Not Everybody is a Star
Netflix famously published a 120-slide PowerPoint manifesto on its innovative approach to managing Human Resources. We wrote about it here. Netflix approached personnel hiring and retention decisions like a professional sports team: it wanted stars at every position. (It’s HR metric was called “talent density.”)
In contrast, my old boss Bill – who was the best boss ever, because whatever I did wrong he was doing it wronger than I was – had a different HR philosophy. Bill stratified his employees into one of four categories: (1) stars, (2) cows, (3) losers, and (4) TBD. Bill’s HR management philosophy was that a team did not need—and did not want—stars at every position. He believed such a team was too contentious. There were too many chiefs and not enough Indians (to use the politically incorrect phrase that Bill would have used). You could say that Bill’s approach was more diverse, was more inclusive. And I’m thinking you would be right in that assessment.
In another article, we touched on workforce diversity, noting that the Big 4 environment wasn’t quite as diverse as it claimed it was. Sure, every characteristic protected by Federal or State law was included, but beyond that there was a sameness—an intentional sameness—to the individuals slotted for practice roles. We wrote—
Those firms say that they are inclusive and focused on diversity, but the kind of diversity they welcome is not unlimited. If you are in a practice role (as opposed to a support role), it is highly likely that you are well-educated, smart, ambitious, and driven. We’re talking ‘Type A’ personality all the way. … Doing whatever it takes because if you don’t there are many others who will! It’s a system intended to weed out people who don’t fit—those who don’t have the right ‘chemistry’—because every year another class of Associates joins the firm, and some of them may make Partner one day if you can’t (or won’t) do what it takes to make it. …
People are different and they have different skills and different motivators. The Briggs Myers folks claim there are 16 different personality types. I don’t know about 16, but I know there is more than one type. But in the world of the Big 4, there really is only one type that succeeds—and that is the type that is driven to succeed.
Thus, it seems that the Big 4 professional service firm environment is not unlike that of the Netflix environment: both are seeking “high performers”—stars—at every position. Yet, Bill wasn’t all that concerned about having enough stars. He thought a workforce comprised of 10 to 20 percent stars was good enough. Those would be the leaders and the “cows” would be the followers.
In Bill’s mind there was nothing wrong with being a cow. If Bill called somebody a cow he meant absolutely nothing derogatory by that comment. In Bill’s view, a cow was dependable. A cow showed up on time and left on time. A cow did what was asked of them, and a cow did it well. A cow wasn’t ambitious and wasn’t seeking glory; a cow just wanted to be told what the expectations were so that they could be met. Cows received “meets” performance reviews and cows received the median merit increases. There was nothing wrong with being a cow. In fact, they were necessary because Bill believed that too many leaders created conflict.
There were positive attributes about being a cow. First, you generally had a long-term employee. You didn’t have somebody who was going to jump ship because they had been passed-over for promotion or because somebody else had received a bigger raise. Generally, cows were content. And a content employee is a good thing if you have a lot of people to manage. So that was the second positive attribute associated with cows: they were easy to manage. They didn’t complain and they didn’t call HR about every little thing. (Which was good because there were already too many people calling HR about Bill.)
In a nutshell, “cows” were the ones who produced the milk, each and every day. Bill depended on that production.
In contrast, “losers” were problem employees destined, sooner or later, for the exit. Whereas Netflix sought to separate the stars from the rest, retaining only the stars, Bill was focused on separating the losers and finding ways to move them out from his organization. In Bill’s philosophy, “losers” didn’t meet performance expectations. Losers didn’t deliver a day’s worth of work for a day’s pay. Perhaps most importantly, losers lacked integrity and you couldn’t count on them to do what they said they would do. Losers were on the fast track to gainful employment elsewhere. Bill figured he had about five percent “losers” in his organization, if only he could identify them.
We all know those people, right? They are not fun to work with. Indeed, they are disruptive to the smooth functioning of the workforce. Bill’s management goal was to identify them as early as possible and show them the door as soon as HR would let him. Building on that, I would say that one important attribute of a company’s culture is how quickly HR will let a manager get rid of such people. Some companies require a ton of paperwork and a Performance Improvement Plan and they delay and delay the final decision, trying to avoid a lawsuit claiming wrongful termination. Other companies move more quickly. Which company do you want to be working for?
I remember this one person at a large defense contractor who was one of those people that Bill would have labelled as being a “loser.” On paper she was top-notch but in reality she was a pain to work with. Literally nobody wanted to work with her. She didn’t report to me but her boss took unexpected medical leave and I was asked to step in on an interim basis. Unfortunately there was no documentation in the employee file about the myriad problems and complaints associated with this individual, so my first order of business was to start documenting and to start discussing “performance concerns” with her. (Discussions that were later characterized as being “ambushes” because I made sure to have a witness present.) Long story short: she received a “Needs Improvement” rating and was denied a bonus, and then she complained to HR and suddenly I was the problem. It took me a long time to wash away the “bad supervisor” stigma. Fortunately, a year later her group transferred out of state, and she said she would only go if she received a promotion. The boss (not Bill) asked around and found out that literally nobody wanted to work for her, or even with her. They said they would quit if they had to report to her. When the boss told her that she wasn’t getting her promotion—and why—she quit that very same day in a huff. Problem solved, and my reputation was restored.
So how do you deal with “cows” and “losers” (or whatever you call them)? Do you seek only superstars or are you happy with a staff of productive, content, employees who produce the expected amount each day? And if you want to get rid of a problem employee, how easy is that to accomplish? These questions matter because they reach into the heart of Human Resource management, company culture, and personal management style.
Before you can be a leader, you have to figure out how you are going to lead.
Bill would have called Harvey Wong a cow. You probably don’t know Harvey because he didn’t have any LinkedIn connections. He didn’t write any articles and, to my knowledge, he never appeared on any panels. He was a member of the (E&C) Compliance Roundtable—perhaps a founding member—but he never sought a leadership role, preferring instead to handle the administrative tasks while others took the spotlight. After he left DCAA, Harvey worked for the same company for the rest of his life. When that company moved him out of state, he went. He didn’t look for another job because he was content with his current job, regardless of where the company located him geographically. He wasn’t a supervisor. He wasn’t a leader. He was in no way a star. He just showed up and did what he was told to do. And he did it well. For a very long time, right up until he passed away in December, 2015.
The world needs more people like Harvey Wong. Perhaps more importantly, people in charge of establishing teams and hiring people need to be okay with hiring people like Harvey Wong—people who are not superstars but who show up each day and do a full day’s work for a day’s worth of pay. If you only search for stars, you are going to miss a lot of cows. And I strongly suspect your workforce is going to suffer for it.
Post-Award Accounting System Audits
Post-award Accounting System audits exist somewhere in the gray area between (1) pre-award Accounting System surveys, (2) audits of Accounting System internal controls, and (3) reviews of the Accounting System as a contractor business system. Accordingly, it’s challenging to prepare for one, even if you have the DCAA’s audit program.
Everybody knows (or should know) that having DCAA determine that your Accounting System is adequate (or, perhaps more accurately, recommending to a contracting officer that your accounting system be determined to be adequate) is a critical step for a government contractor. Yet the subject is surprisingly complex. DCAA devotes an entire chapter in the Contract Audit Manual (CAM)—Chapter 5, “Audit of Policies, Procedures, and Internal Controls Relative to Accounting and Management Systems”—to the topic.
If you are a smaller contractor—a “non-major” in DCAA’s parlance—then you are probably not subject to the Contractor Business System administration and oversight regime defined by DFARS contract clause 252.242-7005. And even if you are a “major” contractor, you still may not be subject to the DFARS Contractor Business System administration and oversight regime, because it is only enforced on the largest contractors. (Why? Because neither DCAA nor DCMA have the resources to enforce the contract clause requirements on all contractors subject to the rule.) Therefore, if you are a “non-major” contractor, then you are likely to be subject either to a very light analysis of your Accounting System internal controls or else be subject to the post-award Accounting System survey.
When DCAA wants to evaluate the Accounting System internal controls at a “non-major” contractor it tends to do so via having the contractor fill-out a questionnaire. The CAM states (at 5-111)—
The process for obtaining an understanding of a contractor's internal controls and assessing control risk at most nonmajor contractors is accomplished by using the Survey of Contractor's Organization, Accounting System, and System of Internal Controls (ICQ) and the Internal Control Matrix, Control Environment and Overall Accounting Controls (ICM-ACTG) which are available on the DCAA Intranet and the APPS.
Obviously, the larger and more complex the contractor’s accounting system, the more rigor that DCAA will use in its evaluation of the ICQ. As the CAM states—
Smaller entities with active management involvement may not need extensive descriptions of accounting procedures, sophisticated accounting records, or written poli cies. Communications may be less formal and easier to achieve in a small or midsized company than in a larger enterprise due to the smaller organization’s size and fewer levels as well as management’s greater visibility and availability. However, when small or midsized entities are involved in complex transactions or are subject to the same le gal and regulatory requirements as larger entities, more formal means of ensuring that internal control objectives are achieved may be necessary.
The CAM further states, “if the nonmajor contractor has one or more of the accounting and management systems listed in 5-102d that generate significant costs, the auditor can use the CAM guidance in Chapter 5, the audit program related to the system, and the related ICAPS with the ICQ to audit the internal controls.”
If the contractor has a contract that contains the DFARS contract clause 252.242-7006 (“Accounting System Administration”) but the 252.242-7005 Business Systems clause is missing (because either the contract or the contractor didn’t qualify for its inclusion), then DCAA will use the official post-award Accounting System audit program (link in the first paragraph). According to the CAM (at 5-203), the post-award audit should be initiated when a pre-award Accounting System survey was not performed or else it was performed but a follow-up review was recommended at that time. Either a contracting officer or a DCAA auditor can initiate the post-award audit.
According to the CAM—
The post award accounting system audit program includes comprehensive steps to gain a detailed understanding of the contractor’s accounting system (e.g., tracing costs billed to source documentation) sufficient to render an opinion on compliance with the DFARS 252.242-7006, Accounting System Administration, requirements. [But if] the procedures in the audit program are not sufficient to render an opinion on the key control activities and objectives that comprise an audit of internal controls. If the auditor determines that the nonmajor contractor's accounting system is so complex, it requires audit procedures contained in the audit program for a major contrac tor, the auditor should discontinue the audit under 17741 and use the Activity Code 11070, Accounting System Audit.
Again, we see that the nature of the contractor’s accounting system should determine the type and depth of audit. It’s interesting to see that a contractor with a complex enough accounting system can actually be subject to the full-scope Accounting System Review audit program, even if it is a non-major contractor that (presumably) would not normally be subject to that level of scrutiny. Obviously, if the audit results in adverse findings and a recommendation to the contracting officer that the Accounting System not be found to be adequate, there would be no mandatory payment withholds (as would be the case with a large contractor subject to the requirements of the 252.242-7005 clause). That said, we would expect a contractor—of any size—that received such an adverse audit report to make it a high priority to immediately initiate corrective actions to address the audit findings.
Thus, if you think your accounting system is so complex that DCAA may use its formal audit program, then you would be well-advised to go find that audit program and prepare for it.
Only you won’t find it on the DCAA website.
It’s missing.
DCAA is currently preparing a new revision of that Accounting System Review audit program, and you can’t see it until it’s officially published on the DCAA website. In the meantime, any older audit programs have been removed.
Readers may recall that the Accounting System Review audit program was one of the first significant audit programs revised after (1) GAO and DODOIG criticism of DCAA audit quality, and (2) implementation of the 2011 DFARS Contractor Business System administration and oversight regime. Then-Director Fitzgerald discussed it at the time, and pointed to it as one of his most important accomplishments. Indeed, in accordance with its importance, a few of the largest defense contractors were chosen to “pilot” the new audit program to make sure it was effective. (Readers may not be aware that the results of that pilot program were … mixed. In hindsight, the fact that it took DCAA auditors literally years to issue the resulting audit reports presaged the agency’s current challenges with audit timeliness and auditor productivity.) It was a Big Deal.
DCAA is now in the process of rejiggering that Big Deal audit program, and most of us don’t know what it’s going to look like. Thus, it is difficult to prepare for any post-award Accounting System Review audits that may use that as-yet-unpublished audit program. (FYI: We’ve seen a draft of the new program, but there’s no guarantee that the contents won’t change between the draft and the final audit program.)
So what is a contractor to do in the meantime?
Our best advice is to go directly to the Accounting System adequacy criteria found in the DFARS, at 252.242-7006. There are eighteen criteria. DCAA auditors must address each of those criteria in performing their audits. Do a self-assessment and see how well you comply with each criterion. Look at your policies and procedures. Do you have written documentation that addresses each criterion? To the extent you see gaps, you know where you have work to do.
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Incentives
After a long number of years working for different employers, of different sizes, in different industries, one gets a certain amount of perspective. This company did that thing well; that company did this thing well. Those companies didn’t do much of anything very well and ended-up in financial trouble; whereas those other companies did quite a bit well and were successful: they were admired by their competitors as well as their customers.
If we know one truth from all that diverse employment and consulting history, it is this: You get the behavior that you incentivize.
If you tell executives that their incentive comp will be based on their individual performance, they will make self-serving decisions, regardless of the outcome to the company at large. But if you tell executives that their incentive comp is a formula that starts with overall company performance, then they will cooperate with each other.
If you tell employees that their raises depend on keeping the boss happy, then they will do whatever it takes to keep the boss happy—perhaps to the exclusion of good corporate citizenship. But if you tell employees that their raises are tied to the company’s performance, then they will start thinking about what’s good for the company.
You get the behavior you incentivize.
If you tell the sales team that their bonuses are tied to sales, then they will deliver the sales; but you may not like the pricing. You may find that your deals are losers, but you didn’t tell them that the sales had to be profitable.
You get the behavior you incentivize.
Similarly, if you are a government contractor, a multi-billion dollar defense contractor, if you establish the wrong incentives you may find yourself with the wrong employee behaviors, and somebody with a conscience may decide to “blow the whistle” on those wrong behaviors. You may find yourself dealing with a full-blown criminal investigation, and resulting litigation under the False Claims Act. You may find yourself agreeing to a multi-million dollar settlement.
Sort of like Huntington Ingalls Industries (HII) did.
You get the behavior you incentivize, and sometimes the incentives are wrong and the resulting behavior is wrong. In the defense contracting world that situation tends to erode shareholder profit.
HII settled its FCA suit, initiated by a whistleblower, for $9.2 million. Not all that much, in the scheme of things.
The verbiage of the Department of Justice press release is dry and details are sparse. From the press release—
The civil settlement resolves alleged labor mischarging on various U.S. Navy and Coast Guard contracts dating back to 2003. HII allegedly mischarged labor incurred on particular contracts to other contracts, even though the costs were not actually incurred by those contracts. The settlement also resolves claims disclosed by HII that it had billed the Navy and Coast Guard for dive operations to support ship hull construction that did not actually occur as claimed.
Mischarged costs. Doesn’t sound too bad. It can happen to anybody.
But if you go looking for more details you can learn that there was a systemic problem, and (in our opinion) it started with employee financial incentives. For example, let’s look at an article written by Anita Lee for the Sun Herald; it relates some of the relator’s allegations that led to the settlement. According to the article, Byron Faulkner (the relator) alleged that the shipyard was subject to organized corruption. The article reported—
The whistleblower lawsuit outlines fraud at Ingalls by more than 20 directors, supervisors and foremen involved with filling out time sheets for contract work on Navy and Coast Guard vessels.
Completing tasks ahead of schedule or on time entitled Ingalls and company supervisors to incentive pay under the military contracts. Ingalls, the lawsuit says, ‘organized and allocated its supervisory and other personnel based on Ingalls’ corporate purpose of receiving maximum dollars in periodic incentive payments.’ Faulkner said he learned firsthand about the fraud after being named a foreman at Ingalls in August 2012.
In our view, the key sentence in the above quote has to do with the allegation that on-time schedule completion entitled the front-line supervisors to receive incentive pay. Unsurprisingly, their decision-making focused on completing tasks on-time—or on creating documents that showed tasks were completed on time regardless of the reality of the situation.
The article reported that “Daily time reports showed hours worked on specific projects, but if too many hours had accumulated on a project to qualify for incentive pay, Ingalls supervisors simply billed the time to a project that would qualify, even though the work was not being performed on that project.”
The whistleblower reported the situation to HII’s internal auditors, who investigated and corroborated at least some of his allegations. The article reported that “The company wound up firing at least 20 managers in the shipfitter and welding departments in 2013.” Two HII supervisors later pled guilty in December, 2015, for their roles in filing the false time reports. However, the FCA lawsuit alleged that the company’s anti-corruption efforts didn’t go far enough or reach all the affected organizations.
Finally, the article reports that HII released a statement that included the following:
The company informed the government of alleged misconduct by certain employees and fully cooperated with the government in investigating and reaching a resolution of the matter. The company has strengthened its compliance program to help ensure that no similar issues arise in the future.
There was no discussion as to whether HII had changed its incentive program to better align incentives with compliant behaviors.
Intellectual Property Dispute
We noted in passing that Advanced Aerospace Technologies, Inc. (AATI) had settled its dispute with Insitu and The Boeing Company and the US government over allegations that its patented technology had been infringed upon. AATI received $12.5 million in the settlement.
The settlement marks a long and contentious litigation history, going back to 2012. A key turning point occurred in early 2016, when Chief Judge Braden reviewed documents alleged to be attorney-client privileged, and ruled that many of the documents were not, in fact, privileged—and thus subject to discovery. Another litigation milestone occurred in November, 2016, when Chief Judge Braden denied a late Government Motion to Dismiss. In that latter decision, Chief Judge Braden provided a lengthy recital of the history of the dispute, as well as an appendix detailing “relevant statutory and regulatory provisions” that would seem to be a good resource for those hoping to deal with intellectual property matters within a government contracting environment.
We are not attorneys, nor are we any kind of intellectual property experts. That said, as we understand the decisions, AATI filed its patents, then received a government contract that required use of the patented technology. To summarize the dispute, we’ll just quote from Chief Judge Braden’s decision, omitting all internal citations.
On October 23, 25, and 27, 2000, AATI demonstrated a recovery system having a propeller guard mounted with a latching mechanism for the Coast Guard. Although the Recovery Contract required ten demonstrations, the Coast Guard decided to cease demonstrations, because several UAVs were severely damaged during the demonstrations. Thereafter, a Coast Guard Commander prepared a draft report evaluating the demonstrations and provided it to Mr. McDonnell. This report did not reference ownership of, or licensing rights to, the propeller guard mounted with a latching mechanism that was demonstrated by AATI to the Coast Guard. More than fifteen years later, on March 29, 2016, a Contracting Officer for the Naval Surface Warfare Center Dahlgren Division (‘NSWCDD’) sent a letter to AATI demanding title to the ‘inventions disclosed in AATI’s PCT/US/2009 Application; U.S. Patent Nos. 6,874,729; 7,097,137; 8,517,306; 8,167,242; 8,567,718; and 8,864,069; and U.S. Patent Application Serial No. 14/518,348,’ pursuant to 35 U.S.C. § 2025 and Federal Acquisition Regulation § 52.227-11.
(The CO demand occurred years after AATI filed a claim asserting that Insitu and Boeing had infringed on its patents, with the government’s authorization and consent.)
So it took five years and an unknown amount of legal fees, but AATI and the defendants reached an acceptable settlement. We do not know where the $12.5 million settlement payment will come from. The government could pay it. Boeing could pay it. Boeing could pay it and be reimbursed by the government. We don’t know. But we know that AATI is $12.5 million richer than it was, before its patents were infringed upon.
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