Oil Spills and Management Theory

There is a saying in the military that you ‘get what you inspect.’ In other words, unless you are constantly inspecting and testing and questioning, people will not carry out the tasks assigned and ‘things will go wrong.’ It is often associated with draconian leadership and ‘Theory X’ management, pooh-poohed by business schools around the world.

But, while the MBAs may not like it, the system has worked fairly well in both the maintenance and readiness of US nuclear weapons, and the safety record of the Navy’s nuclear powered ships and submarines. The two figures most responsible for establishing the control regimes around both US nuclear weapons and the Navy’s nuclear reactors are never mentioned when discussing modern management theory: General Curtis Lemay and Admiral Hyman Rickover. But their success speaks for itself.

That success was and is predicated on a clear understanding on their part that what they were doing was engaging not in risk management but in consequence management, the simple thought that the outcome of an event, not the probability of the event, should drive your planning considerations. Because the failure to be ready to wage war might lead the Soviets to consider attacking the US or its allies, Lemay developed a readiness program for the Strategic Air Command that was without parallel in history. This program was expensive and difficult. It required frequent and painful inspections. It was neither friendly nor polite. It was exacting, demanding and often professionally painful. But it worked. Further, in a setting where the consequences of any mistake were (and are) potential dire, does anyone really want to experiment with any other form of management or leadership? It is worth noting that Rickover’s style was no less extreme – and the record of safety on US submarines and around the Navy’s nuclear reactors spotless.

What this has to do with the Deepwater Horizon incident? Simply this: the inspection regime that was and is in place to monitor operations on these rig failed. Why it failed has yet to be definitively determined, but it is certain that it failed. While there is some discussion about how many inspections did or did not take place over the past five years, what is certain is that the inspections failed to either detect or correct the problems on the rig.

Is offshore oil exploration and production simply too risky? No, certainly not. The fact that these operations take place on hundreds of rigs, with thousands of wells in production, is ample proof that operations can be conducted safely. But, with no pun intended, safe operations are no accident. More to the point, safe operations are no mishap. Incidents such as what happened on the Deepwater Horizon last month are not acts of bad luck or the result of some evil spirit; they are the result of failures in maintenance, in operations (and training), in material – both in design and construction, and they are the result of failures in leadership.

It is likely (almost to a certainty) that the incident is not the result of the failure of a single device or a single person, but of several devices and monitoring procedures, meaning that the sequence of events is going to be a complex inter-relationship of devices, installations, maintenance plans, monitoring plans, training plans, and response plans. Mishaps don’t just happen, mishaps are the result of mistakes, omissions, and poor decisions. And, and this is the important point, mishaps can be prevented.

(Note: the US Air Force (AF 11-202 and DASH-1) and US Navy (NATOPS) have detailed procedures in place to ensure mishap rates are as low as possible. This is done without stifling either leadership or creativity and has produced the finest pilots and finest Air Force and Naval Air arm in the world.)

Mishaps are prevented when there is a confluence of several things:

- Training – people properly trained in the maintenance and operation of the systems involved, as well as in safety procedures in the event of a mishap. Training must be comprehensive and continual.

- Maintenance – equipment regularly inspected, maintained, repaired and replaced at rates well within the failure margins for each piece of gear and for the entire system. Preventative Maintenance, and corrosion control, must become the cornerstone of long-term, sustained operations.

- Parts Support – Parts support is the obverse of maintenance, making the requisite investment to insure that the right parts are used, and replaced, and refusing to cut corners to save pennies in the near term, when doing so may well cost a fortune in the long term.

- Leadership – Leadership provides the ‘thread’ that ties together training, maintenance and parts support. Sound leadership, with a focus on long-term success, will integrate these three components into the daily fabric of the organization, recognizing that the cost of preventing a mishap is never as large as the mishap.

And to ensure that there is adequate training, maintenance, parts support and leadership - particularly in an environment where mistakes and shortfalls can lead to such extreme consequences as we see unfolding in the Gulf right now, there needs to be aggressive and exacting inspections. Inspections should consist of the following (similar procedures may already be ‘on the books’ but, whether they are or aren’t, these steps weren’t in fact taken):

- Regular, comprehensive, frequent inspections: a small team of inspectors spends a full day on a rig and probes every major facet of the rig’s operation. As MMS recommends, these inspections should be carried out monthly. If MMS needs to hire more inspectors, then do so.

- No Notice inspections – every rig should be subject to at least two per year, and they should be truly ‘no notice.’

- A training and readiness certification process for every worker on every rig that requires both practical demonstrations and written knowledge of safety and operating procedures, at least yearly.

- Authority to suspend operations. The inspection team must have an unadulterated authority to suspend operations if they find an unsafe situation or a serious violation of procedures.

Consequence Management, not Risk Management

Central to successful thinking in any type of long-term, mishap free operation is recognizing the difference between Risk Management and Consequence Management. Intellectually, Risk Management focuses on input, on minimizing the probability of given events (parts failure, systems failure, etc.), thereby ostensibly providing safe operations. Consequence Management focuses on the fall-out of such an event and then plans backwards to minimize both the likelihood of such an event occurring as well as constructing plans that will allow minimizing the consequences, the impact, if such an event takes place. Consequence management will also identify those activities that simply are too costly to deal with and should therefore be avoided, replaced with other activities that are more easily managed.

Consequence Management, therefore, if executed properly, allows for addressing a situation so as to maximize long-term benefits while ensuring a plan is in place that will reduce to a manageable level the effects of any mishap.

But Consequence Management, as with the maintenance, training and support programs that constitute the principle elements of any sound mishap prevention effort, requires one overriding element: good leadership. Consequence Management is simply another element of a comprehensive strategic plan, and the right leadership will provide sound Consequence Management because it will develop comprehensive strategic plans.

The oil slick in the Gulf of Mexico is not a failure of the technology of the offshore industry, nor is it a failure in the processes and training available to the workers in the offshore industry, nor is it an indictment of the people on that rig. In the end, the failure of the BOP and the resulting oil slick in the Gulf of Mexico was caused by a failure of leadership; fixing the problem will require fixing that leadership. The lesson that any company can learn from that failure is that long-term growth requires leadership and planning, and every company, every organization needs to renew its commitment to developing that leadership and those plans today.

Additionally, in an industry where mishaps carry with them consequences as severe as does the offshore oil industry, leadership must be supported by aggressive and demanding inspections. Inspections, if conducted properly, will identify shortfalls in training and material before they become critical, and before several shortcomings are compounded into a catastrophe like the one that killed 11 men and is now spilling oil in the Gulf of Mexico.

Do we need new regulations? No. What we need is new leadership at MMS and a focus on Consequence Management.

Fixing Procurement - Part 3

What Can Be Done

(Final part of a three-part discussion on government procurement)

None of this is meant to defend cost overruns. Rather, the point is that they have been a fact of life in this country since our founding. Similar examples abound for the various navies of Europe running back for several centuries before our independence. There is even commentary from the Rome of the Caesars about merchants taking advantage of the army with the open endorsement of the Roman Senate.

So, what if anything can be done to, if not eliminate it, to mitigate it?

First, let’s look at some ideas that may sound good (I have taken some ideas I have found in recent articles in the press), but aren’t going to be of any real help:

* Structure contracts so that they motivate contractors to achieve desired outcomes -- withhold fees in response to cost, schedule, or performance shortfalls, and provide extra payments to reward outcomes that exceed contract parameters.

What’s wrong with this? On the face of it, nothing. Each idea in fact has merit and can and should be used in as part of proper, comprehensive oversight. But, as noted already, how contracts are pieced together is not simply the purview of the contractor. And accurately identifying why a program hasn’t met performance specifications isn’t as easy as it looks. The B-1 was cancelled during the Carter administration. The Reagan administration restarted it. By the time the aircraft was delivered the design had changed (as had the mission), it’s performance had changed and the price had increased. Those changes were the result of both changes in technology, changes in the threat and changes in how the mission was perceived, as well as the cost of closing a production line and then reopening it. And the B-1 was a relatively simple aircraft compared to some of the aircraft now being produced. While the expansion in software coding has added immeasurably to the capabilities of aircraft, the vagaries of software coding have turned out to be more difficult to predict.

* Require more rigorous testing of new technologies before decisions are made to go forward with full-scale development and production of weapons systems. More time and money invested in testing early in the process will prevent major problems later.

Again, sounds good. But, how much is enough? The fact is the US has a massive RDT&E process – the best in the world. And it has been as often as not accused of being responsible for cost overruns. The F-22 was in RDT&E for well more than a decade before the first operational aircraft was built, the F-35 a similar amount of time. Is there a way to place a dividing line between pure R&D and follow-on Testing for the purpose of production? There may be. Defense industry magazines often feature this idea in editorials about controlling procurement. But no one has actually presented specific ideas that work.

* Assess whether a major acquisition program is needed based on national security needs.

This is what might be called a ‘BFO’ (Blinding Flash of the Obvious) right? Well, maybe yes and maybe no. In the 1950s it was the considered the learned opinion of a fair chunk of the US defense establishment that the US had no need for a standing Army, no need for a Marine Corps and little if any need for a Navy. The world had moved to intercontinental bombers, intercontinental ballistic missiles and nuclear warheads. Four decades before that a band of airmen worldwide, under the intellectual leadership of an Italian, General Giulio Douhet, a Brit, Marshal Sir Hugh Montague ‘Boom’ Trenchard, and a Yank, Brigadier William ‘Billy’ Mitchell, advocated for a switch of armed forces to strategic bombing forces, arguing that airpower had made all other military arms obsolete.

These men weren’t stupid and their ideas weren’t insane. But they weren’t right. Just a few decades ago the US built an entire generation of aircraft without any internal guns – they weren’t needed and it saved both weight and cost. Vietnam proved them wrong. We currently have a wide range of thinkers suggesting that the days of manned combat aircraft are drawing to a close, and that we need to stop building these obsolete weapons and move rapidly into unmanned, autonomous combat aircraft. It certainly seems plausible. Is it right? Do we bet everything on this belief, this vision of the future?

Every year each of the Combatant Commanders – the senior operational commanders in the US military, submit their own thoughts on what is needed to best fight the possible conflicts in their theaters. The Joint Staff spends literally hundreds of thousands of man-hours trying to balance of the requirements of each commander against the requirements of all the others. It is fair to say that in the end none of them is ever completely satisfied, and programs that have great intellectual appeal are often negatively affected to meet more requirements of more Combatant Commanders. And these debates are echoed in debates with various Congressmen and Senators in various committees and subcommittees. And it is fair to say that, despite appearances, the overwhelming majority of the Senators, Congressmen, staffers, admirals and generals, and yes, contractors, feel deeply about providing the best for the nation, not simply making sure this or that program gets funded. And still decisions are made that leave nearly everyone upset.

*An Attempted Solution - Since the 1980s the services have taken ‘line officers,’ that is, the officers who actually command the various vehicles, such as pilots or submariners, and send them through a certification process and turn them into ‘contract specialists.’ This program was begun by the services in order to ‘fix’ procurement. Since the program began procurement overruns have actually increased.

There have been numerous suggestions made on how to fix procurement, and many of them make excellent points about returning control to DOD personnel, eliminating the atmosphere of continual engineering development irrespective of cost, the lack of competition in the market, bloated staffs and poor decision-making. All of these are excellent points and should all be implemented as soon as possible.

But, by themselves they won’t end the never-ending cycle of cost overruns. At the very root of the problem of cost overruns are two overriding facts: the first is that it is usually in everyone’s interest to continue various programs whether there has been an overrun or not, and second, there is no intellectually defendable alternate position.

A Real Solution

The first point above has already been explained: despite protestations to the contrary, Congress likes this situation. The only answer to that situation is a demand by the real government (the voters) for greater discipline by their representatives. The fact is that Congress authorizes and appropriates the money and unless the citizenry actively participates in oversight of their own representatives, all the actions to amend the process will amount to nothing. The taxpayer needs to insist on both discipline and accountability by Congress, and without that no other reform effort will yield any significant results.

The second issue is as important as the first: no intellectually defendable alternate positions. This would provide the ‘ammunition’ for those trying to ensure Congressional discipline. Currently, whenever he submits his budget requests, the Secretary of Defense provides a broad justification of each weapon system to Congress, defended by a series of ‘threat forecasts’ that seek to predict the various capabilities that the US may face in the future. Underlying this forecast is doctrine and planning that match US capabilities to these threats in such a way that US interests are defended and US goals are met. This is a complex process and one not easily disputed by those ‘outside the process.’ Unfortunately, the only people inside the process are all within the DOD. This isn’t meant to insinuate that the DOD is trying to hide anything; it is simply the fact that the only people who engage in any in-depth planning about US goals, and the requirements to meet those goals, are all within the DOD. The House and Senate do not have any real means to engage in alternate planning, and there has never been any concerted effort to insist that DOD produce substantive, detailed alternate paths to achieve specific goals with varied capabilities. And, suggestions that they do so are likely to be met with consternation and the response that doing so will require larger staffs and will further slow an already slow procurement process.

The objection would be false, however. The primary responsibility of government, above all others, is to provide for the defense, the security of the nation. The suggestion that Congress hasn’t enough time to adequately delve into various means by which we might achieve that security is to say Congress can’t do its number one job. Congress must find the time to address the key issues, even if that means it refrains from holding hearings on steroid use in baseball or other similarly ‘vital’ issues. Similarly, DOD must focus its personnel on the central issues – requirements for the nation’s security – even if that means fewer people are committed to equally ‘critical’ issues – such as bands, and color guards and redundant flag staffs.

Finally, focusing on contractor malfeasance as the cause for procurement problems is almost universally a smoke screen by either Congress or the DOD or both. Certainly, there have been contractors who have been either inept or criminal (or both). But the numbers are low. In nearly every case, there has been willing complicity on the part of Congress and DOD to drag out programs, change contract performance requirements, adjust delivery dates, etc., - ad nauseam, and then when it comes to light the contractor takes the blame. In fact, the contractors are usually the least culpable of the three. A history of defense contracts has shown that contractors are more than willing to operate openly and respond to the guidance of Congress and DOD, but that it has been the government – DOD and Congress – that has routinely steered procurement onto the rocks. And it will only be by maintaining clarity on the course ahead, and a firm hand on the helm, that we can hope to keep from continually going up on the rocks. New laws, new regulations and pontificating from various high officials translate into nothing more than smoke screens that hide the facts.

We the voters need to insist that Congress do two things at once: ensure that the DOD and the Executive Branch as a whole has the tools and funding to provide for our security, while ensuring that our money is wisely spent. Meaningless or poorly drafted legislation isn’t the answer, the answer is diligence and focus on the part of Congress.

Fixing Procurement - Part 2

Never-Ending Development

Another issue that emerges in any discussion of procurement is just how long it takes to move any program from inception to operation. There are a number of reasons for this, but the major ones are:

No sense of urgency - Whenever there is any discussion of the problem of procurement someone will bring up how rapidly certain weapon systems were developed in the past. The U-2 went from concept to first flight in less than 8 months, the SR-71 from concept to first flight in less than 3 years, the Nautilus (first nuclear powered submarine) from concept to first sailing in 6 years, etc. And there is a great deal of truth in this statement. Of course, what is missed is that whenever we have developed ships, aircraft or systems at high speed we have done so at great cost. Further, we produced many different systems in the 1950s and 1960s that were not successful systems. A quick review of the various fighter aircraft that the Air Force and Navy introduced and then retired between 1950 and 1960 will provide the interested reader with the history of any number of nearly disastrous development programs. Rapid testing and prototyping can be of great value, but it is not a panacea.

The Research, Development, Test and Evaluation (RDT&E) ‘process’ – Not only have systems and platforms become more complex, the negative impact of poor performance once a system is deployed has made both contractors and systems commands in each service terrified of providing a weapon or system that has not been thoroughly tested. Thus US aircraft must endure literally years of testing before they enter initial ‘low rate production’ and additional years of testing after the first production before they become operational. This becomes its own problem; as systems finally reach operational status they are found to be lagging in certain technologies because the hardware and software have advanced so rapidly in the commercial sector while being frozen in the particular weapon system for years.

As anyone who has looked at the history of RDT&E for major procurement programs, the RDT&E can last for years. In the case of the B-2, the aircraft was first funded under an RDT&E program begun by President Carter (1979), it didn’t first fly until President Bush (1989), it reached initial operational capability under President Clinton (1 January 1997) and was first used in combat against Kosovo in 1999. These are very complex programs and require very complex RDT&E that not only lasts years (sometimes decades), but are very expensive. Again, the RDT&E is driven not by finances, but by requirements, and frankly, as someone who has personally benefited from the superlative capabilities of some of the US weapon systems, when people start shooting at you, no one cares about the price, but rather about whether the requirement for this or that weapon system was properly stated and met.

A Word on ‘Cost’

Inflation ‘sticker shock’ – As noted above, the level of national commitment to the Navy shipbuilding in 1798 was similar to the commitment today. But, to say that a ship costs more than ‘Ten Billion Dollars’ has a psychological impact all its own.

But, a warning about ‘cost’ is warranted. A B-29 (the strategic bomber that conducted the bulk of the bombing of Japan during World War II and the aircraft that dropped the atomic bombs on Hiroshima and Nagasaki) was truly the state-of-the art weapon system of its day, with a massive development program, one that was nearly as large as the atomic bomb. More than $3 billion was spent on the B-29 between 1942 and 1946, with 3970 aircraft being produced, after more than a half billion dollars was spent on development, and with an average production cost of just over $600,000.

During World War II the GNP of the US was on the order of $200 billion (actually less, as more than half of the nominal GNP was actually government spending). Thus, a half billion dollars equates to ¼ of one percent of GNP, or approximately $35 billion in current terms. Total production costs for the B-29 represented 1.2% of GNP or an equivalent of roughly $168 billion in today’s terms; and at $600,000 per airframe a B-29, measured as a percentage of national wealth is equivalent to a $42 million aircraft today.

Compare this to the B-2, another aircraft that was truly a state-of-the-art aircraft. Per various GAO reports, $23 billion was spent on RDT&E (in 1997 dollars). As the GDP was $8.5 trillion in 1997, this equates to .27% of GDP (spread over nearly 20 years), or $37.8 billion in current terms. The aircraft themselves (21 were procured) were procured for an additional $21.75 billion, or $1 billion per aircraft, equivalent to $1.65 billion per aircraft today. The cost of RDT&E are comparable, but unit prices have gone up. Of course, when we consider the expected production run – originally anticipated to be 132 aircraft, unit price would have been on the order of $170 million in 1997 dollars or roughly $260 million per aircraft in 2009. (While it might seem doubtful that the DOD would have received 132 aircraft for the same dollar figure as it paid for 21 aircraft, the history of budget overruns has shown that once a number is set for a production run, the total cost remains remarkably stable despite the number of aircraft purchased. This can be attributed to a great many things, but the most likely reason is Congressional support to the means of production.)

This isn’t meant to pick on the Air Force. Virtually every major weapons program in any service yields like numbers. What this does point out is the real angst. First, while the RDT&E for the B-29 took place over the course of just three years, the RDT&E for the B-2 (or F-35 or LCS or the Seawolf submarine, etc., etc.) took place over the course of nearly 20 years (as for each of the above programs.) Second, while the B-2 is a phenomenally capable aircraft, there are only 20 of them (1 crashed). And it is of little consequence to compare the technologies of the two aircraft and claim that one B-2 is ‘X times more effective’ than a B-29. During 1945 the B-29 was a remarkably survivable aircraft that out-flew most of the fighter aircraft in the Japanese inventory, as well as flying above most of the Japanese anti-aircraft weapons. Although tens of thousands of missions were flown, the Japanese were able to shoot down only 157 B-29’s, despite the fact the Gen. Lemay also used the B-29 in low altitude bombing of Japanese cities, a flight regime they were designed to avoid.

Objections that these bombers dropped hundreds, even thousands of weapons for each weapon that hit the target, versus the B-2 dropping one bomb and getting one hit actually addresses the weapons and weapons systems more than the airplanes. GPS or laser-guided bombs can be dropped off relatively simple aircraft with equal accuracy, assuming the right systems are mounted on the aircraft. Such a solution doesn’t address the aircraft survivability in a combat environment.

The $600 Hammer

Finally, a word needs to be added about those spectacular “little” items that make great headlines: the $600 hammer or the $500 toilet seat. First, a number of these stories were just flat wrong, as is born out later in the press (usually on page 17) where it is revealed that in fact the item in question only cost a few dollars. Second, some reflect efforts to hide money for “black” programs – very classified programs that are funded through money hidden in other programs so that our enemies and potential enemies will not know about the program itself (and which in and of themselves are often worthy of real efforts to hide the program and the money, and which are subject to a good deal of oversight by DOD and in all but very select cases Congress). Finally, some of these weird and seemingly outrageous bills are the result of, well, reality. One example will suffice to show the difficulties.

A number of years ago the DOD was building a series of large surveillance aircraft, but was only going to be purchasing perhaps a dozen per year. Aircrews were expected to spend 10 to 12 hours airborne at any one time and so a coffee machine was designed into the aircraft. A normal, commercial coffee machine was picked, and slightly modified for the power requirements on the aircraft and to ensure it couldn’t spill, etc. There was, however, a need (for safety reasons) to isolate the coffee machine in the remote but real possibility of fire and so it was encased in aluminum. To ensure that the case fit into the narrow space allotted to it, and to ensure that each case was identical and would fit into any of the aircraft, the case had to be made to ‘spec.’ As a result, metal-working machines had to be configured for the case, not an insignificant cost, and a quality control process put in place to ensure the case came out as designed. And then, only a dozen or so were made each year. All in all, perhaps $50,000 had been spent on setting up the machine and on training for the machine operator, with some small additional amount for the metal itself. Perhaps 100 of these cases were made over the period of eight or 10 years. And so, the average price of a ‘simple’ metal case was close to $1000.

These stories however, miss the point. Even with a thousand such stories a year, each totaling perhaps $50,000, the total would still amount to perhaps $50 million. A notable sum for all of us, but still a drop in the bucket compared to the several tens of billions of dollars spent each year on procuring weapons for the DOD. In short, ‘fixing’ these problems while ignoring the real issues is meaningless, and worse, may well introduce rules and oversight that would actually add cost to major programs. We need to focus on the ‘big fish.’

The Legislature

Finally, there is the issue of Congress. Congressmen are accurately called ‘Representatives.’ They are supposed to represent the interests of their state and district within the national debate. This has commonly been interpreted to mean that bringing contracts (jobs) to your district is a good thing and seeing those contracts (jobs) go away is a bad thing. A Congressman with a large defense plant of some sort in his district (aircraft manufacturing plant, shipyard, etc.) rapidly becomes very protective of that plant. This is not the same as earmarks, which have a connotation of unnecessary spending in one district. If the Air Force is buying big airplanes, Boeing is likely to get some money and it is a nation-wide construction program, just as it is with ships, where a hull might be assembled in Maine, but there are electronics and engines and weapon systems that come from around the country.

At a minimum, as demonstrated by the six frigates requested by President Washington, the Navy (or the DOD) will attempt to use to advantage this well known response by various Congressmen. There are some large defense programs that have parts made in nearly every single Congressional district. Several programs received a certain degree of fame (or infamy) for having parts made in nearly 400 separate Congressional districts.

The fact is that it is always going to be difficult for Congressmen to vote against a program that brings money and jobs to their district. Compounding this is the very real concern that certain skills and technologies, if not needed now, may be of great importance if ‘something’ happens. For example, there are only a small number of people in the US who have the skills to weld together the hull sections of submarines. It is a very special and very perishable skill. Congress rightly worries whenever the procurement process threatens those skills. If submarine production were to stop for more than several months these people would seek other work, and the US would loose that critical skill. Congress routinely looks at these kinds of issues and has repeatedly strung out various procurement programs in order to insure that such skills remain employed, despite the (considerable) added costs incurred when a program is stretched out.

As a result, despite what it might seem in public spats between Congressmen and corporate leadership, the fact is that Congress, corporate leaders and DOD leadership – uniformed and civilian – normally find themselves all wanting the same thing: keep a production line open, sustain the development program, and make the platform (ship, aircraft, etc.) as capable (sophisticated) as possible, and buy as many as we can afford.

Fixing Procurement - Part 1

Every two years or so Washington talks about ‘fixing’ procurement; every administration makes at least one push to “fix” procurement, Congress usually follows with its own plan. Secretary Gates is currently involved in such a discussion. For those not familiar with Washington DC jargon, ‘Procurement’ technically means anything and everything that the US Government purchases under contract – from large lots of office furniture to F-22s and Aircraft Carriers. In fact, what the politicians and pundits are really talking about is the Department of Defense and its half brother, the Intelligence Community.

Let’s begin by admitting that something is not quite right. A recent example will serve to point out the scale of the problem. The President needs a new helicopter. That is undisputed by anyone who has bothered to make the most cursory examination of the facts. While the helicopters he flies in look great, and are maintained by an incredibly diligent and dedicated group of Marines, civilians and contractors, each of those airframes has more 10,000 hours of flight time, or so I am told. If you have ever been in or near a helicopter, think of what happens to all the various pieces of metal in that airframe, and in particular to the main structural members, after 10,000 hours of shuddering operation. While these aircraft are safe, they are well past their design life and need to be replaced. (By way of comparison, a ten year old car will have roughly 4 to 5000 hours of operating time. Consider a 25 year old car, moving at 125 miles per hour, 1000 feet above the ground. Now put the President in it.)

Enter the VH-71. The VH-71 was a design that was accepted by the DOD as the replacement for the helicopters that are now used to transport the President. The contract called for 26 aircraft, with a total cost of the program being about $6 Billion. While that may seem excessive – nearly $230 million per aircraft, it must be remembered that this aircraft was carrying the President. Accordingly, there was a good deal of research and development money needed (it was a new aircraft and you don’t fly the President around in an untested airframe), and a large chunk of the money actually went to a wide range of special equipment for the President. In other words, this was money in the contract, but not really in the airframe itself.

But, the contract started ‘expanding.’ By the time it was terminated in 2009 it had grown to more than $11 Billion, before any of the helicopters had been delivered to the DOD, although seven have been built.

Now, this is not the first such contract to have an overrun. The list of overruns is, in fact, long and storied. Nor is it in any way a Republican or Democrat unique event. In fact, virtually every single program under consideration or review spans several administrations, from initial concept development through R&D (research and development) to initial acquisition. Each is subject to annual Congressional Review, and, of course, DOD and the entire Executive branch have no money except what Congress gives them. In fact, even then they don’t have money: Congress needs to both appropriate money – identify a specific pot of money for a specific program, and then authorize it being spent – giving DOD the ‘green light’ to actually move the money to the contractor. And there are a host of committees and subcommittees in both the House and Senate that have to play a role in these (and other) steps.

So, if there is this oversight, how can it be that no one objects when a program doubles in size in a matter of three or four years? Who is responsible – really? Why does no one object when a program drags on for years, even decades without yielding any results, yet the funding continues?

While this issue will be batted around Washington, and in the end legislation will be passed that purports to ‘fix’ this, the fact is that the situation is more or less just what everyone wants. That’s why it is what it is. Nor is this new.

A History of Overruns

During an earlier administration – the Washington administration (215 years ago) - the US Navy let out contracts for six frigates. (One of them, the USS Constitution, is still afloat in Boston.) The Navy went out of its way to make sure that the frigates were actually assembled in six different states, with the ribs and structural members made from live-oak from Georgia, the masts and spars came from Maine, South Carolina furnished wood for the decks, Rhode Island produced canvas for the sails, New Jersey produced oak for the keel and cannon-balls, Massachusetts produced more sails, gun carriages, cannon, anchors, and copper plating for the hull (Paul Revere), etc. In the end more than half of Congressional districts in the young country were enriched by the contract. (I recently saw an article in an aviation industry trade magazine that reported that the F-22 was made up of parts from more than 1000 different companies located in more than 40 states.) The Constitution was originally funded at $115,000. The actual procurement costs of the six frigates is listed below.

Constitution 44 guns 1576 tons $302,719, built in Boston

President 44 guns 1576 tons $220,910, built in New York

United States 44 guns 1576 tons $229,336, built in Philadelphia

Chesapeake 36 guns (originally 44) 1244 tons $220,678, built in Gosport (Va)

Congress 36 guns 1268 tons $197,246, built in Portsmouth (NH)


Constellation 36 guns 1265 tons $314,212, built in Baltimore


Numbers ARE Relative

As another point of reference, the US GNP at the time of the ordering of these six frigates was somewhere in the range of $100 - 200 million. Although it isn’t possible to make an exact comparison of GNPs when a fair percentage of the population were farmers who had little surplus and little cash income, the number nevertheless gives a sense of the level of investment the nation was willing to make. Assuming a $200 million GNP, $300,000 represents an investment of .15% of GNP. To place this in perspective, the current US GNP is on the order of $14 trillion. An investment of .15% amounts to $21 billion. The current estimate for the cost of the yet to be built USS FORD, the next nuclear aircraft carrier, is roughly $14 billion. In short, it will cost less than the USS Constitution.

A Built-in Problem

Another point that complicates any effort to control costs is to recognize that irrespective of any other consideration, the economic reality is that this is a monopsonistic market. A monopsonistic market is one in which there are multiple sellers and only one buyer. This is compounded by several other key points: the amount of money available is generally known; it is in the interest of the payer (the Congress) to reward each seller; and the user (the DOD) manages the program with people who are promoted (or otherwise rewarded) based on successfully delivering the platform based on capability, not cost. Let us look at each in turn.

Monopsony

A monopsony exists whenever you have only one buyer and multiple sellers. Just as with a monopoly, this results in an inefficient market. As a general rule, a monopsony will lead to the buyer buying fewer items than an efficient market would produce, which inevitably should lead to market failure. As the market cannot be allowed to fail (the US government still needs to buy tanks, for example) the tank manufacturer is paid a higher price in order to sustain inefficient production. But, there is no way to avoid a monopsony – no one else is going to buy submarines, and even if US aircraft are marketed overseas to our allies, US purchases are still the foundation of any production line.

At the same time, the inefficient market will eventually force consolidation of the production line into a single seller. You then are faced with a single seller (a monopoly) and a single buyer (a monopsony), the most inefficient possible answer.

This has already happened in a number of weapons systems: there is only one builder of tanks in the US, there is only one maker of aircraft carriers, only one maker of large airframes, etc.

This will also lead to legislative ‘fixes’ to economic problems. Congress may insist on competition and so split an already inefficient contract into two pieces in order to maintain two production companies in a given ‘strategic’ industry. The result is two separate production facilities each with an installed production capacity that exceeds the annual purchase of the government. The space launch capacity for the US was like this for many years, until the two separate corporate elements were merged into a hybrid that is struggling to produce lower cost space launch vehicles.

Starting with the ‘Right Answer’

A second problem that develops in this situation is that of complete (or nearly complete) knowledge. Each of the various companies involved in DOD procurement is aware of how much money is available for procurement, with just a small margin of error. And at the same time, unlike any true commercial enterprise, a more efficient production line will not materially affect the number of units purchased. If the DOD wants 100 fighter aircraft for the Navy, and Congress wants to spend $10 Billion dollars, there is no real incentive to making an airplane for $90 million.

The Fox Guarding the Hen House

At the same time, within DOD, programs are managed by uniformed officers who are from that ‘community.’ That is, tank procurement programs are managed by tank (armored) officers; and aircraft procurement programs are managed by pilots from that specific community (F-18 program officers are F-18 pilots, for example). While this obviously is not the case by the time you get to the three star officers who are the senior managers for each service, the day-to-day management of these programs is conducted by officers who have to return to their community when they leave this specific tour.

There is obvious merit to this process: an officer who has spent the previous dozen years on submarines is going to understand what is and what is not needed in the next submarine. It is a good idea to have that expertise helping to ‘steer’ the program.

But, at the same time, such an officer will also want the very best submarine available. And the same officer knows that the submarine community will watch his efforts and ‘grade’ him accordingly. Which provides pressure to continually improve the submarine, which will drive the cost up. There is also great resistance to ever canceling a program or recommending a cancellation because it might be seen as hurting your own community.

Further, if you, as a fighter pilot, know that the Congress is only going to buy 200 or 300 fighters, are you going to want ‘ok’ fighters or the very best that technology can provide? You (and your friends) are going to be flying those airplanes and you will almost to a certainty be outnumbered if you ever go into combat – you want the very best – and who cares about the price.

The American taxpayer says the same thing when the Army and Marines end up in combat: we want the best for our troops (and we do).

Staff Growth and the Authority to Say ‘No’

There is a related problem of the growth in staff sizes and a concomitant reduction in authority of any one individual. Every applicable staff, and every associated staff officer, wants to have a say on any relevant program. That has a simple (but substantial) cost in the amount of time required to push any program review through the respective staffs. This causes a much greater and more complex problem because every staff wants to adjust relevant programs to meet their perception of the required capabilities of the particular weapon or system.

Because there is no mechanism to continual performance improvement, nor is there organizational resistance (there may be resistance from small groups of operators, but they have a hard time getting heard in Washington), adding capabilities or otherwise ‘improving’ the system, irrespective of cost or time, is something that can be accomplished by any dedicated individual or staff. But, once a program has been improved, there are very few offices that have the authority to remove a capability.

It is also worth noting that there is no ‘real’ value in saving money. By that I mean that if a program cost is cut from $5 billion to $4 billion, the Navy or Air Force or even DOD as a whole doesn’t get that money to spend elsewhere. At best, the service can recommend a reapportionment of spending, but Congress will decide. And it is the primary interest of the Congress to make sure that money flows to the various states and districts, not to specific programs to purchase specific capabilities.

Next: Part 2 - the Rest of Problem

How Do You Spell Success?

Attorney General Holder said that the arrest of the ‘Time Square Bomber’ was a success in the fight against terrorists. In the strict sense of how the word is used by the police, perhaps it was; a crime was committed, and a perpetrator was arrested.

Of course, there are some other issues. The accused was able to do the following:

- successfully travel into and out of Pakistan at least seven times

- receive training from a Taliban group of some sort at a Taliban training facility

- build an improvised explosive device

- transport that device to the middle of Manhattan

- initiate the device

- leave the area and evaded police for several days

- board an airplane to leave the country

Thankfully, the man’s skills in assembling the device were wanting and the device failed to explode. That fact, and that fact alone, is what separates this incident from being a spectacular and painful terrorist attack in the middle of New York.

But the Attorney General said it was a success.

One reporter on a morning news show on Wednesday said ‘let’s hope that we continue to have such vigilant citizens’ or words to that effect. Two thoughts: hope is not a plan. And US taxpayers aren’t paying for vigilant citizens. I applaud the efforts of the man who noted something wrong with the vehicle and notified police. He is an outstanding citizen and an example to us all. But, I would suggest Mayor Bloomberg, while wandering around denying terrorism exists, consider awarding the keys of the city to this man. (In case you missed it, Mayor Bloomberg said this about the failed attack after a question as to whether this might be a homegrown terrorist: "If I had to guess 25 cents, this would be exactly that. Homegrown, or maybe a mentally deranged person, or somebody with a political agenda that doesn't like the health care bill or something. It could be anything.")

To the point, the system did fail. The bomb was built and placed in position and initiated. Granted, this is an exceptionally difficult thing to stop. And trying to write more restrictive laws to prevent people from buying the gear or chemicals necessary to build a bomb is meaningless; anyone who knows anything about chemistry will tell you how impossible that is. That this man failed is a sign of his lack of intelligence, nothing else.

It is also worth remembering that if the bomb had worked, we would not have had the vehicle available to search for clues and the various security cameras that contained key pieces of information that led police to the bomber would have probably been lost.

But Attorney General Holder’s remarks that ‘this was a success’ marks the real problem: from the perspective of someone who deals with situations from a police or prosecuting attorney’s perspective, it was a success: a crime was committed and a perpetrator was arrested. Such actions prevent the same man from committing a second crime. But they don’t prevent the next terrorist from committing the next attack.

What failed here, and it is a very difficult problem to deal with, is that the intelligence community failed. It failed because it failed to penetrate the Taliban network, it failed to penetrate the training facilities, it failed to identify the people who have been or are now in the facilities. Is this difficult? Yes, very difficult. But it is what the system needs to do to protect the country.

Recently, the Deputy Director of National Intelligence for Analysis (DDNI/A) from 2005 to 2008 stated that the level of collaboration and information sharing within the intelligence community today is far different and better then it has been for many decades. This may be so. Frankly, I doubt it. Reminiscent of many senior members of the Intelligence Community of the past who would defend their positions by simply claiming that they had intelligence you hadn’t and couldn’t see, he defends his position by claiming a certain level of supremacy, suggesting that if you don’t agree you “are ill-informed or disingenuous.”

The fact is that the intelligence community, despite the hard work of tens of thousands of folks ‘in the trenches,’ is still not organized or led to provide the level of security the people of this nation believe they deserve. In both the case of the ‘Christmas Bomber’ and the ‘Time Square Bomber’ we succeeded despite the Intelligence Community and despite the improvements in collaboration boasted of by the DDNI/A.

To those inside the IC, the real collectors and analysts who are working as hard as they can on these problems every day, who will object, saying something to the effect that this is just ‘too hard,’ ‘we can’t stop every bomber,’ my response is this: imagine if both those terrorists had been successful. After the ‘Christmas Bomber’ succeeded in downing an aircraft we would have found the warnings by his father, the odd behavior, etc. After the ‘Time Square Bomber’ succeeded in setting off a car bomb in mid-town Manhattan we would have eventually found who it was, his multiple trips in and out of Pakistan, his time spent in Taliban training facilities.

We averted two ugly, potentially horrific attacks, but we did so through the failings of the attackers, not through our own competence or diligence. We have benefited from their errors, which have been more consequential then our errors. Sooner or later, if we don’t fix really things, our string of luck is going to run out.

Distrust of the Government

The President, it seems, is upset at those who don’t like government, and went so far as to say that in a democracy we the people are the government. We will forgive the President his bit of rhetoric, but it is worth reminding one and all that dislike of the organs of government, or at least strong distrust, is central to the very notion of the United States and comes to us from our Founding Fathers.

There have been a few folks who have in the past voiced concern about distrust of those in power, irrespective of how they got there. That fear, the fear that those in power will over-reach, will take unto themselves too much power, is one that was central to the arguments that led first to our seeking independence from England, and later to the specifics found in the Constitution.

John Adams, Thomas Paine, Thomas Jefferson and others all commented on the need to limit government, and that the best government was that which ‘governed least.’ George Washington noted that ‘Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master.

The Bill of Rights was drafted and passed to make just that point: that government must be limited. More than any other amendments, the two most forgotten make the very point being made by many people today. They read:

9th Amendment: The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.

Simply put, because a right is not listed in the Constitution doesn’t mean it doesn’t exist, and hence the government cannot take away what the people perceive to be a right simply by passing a law and then noting that the right is not protected. It is worth pointing out that within the intellectual construct of the Declaration of Independence and the Constitution rights exist apart from the organs of government; government can no more create a right then it can create life. The people can, in fact, through the Constitution limit some rights for the common well-being, but only the people as a whole can do that. That, at least is what the Founding Fathers provided for in the Constitution.

10th Amendment: The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

This amendment is pointing directly at the issue of the government, the bureaucracy, attempting to usurp power. It is the ‘sister’ to the 9th Amendment and addresses the limits of power of the government. Note that there is clearly a distinction made between the ‘United States,’ which clearly means the organs of government, and the people, from whom the powers are granted.

This restates what was obvious to the Founding Fathers but is often lost today: the government has no rights, it has powers. Those powers are limited to the powers granted it by the people. The means for granting powers is the Constitution. If there is a desire to either give the government more powers or to change the existing powers, there is a means to do so; it is the amendment process. Short of amending the Constitution the government cannot have any more powers, nor can it further restrict the rights of the people.

Finally, to clarify one point: I don’t think either the Founding Fathers or those who are now voicing distrust of the ‘government’ would be at all confused as to who is in charge in a democracy. But that, of course, is just the point: as the Declaration of Independence says: “That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed.” The Founders were making a clear distinction between the organisms of government, the various branches and agencies that make up the federal bureaucracy, and the people, who are the real source of all the powers – or at least all the just powers – exercised by those various elements of the federal bureaucracy – what the drafters and signers of the declaration of independence termed ‘the government.’ In short, distrust of the government is not the people voicing distrust of themselves, or of the notion of government of the people, by the people and for the people. To the contrary, it is distrust of the organs and agencies of the government - the bureaucracies - and a sense that the powers being exercised were not those granted by the people but have simply been taken by Congress or, worse yet, by these agencies. And that is a cause for distrust.