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Defense Reform Initiative Breakfast
Remarks as Delivered by Deputy Secretary of Defense John J. Hamre, National Defense University, Thursday, May 13, 1999

Thank you very much for the opportunity to come talk here. I will spend the bulk of my time talking about the Defense Deform Initiative, but I do think I need to start with a brief report to everybody about Kosovo.

Despite the obvious disappointment we feel for the mistake that led to the hitting of the Chinese Embassy, we are doing very well from an operational standpoint in Kosovo. The troops are doing a terrific job. We have had a number of times when we have unintentionally created damage that we were not trying to undertake through a planned strike, but probably only four or five times. In a campaign where we have flown 14,000 sorties, we have confronted an opponent that has launched over 300 SAMs [Surface-to-Air Missiles] at us. For all practical purposes, we have been able to operate pretty much unimpeded. This operation is, however, a heavy burden. We have about a fourth of our air forces committed to this now, or we will have by the time we get the last increment there. It is straining the system, but our people are bearing up very well.

Again, we are very sorry about what happened at the Chinese Embassy, and we are looking into why that happened, but it was an accident. We certainly did not do this on purpose. At some point, people are just going to have to say, "You are in a war zone. And we apologize. That is unfortunately what happens." We will do everything we can to make sure we do not have such problems in the future, but it is up to China if they want to throw away a working relationship with the United States. I hope that is not the case. It is not in their interest to do so. I wish they could just open up and accept an apology that is sincerely offered.

It is probably an odd way to start by apologizing for a mistake in an air campaign, but I wanted a broad setting for what I will say, which is that I think the Department is doing a very good job. Think of the complexity of having a period of weeks to bring together the resources and the support structure, the ammunition and the maps, and then to go to a theater we have never been to before, to undertake extensive operations, and to coordinate the activities of 18 other countries at the same time and to do it with such proficiency. It really is remarkable. [In terms of] our primary business, which is combat, nobody does it better than we do.

I contrast that with our support side -- our business activities -- which is not as strong. I am sure that many of you are familiar with the current Sigma revolution that is underway in American business. It grew out of an engineer’s concept of trying to engineer processes so that there will only be one mistake out of 10 million operations. That is Sigma. So, it is a distribution curve, and it is out at that 6th Sigma that you only have very rare errors.

Sigma really grew out of the experience Motorola had when they began making pagers. They did not start out with the expectation for error-free operations. They thought they would reach a year’s-worth of operation before they would breakdown. Instead, they have operated for the equivalent of about 10,000 years, because they had engineered excellence into each step along the way and produced a marvelous product. This has now become the innovation in American business that is sweeping the country.

I would argue that in our line of work, despite our occasional mistakes, we are a six-Sigma operation when it comes to our primary business, which is going to war. When it comes to our support activities, I am afraid we are probably a two-Sigma operation. It always surprises me that an organization, on the one hand, could demand such excellence in the innovation and energy and creativity on the fighting side. Then, in the other part of the organization, which is the support structure, we live with wreckage, in many ways -- old, outdated, obsolete business practices, computer systems that nobody has the original source code to any longer. We are not even sure how they work. We found that out while we were preparing for the year 2000. There is a willingness to tolerate poor business practices.

 

When he launched the Defense Reform Initiative about a year and half ago, Secretary [Cohen] said that we have to find a way to get the support side of our organization to have that same quality and driving sense of excellence as the warfighting side of the family. This was under the rather insistent prodding of the Hill. [Congressman, Herb] Bateman, in particular, has lashed me at hearings and said we have to get better at this.

So we have been working hard. This year, two big events have affected our efforts. One was having more money given to us by the White House and now up here on the Hill, and more money coming yet. Second, what is happening in Kosovo.

I have said many times that I feared that having additional funds to our budget would take away the impetus for reform in the Department. Why change if Congress will give us more money? I have also found that it is exactly the other way around. There is no plausible way that we can approach Congressman Bateman or his colleagues and ask for money without demonstrating that we are doing everything we can to get better, to squeeze out the inefficiencies of the system. If we were not trying to do everything we could in that area, we would have no credibility coming to them and asking for more. In turn, they would not be able to turn around to their constituencies and justify a vote for more defense spending if they were not demanding that we do a better job of reforming and becoming more efficient. We are trying very hard to justify the confidence that they have in us by giving the resources to undertake these missions, by concentrating on these problems.

Let me give you some examples. We process about 10 million contract actions a year; 70 to 75 percent of them are for less than $2,500. Now, in the old days, we had to cut contracts. I remember my wife, who works for an association here in town, coming home one night with an irritated look on her face. They were hosting a conference and it required a five-page contract from the Department of Defense to pay the $175 fee to attend the conference. A five-page contract. Now, obviously, it was issued by a Navy engineering activity, and it was some mistake that said they had not returned the pressure vessels when they were done with the test. [Laughter.]

We have a big system with thousands of people cutting contracts for something that a credit card would take care of. We started about a year and a half to two years ago to try to push away as many of our contract actions as possible and use just a commercial credit card. We have done very well. I think of the 10 million transactions, probably 6 million of them this year are going to be done on a credit card. So we get out of this business of cutting contracts and writing checks.

Out at Columbus, Ohio where we have our primary contract payment operation, we have 15 linear miles of shelves dedicated to the 400,000 contracts under active administration. We are choking in paper. We need to get to a point where we only issue a contract when we really need to have true contractual discipline and instead use commercial practices to buy as much as possible. We are making good progress.

We have a larger, related effort to get the paper out of the business. You can imagine what it is like working with 400,000 contracts, 15 miles of shelf space dedicated to contracts. There is a great deal of what engineers call "scrap and rework." You make a mistake, you find it out later, you have to go back and correct it. Those are three wasted actions as opposed to getting the job right the first time. Many times, these contracts are voluminous and [highly] inaccessible. For a contract on the M-1 tank, we would need an M-1 tank to deliver it. [Laughter.] It probably takes 800 or 900 boxes to contain the contract.

We have been shifting to on an electronic basis as much as possible through imaging. We have now shut off, at least to the finance world, over half of the contract-writing systems simply because we can get them electronically. So, we are making very good progress on that, too.

We are slower than we wanted to be, but another of our goals was to try to privatize our utilities. We operate about 550 utility systems -- electricity, natural gas, water -- and we would like to privatize them. We have seen very good results in a small number of cases we have undertaken, and we are committed to review every one of those systems over the next 18 months. Our goal is to privatize half of the systems, because we think there is more innovation in the private sector in these systems than we have in our limited ability to resource them over time with investments in new hardware.

Where I think we have stumbled is on the issue of base closures. I am not trying to make this an awkward moment for anybody, because we all know we have more installations than we need. I recognize that it is very hard to close bases. Mr. Bateman has the luxury of representing an installation that will never close -- we will never be without the Navy and it will always be in Norfolk. He can be a little bit more dispassionate than some of the others here.

We are not making much headway. This is a hard environment. The last round of base closures, with what happened with the depots, led people to lose confidence that the system was working, and it gave people an excuse not to act. We know we need to close more installations, but we do not have the spirit of trust right now that it takes to make that step.

I think one of the greatest impediments standing in the way on base closures is the army of lobbyists here in Washington that can hardly wait to swoop down on these poor communities, scare the hell out of them, and try to get hired on as consultants to save the base. That is one of the real reasons why members do not want to do this. Even the winning communities, the bases that will never ever get closed, have lobbyists on top of them, scaring them to make them spend a couple of hundred thousand dollars on consultant fees that they really do not need to spend. This has really created resistance.

Even so, at some point in time we will have to close some additional facilities. I think that is clear. In any case, we will not get the benefit of closures in Secretary Cohen’s tenure or my tenure because the results will not come in for six or seven years. So, unfortunately, we are giving our successor, probably two times removed, a problem. We continue to ask for your help. I know it is a very, very tough thing. Nobody has been more courageous than you gentleman, to face this very difficult problem of balancing local requirements -- which are very real and have to be honored -- against the national requirement for which we need an affordable program over time.

 

The other problem where we are making limited progress – it is a mixed success, I would say – is the A-76 competition. This is very tough because over the years we have committed to a process that will give government employees a chance to compete for their jobs against the private sector. Over time, a process has evolved that nobody likes. The government employees do not like it, because they have to go through a very painful process to try to hold onto their jobs. The private sector does not like it, because it takes two years to undertake the competition, and they feel it is rigged. So this is a very, very unhappy arrangement. Unfortunately, I do not have a better solution to the problem.

What is the alternative? We could just privatize without going through any process, but then we would have to confront a genuine fairness issue. People have signed up, committed their lives to work with us, and we cannot just throw them away. At the same time, we have to be clear to government workers that we cannot hide behind process as a protectionist device to insulate them from the rigors of competition. We have too much of that going on.

We will try to compete 200,000 jobs over the next four years. We are only doing about half as well as we had hoped to by this time, but on the other hand, we have competed more jobs in the last six months than we had competed in the previous 13 years combined.

There is an additional frustration. A community will hear that there is going to be an A-76 competition and will conclude that it is just the first step toward closing a base. I know Members of Congress hear about this. I certainly hear about it, and I tell people that the best way to protect their base is to become more efficient. Lowering the cost of the installation means it will fare much better in base closings in the next round. As a matter of fact, the worst thing to do if you fear a base closure is to dig in and do nothing and stay inefficient.

I would argue that our current system on A-76 punishes everybody and rewards nobody because it takes too long. It means that a government employee has to sit there for a period of two years with all of the anxiety and uncertainty that comes with this sort of change. That is not fair to them any more than it is fair to businesses that have to wait two years to compete for a job. Businesses are used to making bids and closing in weeks or months, not years. So we clearly are going to have to find a way to get past the current inefficiencies in order to accomplish this goal.

We should stay on in this course because it does strike a fair balance between the rights of government employees to be able to at least compete for their jobs and the rights of the private sectors to do better. We will work our way through these tough changes.

 

Now, are we making progress? I am very, very gratified by how the Department has come together to work on these problems. Just yesterday there was a detailed review with the DLA [Defense Logistics Agency]. DLA’s operating cost -- and this is coming from a study that was done by KPMG [global advisory firm] -- that we saved over a billion dollars a year from the reform initiatives in the last three to four years.

Congress was right to criticize the old, inefficient systems. Five years ago, you would go out to Walter Reed [Hospital] and see a big warehouse room like this, full of medical supplies. You do not see that today, because we order directly just like the way other hospitals do, right from the suppliers, and it comes that morning. We have set out contracts around the country now where all cleaning supplies and construction materials can be delivered when we want them. We do not have to have a warehouse. If we buy materials in advance and do not use them all, what do we do with that last two gallons of paint? Usually, it sits on a shelf for a couple of years and then somebody throws it away. So the scrap and loss rate -- shrinkage is what I think accountants call it – no longer exists, because, under this contract, the contractor takes back whatever we do not use.

We found that, apart from our transaction costs, which are running about 50 percent less than in the past, just the prices are less going this way than if the government were buying it. That’s because we just aren't the most agile buyers in the world.

We have many success stories, but we continue to have challenges, as well. I talked with Jack Welch at General Electric once and he noted that we have a tough problem. If he cannot get an operation efficient in General Electric, he sells it. We cannot do that in the Defense Department. We cannot separate out the back shop, and say, that is not our first line of work and we are just going to sell it. We have to take a very different approach. Mr. Bateman has said this countless times. We have to become more efficient. That is what we have to do in the Department.

In the long run, getting additional dollars now to balance our program and carry on operations in Kosovo and in other places only carries us through the present. These dollars do not provide the solid underpinning we need over time to resource this Department. That means that we must generate efficiencies internally. I would argue that we simply need to capture the same sort of innovation and energy that we see in our warfighting side and bringing it throughout the system. If we can do that, we can win over the American public.

We are not there yet, but we are making progress down that road. I am very, very grateful to Stan [Soloway, Deputy Under Secretary of Defense for Acquisition and Reform], Eileen [Giglio], and all the folks who are heading up the Reform Initiative in the Department. It is a hard business to tell people the way they are doing it now is not working, is not very good, and has to change, but you are doing well and I am very grateful for your work. Thank you all.