Pessimism About Acquisition Reform
Few people doubt the Federal acquisition system is broken. The only real question is whether it can be fixed. Opinions vary.
Leaders at the OFPP and DoD believe they have some bandaids to staunch the hemorrhaging of taxpayer funds, the waste associated with cancelled programs, and the ridiculously long development timeframes. They don’t promise a 180 degree flip-turn in the current bureaucratic swamp that impedes efficient innovation and execution. But they hope for some incremental improvements.
They are the optimistic ones.
Others say the problems in the defense acquisition environment are endemic and that they are too intractable to be fixed by anybody. Recent reports seem to telegraph that the current version of “acquisition reform” is dead on arrival, even as Ash Carter takes the helm at the Pentagon and Frank Kendall dishes about “Better Buying Power 3.0”.
We’ve offered opinions regarding Obama-era acquisition reform efforts, which have been mostly negative and probably more than a little cynical regarding the notion that more and/or better processes were going to fix the problems that contractors face when trying to perform Federal contracts. As we gain first-hand experience with entities that are agile and flexible and innovative we are learning how the CAS and FAR rules act to stifle and impede the very traits the DoD leadership says it wants in its contractors. We see, for example, how “high speed, low drag” contractors have to slow down and add overhead just to respond to the auditors, and how they are penalized and forced into litigation for failing to properly comply with the smallest regulatory nuance. We spend our professional lives trying to help contractors find a balance between the demands of the programs and the demands of the bureaucrats; and too often it seems more profitable to make the bureaucrats happy—and to hell with efficient program execution.
But we are not the only pessimists around.
Sanda Erwin, writing in National Defense magazine, reports that Gordon England, former Deputy Secretary of Defense (under Donald Rumsfeld), is one of the pessimists. Ms. Erwin quotes England as follows –
‘It's our form of government,’ England said during a panel discussion last week at a Naval Institute conference. ‘How can we be innovative?’ he asked, when it takes years to get budgets approved and move programs through the Pentagon bureaucracy. ‘That's the reality. How do we deal with this? It is a real issue.’
When he was Donald Rumsfeld's deputy secretary during the George W. Bush administration, England and his boss scratched their heads over this issue. ‘We've done 128 studies on acquisition. The bottom line is that I don't think it's going to get better,’ England said. ‘I don't believe commercial companies are going to jump into this environment because it hurts their commercial business.’
England was not the only pessimist to be quoted by Ms. Erwin. One panelist stated “The Pentagon's $180 billion a year research, development and procurement budget is not enough to entice new suppliers because of the regulatory burdens. From a commercial player standpoint, it's a very high cost proposition."
Ellen Lord, CEO of Textron Systems, was quoted as follows—
The Pentagon insists it wants faster and leaner programs, but the rhetoric is divorced from reality, Lord said. ‘We have layer upon layer upon layer of oversight that is putting so much cost into the system,’ she said. ‘Small companies cannot afford to play. Even big companies are opting out.’
Better buying power 3.0 encourages program managers to seek new products from commercial suppliers that fund their own research and development. But Pentagon requirements for internal company cost data deter commercial companies from doing business with the government, she added.
Another participant, Tom Captain of Deloitte Consulting, was quoted at length. We have paraphrased his quotes as follows—
Many in industry are a bit suspicious. Contractors get the feeling that current efforts to fix defense acquisitions are another ‘initiative du jour’ that will generate lots of reports and media coverage but will not break through the institutional inertia. It doesn't mean that the Defense Department doesn't have good ideas, but there is little reason to believe that any new round of reforms will reverse trends that keep weapon systems over budget and behind schedule.
The tenets promoted by ‘better buying power,’ or BBP, have been helpful… But not much real progress has been made. We haven't gotten the results we were looking for. Programs are getting more expensive and more complicated.
In the same magazine, Yasmine Tadjdeh wrote that CEOs of defense contractors are calling for a more business-friendly approach out of the Pentagon. For example, she wrote—
Jerry Demuro, CEO of BAE Systems, said industry is being stifled by odious acquisition red tape. Contractors must navigate layers upon layers of bureaucracy before it can develop systems. Contractors are also dealing with exhaustive audits that tie up personnel.
Extensive audits and bureaucracy are not ‘improving the affordability [or] the quality of these products and certainly the time to get that delivered to the soldier,’ he said. ‘Industry has demonstrated that it can be very agile, ... but we have organizations ... where we have one third of the revenues, half of the employees and now three times the number of auditors resident in the facility,’ he said. Dealing with audits and regulatory hurdles are expensive and labor intensive. That is money that is not going toward the development of ‘the next whiz bang application,’ he said.
To some extent, the foregoing are examples of time-honored complaints. But on the other hand, it seems clear that many (if not most) knowledgeable insiders think the current problems can only be solved by a cultural shift at the Pentagon, as well as a change in approach by Congress. We are sadly pessimistic that such dramatic changes are going to develop in the near future.
Let’s put it another way. BBP and its spawn are evidence that DoD leaders are looking for a gradual change from the status quo, an evolution if you will. From where we sit, what’s required is a fundamental revolution. A complete dismantling of the current system in favor of a more streamlined and rational approach, where buyer and seller agree on terms and then hold each other accountable for fulfilling those terms. The likelihood of such a revolution happening anytime soon is about the same as you winning the next Lottery you enter.
Sanders Presenting at Joint NCMA/AGA Educational Seminar
Nick Sanders, Principal Consultant of Apogee Consulting, Inc., will be a presenter at an upcoming educational seminar jointly sponsored by the San Diego Chapters of the National Contract Management Association (NCMA) and the Association of Government Accountants (AGA).
On Wednesday, March 18, 2015, Mr. Sanders will be participating in a seminar entitled “Estimating, Proposing and Analyzing Material & Subcontracts” along with Tom Schmitz (former Manager of Estimating and Pricing for Raytheon’s Space and Airborne Systems division), Leann Densley, and Jose Gutierrez (DCMA Cost/Price Analysts). The 3 hour seminar will cover such topics as:
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How to support proposed material and subcontract costs
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Ten ways a supplier/subcontractor can improve proposals
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Documentation required to support acquisitions of commercial items
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How the Government analyzes proposed material and subcontract costs
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Performance of Cost Realism analyses
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Government evaluations of prime contractors’ Cost/Price analyses
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Providing cost or pricing data from subcontractors to prime contractors
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When a prime contractor should request assist audits from DCAA and/or DCMA
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Price Reasonableness and what happens if a prime contractor cannot support the reasonableness of subcontract pricing
Location: San Diego, CA
Cost: $75 for NCMA/AGA members, $100 for non-members
Register online at www.ncmasd.org
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Resources for Fighting Fraud
 We’ve not been shy about publicizing fraud and corruption in the defense acquisition environment. We’ve called out passive leadership, negligent leadership, and even actively corrupt leadership. We’ve called on public company senior leadership and Boards of Directors to invest in effective internal controls. We’ve called on the Secretary of Defense and the ranks of senior military officers to fight fraud and corruption. All in all, we’ve written nearly 50 articles that have something to do with internal controls, effective or otherwise.
Government auditors are taught to look for fraud and to report it when they find evidence of it. Indeed, they are taught to look for “fraud indicators” and are taught various fraud scenarios. While at times the training results in an attitude that goes a bit past “professional skepticism” and starts to look more like prejudgment, in point of fact there is enough wrongdoing by enough government contractors to justify an auditor’s sensitivity to fraud. The bottom line is that while some auditors take skepticism into the realm of adversarial bias, we as taxpayers very much want auditors to be looking for wrongdoing and to report it when they have evidence of it.
But more than that, we should want to create a culture of ethical decision-making and compliance. We should not wait for auditors to ferret out wrongdoing. We should not rely on after-the-fact audits to detect instances of fraud and corruption. We need to be fighting fraud on a regular basis, so that the auditors have nothing to find.
Another Apogee Axiom: You can’t audit an entity into compliance.
You cannot create a compliant state via audit.
The most an auditor can do is to detect instances of wrongdoing after they’ve occurred. When an auditor finds an instance of noncompliance, that means some individual or group of individuals chose not to comply. The organization created an environment where that person or those people felt it was okay to cut a corner or to do a little “gaming of the system.” Either the expectations weren’t made clear or the individuals didn’t receive appropriate training – or they ignored what they were told. In many cases, we suspect the individuals simply mimicked the behaviors they saw around them. Leadership set the example and the ranks mirrored it.
A study by the U.S. War College found that U.S. Army officers routinely lie. The study found “in the routine performance of their duties as leaders and commanders, U.S. Army officers lie.” That’s not us saying so; that’s the U.S. War College saying so in an official publication. CNN discussed the report, and wrote—
The study describes a ‘culture where deceptive information is both accepted and commonplace’ and where senior officials don't trust the information and data receive -- such as compliance with certain Army training requirements or forms outlining how a mission was carried out. But Army officers are faced with an increasing number of requirements and bureaucratic hoops, according to the study, and rather than work with a rigid military brass to reform a burdensome bureaucracy, officers will simply sidestep those requirements, lying on forms and often rationalizing their answers.
The result? ‘Officers become ethically numb,’ explains the study … ‘Eventually, their signature and word become tools to maneuver through the Army bureaucracy rather than symbols of integrity and honesty,’ the researchers wrote. ‘This desensitization dilutes the seriousness of an officer's word and allows what should be an ethical decision to fade into just another way the Army does business.’
And if military officers routinely engage in lies and deception, should we be surprised at the number of instances of bribery and corruption in the enlisted ranks being reported by the DoD Inspector General? And should we be surprised if the contractors start to mimic the behavior of their military customers, if only to survive?
Well, yes. We should be surprised. We should be surprised and appalled. But we’re not. Not really. We’re numb and a bit blasé to the notion of corruption within the Department of Defense and its contractors. It’s become the norm, hasn’t it? We have become so used to DoD IG auditors and DCAA Auditors and fraud investigators finding instances of fraud and corruption that we no longer question the source.
But you can’t audit an entity into compliance.
You can’t make employees accurately report time by conducting frequent timesheet audits and reporting instances of noncompliance. You can’t make buyers conduct a good source evaluation and selection by reviewing purchasing files months after the fact. You can’t detect bribes and kickbacks by making people fill out a form once a year.
You want an ethical cultural where compliance with expected standards is the norm? You’ve got to work for it. You’ve got to communicate expectations and train people. You’ve got to deploy rigorous internal controls. And most importantly, you’ve got to hold people of all ranks accountable for their decisions.
Creating an ethical culture is not the province of auditors; it’s the province of leadership. And academics studying leadership also study ethical cultures.
In one academic article, we read the following –
Individuals' intentions to report the ethical violations of others are also related to moral agency. If unethical behavior is to be addressed in organizations, authority figures must know about it and therefore must set conditions to promote follower reporting. Followers tend to keep their knowledge of ethical problems to themselves for a number of reasons, including fear of retaliation, a sense that nothing will be done, or habituation to silence in authority situations (Detert & Edmondson, 2011;Kish-Gephart, Detert, Treviño, & Edmondson, 2010). Ethical leadership and a strong ethical culture can be expected to enhance followers' willingness to speak up because they are more likely to feel protected from retaliation and to believe that positive actions will be taken to address their concern.
In sum, there are resources and people who can help guide cultures toward a state of compliance, but it won’t be the auditors leading the journey. Auditors exist to detect instances of noncompliance that the culture created, either through action or inaction. But until an entity, organization or culture reaches the desired state of ethical decision-making and compliance, auditors are all we’ve got.
And thus the need for resources to help auditors detect fraud, such as this great site hosted by the DoD Inspector General. The DoD IG site contains lots of resources for fighting fraud, including “Red Flags and Indicators,” “Contract Audit Fraud Scenarios and Resources,” and “Other Fraud Scenarios and Indicators.” Granted, some of the scenarios and indicators are intended for governmental use but they can be easily tailored for use by contractors.
There is even a set of quizzes to test one’s “Fraud IQ”. Go on, take the quizzes. You take all those quizzes on Facebook, don’t you?
But that’s not all.
We also found an Air Force Procurement Fraud Indicators Handbook, written in 2008. We located a 2012 PowerPoint slide deck from a presentation made by Jim Ratley (ACFE) to the Institute of Internal Auditors entitled Corporate Fraud Awareness in Today’s Global Regulated Environment. And we also dug up a book by the OIG of the National Science Foundation called Possible Grant Fraud Indicators.
And those were all returned within the first ten hits of a Google search using the phrase “fraud indicators.” We did not even look at the other 60 million hits Google returned.
The point is that there are many, many resources available for fighting fraud and corruption. And such resources need not be used only by auditors. They can – they must be – used by organizational leadership to drive behavior and decision-making toward a state where ethics and compliance is simply a part of the entity’s culture.
The resources to fight fraud and corruption are readily available.
But is the willingness?
Tone at the Top
 You know we don’t like to post and repost and repost again the litany of fraud and corruption stories that flush down the sewer pipes of the internet like polluted storm runoff spills into the local lakes and beaches. The ones who might benefit from reading those stories don’t look for them, or don’t believe they apply. Fraudsters don’t think they can get caught, or they don’t think they have any other options available. So it doesn’t matter what we post to the ones who need to change.
And our passionate pleas for action and accountability at the top of the pyramid, for the “tone at the top” to be more than merely a tone, to be a full orchestrated symphony of internal control and monitoring, similarly falls on deaf ears. The ones who need to lead their organizations don’t look for them, or don’t believe they apply. Negligent leaders don’t believe they need to do any more, or think they have other, more pressing, priorities. So it doesn’t matter what we post to the leaders who need to change.
In one of our screeds (link above), we wrote –
“When you find an entity where senior leadership is not being held accountable for its actions (or inactions) then you can be fairly certain you are going to find corruption and fraud somewhere lower in the organization.”
With those depressing thoughts in mind, consider this recent news story published by The Washington Post. Written by Craig Whitlock, the story discusses gratuities accepted by three Admirals and how, as a consequence, they were censured. According to the story –
Navy officials said the three admirals improperly accepted ‘extravagant dinners’ and other gifts from Leonard Glenn Francis, a Malaysian defense contractor who made a fortune by supplying Navy vessels at Asian ports until his arrest in 2013. The three officers — Rear Adm. Michael Miller, Rear Adm. Terry Kraft and Rear Adm. David Pimpo — were sanctioned for misconduct committed in 2006 and 2007, when they were assigned to the USS Ronald Reagan aircraft carrier strike group.
The three Admirals did not act alone. As Mr. Whitlock reported—
Francis, known as ‘Fat Leonard’ in Navy circles for his girth, pleaded guilty in federal court last month and could face up to 25 years in prison. He admitted to bribing 'scores' of Navy officials with prostitutes, envelopes stuffed with cash, luxury travel and other enticements in exchange for classified information that he used to cinch federal contracts.
Five current and former Navy officials have also pleaded guilty in the case; two others are facing federal criminal charges. Prosecutors say more indictments are likely, especially now that Francis has agreed to cooperate with investigators. The Navy has said it expects to mete out discipline in the coming months to still more officers whose misconduct was not criminal in nature but who may have violated ethics rules.
Now, it’s not like this situation sprung up suddenly like Venus arose from the waves. We’ve been following it for some time. And we’ve clearly noted that this is not just a Navy problem; it’s a DoD-wide problem. For example, we reported that one Major General was called on the carpet for ethics violations. Meanwhile, a former US Air Force Lieutenant General just agreed to pay $125,000 to settle claims that he engaged in prohibited a conflict of interest after he left military service and became the CEO of Mav6, LLC, a privately owned defense contractor.
And while all this is going on, the lower ranks have their own stories of bribery and corruption. For example, here and also here.
As we asserted long ago, when you find an entity where senior leadership is not being held accountable for its actions (or inactions) then you can be fairly certain you are going to find corruption and fraud somewhere lower in the organization. We offer this blog article as evidence in support of that assertion.
Let’s put this into perspective, shall we?
While Contracting Officers and Contracting Specialists and contractor compliance folks are arguing over complex FAR and DFARS rules, while smart people with experience and training are arguing over the interpretation of a FAR clause or arguing over the interpretation of a recent legal decision, these military officers (who have risen to the top echelons of their professions) are wantonly and blatantly ignoring the most fundamental ethical precepts. While acquisition professionals publicly debate the authority granted to a Contracting Officer’s Representative or whether a Task Order can be modified after the expiration of the underlying ID/IQ Period of Performance, these leaders are accepting gratuities and proffering “classified information.”
Or, as Vern Edwards recently posted on WIFCON after a lengthy debate by seriously competent people about an arcane point —
… I'm leaving this petty crap topic behind me and moving on to more important topics in acquisition -- like the sources of workforce competence, the nature of services, the nature and principles of acquisition strategy, and the effectiveness of competition policy. I'll be damned if I'll spend my last years in this business arguing about COR authority rules when we don't know how to buy IT in a world in which IT is crucial to our national security and public well-being. … We've got serious problems in acquisition, what with Supply Corps admirals being admonished and relieved for accepting the services of prostitutes provided by ship husbanding contractors and a workforce that is losing respect, trust, self-esteem, and control of its own professional destiny.
Mr. Edwards was correct, as is usually the case. It’s human nature to focus on the little risks and to ignore the bigger problems. And make no mistake, the Department of Defense has some really big problems that desperately need to be solved.
It’s time for some acquisition leaders to emerge and to be listened-to. It’s time for the new SECDEF to shake things up, to up-end the status quo, and to implement some serious internal controls that act to detect and deter wrongdoing by the military and the acquisition folks that support them.
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Recently DCAA issued two pieces of guidance to its auditors aimed at assisting them in distinguishing between “expressly” unallowable costs and the normal, run-of-the-mill, unallowable costs. It matters and there are financial implications involved. As we noted in our first article (on the first piece of audit guidance)—
