The $37 Billion Lesson DOD Could Learn from IBM
Policy + Politics

The $37 Billion Lesson DOD Could Learn from IBM

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The mid-1990s were a bad time for IBM. The tech corporation’s stock had fallen from $111.87 in 1989 to $51.50 in 1993. The problems at the company were almost too numerous to identify.

They included:

  • Out-of-control budget and resources measured in the billions, not millions
  • Poor integration of the financial, technology and supply chain
  • Workforce redundancy
  • Unaffordable medical and retirement costs
  • Thirty-one different internal communication networks and 155 different data centers
  • Many different ledger systems – as many as 266

According to a group of business leaders who advise the Pentagon, today’s Department of Defense has many of the same problems as the IBM of yesterday.

Related:  How a New Army of Robots Can Cut the Defense Budget 

In a January 23, 2014, presentation, “Implementing Best Practices for Major Business Processes in the Department of Defense,” advisers  to the DOD – including Regis Group president Robert Stein; Philip A. Odeen, chairman of AES; and John B. Goodman, managing director of the U.S. Defense Portfolio for Accenture – said that the solutions IBM used to address its woes also be used to achieve savings at the Pentagon. The advisers are members of the Defense Business Board (DBB), an advisory panel to the Pentagon that suggests solutions to DOD’s spending problems.

Changes to DOD logistics and supply alone could save $18 to $23 billion, according to the board. New cost management and financial practices could save $4 to $6 billion. And changes to personnel could save between $5 and $8 billion.

In other words, in a perfect world, the practices of private business could save DOD between $27 and $37 billion each year.

“The Department of Defense is facing one of the world’s most demanding business process environments in an increasingly unpredictable environment,” the board wrote in the report. “Implementing the DBB recommendations would increase DOD efficiency…. [Doing so] would also increase DOD flexibility and adaptability.”

Related:  The 3 Biggest Losers in a Slashed Defense Budget

The Pentagon is desperate to find ways to save money. Its budget is falling from $526 billion in 2013 to just below $500 billion this year. Additional reductions over the next decade are set to remove another $600 billion from the budget.

Tough choices are required to yield these savings. According to the DBB’s Task Group chairman William Phillips, the most effective reductions would come from how DOD pays its soldiers.

“The single biggest opportunity for long-term savings is to address the compensation and benefits issue,” said Phillips in an emailed response to questions.

The report recommends that DOD pay be based on performance, as opposed to compensation scales that apply to all soldiers. Right now, the lowest performing soldier within a pay class makes just as much as the highest performing soldier in the same class.

The group also recommended pay and retirement benefit reductions, typically the third rail of defense spending. In the short term, the reward for slowing pay and benefit increases would be small - just $1 to $2 billion. But over the next two decades, the board said that pay and benefit reductions could save up to $270 billion.

Related:  Budget Bloodletting at DOD Has Just Begun

The board determined that DOD’s staff is riddled with redundancies and inefficiencies, as well as unnecessary layers between soldiers and top brass. Eliminating these redundancies along with reducing the number of layers would save up to $8 billion.

On the logistics and supply-chain management front, the board recommended that DOD transfer all services to one system to manage information. They found that DOD’s “[multiple] disconnected cost centers and processes” make it difficult for the Pentagon to track inventory and keep its books in order. The board also urged DOD to get rid of expensive old warehouses and to better negotiate contracts for goods and services with an emphasis on quality and results, not just low cost.

The board also took DOD to task for poor financial management; the Pentagon has famously never been able to pass an audit. The group recommended that DOD establish best business practices and scorecards for better financial management across the building and to continue to invest in technology to integrate financial management systems.

Difficult to Change
Loren Thompson, chief operating officer of the non-profit Lexington Institute, a think tank focused on national security, said applying private sector practices to DOD is a difficult task, especially in the contracting realm. He said DOD should change incentives for the companies it does business with.

“You have to connect price and performance,” said Thompson. “A dumb buyer just expects contractors to do a good job without the right structure of incentives.” 

There are a few caveats about the IBM case study as it relates to DOD. The changes suggested by the Defense Business Board would take a considerable amount of time – a commitment of at least five years to begin to see results.

DOD cannot make these changes alone, either. It would need congressional backing to change its contracting rules, as well as money to integrate systems. Congress has also been reluctant to make any changes to DOD’s benefit structure.

As a private company, of course, IBM had the ability to move fast – making sweeping changes that turned the company’s fortunes around. Pentagon brass are likely to be against such sweeping action that dramatically changes the status quo.  

Phillips, however, said he believed the changes suggested in the report were possible. “The lessons from the IBM case study can be applied, where practicable. Yet we know they cannot be applied as quickly as IBM did it, or with IBM's flexibility,” he said. “The focus on cost areas, such as supply chain, facilities, people and benefits, as well as organizational overhead, are all areas that the DOD has begun to address.”

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