Floor Statements
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FLOOR STATEMENT BY SENATOR McCAIN ON THE DEFENSE DEPARTMENT’S “CULTURE OF INEFFICIENCY” AND SENATOR HAGEL’S NOMINATION
February 4, 2013
“This past year, our national debt passed a staggering $16 trillion – more than $51,000 per American citizen. And, today, several very serious fiscal matters that would seriously impact the Department of Defense and the U.S. defense industrial base (including budget sequestration, the debt-limit, and disposition of a defense budget for fiscal year 2013) remain unresolved. Underpinning all of these matters is the larger issue of why the culture of how the Department of Defense ‘does business’ must change. While daunting, this question provides us with a valuable prism through which Senator Hagel’s nomination, now pending consideration by the Armed Services Committee, should be considered.
“By ‘culture,’ I mean the mindset that has, for years, pervaded how the Department buys goods and services and manages its assets and resources without regard either to affordability or what our service-men and -women actually need to defend of the nation.
“After years of developing legislative initiatives intended to reform how the Department ‘does business,’ I am convinced that the single-most effective agent of cultural change at the Department is the right leadership – leadership that recognizes that the Department owes to the taxpayer a stewardship obligation to extract maximum value for every defense dollar spent and a moral responsibility to the war-fighter that these dollars are being spent wisely to effectively procure desired combat capability. We need strong fiscal leadership to reject the ‘use or lose’ mentality that incentivizes managers of the Department’s programs and activities to spend every dollar, no matter what our priorities really are. And, replace it with a process that actually rewards sound program management; incentivizes efforts to cut costs; and rewards those who use entrepreneurship and ingenuity to meet mission requirements while returning taxpayer funds to the U.S. Treasury. In other words, cultural change needs leadership that not only rejects ‘business-as-usual’ but also challenges it. Where Senator Hagel is on this is not clear.
“One area that reflects how desperately the Department of Defense needs to change its culture of inefficiency is how it procures goods and service – in particular, how it acquires major weapon systems. While reforms in this area have been attempted for more than 25 years, the same deplorable outcomes – major cost overruns, schedule slips or failures to perform as promised – persist. Why? It’s because, despite these efforts, the underlying culture within the Department of ‘business-as-usual,’ which predisposes its largest programs to these outcomes, has been allowed to live on.
“In how the Department procures its largest and most expensive weapon systems, this translates into a mindset that so fails to recognize the need for affordability that it has made the Department more willing than it should be to accept, at any cost, more risk than it can responsibly manage. There are far too many examples where the Department begins a major program without knowing what it really wants or how these requirements should translate into technical specifications that are designed to generate the combat capability it really needs. Also, all too many times, there is no traceability between these specifications through a test regime that is sufficient to ensure that the system the Department is procuring is operational effective, suitable and survivable before entering operational testing or early production. So, what happens? These systems stay ‘on rails;’ blow through their original cost and schedule estimates; and, at the end of the day, bear little resemblance to what the war-fighter actually needs.
“But, program management, fixated on ‘keeping the money flowing,’ push the program – many times, reimbursing the contractor for its costs throughout and with the parochial support of Members of this body – down the development pipeline, offering facile excuses for poor performance and, ultimately, less-than-desired capability. And, all of this happens within an overall management system that’s overly cumbersome and costly and provides for no meaningful accountability.
“In the aggregate, this has been a ‘perfect storm.’ A defense procurement culture that’s content with promises of exquisite solutions over actual affordability has squandered literally billions of taxpayers’ dollars. According to recent study, since 2004, programs cancelled by the Army alone consumed between $3.3 billion and $3.8 billion per year, that is, 35-45% of the Army’s annual budget for development, testing and engineering over this period. Obviously this is simply unacceptable and unsustainable.
“And, yet it happened again just recently. A couple of months ago, the Air Force – quite rightly – decided to kill a huge logistics/supply-chain management business system, called the Expeditionary Combat Support System (ECSS). But, it did so only after (1) sinking about $1 billion into the program since its start in 2005; (2) recently finding that another $1.1 billion would be needed to field just 25% of ECSS’ promised capability; and (3) extracting, from the taxpayers’ total $1 billion investment, less than $150 million in useable hardware and software. This is a travesty and, in terms of how little benefit we realized compared to how much was spent, one of the most egregious examples of mismanagement in recent memory.
“While some reforms have helped, much work needs to be done. The Weapon Systems Acquisition Reform Act of 2009, and its prescription to ‘start programs off right,’ was a move in the right direction. And, I’m pleased to report that, in its last of three reports focused on how effectively the Department has been implementing WSARA, the Government Accountability Office recently found that the Department has been taking positive steps to implement this reform act. And, it did so having sampled 11 weapon acquisition programs, including the KC-46A tanker, the SSBN(X) Ohio-class ballistic missile submarine replacement and the Ground Combat Vehicle (GCV).
“But, getting rid of poor cost-, schedule- and performance-outcomes in how the Department procures goods and services will require the sustained and enduring change that only a change in culture can provide. And, when it comes to defense procurement, a change in culture is possible only with leadership that recognizes that for government to act as a responsible steward over defense dollars, it must be as knowledgeable, skilled and sophisticated a buyer, as Industry is a seller. Whether Senator Hagel would serve as the right leader at the Department of Defense to foster needed cultural change in the Department’s procurement practices is unclear. What we do know is that the right person must embrace the following principles:
• Set realistic requirements early and manage changes to those requirements aggressively. The Department must enforce better discipline and achieve greater accountability in how it meets its most critical military needs by dismantling stovepipes among the requirements, acquisition policy and budgeting communities and ensuring clear lines of authority within acquisition organizations. With the benefit of robust participation by the uniformed military, requirements should be frozen early, allowing for sufficient trade-space among the program’s cost-, schedule- and performance-variables to ensure that it is effectively managed throughout its lifecycle. ‘Exquisite,’ high-risk, next-generation solutions should be spiraled-out over time. In other words, programs should be set to shorter acquisition timelines and should be managed to them.
• Improve the Department's ability to price risk – effectively and independently of Industry – and budget to that cost. By risk, I mean risk that a system is exposed to throughout its lifecycle: technical-, software-, development-, integration-, manufacturing-, sustainment-risk – all of it. Acquiring weapon systems thoughtfully vis-à-vis risk would minimize funding instability (which can absolutely decimate a program’s ability to deliver required capability on budget and on time) and ultimately result in reliable systems that will be affordable to own and operate.
• Revitalize and, where necessary, build-up the Department’s ‘organic’ workforce in areas most vital to ‘buying smart,’ like, cost-estimating, technical- and systems-engineering, developmental testing, etc. The Department must be able to conduct proper should-cost analysis to inform its positions when it negotiates contracts and conduct engineering trade-off analysis to manage programs effectively over their lifecycles. With the benefit of this capability, the Department will be able to more effectively target affordability and control cost-growth.
• Require the use of the type of contract that’s most appropriate to the level of risk to be managed and the fee structure that’s most appropriate to the type of performance to be incentivized. This, of course, requires the Department to know what it really needs and, in connection with that requirement, exactly what kind of contractor performance it wants to incentivize. To the extent and as quickly possible, the Department must get its programs into a low- to moderate-risk environment, where it can use fixed-price contracts to effectively incentivize cost-control.
• Better incentivize productivity and innovation. Rationalize profit policy and effectively use performance-based contracting and other tools in the contracting toolkit to incentivize and reward contractors for effectively managing costs, successfully managing their supply chains and indirect expenses, and actually delivering promised capability.
• Promote real competition, instead of just ‘checking the blocks.’ Nothing drives costs down and enhances quality more effectively than competition. So, the Department has to make sure that competition, or the option of competition, is brought to bear on a program throughout its lifecycle, at both the systems and subsystems level. To the extent that the Department has been recently successful with some of its large, high-profile procurements, it’s because it’s been able to leverage competition aggressively.
• Improve how the Department acquires services. Military departments that have already started diving into this area have already found massive opportunities for savings and efficiency – easily amounting to billions of dollars. This initiative should not only continue; it should expand throughout the defense enterprise.
• Reform how the Department procures information systems, especially, major automated information systems. While the technical aspects of these products are, of course, fundamentally different from major weapon systems, the basic tradecraft – especially those that reflect best business practices – shouldn’t be that different. Procuring cyber-security capability may, however, require greater agility and flexibility than what can be provided under the long and slow ‘deliberative’ acquisition process.
• Improve the ‘rapid acquisitions’ process. In support of on-going operations, the warfighter cannot rely on the ‘deliberative’ acquisition process to satisfy its needs. The process by which these sorts of urgent operational requirements are satisfied reliably and cost-effectively needs to be reformed.
• Rein in the Department’s ability to reprogram funds. I have been appalled that in fiscal year 2011 alone, the Department transferred nearly $27 billion among Defense accounts and that only $11 billion or 40 percent of these transfers received any type of congressional oversight. And, that oversight was limited to just eight Senators out of a hundred. Despite that the Department cannot be audited, we continue to provide it with the flexibility to engage in what amounts to budget gamesmanship, where certain accounts, such as operations and maintenance and base-operations support, which are intended to satisfy ‘must-pay’ bills, are historically underfunded in the President's annual budget requests – with the understanding that the Department will be able to transfer funds between accounts down-the-road. In my view, this type of budget gamesmanship is a big reason why the Department cannot annually produce auditable financial statements and frustrates objectively assessing the priority or urgency of the Department’s requirements.
“This brings me to the other major area of how the Defense Department ‘does business’ that underscores the need for cultural reform – defense financial management. And, the most significant thing that can be done in this area is finally getting the Department auditable.
“There can be no doubt that the ability of the Department to be audited independently would help ensure that defense dollars are not wasted, lost or otherwise misused. Absent auditability, the General Accountability Office (GAO) has, since 1995, designated the Department’s financial management as ‘high-risk.’
“Today’s fiscal challenges bring new urgency to the issue of auditability at the Department of Defense. To navigate successfully through this period of austerity and fiscal uncertainty without inadvertently impinging on military readiness, the Department will have to make management decisions that are fully informed and carefully calibrated. And, to ensure intended results, the Department has to make sure that these decisions are being executed as planned.
“From well-managed companies in the private sector, which have to make decisions like this all the time, we know that reliable financial data, effective internal controls, efficient business processes and sound business systems are needed to support an organization whose finances can be audited.
“Granted, the Department won’t use auditable financial statements themselves to make important management decisions. But, the high-quality of the financial information that feeds into financial statements that are ready-for-audit would be incredibly valuable – indeed, indispensable – for identifying opportunities for savings and efficiency; successfully implementing initiatives and management controls to realize these savings and efficiencies; and making sure that increasingly scarce defense dollars are redirected to higher defense priorities. This would give the primary stakeholders in how the Department is managed – the warfighter and the taxpayer – confidence that defense management decisions can be relied on to produce intended results. Given the state of financial management at the Department today, we do not now have that confidence.
“One big reason why we don’t is that, to date, the Department’s commitment to achieving financial auditability has been characterized by blown-deadline after blown-deadline. Various statutes, including the Chief Financial Officers Act of 1990, the Government Management Reform Act of 1994, the Federal Financial Management Improvement Act of 1996, and other provisions in various defense authorization and appropriations acts, have required financial improvement at the Department or for the Department to produce auditable financial statements. But, after continuous failure, we are now at a point where, for example, when then-Secretary of Defense Gates was trying to find efficiency and reduce waste at the Department just a few years ago, he said that what he was doing was ‘something akin to an Easter egg hunt.’ He explained, ‘[M]y staff and I learned that it was nearly impossible to get accurate information and answers to questions such as “[h]ow much money do you spend?” and “[h]ow many people do you have?”’
“For this reason, after succeeding Secretary Gates, Secretary Panetta immediately elevated financial improvement to a top priority of the Department by directing the Department to cut in half the time to make a key financial statement, called the Statement of Budgetary Resources (SBR), ready-for-audit. Now, this goal must be achieved by fiscal year 2014. Seeking to leverage Secretary Panetta’s initiative and with the assistance of Senator Ayotte, the Senate Armed Services Committee included a provision in its authorization bill this year that formalizes this goal.
“I am pleased to say that, while much work needs to be done for the Department of Defense to achieve its audit-readiness goals, the Department has made some limited progress, particularly through its Financial Improvement and Audit Readiness (FIAR) plan, which the Senate Armed Services Committee legislated as a requirement a few years ago, and the House Armed Services Committee’s Panel on Defense Financial Management and Auditability Reform found early this year contained a ‘reasonable strategy and methodology.’
“In my view, it is no longer the case that top defense managers ‘just don’t get it’ or that they are dragging their feet because they just don’t see financial improvement as a priority. Indeed, perhaps a silver-lining to today’s fiscal challenges is that it seems to have united top management at the Pentagon into finally realizing how important it is for the Department to become financially auditable.
“Indeed, over the last few years, some agencies within the Department, like the Army Corps of Engineers, the Military Retirement Fund, the Defense Contracting Audit Agency, and TRICARE’s Contract Management Activity have received clean audit opinions. As GAO's director of financial management and assurance Asif Khan recently said, Secretary Panetta’s directive has resulted in a ‘change in tone at the top’ that has ‘reset’ the Department’s efforts to achieve an unqualified audit opinion. How exactly would Senator Hagel, if confirmed, further Secretary Panetta’s efforts here?
“This is not an academic question. As the Department of Defense's deputy inspector general for auditing Dan Blair recently noted, for the Department to achieve an auditable Statement of Budgetary Resources (SBR) by 2014, it must run what amounts to ‘a big checking account with thousands of people being able to write checks’ and that capturing an ‘auditable universe’ within it will require reconciling between a general ledger and subsidiary ledgers.
“A big problem is ongoing delay in implementing very expensive business computer systems called ‘enterprise resource planning’ systems (or, ERPs), which perform a number of business-related functions vital to transforming the Department’s business operations. The ECSS system I mentioned a few minutes ago is an ERP.
“As of December 2009, the Department has invested over $5.8 billion in ERPs and will invest billions more before they are fully implemented. But, most of them are over-budget and behind schedule or haven’t provided promised capability. And yet, these ERPs make-up more than half of the Department’s entire expenditure in the area of business transformation, costing taxpayers more than $1 billion each year.
“This is vitally important: If the Department doesn’t get ERPs, like ECSS, right, not only will have the Department squandered those monies that it had already sunk into these programs, but it will have also severely undermined its ability to improve the efficiency and effectiveness of the scores of business-missions, like, logistics and supply chain management, etc., that are key to supporting those service-men and -women who defend the nation.
“So, what needs to be done? From the top-down, lines of authority must be clarified. The relevant workforce must be well-versed in government accounting practices and standards and experienced in related-information technology. Given how vitally important ERPs are to this mission, people who have actual experience successfully implementing global business systems must be properly mixed into the workforce. And, contractors hired to integrate these business systems into the Department must be the best-qualified partners and held to the same high-performance standards that should apply to any other major defense acquisition. Within this overall structure, there must be sufficient oversight and accountability vis-à-vis a well-defined and federated business enterprise architecture that ensures that, in terms of organizational transformation and systems modernization, all the different elements of the Department are moving in the same direction towards a single goal. And, these kinds of issues need to have the day-to-day attention of Department’s Chief Management Officer (CMO), that is, the Deputy Secretary of Defense, and the CMOs within the military departments.
“At this point, I am of the view that, with all of the congressional reforms and mandates in the area of financial improvement over the past few years, the Department of Defense has all the tools it needs to have in its tool-kit to achieve audit-readiness on time and on budget. The issue is leadership and execution. And, as the House Panel on Financial Management and Auditability Reform noted, a vital part of that is ‘ensuring that senior leaders are held accountable when audit readiness goals are not met and, conversely, rewarded when goals are achieved.’ Also, defense financial improvement must no longer be regarded as an activity important only to the Department’s financial community. Field commanders have to be fully engaged and interested in driving change outside the Pentagon. If Senator Hagel is confirmed, his setting this tone from the top will be vitally important.
“Is all of this enormously challenging? It absolutely is – as befits an organization of the size and complexity of the Department of Defense. With an annual budget equal to the 17th largest economy in the world, as the Institute for Defense Analyses recently noted, the Department’s ‘business’ of achieving its unique and disparate missions worldwide on an ongoing and contingency basis equates more to an economy than a commercial business.
“Be that as it may, with an annual federal budget deficit of $1.3 trillion and defense reductions of at least $487 billion (and possibly with sequestration another nearly $500 billion) over the next ten years, the Department needs to have reliable financial management data to help it distinguish between defense budget cuts that are prudent and necessary, and those that may impinge on military readiness and, therefore, endanger our national security.
“Only a Department that can be audited can give us the assurance that the Department is moving in the right direction – in terms of identifying the right opportunities to save defense dollars and eliminate waste, and redirecting increasingly scarce defense dollars to higher defense priorities.
“All that I have discussed today illustrates how important sound leadership at the top of the Department of Defense is to ‘buying smarter’ and getting the Department ready-for-audit. Without leadership fundamentally and unalterably mindful of the Department’s responsibility to the American people to use defense dollars wisely, this cultural change will forever remain elusive. For this reason, this body’s consideration of the President’s nominee to serve as the next Secretary of Defense will be more important than it has been in recent memory.
“Thank you, Mr. President.”
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