Pentagon Procurement Reforms Face Slim Chance of Success

By Nathaniel H. Sledge Jr.

If you hire the right people, you can give them the responsibility, then keep your mouth shut and collect your paycheck.

That was movie director Woody Allen at a 2010 press conference explaining why he and his casting director, Juliet Taylor, choose actors who will work well without a lot of direction.

The same idea applies to the Pentagon’s latest efforts to put an end to massive cost overruns in its procurement programs.

Inefficiency increasingly threatens the Defense Department’s ability to fulfill its missions. One important area for potential cost savings is defense acquisition. The Pentagon’s senior procurement officials and the military services are focused on the cost growth of major weapon systems, which has been tough to contain. According to the Government Accountability Office, in 2008, cost overruns for the Pentagon’s 96 largest programs were 42 percent higher than initially estimated. The overruns added up to nearly $300 billion.

Driving productivity and leanness into acquisition programs is the overarching goal of an efficiency initiative led by Undersecretary of Defense for Acquisition, Technology and Logistics Frank Kendall. Called the “should-cost estimation process,” it is intended to serve as the primary tool for ensuring that major programs are achieving targeted cost savings. The should-cost estimate itself is an internal management tool, developed by project managers, to incentivize performance. The estimate is not for public consumption or wide dissemination within the services or the Defense Department, but senior leaders can use it to gauge program efficiency.

To measure whether programs are efficiently run and affordable, acquisition executives must compare the actual cost of programs against the “service cost position,” which is determined through a non-advocate independent government cost estimate. This estimate is called the “will-cost” estimate. Not surprisingly, the actual cost of programs often exceeds the will-cost, and the will-cost often exceeds the budget profile. Herein lies the need for action.

Will-cost estimates are developed by a cross-section of financial and program offices at the Defense Department.

Seasoned program managers continually put downward pressure on the costs of their programs by identifying the drivers of each cost element and managing their programs to meet requirements. What is in the art of the possible is known as the should-cost estimate. This cost is what the program manager believes is possible in the context of creative, innovative and disciplined measures to increase productivity.

In theory, the annual should-cost estimate should be less than the will-cost estimate. On a multi-year basis, the should-cost profile must have an acceptable downward slope as it stays below — which is preferable — or approaches from above and eventually flies below the will-cost estimate profile.

The should-cost process should drive program managers toward the will-cost estimate. Project managers must look organically and within other government agencies for cost savings, and ought to use the results of should-cost estimates to inform contract negotiations and achieve savings.

In theory, the should-cost process is redeeming and valuable. At first blush, should-cost management is admirable because it provides impetus for program managers to be continuously aware of the cost implications of their decisions and plans. Insight and assessment lead to greater proficiency, too, as lessons are learned and applied to the next round of estimating and contract negotiating. Managers are then able to develop a repository of knowledge that can help shorten decision cycles, steepen learning curves and reduce the costs of conducting should-cost estimates.

Good intentions will not make this policy succeed. The solution to a multi-decade problem such as cost overruns will require new leaders, culture, processes and organizations. Sadly, none of these changes is on the horizon. Lacking fundamental change, an incremental and realistic policy that does no harm might work.

Should-cost management is only a small part of a larger effort to get better value for the taxpayers’ money. But how can the Defense Department reform acquisition when there’s so much waste and inefficiency everywhere else? Just as “no man is an island,” no aspirational policy such as the should-cost initiative can succeed if it relies on a generally dysfunctional culture that is resistant to change.

As long as the government maintains its extraordinary regulatory burdens and a fixed and entitled workforce, senior leaders will resort to a patchwork of disconnected and costly initiatives aimed at securing marginal improvements in efficiency.

Additionally, this effort to rein in costs will succeed only if it is launched properly, managed through a reasonable transition period and nurtured to become sustainable. Of these three difficult phases — initiation, transition and steady state — the launch, or initial implementation, is the easiest, but not by much. If the initial implementation fails, then the transition and steady state phases will be impossible because the policy will lack credibility as well as momentum.

Should-cost management will also fail if it is characterized by top-down, bureaucratic control, as it appears to be right now. The need to understand what a well-run program should cost is easily grasped. The devil, as they say, is in the details. The question is, who can best manage the vagaries of cost management to achieve program goals?

The should-cost process must be stable but updated continuously. Its databases should be secure but accessible to academicians, practitioners and the chain of management. And though slightly different in scope, it should have no less depth than is required for the mandatory should-cost review that occurs prior to contract negotiations. Sadly, all these processes — even in the Internet age — are manpower-intensive. Additionally, the increased depth and frequency of reporting gives birth to various process reviews, each of which requires pre-briefs.

As the initiated are fully aware, preparation for pre-briefs is a debilitating, non-value-added activity. Time is a precious commodity, and if history is any guide, the excessive oversight associated with should-cost management will expend lots of it.

Excessive bureaucracy is the sworn enemy of any enterprise that values innovation and efficiency. Put excessive emphasis on compliance, and it is compliance overkill, but not performance. Program managers should not be forced to take on additional burdens to implement the should-cost/will-cost policy. Reduced oversight is desired, but at least holding the line on current levels is imperative. Additional time, effort and resources must be minimized. Senior acquisition officials should leverage existing reports, reviews and databases. Ineffective reviews must be eliminated or curtailed to make room for should-cost management. In short, this must be a “bureaucracy neutral” policy.

Program executives and other decision makers must not lose sight that the ultimate goal of the should-cost initiative is to improve program efficiency and save unnecessary costs during a time of decreasing defense budgets.

As suggested in the World War II slogan, “Save kitchen waste for the pigs,” programs must contribute to the military services’ bottom-lines, so that resources can be applied where needed. Each program manager has a role to play in the success of the overall effort. Stovepipe mentality is tempting, but it must be resisted.

The services must find the sweet spot where the should-cost estimate provides sufficient — but not too much — information. An overload of information creates non-value-added activity at best, and results in debilitating, process-confounding measures at worst.

The military services are trying to come up with schemes to follow the spirit, if not the letter, of the new policy. Minor differences aside, the services’ approaches are similar. All are top-down and bureaucratic. Not to pick on the Air Force, but it serves as an example of how the services tend to address issues of accountability, effectiveness and efficiency.

Air Force documents suggest that the service is concerned with scrutinizing every program element and cost justification of a major weapon system. This is tantamount to jumping into quicksand. But this development isn’t surprising in the context of Air Force enterprise management. According to studies of acquisition efficiency, many of which will never see the light of day, the prevailing view among managers of Air Force programs is that the service’s management schemes are characterized by excessive top-down authority, over-centralization and endemic risk aversion. Tight oversight and compliance are this service’s preferred methods for achieving performance, but they do not work, especially for acquisition.

The consequences of autocratic culture and risk aversion are emphasis on compliance over performance, heavy oversight versus operational discretion, and the institution of numerous mandatory reviews that don’t add value. Furthermore, top-down prescriptions to ensure compliance lead to broad-brush, one-size-fits-all solutions. The nuance and flexibility necessary to successfully manage unique and disparate programs are often lost. In most large, hierarchical organizations the efficacy of these bureaucratic approaches naturally goes unquestioned. But it is clear, upon inspection, that this practice is inefficient. Skeptical? Well, programs have become increasingly unaffordable over the past 40 years, piling up trillions of dollars in cost overruns. Q.E.D.

The desire to scrutinize every program element will prove impractical. The military services should concern themselves with the drivers of program costs rather than nit picking the costs of every program element, which is virtually impossible. As the Russian proverb cautioned, the Pentagon should “trust, but verify.” That is, critical things deserve review and oversight, regardless of who is responsible for them. But it also implies that you can’t check everything. Troublesome trends deserve more scrutiny than healthy ones. For example, if a program’s should-cost estimate is less than its would-cost amount, then the program should not be penalized for not showing as much year-over-year progress in cost cutting as a program where the trend is reversed, which means there is more “head space.”

The level and frequency of scrutiny should be a function of the trajectory of savings and the rate at which costs are approaching or exceeding the will-cost estimate. Therefore, comparisons of the will-cost and should-cost estimates must be focused on the aggregate and on the dynamic nature of the difference between the two estimates.

Complexities notwithstanding, this initiative will not work without the cooperation of program managers. Beyond their patriotism and service orientation, they must have incentives to cooperate with the should-cost management initiative.

To ensure compliance, there must be positive incentives over punitive measures. Employing the carrot more often than the stick will make the establishment of an enduring and sustainable culture of efficiency more likely. Incentives must be aligned with performance to increase their credibility and reinforce the appropriate behaviors. Efficient program managers should benefit from “benign” oversight, while inefficient programs should get “help” but not sanctions; that is, unless the program is a candidate for restructuring.

Should-cost management faces an uphill battle because it is counterintuitive and confounding to human nature and the culture and traditions of the military services. Bureaucracy and lack of incentives pose the greatest obstacles to the success of the should-cost initiative.

Project managers have little incentive to build cost-savings into their acquisition program baselines because this act reduces their management trade space, making it more challenging to demonstrate year-over-year progress. A program manager who works to achieve a baseline reflective of should-cost initiatives is shooting himself or herself in the foot or, if one prefers, donning a strait jacket.

Project managers, contractors and functionaries at various levels are not likely to trust one another either, or cooperate with a regimen that will punish rather than reward efficiency. This does not mean that the efficiency initiative will fail, but different tools must be found if the catalyst of should-cost management proves ineffectual or its implementation becomes too cumbersome.

It is not the idea or strategy, but rather the implementation that matters most. The Defense Department has not demonstrated that it can successfully implement good, or even bad, management strategies.

In the absence of fundamental change, the ship of culture will not steer in the right direction, and the entire should-cost management enterprise will become an albatross, costing more than it saves. This failure will also frustrate the efforts of program managers to pursue cost savings. The track record of the military services at implementing complex business management regimens is simply not reassuring.

There have to be better ways. Instead of directing, the Defense Department should be decentralizing operations and focusing its attention on the structural problems that plague the entire national security enterprise. Maybe the department would be better off dealing with the four “creeps” — or horsemen of the Apocalypse — that haunt every institution of a certain age and size. These are mission, brass, regulatory and requirements creep.

Can the implementation of should-cost management overcome the endemic inefficiency that is built into the fundamental structure of the defense enterprise? Are things really different this time? It does not look like they are. There’s no real catalyst to force change. This is yet another top-down, bureaucratic solution for the perennial cost problem. Does business as usual really represent impending disaster? No, if we continue a policy of muddling through. Yes, if the defense budget is cut deeply and the Pentagon is held accountable for its financial management. But it has not been held to account since the dawn of the Cold War.

Issues of structures, resources and opportunities aside, most remaining problems are associated with principles, leadership or human capital management. After getting the principles right, the focus must be on leading and managing people. Even those who are not fans of his 43 neurotic movies have to agree that Woody Allen learned an important lesson that the Pentagon has not. Programs cannot be run successfully from the E-Ring.

If personnel in the field can’t be trusted to run programs more effectively, then dig deeply and overhaul the selection, training and promotion systems. Instead of relying on top-down directives to change perspectives and practices, why not devolve authority and responsibility to program officers? If senior leaders want to rein in costs, then why don’t they try tapping the creativity and energy of those closest to the work? If they fail, retrain them. If they fail miserably and repeatedly, show them the exit. If they are corrupt, send them to jail. But if they succeed, we should bottle their magic and give them greater responsibility and authority.

Nathaniel H. Sledge Jr., PhD, is a retired Army colonel who served as acquisition program manager in four project management offices, and worked at the Army Budget Office in the Directorate of Investment.

Topics: Procurement, Acquisition Reform

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