit of context .... Recently, a young lady left one of the Top 5 A&D companies for a new career at one of the large oil companies. This young lady had graduated a year before from the University of Southern California with a B.S. in Industrial Systems Engineering, and had been hired as a Manufacturing Engineer. Roughly a year later, she departed, frustrated with the company environment. In her words, Business units did not work together so the teams I worked on were very dysfunctional. It was always a blame game between different units when problems arose, and every group was constantly trying to get out of doing work by saying it was another groups responsibility. I am a person who will jump to fix something when I see a problem, but in this environment I was discouraged from doing this because "it was not our job." Also, people did not show up on time to meetings even when they were with third party companies, which I thought was embarrassingly unprofessional. ... I talked to some people at [company] about it; several people were on my page but others were very anti-change. I [think] the majority of upper management understands the problem, but there is an inability to implement cultural change because the majority of employees have been there 20 plus years and are very stuck in their ways. Hopefully they [will start] to work together or I am afraid more individuals will leave the company out of frustration.
Does this sound familiar? Is this disillusioned young engineer describing your company? Is there anything that can be done?  Now, back to the memo, written by Brad Garlinghouse (a Senior Vice President at Yahoo!) in 2006. It describes how Yahoo! suffered from some of the problems described above, and what he proposed to do about it. With hindsight, we can note that his "peanut butter manifesto" was not fully implemented, nor was it entirely successful--but it nonetheless stands out as clarion call for management action that should be trumpeted by many (if not all) leaders in A&D management, if they are to address the issues facing the industry. Mr. Garlinghouse wrote the following to his colleagues: I believe that we must embrace our problems and challenges and that we must take decisive action. We have the opportunity -- in fact the invitation -- to send a strong, clear and powerful message ... that we recognize and understand our problems, and that we are charting a course for fundamental change. Our current course and speed simply will not get us there. Short-term band-aids will not get us there.
We lack a focused, cohesive vision for our company. We want to do everything and be everything -- to everyone. ... We are reactive instead of charting an unwavering course. We are separated into silos that far too frequently don't talk to each other. And when we do talk, it isn't to collaborate on a clearly focused strategy, but rather to argue and fight about ownership, strategies and tactics. Our inclination and proclivity to repeatedly hire leaders from outside the company results in disparate visions of what winning looks like -- rather than a leadership team rallying around a single cohesive strategy. I've heard our strategy described as spreading peanut butter across the myriad opportunities...The result: a thin layer of investment spread across everything we do and thus we focus on nothing in particular....
We lack clarity of ownership and accountability. The most painful manifestation of this is the massive redundancy that exists throughout the organization. We now operate in an organization structure -- admittedly created with the best of intentions -- that has become overly bureaucratic. For far too many employees, there is another person with dramatically similar and overlapping responsibilities. This slows us down and burdens our company with unnecessary costs. Equally problematic, at what point in the organization does someone really OWN the success of their product or service or feature? ... there are so many people in charge (or believe that they are in charge) that it's not clear if anyone is in charge. This forces decisions to be pushed up -- rather than down. It forces decisions by committee or consensus and discourages the innovators from breaking the mold ... thinking outside the box. ...
We lack decisiveness. Combine a lack of focus with unclear ownership, and the result is that decisions are either not made or are made when it is already too late. Without a clear and focused vision, and without complete clarity of ownership, we lack a macro perspective to guide our decisions and visibility into who should make those decisions. We are repeatedly stymied by challenging and hairy decisions. We are held hostage by our analysis paralysis. We end up with competing (or redundant) initiatives and synergistic opportunities living in different silos of our company. ...
We have lost our passion to win. Far too many employees are "phoning" it in, lacking the passion and commitment to be part of the solution. We sit idly by while -- at all levels -- employees are enabled to "hang around". Where is the accountability? ... As a result, employees that we really need to stay (leaders, risk-takers, innovators, passionate) become discouraged and leave. ...
If we get back up, embrace dramatic change, we will win. ... 1. Focus the vision. We need to boldly declare what we are and what we are not. ... We can't simply ask each BU to figure out what they should stop doing. ... The direction needs to come decisively from the top. We need to place our bets and not second guess. ... We need to make the tough decisions, articulate them and stick with them -- acknowledging that some people ... will not like it. Change is hard.
2. Restore accountability and clarity of ownership. Existing business owneres must be held accountable for where we find ourselves today -- heads must roll. ... We must redesign our performance and incentive systems. I believe there are too many BU leaders who have gotten away with unacceptable results and worse -- unacceptable leadership. ... We must signal to both the employees and to our shareholders that we will hold those leaders (ourselves) accountable and implement change. ... It must be very clear to everyone in the organization who is empowered to make a decision and ownership must be transparent. With that empowerment comes increased accountability -- leaders make decisions, the rest of the company supports thosse decisions, and the leaders ultimately live/die by the results of those decisions. My view is that far too often our compensation and rewards are just spreading more peanut butter. We need to be much more aggressive about performance based compensation. This will only help accelerate our ability to weed out our lowest performers and better reward our hungry, motivated and productive employees.
3. Execute a radical reorganization. The current business unit structure must go away. We must dramatically decentralize and eliminate as much of the matrix as possible. ... I emphatically believe we simply must eliminate the reduncancies we have created and the first step in doing this is by restructuring the organization. We can be more efficient with fewer people and we can get more done, more quickly. We need to return decision-making to a new set of business units and their leadership. But we can't achieve this with baby step changes. We need to fundamentally rethink how we organize to win. ... two key principles must be represented:
Blow up the matrix. Empower a new generation and ... leave no doubt about where accountability lies.
Kill the redundancies. Align a new set of BUs so that they are not competing against each other.
I don't pretend that I have the only available answers, but we need to get a discussion going; change is needed and it is needed soon. We can be a stronger and faster company -- a company with a clearer vision and clearer ownership and clearer accountability. ... I don't pretend this will be easy. It will take courage, conviction, insight and tremendous commitment. I very much look forward to the challenge. So let's get back up. Catch the balls. And stop eating peanut butter.
Is this executive describing your company? Does your company suffer from uncommunicative--or even competing--silos, excess bureaucracy, decision by committee, and a lack of passion to win? Are responsibility, authority, and accountability misaligned? Does incentive compensation reward those playing to win, or only those who are playing not to lose? If so, then perhaps some of the organizational fixes proposed (or declared) by Mr. Garlinghouse might be worth considering. Suppose you were to "blow up" your management matrix? What might the next generation management structure look like? Would decision-making be pushed down to program managers, who would be the mini-CEOs of their program fiefdoms? Or would you create program portfolios, with support matrixed to the programs only for a relatively limited organizational subset? If you had a blank sheet of paper, what org chart would you create?  There may be no "correct" answer to the foregoing questions. But we know from experience that organizational silos are the bane of effective and efficient leadership. Moreover, where silos exist, the spaces between the silos are "no-man's lands" of ambiguity and non-accountability, where nobody takes responsibility because decision-making authority is unclear. Time after time, we have seen the distance between the silos--measured in terms of geography, job function/title, and hierarchy--defeat the best management intentions. Consider Mr. Garlinghouse's call to action. Is he calling to you?
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