Deputy Secretary John J. Hamre
Dr. Hamre: Thank you. Please accept my apologies for being late. I find it enormously rude when people aren't on time myself, and for me to be late is embarrassing. I had planned on getting on the road earlier than I did because the traffic this morning, as some of you may know, is really quite bad. We had an accident on the 14th Street Bridge, and when that happens, absolutely everything gets constipated. And then unfortunately I got hung up -- we're working out some talking points associated with the Land Mine Convention and things that the president is going to say, and so I just couldn't get away. So I really am sorry. Thank you for understanding.
I'm here because I am paying a debt. I had agreed to meet with you all earlier, and I had to drop out on that at the time, and so I'm back now, I hope, with a stronger and richer message than I was going to have before. At that time, I was the comptroller and was going to try to exhort you into helping me, and now I'm in a different position where people seek my support rather than avoid my meetings.
So I would like to at least share with you some of the things that we are planning to do. Obviously, it is enormously important as we interface with all of you, those of you in the private sector, I know that there are a certain number of folks here who are from government, and so your lives are going to be more upset by me than are the civilians in the room -- non-DoD I should say. But nonetheless, all of our lives are going to change fairly dramatically, and I would like to talk about that.
Two things are very clear to me from watching what has unfolded the last several years in Congress, and that is simultaneously we want no mistakes in the acquisition process, and we don't want to pay for the infrastructure it takes to provide no mistakes. Have I got it right? And I think that's -- obviously that's an impossibility in this world, and yet we keep hearing the drum beat that there is an army of shoppers at the same time that we are castigated for spending too much money on, you know, commercially available equipment when we buy for the Government. There is so much dissonance in our lives that it's very hard to sort all that out.
So we are marching off on a path where we think it makes sense. We are obviously going to be needing all of your help and probably will have to modify some of our plans and our direction, but we are going to try and reconcile these two things, these two inherently contradictory and unreconcilable goals. We are going to try as best we can to deal with that, and I would like to talk with you about that because, in essence, it's not possible to reconcile these two inherently contradictory goals without it being a team effort between the government and the private sector because at its core is thinking fundamentally about new ways of doing business, where at its core we trust each other.
My sense is that's not a common word in your vocabulary because you're frequently thrown into battle as the champions for your respective sides, and the goal is to kill each other, and to all of a sudden say that this new modality is one where the default premise is trust but I think that ultimately is what we're talking about. We are not going to be able to lower the cost, the transaction costs, associated with the acquisition process and minimize -- I don't say eliminate -- but minimize mistakes unless we can become more thoroughly integrated as partners in this process.
There are several initiatives that I think are going to typify the challenges we are all going to face and which I would like to discuss. First of all, we have made a commitment as a department to become a paper-free acquisition process by the turn of the century. Every time I say that, and knowing individuals in the Department of Defense, they turn white as a sheet for good reason. As I said, I used to be the comptroller and was responsible for the financial management activities of the Department. I remember the first time I went out to Columbus, Ohio, where we have the large DFAS Payment Center for large contracts. It's a large operation. We disburse about $43 million an hour. The first thing you see is these big sorting wheels that were probably built in the 1930's to sort the paper that comes in the door every morning. There are 15 linear miles of shelf space dedicated to contracts, contract mods.
We are choking on the process. Nobody in the Department -- I don't mean this critically -- nobody is doing financial management; we are busy coping with the wreckage of financial services. And that's not criticizing anybody's (inaudible); that's the way this system has evolved. Frankly, a fair number of businesses -- I think that in some ways we are further ahead than some businesses are. I am shocked to find out that I have 3,000 invoices at Columbus that are about 1,000 of them are over three years' old, and nobody is asking for their money. It is for a unique set of reasons having to do with fiscal law. We didn't have available funds to liquidate those invoices, and nobody is saying anything, which tells me that industry is just as screwed up as we are.
Now, and obviously if you are choking on a paper process, and we are choking on a paper process, thinking in very superficial ways about getting rid of the paper forces you to confront underlying ways of doing business. Think about this. Sixty-five percent of all of our payments out at Columbus are for less than $2,500. Here we have a contract payment operation where on the average it costs us 150 bucks to make a payment, and $2,500, $1,500 payments. It's Looney Tunes.
So you need to rethink in fairly fundamental ways and force yourself into the process of thinking about a paper-free environment. It's remarkable it hasn't had an energizing effect on our community. We are having a series of meetings right now, and I had a late meeting last night -- you have to bring everybody to the table, the Air Force and Gen. Malishenko from DCMC. We've got to get Gary Amlin from DFAS and Gen. Cully from DISA. You have to bring everybody to the table at the same time to figure out solutions to this, but it is energizing to us right now, the opportunities.
And let me just describe one because ultimately I'm going to ask you to be potentially partners with us on this. There is a very fast way to get to a paper-free environment for large contract operations. You have to segment this market, and I'll talk to you about some of that in a second. But in terms of large contracts, there is a very snappy, fast way to do this.
Even though we have all in our respective worlds spent gazillions of dollars with software houses to develop systems to run all this, one thing, and it's all unique -- none of it is standardized -- and it's painful as hell to try to put it in an EDI interface. Some of you have been working on that problem. The one thing that has been normalized in this environment over the last 25 years, and that's the instructions that the computer finally sends to the printer. You all want to be able to swap printers, huh? So it turns out, that's one thing in the office-automation world that has been normalized.
Now, if you can put a server in between the computer and the printer and steal a set of electrons on the way to the printer, you can get an image of that document. You don't have to turn it into paper. Now, we in the Department of Defense, on the average, when we write a contract, we will print up 17 copies of it. Only one went out to Columbus, Ohio, in that 15 linear miles of shelf space. God only knows where all the other stuff is.
If you adopt this approach, where you are putting a server at that contract-writing shop and getting an image of that contract, you can then use standard Internet tools and call that contract up. You know, you come up with an automated indexing mechanism through which you can get that contract. You can now get an enterprise-wide imaging solution, and nobody has to change their business practices. It's revolutionary when you think about it.
You know how hard it is to get people to change business practices. I mean, the hardest problem about converting to ECEDI is that you all may want to do it with us so that you can get your payments faster, but if the rest of your private sector trading partners aren't interested in it, it forces you to bifurcate your billing processes, and nobody wants to do it. So it's like the Mach level, the speed of sound. We can't break that barrier when it comes to ECEDI because we are forcing you to confront something that you would rather not deal with.
But you can do it this way very inexpensively, and the return on investment, just in the finance world alone -- I mean, right now, the finance world, DFAS, is buying the servers and putting them in locations, and we get a return on investment from file-clerk savings alone within five months. It's dirt cheap, and anybody can join on to the identified solution when they are ready to, when they get the confidence that they no longer have to look at that sheet of paper to do their business.
Now, one of the things ultimately that I want to broach with all of you is the subject of us putting a server in your billing offices and not ever turning that invoice into paper. Let us pull it from a server that we would own and put in your organizations so that we can pay you electronically. Now, this is the first you're hearing about this, but I really want you to start thinking outside of the box, like we're thinking outside of the box. I want us to become integrated in an enterprise-wide solution to this process where we are genuinely partners, and we'll follow up with you in talking about this.
The second part of this segmentation of the problems is we are increasingly going to try to adopt what I call "hybrid tools" in the contract-payment business. Now, I don't know how many of you are used to producing something and then calling an DCMC inspector and saying, okay, come some time, look at this, and then we'll sign the DD-250; and then, of course, that just triggers the whole paper process for us to eventually pay you, once we can marry up all these sheets of paper. It's not at all clear to me why instead of it being a DD-250 it can't be a credit card payment authorization, just like when you're buying a pizza: Pay on receipt. Pay at time of delivery. There is no reason we can't do it.
Now it forces you to go through some fairly fundamental rethinking about the business process, about, for example, source acceptance. I mean, we've created a whole modality of working with the private sector on source acceptance, but you have to rethink. This is on our side of the equation, and we, the Department of Defense, have to rethink. It also is, frankly, is going to force through, I think, a more interactive approach in internal controls with you all, so that if we are, in essence, taking delivery and paying on location, then we have confidence in the liabilities that come with that and your responsibilities that come with that, so that we can, both sides, streamline our business process so you are no longer having to cut DD-250's and are no longer having to cut invoices, and you get paid right away.
But there come obligations with that, obligations of confidence, internal controls, of working together. So I think this is another avenue we're going to be exploring with you in the next couple of months.
Third is this issue of source acceptance of goods. I personally think we, the Department of Defense, have to think -- rethink -- our whole basis for source acceptance. When I look at -- this is one area where there is probably some of the starkest differences between how the government does business with vendors and how the private sector does business with vendors, is in this area of source acceptance. It's not uniform. It's not at all uniform, but it is startlingly different.
We may have to adopt in the Department more flexibility in our approach in the area of source acceptance, but currently we have 200,000 items for which we require source acceptance. Far too many of those items are there because of relatively minor issues that occurred early on in receipt of that product, and then we have embedded and never gone back to think about it again, a requirement that we source accept everything.
We have under way right now a systemic review to look at our source acceptance procedures. I think it's going to take us another six or eight months before we can get a final bead on it, and we will review -- we are committed to doing a 100 percent review -- of source acceptance goods over the next three years.
What we have attempted to do in our business, of course, is ignore the transaction costs associated with source acceptance because they were never paid by the customer who ultimately was getting the goods. Source acceptance was a free commodity in the Department of Defense, and, of course, any time you get something that's free, you either tend to abuse it or overuse it or, you know, ignore it or something. So finding ways of bringing the transaction costs associated with source acceptance into the acquisition process is going to be a high priority for us over the next year.
Finally, an issue that probably is going to have some impact on all of you, and that is, what is going to be our approach to government-furnished equipment? We have an enormous amount of government-furnished equipment in the custodial care of contractors. It is, frankly, being poorly managed. As a large-scale process, business practice, it's being poorly managed. I'm not saying that you, as companies, are doing a poor job or us, the government, we're doing a poor job; it isn't that. I'm not saying there are any venal or wicked people that are doing bad things; I'm saying that the process, the process is one that is not systemic toward thoughtful management.
And so invariably we end up repeatedly buying things that we don't need, or we tend to keep things and keep them on the books much longer than their economic utility. There tends to be a -- the default mechanism is always save it, and that's certainly not the mode that you have in your world, you know: At all costs, save that 286 processor. I don't know where we're going to put it, but we're going to have it, you know.
The default mechanism is all wrong in government-furnished equipment. This is a very complex problem to solve. It's going to require that we change the starting position on how we treat new things with new contracts as well as how we systemically go about the process of liquidating what's there, and it's a very complicated problem; and, again, we have tended to ignore this because the transaction costs were relatively invisible in our system. So finding a way to make them explicit is going to have to be our criteria for the next -- part of our action plan over the next year.
I hope what comes across to you, and, again, I apologize that I'm not going to be able to stay long, what I hope is coming across to you is that we are taking a very far-ranging look at this area and in all honesty cannot accomplish what we need to get done by ourselves. It will be impossible. It will be impossible to do these things without, frankly, the active participation and support of our private-sector partners. We really do have to think about ourselves in quite different ways: No longer as adversaries in every dimension of our feelings, but, frankly, as partners, as we together try to reconcile the inherent contradiction of the two large, political pressures we're all facing. We don't want any mistakes, and we don't want to spend anything on having no mistakes. To try to reconcile that means we're going to have to be working together on all of these things.
I'm very open to your suggestions, to your comments. I think we want to create open venues to hear these problems out. Five years ago, FacNet was the solution to everything. We now know that's not the solution to everything. Three years ago, ECEDI was the answer to everything. We now know that isn't the answer to everything. We're going to have to break up this problem into pieces, and we're going to have to find ways with you where it makes sense to accomplish a goal all of us are interested in, is to make as seamless as possible the interdependency of our mutual systems so we can trust each other and use each other's information and carry out our business.
That's all I have to say. Thank you.
The Moderator: Dr. Hamre does have time for a question or two, so if anyone has a question. It's very hard to ask questions in a big audience like this. Yes, ma'am, please. You are very brave.
Dr. Hamre: This is a very painful question you have asked. I have been personally vilified on the floor of the Senate on seven separate occasions and called a criminal for my proposed solution to this problem, so I must confess, I do not approach my answer to this question in an unbiased manner.
What disturbs me is the way in which progress payments are gradually being transmogrified into a different beast than what it started with and being subjected to all of the controls that revolve around commercial payments. Progress payments were set up as a payment device for the convenience of the government to avoid interest payments. It was never designed to really be anything other than that, but it's gradually being evolved into something other than that, and we are now being increasingly forced to treat the progress payments where we withhold between 10, 20 percent on a payment and to treat it in our accounting systems as though it were a regular commercial payment.
I want to step back into the environment and say, is that really what we want to be doing? Invariably -- and my very good friends in the IG, and they are good friends; I worked very closely with the IG over the four years when I was the comptroller, and this is one area where I think we have a disagreement. They can point to a contract, a wholly untypical contract, like the Titan IV, and to extrapolate from that some business practices that we ought to change as it relates to progress payments, and my argument is that it's very unlike most of our progress payments, and we shouldn't take that -- frankly, I didn't support the Titan contract for other reasons, let alone it being such a fouled-up contract. But having said that, we shouldn't take that experience and extrapolate it into a much larger venue and apply it to all progress payments.
So I think that we need to step back and to say, what is the nature of this as a payment device? What is the nature of this as a financing tool? Is this something that the Department wants and still needs? And I'm perfectly prepared to go back and ask very fundamental questions about whether we still need progress payments in a world where we're trying to evolve toward more commercial-like practices. But having said that, I don't think that we ought to -- that we need to, not that we ought to, but that we need to encumber progress payments with all of the restrictions that come with fiscal law that really were designed for a different application.
Now, this is an ongoing debate, and it is a debate that we had for three years in the Department when I was the comptroller, and it is one that is still unsettling. And I know it is still raging, and it's not that people come to the table with, again, no selfish or venal motives; it's that people honestly come to the table with a perspective, and we're trying to reconcile this, but my personal view is it's not reconcilable unless we're going to abandon the historical notion of progress payments.
And my personal view is we ought to return to the historical notion of progress payments and lower the transaction cost penalties that come with it in the near term. In the long run, because we are withholding payments, I do not believe that the government is in any sense at risk for overpayment because of our current practices for accounting for progress payments -- my personal view. I think that there are some that differ with that, and we're going to try to find a way to reconcile it, but this is still work in progress.
Q: Sir, would you comment on some of the downsizing efforts, particularly as they affect the field rather than the headquarters?
A: Which downsizing efforts?
Q: The program budget guidance downsizing (inaudible) and the QDR. These are all similar.
A: Okay. They are. They are all being integrated in the budget that we're currently pulling together. We are under a very, and we have been... people have to remember, we are now in the 12th year of budget cuts for the Department of Defense. This has been going on now for 12 years straight, and if anybody thinks there is still fat in the system, they are wrong. Okay? You cannot go into the 15th year of budget cuts and not lose capability unless you fundamentally step back and say, okay, we're going to do this in different ways.
I personally think we need to do things in different ways, so I'm not loathe to that; but we do need to do it in different ways. We have very significant downsizing targets, especially for civilian strength levels. By definition, that cannot be engineered in detail at the headquarters. That must be done in the field. What we must do, I think, at the headquarters level is impose realistic targets and not make them more stressful than that, and then to have reasonable expectations for how the field structure will implement things, and then set up a monitoring mechanism to know what's going on and be prepared to undertake the course correction.
We have lots of different things going on in different venues. There is the normal downsizing that's going on in DCMC any way part of what they have been on a glide path for the last three and four years. They still probably don't have the final details on where they have to be by the year 2002. I'm very familiar with DFAS and their downsizing plans. We have just gone through the consolidation of bringing in the 333 accounting stations into 20 operating locations, and now we're going to turn and say now we want you to cut that in half again. All of the military departments, of course, are going through a downsizing and a restructuring of their procurement offices. There is an awful lot moving simultaneously.
All I can tell you right now is that I'm impressed by the clarity and consensus that exists at the top as people are looking at this problem. It's remarkable. The session I had last night was really probably one of the better meetings I've had in the three-and-a-half months since I've had this job -- it seems like three-and-a-half years -- because there is a remarkable, I think, clarity and consensus and willingness to tackle this together because we are all, frankly, sharing the problem. And we are finally, I think, coming to realize, the hardest thing to realize in our kind of an organization, that we are mutually dependent on other people's success. You know, stove-pipe, chain-of-command organizations tend to view success fairly much internally for their organization, and what impressed me most about last night, and over the last several weeks, is the way in which the shared success is now being viewed as mutually dependent. We're mutually dependent on success in other people's worlds, and that, I think, has been a startling change.
As to the details of the downsizing in the field, I have no doubt we are going to have some wreckage along the way. Frankly, all of you have been living with that. You that have been going through consolidations and downsizing have to know that yourselves. And the most important thing with any of these initiatives is at the very outset announcement you know you're going to be making mistakes. You don't know them right now, and you are prepared to correct them when you find them, and we're going to do that.
But that's about as much as I can tell you right now. I am not going to know exactly how it's affecting you personally, and it is one of those things, finding ways to get those problems surfaced at the senior level is a very important thing so we can figure out how to engineer around them.
Yes, sir. I think this will have to be my last one.
A: Well, I -- do you all know what GPRA is? Okay. It's this new kind of performance objectives kind of context for the federal government. I, to be perfectly blunt, have not been all that impressed by GPRA. The main reason is I think we've been doing that for 25 years -- maybe not all that well, but we've been doing it for 25 years. This is not new to the Department of Defense to think about where you want to be in five years, lay out measurable goals, and then keep track of yourself. Now, it has bridled a little bit under our limitations in the finance world because there was a profound decoupling in the finance world between how we measure things, which is usually with inputs, and then the actual output measurement in the accounting systems. It was like a spinal-cord-injury patient. There is no connection at all, and trying to pull that together again has been painful, and it's gradually and very slowly coming together.
But, having said that, we as a Department have been doing performance -- setting performance measurements and have embodied it systematically for years in the PPBS System. And so I chafe a little bit that committees that are not our committees of jurisdiction come in and say we're bums. Give us a C-minus. Okay? This year we got a C-minus, and we only got a three-and-a-half-billion-dollar plus-up to our budget.
So I'm not sure -- there is a profound disconnect in my mind between what GPRA means and what it really means to us on a daily basis. I believe we should do the goals of GPRA, and I believe we've been doing them for 25 years. If we're not doing them well, then let's find a better way to do it, but I don't think we have to invent anything new in the Department of Defense to comply with. And I'm not "dissing" the GPRA process; frankly, I'm saying, you finally are starting to catch up with us; we're there; we've been doing it.
Again, I apologize for coming late and leaving early. Usually you don't mind that if they are in-laws, but -- thank you all very much. I appreciate it.