Apogee Consulting Inc

Strategy Like Peanut Butter? Consider a Radical Reorganization!

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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?
Matrix Management

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?
Radical Reorganization

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?

Security Assistance - FMS, FMF, and IMET

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The U.S. Department of Defense (DOD), as authorized by law, engages in Security Assistance, which is broadly defined as a group of programs in which either the DOD or its contractors provide defense articles and services to certain international organizations and foreign governments "in support of national policies and objectives." Security Assistance (SA) "includes such diverse efforts as the delivery of defense weapon systems to foreign governments, U.S. Service school training to international students, U.S. personnel advice to other governments on ways to improve their internal defense capabilities, and U.S. personnel guidance and assistance in establishing infrastructures and economic bases to achieve and maintain regional stability." Defense articles, including major defense systems, subsystems, support equipment, repair parts, and publications are available under SA. Defense services, including training in U.S. military schools or through mobile training teams, construction, engineering, contract administration, program management, technical support, and repair are also av DSCA Logo ailable.

Which entities participate in SA, and to what extent, are determining by the U.S. Department of State. The Defense Security Cooperation Agency (DSCA) is the implementing agency for DOD.

Within the SA umbrella there are several programs, including:

Foreign Military Sales (FMS). FMS programs are authorized by the Arms Export Control Act (AECA) and managed by DOD on a cost-plus 3.8% basis. When defense articles and/or services are required, the requesting country's representative provides a Letter of Request (LOR) to the U.S. counterpart. Copies are sent to the (Depart Bureau of Politico-Military Affairs and the DSCA. The original is furnished to the DoD Military Department or other implementing Defense Agency that will prepare the response in the form of a LOA. To encourage standardization and interoperability among U.S. and SA countries, FMS normally involves the transfer of those articles that have been fielded by U.S. forces. Under certain conditions, foreign customers can elect to co-produce or co-assemble defense articles in lieu of transfer. Also, defense articles are occasionally leased to foreign entities instead of being sold. A list of recent FMS awards can be found here.

Foreign Military Financing (FMF) grants or loans. Congress appropriates FMF funds in the International Affairs Budget, the Department of State allocates the funds for eligible foreign entities; and the DOD executes the program. According to the DSCA, "FMF helps countries meet their legitimate defense needs, promotes U.S. national security interests by strengthening coalitions with friends and allies, cements cooperative bilateral military relationships, and enhances interoperability with U.S. forces." The DSCA further notes that, "because FMF monies are used to purchase U.S. military equipment and training, FMF contributes to a strong U.S. defense industrial base, which benefits both America’s armed forces and American workers."

International Military Education and Training (IMET). According to the DSCA, the objectives of the IMET program are to further the goal of regional stability through effective, mutually beneficial military-to-military relations which culminate in increased understanding and defense cooperation between the United States and foreign countries; and to increase the ability of foreign national military and civilian personnel to absorb and maintain basic democratic values and protect internationally recognized human rights." Students are exposed to U.S. military procedures and the manner in which the military functions under civilian control.

DSCA has published several guides to help foreign customers and U.S. contractors navigate the intricacies of SA programs. In August 2009, the latest version of DSCA's Guidelines for Foreign Military Financing of Direct Commercial Contracts was published. The Guidelines establish compliance criteria for contractors participating in SA programs. Importantly, the compliance criteria include the following:

In order for a DCC to be approved for FMF funding, the defense articles purchased must be manufactured and assembled in the United States, or the defense services purchased must be performed by U.S. manufacturers and suppliers, purchased from U.S. manufacturers or suppliers, and composed of U.S.-origin materiel, components, goods, and services (hereafter “U.S. content”). Prime contractors must maintain and provide, if requested, supporting documentation for the value of both U.S. and non-U.S. origin content. In the event the purchase of a U.S. end item consists of both U.S. and non-U.S. origin content, only the value of the U.S. origin content will normally be financed.

Direct Commercial Contracts must specify all non-U.S. origin content. If not identified in the contract, non-U.S. content must be identified to DSCA by the Purchaser in supporting documents. To facilitate this:

A. The prime contractor is required to identify to the Purchaser any non-U.S. content, the corresponding value contained in the contract, and where applicable, supporting documentation to demonstrate that the USG has procured or is procuring the same non-U.S. content or non-U.S. origin items, components, or services from the same non-U.S. source for the same end item the USG has procured or is procuring. Supporting documentation should include the USG contract number(s) under which the non-U.S. content/item(s) was purchased, if appropriate, and any other pertinent information.
B. If raw materials, components, or items used in the manufacturing process are procured from both U.S. and non-U.S. sources, and are not segregated as to origin, and are incorporated on an interchangeable basis into the prime contractor’s articles or services, the actual dollar value need not be identified. Instead, a non-U.S. content estimating methodology or system (for example, an annual survey) may be used by the prime contractor. The use of such a methodology must be approved by DSCA prior to DSCA processing the DCC.
C. The non-U.S. content of spare parts that are acquired separately by the Purchaser in a stand-alone DCC, not as part of an end item or as part of a “system” procurement, will not be approved for FMF funding. The non-U.S. content of a spare part cannot be funded under the COTS items exception unless the same spare part meets the requirement for being considered a COTS item.

To conclude, SA programs offer another sales channel to DOD contractors. There are additional compliance requirements and risks associated with the programs, as exemplified by the foregoing; however, savvy contractors are willing to accept the additional requirements and risks in return for the opportunity to diversify their customer base and to sell their products and services in the international marketplace, under the sponsorship of the U.S. Government.

Lessons of the Top 100 Aerospace/Defense Companies

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On August 9, 2009 Flight International published its analysis of the Top 100 A&D companies in the world. The article contains some interesting lessons from which other companies may be able to learn.

1. EADS vs. Boeing. As we previously noted, EADS has supplanted Boeing as the Number One Aerospace/Defense company in the world, aided by (a) a seven percent strengthening of the Euro vs. the U.S. Dollar, and (b) a top-line revenue growth of U.S. $9.8 Billion (contrasted to Boeing's 8.3% revenue decline of $5.5 Billion versus last year's sales). Obviously, Boeing's sales were impacted by the 57-day machinists strike, which Flight International (and its PricewaterhouseCoopers compliation team) estimate cost Boeing about $4.3 Billion in lost business. Looking only at the commercial aircraft businesses, Boeing delivered 375 aircraft in 2008 versus Airbus' record year of 483 deliveries. As a result Boeing Commercial Aircraft (BCA) suffered a sales drop of 15.3% while Airbus' sales rose 18.9% (or 11.2% after currency adjustment). After looking at those numbers, it's no wonder the BCA President decided to retire. On the defense side of the house, EADS' defense business grew 47.2% to $17.8 Billion (after currency adjustment), even after its well-reported troubles with its A400M military transport aircraft. In contrast, Boeing's Integrated Defense Systems (IDS) business reported flat revenue growth.

2. Companies connected to the Boeing supply chain did not fare well either. For instance, Spirit Aerosystems, Kawasaki Heavy Industries, Curtiss-Wright, and Fuji Heavy Industries each underperformed against their peers. In contrast, some Airbus suppliers Zodiac Aerospace, Latécoère, and Moog outperformed their peers.

3. The past decade has been the time of the big defense primes, with sales per head and inventory turns and ROIC increasing at the largest of the defense companies. However, the Flight International analysis revealed that the historical trend might be changing. The article reported that "Boeing's Integrated Defence Systems unit failed to grow and Lockheed Martin's aeronautics and electronics business shrank 1.5%. Northrop Grumman, meanwhile, managed only modest growth, of 2.4%, in its defence aerospace business." These results are compared to the defense industry as a whole, "Overall, the defence aerospace industry maintained its momentum, with the top 15 companies or divisions growing 6%, against a comparable figure of 7% for 2007." In other words, the rest of the industry outperformed the largest companies, in contrast to what has been experienced over the past decade.

False/Inflated Invoices on Government Subcontract Leads to Fines and Jail Time for Executives

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On September 9, 2009 the Department of Justice (DOJ) released a press release announcing that Delmar Spier (CEO of United States Protection and Investigations, LLC (USPI) and his wife Barbara Spier (President of USPI) had entered guilty pleas in the U.S. District Court (District of Columbia) for conspiracy, major fraud, and wire fraud in connection with USPI's subcontract with the U.S. Agency for International Development's (US AID) rebuilding efforts in Afghanistan. USPI provided security and protection services to a US AID contractor under a cost plus fixed fee contract. This contract type requires the contractor to invoice only for the actual costs it incurs, subject to the allowability criteria of FAR Part 31.2. USPI invoiced its prime contractor for "inflated expenses ... for rental vehicles, fuel and security personnel [and for] fabricate[d] invoices from fictitious companies..." over a period of four years, from June 2003 to July 2007. According to the DOJ press release, the fraud was worth $3 million, which the Spiers agreed to disgorge back to the U.S. government.

Sentencing has yet to occur, but the press release notes that "The conspiracy charge carries a maximum sentence of five years in prison and a $250,000 fine. The charge of wire fraud carries a maximum sentence of 20 years in prison and a $250,000 fine. The charge of major fraud carries a maximum sentence of 10 years and a $1 million fine." Two other USPI employees were indicted along with the Spiers; one of those employees (William Dupre) is scheduled to be tried in December 2009.

See the DOJ press release here.

This is a timely reminder that corporate executives will be held responsible for violations of Federal statutes and regulations in connection with the contracts they receive, and that compliance is almost always the less expensive option. Moreover, prime contractors are responsible for providing oversight over the activities of their subcontractors, particularly when those subcontractors have cost-reimbursement contract types.

Trust – But E-Verify

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USCIS Logo DHS Logo Effective September 8, 2009 Federal contracts and solicitations will contain clauses that mandate use of the E-Verify system to determine that employees are eligible to work in the United States. Administered by the Department of Homeland Security’s U.S. Citizenship and Immigration Service (USCIS), the E-Verify internet-based system to verify the work eligibility of new hires and the validity of Social Security Numbers (SSNs) based on completed I-9 Forms. The system, a legacy of the Bush Administration, was (up until 9/8/09) voluntary—but no longer. The Federal Acquisition Regulation (FAR) has been revised (primarily at 22.1800) to mandate use of E-Verify for nearly all Federal contractors.

E-Verify Logo The new rule will be in included in solicitations and contracts expected to exceed $100,000 in value, except for contracts to acquire commercial off-the-shelf (COTS) items. Existing ID/IQ contracts will be modified to include the clause if their period of performance is expected to last longer than six months after the September 8, 2009 effective date. The new rule will require contractors to (1) enroll in E-Verify within 30 days of receiving a covered contract if they are not already enrolled (some 92,000 employers have already enrolled), (2) check the eligibility of all new employees hired during the duration of the covered contract, (3) check the eligibility of any existing employee that is assigned to a covered contract, and (4) flow the clause down to subcontractors if the value of the subcontract is greater than $3,000.

It may be difficult for contractors to determine which employees have been verified and which need to be verified (because they are being assigned to a covered contract). The new rule provides some flexibility in this area. Instead of only verifying employees assigned to the contract and other new hires, a contractor may elect to verify all of its employees. If it elects this option, the contractor must verify every one of its employees within 180 days of (1) enrollment in E-Verify; or (2) notifying E-Verify Operations of the decision to exercise this option.

Because of the obvious compliance challenges involved in this new rule, USCIS is offering free webinars on Form I-9 and the E-Verify program, including E-Verify requirements for federal contractors. Contractors can sign up for a webinar here. USCIS has created guides to help Federal contractors with E-Verify requirements – there is both an initial Users Manual and a Supplemental Guide.