At Defense Inc., Rules Are Changing

But one of the duller rules, Rule No. 96, might be the most apt in Rumsfeld's present circumstances: "Normal management techniques may not work in the [Defense] Department." It's a remarkable understatement, but no wonder. Managing the Pentagon bureaucracy is considerably more complex today than it was two decades ago when Rumsfeld first served as Defense Secretary under President Gerald R. Ford. The intervening years have brought hundreds of new regulations and new layers of management and oversight. The most significant new wrinkle is that the Soviet Union, long the focus of military planning and the rationale for virtually every military decision, no longer exists. The Cold War is long gone, but the United States still is trying to figure out how to get along without it.

When the Pentagon releases the much-anticipated "Quadrennial Defense Review" later this month, most reviewers will focus on what the document has to say about strategy, weapons and force structure. Those are the meat and potatoes of military planning. But the key to affording the troops and weapons needed to fulfill the strategy will be better management. Without better personnel policies, meaningful financial planning, wise capital investment and a rational procurement process-things easily overlooked during the excesses of the Cold War-there won't be enough troops with the right equipment to deploy on future missions.

It's a challenge Rumsfeld seems to recognize. Remarkably, the 20-page "Terms of Reference"-the guidance Rumsfeld issued in late June to the brass completing the QDR-require Defense planners to improve management. According to the guidance, the military must "ensure DoD's institutional viability by strengthening DoD's commitment to people, streamlining and revitalizing its facilities and infrastructure, and reforming its acquisition, financial and business practices."

Further, Rumsfeld's guidance requires Defense planners to establish performance standards: "The approach to risk mitigation must include the use of activity-based costing and identification of output-based metrics and standards to reduce inefficiencies throughout the department." According to the guidance, "DoD will seek support from Congress to streamline infrastructure, outsource and privatize more functions, improve business practices, fashion incentives for cost savings and efficiencies, and reform acquisition and financial systems. Success will reduce the risks from continuing to squander scarce resources and mismanagement, both of which erode public support for defense and reduce U.S. military capabilities."

It's hard to imagine the military brass giving much thought to activity-based costing, performance metrics and other management tools without explicit guidance from the top. Those are the domains of bureaucrats, not warfighters. Even more unlikely would be incorporating those tools into a central planning blueprint like the QDR. The fact that the brass is getting that guidance is a tribute to Rumsfeld's goals for running the department. But whether those goals will be achieved on his watch is another question. As Rumsfeld has acknowledged in the "rules," management at Defense is hardly "normal."

Long-standing Problems

The Defense Department dwarfs other public and private-sector organizations in size and complexity. Its operations involve more than $1 trillion in assets, it spends more than $300 billion annually and it employs more than 3 million people. The size of Defense is daunting; so too are its problems. The Defense inspector general recently identified $1.1 trillion in financial statements that lacked adequate audit data or documentation. Not a single agency within the department has been able to meet accounting and reporting requirements. Management problems at Defense are varied, but most stem from the lack of reliable, day-to-day financial data.

For too long, the Defense Department has been able to circumvent abysmal management systems by living off Cold War largess. But the threats facing the United States have changed, and Cold War Defense budgets have given way to domestic priorities, including the tax cut authorized by Congress this summer. As a result, Defense is under increasing pressure to clean up its bookkeeping and demonstrate better financial stewardship. This process was started during the Clinton administration, and it surely will be accelerated under the Bush administration.

"If it's a high priority, this place can do wonderful things," Stephen Friedman, retired chairman of New York investment banking firm Goldman Sachs, said at a Pentagon briefing for reporters in July. Rumsfeld hired Friedman last spring to produce a road map for reforming the department's finances. Friedman acknowledged it would take years to truly fix the department's finance and accounting systems-to standardize processes across the department and buy and install new computer systems that would put the department in compliance with the financial reporting laws passed over the last decade-but he emphasized the department could have measurably better financial data before then.

The department's successful Y2K program is a testament to what commitment from senior leaders can mean in overcoming serious management challenges, Friedman says. "Y2K was a clear leadership priority. Everyone we talked to in this building said it was important. They understood it. It was regularly monitored. There was a clear sense of accountability, and there was a timeline." By applying those parameters to transforming financial management, it, too, can be fixed, he said.

The department must produce a Defense-wide system architecture that meets financial reporting requirements and produces reliable financial data that can be used by managers, said Friedman. At the same time, to realize more short-term benefits, the department should establish activity-based costing in a couple of key cross-cutting areas, such as logistics, he said.

"This Secretary has a keen understanding of the importance of financial management tools for running a complex organization effectively," said Friedman. "[Senior leaders] know you can't run an enterprise of this complexity without immeasurably better financial information than you presently have."

Corporate Makeover

Better management and access to the information that makes it possible clearly are priorities among Defense leaders. For the first time in many years, the services are being led by former corporate executives who not only expect better management tools, but also believe they are necessary.

Army Secretary Thomas White, a former executive at energy giant Enron, speaking at Government Executive's Excellence in Government conference in August, told an audience of federal managers that while crisis management is an Army core competency, he's anxious to add business management to the service's portfolio.

White is working closely with Gordon England and James Roche, secretaries of the Navy and Air Force, respectively, on two councils established by Rumsfeld to improve management at Defense. The relationship is unprecedented-historically the service secretaries have been adversaries in the inevitable budget battles that sweep the department. While they undoubtedly will still go to bat for their services, it's clear the service chiefs answer to a higher authority.

England, a former General Dynamics executive, told reporters in June that none of the service secretaries would have made the sacrifices necessary to take the jobs if they weren't committed to making significant changes. "We were all willing to come and take on this challenge as long as we weren't going to work on the margin," he said.

"We are here to fundamentally improve the business practices of the Department of Defense and our respective services, and we will work together to do that. And that is a very, very important difference," England said.

Of course, if Rumsfeld is intent on running the Defense Department more like a corporation, he'll need the cooperation of an unusually unruly board of directors-the 535 members of Congress who control his budget. In his first several months on the job, Rumsfeld demonstrated a tin ear for many members' concerns. His plans for the military have alternately left members of Congress feeling kept in the dark or blindsided by events, depending on the issue.

Nonetheless, Rumsfeld seems to have won a significant concession from lawmakers that will go a long way toward lubricating the engine of better management: Congress will allow Defense agencies to apply savings from better business practices to the services' growing lists of unmet needs.

It's a huge incentive, says White. "The boss has changed the rules."