Sequestration as a Godsend: Operate the DoD as a Modern Business Organization

Executive Summary

Two years ago this month, Small Wars Journal published an opinion piece I wrote titled, “The End State”.  The first sentence sums up the gist of the paper: “Modernizing the Department of Defense (DOD) organization using known blueprints from the market place will allow the DOD to remove $100B from its annual baseline budget without cutting a single weapon system program. Pretty bold statement; but take it to the bank."

That paper is essentially a summary of a much larger work I produced to articulate concrete changes designed to transform the DOD and the Services into an efficient and agile enterprise. I never found a publisher for the larger document and it has lain fallow so to speak until now.

After Secretary Hagel’s speech at the National Defense University (NDU) on 3 April where he announced he had tasked the department to conduct a strategic review, I contacted the team at the SWJ and asked if they would be interested in publishing the larger document in a series.  The fact that you are reading this now, indicates they said yes…

In Secretary Hagel’s words, “…we need to challenge all past assumptions, and we need to put everything on the table… it is already clear to me [we] must confront the principal drivers of growth in the Department’s base budget – namely acquisitions, personnel costs, and overhead.”

That is what this paper does.

The End State

Dr. John Kotter, arguably the most quoted individual in the field of change management summarized the state of change required in his 1996 book, Leading Change: 

…The typical twentieth-century organization has not operated well in a rapidly changing environment.  Structure, systems, practices and culture have often been more of a drag on change than a facilitator.  If environmental volatility continues to increase, as most people now predict, the standard organization of twentieth century will likely become a dinosaur…

The rate of change in the business world is not going to slow down anytime soon.  If anything, competition in most industries will probably speed up over the next few decades.  Enterprises everywhere will be presented with even more terrible hazards and wonderful opportunities driven by the globalization of the economy along with related technological and social trends.

Over the past thirty years, in response to market forces, the world’s largest public corporations modified their organizational constructs to be more agile, autonomous, self contained, accountable and successful. They had to respond to survive.  They have taken advantage of technology to slash overhead, merge organizations, eliminate whole echelons of management, increase individual productivity, optimize its supply chain, and provide its investors complete transparency to its management and business successes or shortcomings in near real time. 

Conversely, the DOD or military services answer to virtually any business modernization problem they have faced in the past twenty years has been to throw technology at it the problem. To be fair, the marketplace did the same thing in the eighties and early nineties.  CIO’s were buying the next best thing as fast as corporate could empty their wallet.  In the early 2000’s, the CEO started to ask questions…we spent all of this money, but not only did we not get productivity improvement, but our costs to sustain this technology stack are out of sight.  In 2004, McKinsey & Associates published research finding from a study that looked at 200 companies from 1994 – 2002.  This research documented the following:  When businesses bought software to retire legacy applications without organizational change they managed a 2% ROI.  When they leaned out their organization without any change in the systems they used, they managed an ROI of 8%.  When they combined the two initiatives, companies achieved greater than 20% ROI. 

DOD is aligned along functional disciplines whose goal is to make sure it spends what it budgeted. In DOD’s case, the organizational constructs allowed the technology spend to be duplicated hundreds if not thousands of times over. Similarly the DOD duplicates its organizational alignment many times over at each echelon of management.  And for all intents and purposes, the DOD has not flattened its organizational alignment; there are ten echelons of management between the SECDEF and the brigade in the fight.  The ROI in the DOD stands to be substantially larger than 20% simply by organizing by lines of business, taking a hard look at how many times it needs to staff a cost center and cutting out whole echelons of middle management.  Couple that with the software technology they selected the ROI stands to be substantially greater.

The need to morph the organization to respond to threat is no longer a once every ten years gig.  It is a daily event now and will eventually become an hourly event, just like it is on the battlefield.  The world knows there is no military more able to morph to the conditions of the battlefield, respond accordingly and deliver the desired outcome than the United States military.  But the rules of war have changed.  It is not enough to throw money at the problem and win by brute force logistics; in fact the country cannot afford to fund the DOD at the current levels of the GDP. The internal businesses supporting the military team in the field are now faced with a crisis they have never before witnessed: what was once a variable is now a constant.  Change is constant. The military must now turn its attention to becoming the most efficient consumer of resources without sacrificing capability.

To me, sequestration is a Godsend.  Sequestration is a once in a generation opportunity to address the changes needed to take the US military to the next level of capability.  As President Franklin Roosevelt said in his first inaugural address,  “This is preeminently the time to speak the truth, the whole truth, frankly and boldly…that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”

Bottom Line: DOD needs to address its management practices (organization) to find its way out of this morass.  Once the carving, shaping, sanding and polishing is complete, the new, efficient DOD organization can lay in automation to provide the tools necessary to support it. 

In the following pages, you will conclude the Department of Defense (DOD) and Congress have not kept up with the modern management practices in the new world of consumers with a myriad of choices, instantaneous information on quality, customer satisfaction, global competition, compensation practices, and optimized global supply chains.  Where the DOD approach to organization was once the organization construct most copied by large corporations in the 1950’s, today that is no longer the case.  

Because the total cost of sustaining the force is growing faster than inflation, DOD needs real growth simply to maintain present force levels.  Sustaining our current size and capabilities is essential to prosecute current wars, meet U.S. commitments worldwide, and conduct unanticipated operations, including relief efforts for natural disasters.  We cannot afford to make cuts in the size of our force or our operations while we are at war. --Deputy Secretary Defense William J. Lynn, statement to the house Budget Committee, 4 March 2010

The opinion Mr. Lynn tendered, which assuredly came from advice his staff provided, assumes the DOD organization is optimally constructed and its management, compensation and business practices are equally lean and mean.

If you believe his statement is an irrefutable fact chiseled in stone, you won’t find this document enjoyable reading…because the DOD is not organized optimally, and its management, compensation and business practices are relics from a time long since passed. Even more worrisome is the fact there isn’t a single four-star military leader who has taken ownership of this very real threat to our security.  Congress doesn’t get off the hook either.  They impose administrative requirements that by their very nature introduce a lot of make work for the sake of information and oversight. They need to man up and work with DOD to eliminate the artificial barriers in exchange for access and transparency of their books.

The old organization cannot keep up with the speed of change.  The old organization is bloated with overlapping and duplicative functions.  The old organization does not provide incentives to the employees to improve their productivity.  The old organization does not incentivize management to flatten their organization; in fact it incentivizes them to do the exact opposite.  The old organization is not easy to understand who does what, to whom, and when.  The focus is blurred and accountability suffers as a result.  Note the term “old”; unfortunately it is really “current.” 

Modernizing the organization using known blueprints from the market place will remove $100B from the annual baseline DOD budget.

There are four phases DOD will need to successfully complete in order to transition from the most expensive and lethal military to operate and maintain to the most efficient, sustainable and lethal military to operate and maintain. These phases are not serial once DOD starts the first phase. 

Phase I will be the easiest to execute, but hardest to start. This is the building block phase. This is where the DOD leaves the comfort zone of its current manifestation, decides to take the leap into the unknown, re-organizes the corporation along strategic business units (SBU’s) and separates cost centers from business entities.  This phase will produce a minimum 5 SBU’s and 3 cost center groups. It eliminates duplicative staff between OSD and the Joint Staff. It eliminates the practice of having staff manage line organizations. It eliminates duplicative staff between the Service Secretariat, the military HQ staff, and the major commands. It consolidates a number of headquarters staffs whose line of work is closely related.  Using the Army as an example, they will be able to close a minimum of 25 center or command headquarters in this phase. And it completes the transition to joint objectives as envisioned by the Goldwater-Nichols legislation of 1987.

Phase II will be much harder and will have more emotion involved.  It still is an organization alignment exercise, but this one will explore and eliminate echelons of command because technology enables them to do so. This is where the military Service Chiefs will have to bite the bullet on their watch and lead the effort to winnow down the senior officer “Christmas tree.” This is also where DOD will adopt a much leaner management model within the remaining companies themselves. Lean is defined as “doing more with less. Use the least amount of effort, energy, equipment, time, facility space, materials, and capital – while giving customers exactly what they want”. It is designed to remove duplicate functions at each management level.  It is designed to eliminate waste in any business process.  In this phase, again using the Army as an example, they will be able to close 30 command headquarters.  Of the commands remaining, their staff structure will become much leaner.  Each HQ will have a commander, a director of operations, director of industrial support and a director of community support.  The director of operations fills the role of commander in his/her absence.  Deputy CGs will disappear.  Everyone will work in the command center; there is no staff.  They will not replicate cost centers below the Strategic Business Unit.

Phase III, which has proven to be intractable to date, centers on getting the internal DOD businesses to operate collectively and collaboratively on a unified business platform.  The savings achieved in the first two phases will appear trivial compared to the savings phase III will deliver. Again using the Army as an example, this is where the Army will take advantage of the ERP software they have selected by adopting an entirely different approach to fielding software across the Army.

Phase IV will be the hardest because it will require Congress and DOD to collaborate and agree to modify business practices in areas of budgeting, acquisition, spending, resource management, asset management and compensation plans.  This section is a summary of types of things that need to be addressed, since in reality, this section alone could be the subject of another paper.

“We have met the enemy…and he is us”

Walt Kelly’s immortal phrase coined on an Earth Day poster in 1970 really does capture the essence of the challenge facing DOD.  DOD appears to need more resources but with the economic challenges facing the country today, Secretary Gates says the DOD needs to increase the productivity for what it spends and that of its people. Every dollar they mismanage or spend needlessly is lost for truly needed requirements. Fixed costs are a burden that eliminates innovation and flexibility. Every rule that needlessly adds cost to a process is a rule they need to eliminate unless the law requires it; and they should confirm the law still has merit before moving on to support it.  The cold hard reality is Secretary Gates’ “efficiency” initiative is but the tip of an iceberg.  Two years after I wrote this paragraph, the urgency to address these issues has become even more intense.  Secretary Hagel has tasked his subordinates to provide him a plan to cut 33% of the DOD.  With aggressive leadership that is thoroughly convinced the nations’ security rests upon adopting these modern organizational constructs, the military will achieve organizational quality and effectiveness that will surprise everyone.  Because the topic is quite complex as well as detailed, this paper will be published as a series of articles.

Part I

…The typical twentieth-century organization has not operated well in a rapidly changing environment.  Structure, systems, practices and culture have often been more of a drag on change than a facilitator.  If environmental volatility continues to increase, as most people now predict, the standard organization of twentieth century will likely become a dinosaur. --Dr. John P. Kotter, Leading Change

In business terms, with an annual baseline budget of $549 billion and a combat operations bill for $159 billion, the Department of Defense (DOD) is the largest multi-national conglomerate in the world by a factor of ten.

In business terms, DOD principally produces teams that compete on any stage and win.

In business terms, the DOD overhead is excessive which means DOD has extraordinarily large complements of people who do not pull triggers in contrast to those that do.  This fact translates into billions of dollars spent that do not improve capability or value.

In business terms, each internal DOD organization that provides support to the team is a monopoly.  They do not have any competition to drive an ongoing evaluation of the way they operate.

In business terms, the DOD operates as a cost center; without employee incentives to reduce the cost to operate the center, their objective is to spend everything allocated.

In business terms, leadership is incentivized to increase their staff because pay and position is based upon the number of people under their supervision…not for producing a quality product or service for an industry leading price point.

In business terms each Service manages 80 plus distinct business entities and a dozen cost centers, but you would not know that looking at the organizational structure.

In business terms, 80% of the businesses each Service manages are the same type of business as its sister Services; the only difference is the type of team they produce.

In business terms, its organizational structure has enabled the stovepipe functional domains to purchase and develop thousands of duplicative or overlapping business systems.

In business terms, after many billions of investment to automate its business processes, the cost to run DOD has gone up and DOD is unable to pass an unqualified audit.

In business terms, the senior military leaders (Service Chiefs) do not want to be remembered as the Chief who dismantled the status quo and eliminated 80% of the four star billets on their “watch.”

How Do “We” Manage “Us?”

In business terms, the DOD and its three Service entities remain organizationally in the last half of the last century.  Each employs a traditional top down autocratic, bureaucratic, mechanistic line and staff organization.

Professionals who study organization theory say the line and staff organization was the predominate construct employed by the largest corporations in the middle of the last century.  They also say the organization itself is slow to move on an opportunity, slow to innovate, slow to respond to complaints about product or service, risk averse, and often if not always has very complex and confusing chain of command.  Since the competitive landscape did not change very often, and the firms were able to sell everything they made to the domestic market, this management construct was put in place to reduce the chance to make mistakes; another way to look at it would be to preserve the status quo.

The Under Secretaries of Defense (USD) and the Assistant Secretaries of the Services as well as the traditional cost centers like Public Relations (PR), Chief Information Officer (CIO), and Director of Administration and Management (A&M), provide policy guidance as well as run both cost centers and businesses with no real accountability or focus on the results. So right off the bat, DOD has a conflicted organizational construct. Some DOD cost centers run fee for service organizations and some business areas operate under direct appropriation from Congress funds. USD (P) is in the direct operational command chain while USD (C), USD P&R and USD AT&L provide resources and support and USD (I) provides a service.  In their current configuration, the five Under Secretaries represent the DOD conglomerate staff.  Collectively they manage 15 independent Defense Agencies and three corporations (Army, Navy, and Air Force), each with Assistant Secretaries that roughly align with the conglomerate although the Service Secretaries do not have an equivalent Assistant Secretary for USD (P) or USD (I).  As noted these Secretaries manage agencies with a mixed bag of responsibilities that mix cost centers with business units. Here are some examples.

The USD, P&R has responsibility for HR, a common cost center, which includes talent management, workforce management and workforce deployment for both military and civilians (3.1M employees); it also is responsible for one of the largest basic and domain skills training businesses (145K people/year) in the world, not to mention a recruiting business and an internal education business that ranges from general dependent education to college (service academies) followed by professional education in specific fields such as medicine, contracting, logistics, and foreign languages.  On top of that they also are responsible for managing the $4B Defense Travel System, the $30B internal DOD military medical insurance program (TRICARE), the Service Group Life Insurance (SGLI) program, and the Armed Forces Reserve Affairs, which by the way includes everything: labor, real estate, budget, etc.  And they also manage a $6B global grocery business (DeCA) and the retail exchange stores around the world.

The USD, AT&L is the chief procurement officer and the chief technology officer of the DOD again each of which are common cost centers. In addition to these roles, AT&L provides policy guidance for contract management, missile design and procurement, business transformation, depot maintenance, field maintenance, supply chain, wholesale and retail supply, transportation, research & development, 28.3M acres of real estate, 555K facilities to maintain and manage with a replacement value of $710B, and a $55B construction, engineering and environmental compliance operation.  They also run the Defense Acquisition University (DAU), manage a $38B wholesale distribution business (DLA), a contract management agency (DCMA) responsible for keeping track of $400B in annual spend, an $8B missile design and procurement agency (MDA), a massive defensive activity to limit the use of weapons of mass destruction (DTRA), and a $3.2B Research Center (DARPA).

The USD, Policy is responsible for the DOD global policy for combat operations, deterrence, and humanitarian relief.  They also deliver the SECDEF instructions for any operation to the Joint Staff.  And yet, they run a $36B foreign military sales organization (DSCA), and a POW/MIA agency.  If you look closely at their organization, it effectively mirrors the Joint Staff and the COCOM alignments. 

The Joint Staff, combined with the Combatant Commanders virtually mirrors the USD, Policy organization, plus intelligence, HR, Ops and CIO.  The Joint Staff J5, J7, and J8 replicate USD (P) ASD, Strategy, Plans and Force Structure and the Combatant Commands align with their political counterparts on USD (P). 

Most of these “businesses” represent a community or professional service or an organization that designs, builds, buy, sells, distributes or repairs product. Several of these agencies provide direct combat support and combat service support to the joint community. OSD staff is managing line organizations that are “in the fight” that logically align to one or more of the specified Joint commands.  This practice dilutes accountability for the various operations and businesses the DOD manages and complicates the flow of information, coordination, and chain of command necessary to achieve a unified joint response. As you might imagine, there is a lot of duplication of effort and overlapping responsibilities under these circumstances. 

The Flip Side

Dr. John Kotter, quoted earlier in this document from his 1996 book “Leading Change”, is considered the # 1 change guru of change gurus in America.  As noted he opined, “the standard organization of twentieth century will likely become a dinosaur.” He also went on to say, “The rate of change in the business world is not going to slow down anytime soon.  If anything, competition in most industries will probably speed up over the next few decades.  Enterprises everywhere will be presented with even more terrible hazards and wonderful opportunities driven by the globalization of the economy along with related technological and social trends.”  He was and is correct.

Over the past thirty years, in response to market forces, the world’s largest public corporations modified their organizational constructs to be more agile, autonomous, self contained, accountable and successful. They all reacted to the phenomena of having a customer who has all the information necessary to make an educated value driven decision on whether to buy from company A or company B. 

They had to respond to survive.  They have taken advantage of technology to slash overhead, merge organizations, eliminate whole echelons of management, increase individual productivity, optimize its supply chain, and provide its investors complete transparency to its management and business successes or shortcomings in near real time. The speed of information, disconnected from the confines of four walls permeates the individual consciousness with osmotic efficiency 24/7/365. In less than five years a social network on the Internet went from 0 to 500 million members.  Imagine having that kind of access.  

Every organization that survived took the steps to make visible its individual profit / loss centers and flatten their organization to respond to the lowest level of customer concerns or employee innovations in the time it takes to boot up your laptop. They can respond to the newest competitive threat in the time it takes to read the RSS (Really Simple Syndication) feed.

The country has been at war since 1991.  To make matters worse it is now in the midst of the worst financial crisis since the 1930’s.  Unemployment hovers around 9.5%.  Interestingly enough, the wages and benefits public employees earn have come under fire.  Why do we have so many of them?  Why do they have better benefits and earn better wages than an equivalent role in the private sector? What if Congress reacts to this and drops an indiscriminate meat axe to the DOD budget?  It is already happening.

As a matter of principle and political reality, the Department of Defense cannot go to the America’s elected representatives and ask for increases each year unless we have done everything possible to make every dollar count…[that cannot be accomplished] unless there is real reform in the way this department does its business and spends taxpayer dollars. --Honorable Robert M. Gates, US Secretary of Defense, 18 May 2010

In the original paper, I titled it “The End State.” On the one hand it represents a goal; on the other it is a goal that never ends.  The need to morph the organization to respond to threat is no longer a once every ten years gig.  It is a daily event now and will eventually become an hourly event, just like it is on the battlefield.  The world knows there is no military more able to morph to the conditions of the battlefield, respond accordingly and deliver the desired outcome than the United States military.  The rules of war have changed.  It is not enough to throw money at the problem and win by brute force logistics; in fact the country cannot afford to fund the DOD at the current levels of the GDP. The internal businesses supporting the military team in the field are now faced with a crisis they have never before witnessed: what was once a variable is now a constant.  Change is constant. The military must now turn its attention to becoming the most efficient consumer of resources without sacrificing capability.

DOD needs to lead

One of the sacred tenets of our Constitution calls for civilian control of the military.  Beginning with President Washington, each subsequent President has deemed it appropriate to have a cabinet to help him manage the business of government.  There have been several iterations of this model, but the basics are the same.  The political leadership has its staff and the military leadership has its staff.  Each staff duplicates the other.  The overriding premise of this construct has been two fold.  The nation’s military is under civilian control, and the civilian leadership jealously guards this prerogative.  That said the military is equally jealous about its self worth and has always felt that it had to have its own staff to “interpret” the political guidance to the field commanders so that military people could relate to military people. 

After twenty years at war, the political and military echelons in DOD and the Service Secretariats have never worked more closely and in concert even though these two entities operate as separate staffs. If Secretary Gates brought in Jack Welch, the legendary former CEO of General Electric, how do you think he would structure us?  What would be the art of the possible if they were to look each other in the eye and say, “Do you think this construct has outlived its useful life?  What do you say we take the next step and merge these separate echelons and acknowledge the technology available today allows, in fact enables, us to reduce further the levels of coordination.”

On the analytical level, the question before DOD and Congress is how do they acknowledge these facts and produce a politically acceptable management model?  What model will allow the DOD to maintain civilian control of the military establishment, collapse duplication of common skills and management echelons, and still provide the Congress the visibility into how DOD manages their investments and the President the capability to support the country’s global national security agenda? Below are the core challenges facing the DOD:

• Congress imposes administrative requirements that by their very nature introduce a lot of make work for the sake of information and oversight. This is their way to impose their will upon and manage DOD and the Services and hold them accountable. Unfortunately, it perpetuates illogical procurement practices that ultimately increase the landed price of the asset.
• DOD may not make any changes without Congressional approval.  How many businesses would survive if they had to go to their stockholders to get approval each and every time they wanted to close a factory, lay off people, hire a CEO, promote an executive, buy a product, or change the way they are organized?
• Civilian control of the military has led to an organizational approach where civilian and military staffs are virtual mirrors of each other
• There isn’t any distinction between a business and a cost center
• OSD staff manages a number of line organizations directly engaged in war fighting and support
• The military “Christmas tree”… Echelons of command remain in spite of advances in technology that would logically allow them to eliminate the extra layer of dialogue
• Each echelon of command replicates the staff structure above, again in spite of the enabling technology to remove and consolidate them
• Compensation plans do not provide the workforce with any incentives to optimize
• The existing culture agrees philosophically that there is waste, but it is someone else being wasteful

On the emotional level, how do DOD, Services, and Congress see and feel the need to change?  Virtually all of the discourse on how to effect change tells us substantive change cannot grow roots unless the senior leader is leading (not managing) and championing change and the people involved have a cathartic experience that provokes an emotional response that helps them see and feel the need to do something. It is not hard for the change agents to see and feel the problem.  The challenge is how to viscerally connect with a significant portion of the organization. 

Herein lies the conundrum.  Every soldier understands this challenge.

If you take two battalion commanders, each in charge of a specific sector and one is attacked the other battalion will not hesitate to redirect its attention to augment its sister unit under fire.  A couple of months later, those same two battalion commanders now sit across from each other in the Pentagon each managing a program worth a million dollars.  One guy gets a call advising him that he is going to lose half of his program dollars.  The other guy overhears the conversation and immediately obligates all of his dollars to preclude having to share it with the guy who just got hammered.  The same person who came to his aid on the battlefield threw him under the bus in the building. --BG Ed Donnelly, USA

What is the difference in the two states?  On the battlefield, the military is a team; they belong to each other, live and eat together, and train together.  They win together and sometimes fail together. They train for the worst so that when the worst arrives they know everyone’s qualities and know how to compensate and defeat the enemy together. They know when their battle buddies are faced with the ultimate test, they are prepared to take the risk and press forward.

In the support organizations the team is staff.  They don’t own the outcome.  This has to change.  They need their own team too…and they need to get closer to their customer.  They need to feel they have a critical role in their customer’s success; they need to own up to the need to be accountable and efficient all the while providing their customer the best product possible.  More importantly, they need to benefit for embracing the mantra to be the best at what they do for less money than anyone else.

One would think, because of the state of our nation’s economy, the President, DOD and Congress now have the closest thing to a “burning platform” to make radical change in the way DOD and the Services operate internally as well as the way they each work with the Congress to manage the nation’s defense.  The President called it “our generation’s Sputnik moment” is his 2011 State of the Union address. If one took a poll of the DOD employees the day after the speech, do you think we would find the vast majority of the DOD community “burning” to lead the charge towards remaking the DOD into the most cost effective, efficient and accountable military in the world?

Given the challenges noted above, it would seem unless the DOD and by inference the Service Secretaries, take a step back and view themselves as a group of business teams that could be led, evaluated, managed and compensated in terms of a business, progress towards providing the kind of visibility, efficiency and accountability one would expect from a publicly traded company will languish.  More importantly, each team needs to find the gut-wrenching event that makes it clear to the team members, what is at stake if they are not successful.  And Congress must be a partner willing to take a fresh look at how they work with the DOD.