DoD and Fortune 500 Financial Operations

The Army, Navy, and Air Force each manage annual budgets that would place them in the top 10 of Fortune 500 companies. They manage more money than the largest US banks, auto companies, or even Warren Buffett. 

 

Company

2011 Revenue

1

Wal-Mart

$422B

2

Exxon Mobil

$355B

3

Chevron

$196B

4

Conoco Phillips

$185B

 

Navy

$156B

5

Fannie Mae

$154B

6

General Electric

$152B

 

Air Force

$143B

 

Army

$137B

7

Berkshire Hathaway

$136B

8

General Motors

$136B

9

Bank of America

$134B

10

Ford

$129B

Sources: Fortune 500 List and Defense Budget

You’re probably familiar with the old adage: there are two things people don’t want to see being made, sausage and legislation.  I would add the Defense budget to that list.

The DoD’s Planning, Programming, Budgeting, and Execution (PPBE) process is in dire need of an overhaul.  Hundred billion dollar budgets are developed via Power Point slides, Excel files, and archaic software coded in Ada.  Decisions are made based on rank, who is in the room, and how well staffs can quickly convey value (or impact of a budget cut).  Budgets are programmed five to six years out, starting with a baseline extension – a program or organization’s current budget plus a standard inflation factor.  Over the next five years that budget element will vary widely based on fluctuating priorities, leaders, and budget targets.  Extensive work is done in estimating costs for major weapon systems based on requirements, but not enough energy is placed on truly analyzing alternatives.  While DoD programs conduct year long Analyses of Alternatives, the chosen solution is often known at the start and rarely develops viable, out-of-the-box, innovative, low cost alternatives.  Staffs work long hours conducting analysis, preparing reports, and briefing leadership, mostly in piecemeal, fragmented stovepipes with hopes that someone, somewhere is integrating their efforts.

Now examine how the 10 largest companies develop and execute their financials.  They have accounting systems that can close their books daily.  Business intelligence, data analytics, and portfolio management software are leveraged to analyze the complex patterns and inter-dependencies, support enterprise decision making, and devise optimal solutions.  They have a thorough understanding of their environments by compiling inputs from countless structured and unstructured sources.  They use crowdsourcing to develop innovative solutions.  They are frankly, much, much better at managing $100B enterprises than the DoD.

This is not another: “Government needs to be run like a business” piece, but rather the DoD needs to learn more how these industry leaders manage their operations and emulate their best practices.  The DoD has struggled for years to adopt portfolio management, mostly because of the battles over control.  There are other limiting factors such as a robust enterprise IT infrastructure, trained staffs and leaders, and a cultural resistance to changing decades old operations.  DoD leaders and key players in the PPBE process need to visit Fortune 100 companies to learn about their financial operations (as much as companies are willing to show their trade secrets).  DoD should hire some of the major consulting companies that analyze Fortune 500 operations to review the DoD’s PPBE framework, processes, players, products, and IT tools to recommend improvements or ideally a new model.  Having a major Department-wide review by an independent, external group (other than GAO or Congressional Research Service) would provide OSD leadership valuable insight into improving the financial execution of multiple $100B enterprises.

The DoD’s Race Against the Machine

The DoD’s new Defense Strategy and Budget Priorities clearly show its in its own Race Against the Machine.

As the DoD sunsets two wars and cuts $487B from its budget over the next decade, it is clear that advanced technology will shape the future force.  The DoD is increasing unmanned systems, cyber operations, and information, surveillance, and reconnaissance (ISR) capabilities while decreasing personnel, manned fighter aircraft, ships, and bases.  Secretary Panetta said DoD must “leverage the lessons of recent conflicts and stay ahead of the most lethal and disruptive threats of the future.”

Race Against the Machine by Erik Brynjolfsson and Andrew McAfee describes how the Digital Revolution is accelerating innovation, driving productivity, and irreversibly transforming employment and the economy.  Computers increase productivity across all industries enabling products to be developed faster, cheaper, and at higher quality.  Technology has automated farm and factory work and is quickly penetrating the Service industry.  They profile some of the recent breathtaking technological breakthroughs:

  • IBM’s Watson besting human champions at Jeopardy
  • Google’s automated cars that can drive in traffic on roads and highways by themselves
  • Siri, the personal assistant on Apple’s iPhones, understands human speech well enough to answer a broad range of everyday requests

The well known Moore’s Law applies to a broad range of IT measures doubling every 18 months from processor speeds, storage capacity, network bandwidth, and energy consumption.  As we’re decades into the Digital Age, the authors highlight how we’re now reaching the exciting steep part of the exponential curve.

The latest DoD trend is from manned aircraft to remotely piloted aircraft (RPA) – AKA unmanned systems or drones.  RPAs now account for 31% of all military aircraft (7,494 RPAs vs 10,767 manned) – a rapid increase from the 5% in 2005.  The manned aircraft mafia still command 92% of the aircraft procurement budget with pricey manned systems like F-35, Next Generation Bomber, and KC-46 dominating future budgets.  The DoD spent $26B on RPAs since 2001.  See more details in the US Unmanned Aerial Systems Congressional report and the 2009 UAS Flight Plan (Hat tip: Danger Room).

The one technological misstep was the budget decision to cancel the Air Force’s Global Hawk Block 30 program and extend the 1950s era U-2 program.  The rationale was the Global Hawk Block 30 development and operational costs were at best comparable to the dinosaur of manned aircraft.  My initial reaction was to compare this to a scenario where NASA retires the Space Shuttle fleet to return to the Apollo program.  The DoD isn’t taking a 60 year step back, but will continue to invest in Global Hawk Block 40, NATO’s Alliance Ground Surveillance (AGS) and the Navy’s Broad Area Maritime Surveillance (BAMS) – ideally at a higher ROI.  The challenge with the DoD and Defense Industry developing advanced technology solutions is they design 10+ year programs unable to leverage the benefits of Moore’s Law.  Until the DoD is able to adopt Agile practices with small, frequent capability deliveries to users, they will continue to squander exciting technological advancements and billions of taxpayer dollars.

Cyberspace meanwhile has emerged as the new operational domain where cyber attacks can achieve the same operational effects at an order of magnitude cheaper, faster, and safer than conventional military operations.  NATO forces launched 100 cruise missiles into Libya in 2011 at $1 million each to disable their air defenses.  DoD leadership considered launching a cyber attack that could have achieved the same results at a fraction of the costs.  The DoD is aggressively debating strategies and policies while developing capabilities and partnerships to execute Cyberspace operations.

As personnel costs continue to rise, particularly from healthcare, the DoD is making tough budget decisions to invest in technological advancements to achieve its missions.

Most of the personnel reductions are a result of ending two major wars, which required a considerable ramp up of personnel post 9/11.  Yet the long term US budget outlook will continue to put pressure on Defense budgets.  An increasingly networked world brings ever more complex challenges, requiring agile, impactful, and responsive military solutions.  For DoD to achieve considerable cost savings, increases in mission effectiveness, and be responsive to emerging threats, it must continue to embrace the Digital Revolution.

The largest potential for advancement and cost savings is in business operations.  Portfolio management software and data analytics can be leveraged in managing hundred billion dollar budgets instead of Power Point slides and 1960s budget software (I’m not kidding).  Many base support operations can be digitized and automated, saving billions in personnel costs.  Global military logistics operations can improve integration of technology into their processes as UPS and FedEx have perfected years ago.  DoD can radically transform headquarters operations by breaking the data silos, enabling broad collaboration, and fostering enterprise knowledge repositories.

Leveraging advanced technology and human innovation enables more efficient and effective operations while providing exciting new capabilities and opportunities to achieve our strategic military objectives.

Former DEPSECDEF on The Pentagon’s Financial Drawdown

Former Deputy Secretary of Defense Gordon England penned an Op-Ed in the NY Times advising the new SECDEF on how to find some of the $400B in Defense savings that the President is looking for over the next 12 years.  He urged Mr. Panetta to

Resist the temptation to quickly kill procurement programs and research and development activities. Nor should he make proportional cuts to programs across the board. History shows that this would result in a hollowed-out force that will embolden our enemies. It’s the easiest way to go, but also the worst.

England’s Five Point Plan Included:

  1. Cut the civilian workforce before the military.  Shrink the Pentagon bureaucracy – cut 100,000 of the 700,000.  No additional outsourcing to increase Pentagon efficiency.
  2. Increase defense sales to Allies to reduce unit costs and overhead while creating more jobs in the US.
  3. Put a moratorium on new procurement programs while increasing production on existing ones to complete them faster and cheaper.
  4. Adjust the “tooth to tail” ratio by reducing support personnel in favor of warfighters.
  5. Give Services and COCOMs more decision authority in acquiring weapon systems to avoid lengthy [JCIDS] requirements process and empower them to change features to save cost and schedule.
So what’s your take on this plan?  Some of these are long standing recommendations to reform the Pentagon?  To achieve $400B in savings requires some game-changing strategies.  It will require revamping the Pentagon’s culture to avoid repeating the same budgetary issues we’ve faced for decades.  Even with massive increases in defense spending to fund 2+ wars, programs were continually being cut, stretched out, and overly regulated in an attempt to control costs.  If we were to eliminate tens of thousands of jobs from the bureaucracy, what tools and strategies can we implement to vastly improve the productivity and effectiveness of those remaining?  Cutting 100,000 personnel or revamping JCIDS (which they’re trying) are major long term strategies, so what small steps could be achieved in the next 6-12 months?