Thursday, June 18, 2015

Hubris Follow Up

It's clear from the preceding post that either I failed to convey the problem with industry telling the military what to do or there are readers with an inaccurate understanding of the customer-company relationship.  I'll try to briefly clarify the issue.

A company, and its Board of Directors and CEO, have a legal fiduciary responsibility to the company's shareholders to wisely manage the company's finances and direct its performance.  A company cannot spend money in a manner that might lead to bankruptcy. If a company opts to "bet" a portion of its earnings on a particular piece of R&D, it does so with no more money than it can afford to lose.  In this respect, a military supplier is much like a customer in Las Vegas - don't bet more than you can afford to lose.

Further, it is vital to understand who a company is "working" for.  Boeing, for example, is not working for the United States or even the US military.  It is working for its shareholders. This is an incredibly key point.  What it means is that Boeing is not trying to develop and sell the product that best suits the military - instead, Boeing is trying to develop and sell the product that best suits Boeing, meaning the product that best fits their existing or desired product line and generates the greatest profit and cash flow.  Think about it - if Boeing and every other company were trying to develop the best product for the military they'd all agree on who's product was best and the other companies would drop out of any procurement competition. Well, of course they don't do that.  That means that in any given competition several of the competitors are knowingly putting forth sub-optimal products without saying so and are happily trying to take the taxpayer's money regardless.  There's nothing wrong with that. That's how the market system works and the onus is on the military to be able to distinguish between good and bad products (an argument for establishing internal design capability and technical expertise within the military!).

Let me summarize.  Boeing (and everyone else) is not investing R&D to help the military.   They are investing to help themselves.  Boeing (and everyone else) is not producing the best product for the military.  They are producing the best product for Boeing.

The mere fact that Boeing "bet" on a particular line of research and product development does not in any way, shape, or form obligate the military to pursue that path from some sense of responsibility (that's corporate welfare sponsored by the military) or in response to some veiled (or, in this case, explicit) threat from industry.  Response to a threat is extortion.

Those of you who worry that Boeing will fold because their product was not chosen are not grasping the Microsoft-IBM example.

Eisenhower warned us about this and some of you are buying into the very phenomenon he pointed out.  Think harder about this.

25 comments:

  1. I'm not worried that Boeing will fold because of this. I'm worried that the Navy is screwing up yet another program because they can't get their act together.

    For every day of this "pause" the costs to restart it multiply.

    Boeing is in the business of producing products that customers want to buy. That is "what's best" for Boeing and Boeing's shareholders.

    If customers don't want to buy their products, Boeing will go out of business. That's Econ 101.

    Boeing needs to spend internal R&D money on projects that have a reasonable chance of producing a successful product. This is not Vegas. Boeing can't just throw money on Red or Black and hope for the best. If Boeing loses faith that a Government project will ever amount to anything, it's only logical that it focus it's R&D money elsewhere. It's not extortion. It's reality.

    This is a warning that government programmatic ineptitude will cause the government problems, and make everything cost more. Companies may be less interested in pursuing the project further.

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    1. Nothing you've said obligates the military to be a corporate welfare source for Boeing. If the military is that confused and directionless (and they are!) then Boeing should not be "betting" at all. They should wait until the military comes out with actual requirements. If Boeing opts to try to jump ahead with their R&D then the risk is all on them.

      Now, is the military acting in the best and most productive manner in their acquisition programs? Of course not!!! They're idiots. Still, that does not obligate them to bail out Boeing.

      Again, let's be very clear. If the military's decisions are directly influenced by threats from a supplier, that's extortion - in fact, that's the legal definition of extortion. Further, it's stupidity and would result in the acquisition of sub-optimal weapons and systems.

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    2. Even without knowing the intimate, internal details, one could make a pretty good argument that the F-35's continued existence is in large measure due to the incestuous relationship between the military and its supplier and nothing good has come from that. Any unbiased observer would have cancelled the F-35 long, long ago for a whole host of reasons. Clearly, there are factors other than product performance and supplier efficiency at work.

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    3. Boeing isn't asking for a bailout. Boeing isn't threatening anyone. They are annoyed at what appears to be government ineptitude.

      The government basically said, "Stop what you are doing until we get our sh*t together." But there is a cost for Boeing (and the other contractors) to do that. There will be a cost to the government to restart the program, if it ever happens.

      Boeing is doing nothing more than rightly telling the government this, that its ineptitude will have a cost.

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    4. If you read the Boeing comment as a friendly reminder rather than a threat then you probably perceive Putin as a global good neighbor.

      If Boeing is using their own internal money then the government/military has right or even interest in telling Boeing what to do.

      You seem to have lost sight of the customer-company relationship. The customer tells the company what to do (by spending or withholding discretionary spending), not the other way around.

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    5. And the company tells the customer how much it will cost them.

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    6. CNO,

      What might happen if Boeing goes through with this so-called "threat"?

      1. Boeing exits the UCLASS program entirely.
      2. Boeing asks for a reworked contract upon restart of UCLASS.
      3. Boeing re-evaluates spending its own money on future projects of this type.

      Still looking for where this rises to the level of "extortion".

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    7. Extortion is a threat intended to produce a desired course of action. Read the original linked article. Boeing threatened the military to try to force them to pursue a course of action that Boeing desires.

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    8. You're playing fast and loose with that word.

      Nobody is going to charge Boeing with extortion for this story. You are the only one suggesting it is.

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    9. Of course no one is going to charge them. That doesn't change what it is.

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    10. Extortion involves a threat to produce a desired action, but not all threats to produce a desired action are extortion.

      If I threaten to sue you to pay the money you owe me, I am threatening you to produce a desired action (pay me!). But that is not extortion.

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  2. I know it's not popular to say this to Americans, but I've become convinced that there should be a much more vertically integrated system.

    CNO has called for the re-incarnation of BuShips. I think it should be even more vertically integrated than that - a state owned crown company that will take care of a substantial proportion of defense needs. There could be multiple companies giving some type of "competition".

    These crown corporations would attempt to operate at break even and work very closely with actual troops to determine what was required. Their directive would be the national interest, not profit.

    Although it will not be perfect, I think that overall, it could be "less bad" than the current setup. What's good for the military industrial complex may be completely at odds with the best interests of the US.

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    1. Ahh a socialist military-industrial paradise! ;)

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    2. It would not be a paradise - far from it. But it would not have competing interests and incentives compared to the rest of society.

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    3. I might agree with you in concept but the problem is that the government has botched every program it's ever undertaken. A govt run military industry would be horrible. That said, it might still be better than what we have now!

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    4. What other alternatives are there?

      Other nations have seen some degree of success with State Owned Enterprises.

      In the civilian sector, there are even some that can outperform private sector companies.

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    5. Alt, I get the sense that you're not a US citizen. Nothing wrong with that! However, here in the US, we're faced with the failures of Social Security, Post Office, IRS, etc. which makes us very leery about yet another massive government program. As you put it, though, it might still be less bad than the current situation.

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  3. For CNO: Wow ... Extortion, botched every program it's ever undertaken; strong words. I am not going to try to match wits with you, but will say, your view on how things work is a bit obtuse and narrow minded.

    Boeing is a company, no arguing that, believe it or not, they want to do the right thing for our country but they can not do it for free. Industry funds quite a bit of the initial R&D internally (not all profit goes to stockholders) and in many cases they government could not touch getting to capability without this initial investment. For example, industry has poured billions of dollars into research for Hydrogen Fuel Cells, guess who is reaping the benefits of those billions??? The government. Do not be so naive as to think or call every contractor or industry company blood sucking and in it for the dollar; do you work for free?

    Do you propose that the government, who you find so incompetent, take over the industrial base and become the producers of all things DoD? How much infrastructure and overhead do you think that will be? Where would we find the workforce to do that, where would we get the money to fund such an effort?

    Boeing had the fortitude to voice their opinion, no threat or extortion going on; kind of think free speech allows them to do that.

    OBTW ... Botched every program? Go lift the tent on the FA-18 A/B/C/D/E/F program and tell me what they got wrong, and ... yes, Boeing kind of has something to do with that.

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    1. AJF, whoa, there! Go back and reread what I wrote versus what you think I did. I'm not anti-corporation in the slightest nor am I opposed to internal research. I'm on a mobile device so I'll answer you more fully, later.

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    2. AJF, by now you've hopefully had time to reread what I wrote. I completely support our free market system. That said, we need to understand how that market system works and it works as I described - the companies operate in their own best interests not the government or military's best interests. Hopefully, for military suppliers, the company's interests and the military's will coincide and both parties benefit. Unfortunately, that often do not. Consider the LCS or the F-35. Those are of dubious benefit to the military and yet you don't hear the companies clamoring to shut down their products out of concern for the best interest of the military.

      There's nothing wrong with that. It just means that that is how the system works and the onus is on the military to make intelligent assessments of company's products and their benefit to the military and to pass on products that do not offer sufficient benefit. The military is failing, badly, to do that.

      As far as the government botching every large program it's attempted, consider Social Security (heading for insolvency), Post Office (broke and failing), Obamacare (driving doctors out and increasing premiums and deductibles, IRS (corrupt and politically motivated), etc. A government program is a sure way to ensure failure. That said, I've stated that the military should consider the possibility of a military run "industry". It would be horribly inefficient but still might make sense - someone would have to look very carefully at that proposition.

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  4. CNO ... Thank you for the response, was not available to write for the last couple of weeks.

    What I like about your blogs is the difference of opinions and perspectives. Mine is shaped by a long career in the military and the experience of industry.

    I have seen industry from both sides and the best way to put it is, it is not as black and white as you think or state. "Boeing" does not work solely work for the stockholders, they are a part of the equation, they work for the customer, and a big customer is the government. If they worked for the stockholders there definitely are elements of their portfolio that would close tomorrow. Military aircraft production is not a profitable business, commercial aviation dwarfs military by at least an order of magnitude. In fact, there are many programs industry support for a government customer that lose money. There are reasons for this, and one is to provide that unique expertise iso of our Nation. You do not have to believe it, but from experience, I can tell you that it is true.

    I like what you write and do respect your opinion. You provide examples to support your opinion, but there is a lot of detail inside of those examples that does not readily jump out to the reader. The insolvency of Social Security did not happen over night and is a very complex operation, saying this is a government failure is stretching the truth.

    What I am getting at is this, DoD is a complex business that has a lot of room for improvement. Senior leadership knows this and does work hard at the efficient management, but ... there are many, many cooks in the kitchen and they are all not on the same page or have the same agenda. And now, congress wants to have the service chiefs hold 51% of the vote on RDT&E, bad decision. Not because of bad intentions, but for lack of understanding of how to manage programs, business and the complex world of acquisition.

    This is not easy, and there are great people trying each and everyday both in the government and industry trying to "right the ship". Just try to remember that it is not as simple or clear cut as you like to portray it.

    Thanks again for your response.

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  5. Not sure if these posts are monitored after the original flurry, but if they are, here is a very well written article that articulates some of the challenges that industry struggles with and suggestions that could influence better business practices on both sides ...

    http://lexingtoninstitute.org/dan-goures-speech-acquisition-reform-must-start-with-culture/

    "Most private contractors work hard to be a good partner to DoD. Despite the attitude of many in the acquisition bureaucracy, they are motivated by more than money. The Pentagon needs to reciprocate this commitment by becoming a good partner to industry."

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    1. AJF, yes, all comments are monitored and noted regardless of the age of the associated post - a good reason to go back through the archives and reread posts! Thanks for the link. I'll check it out.

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    2. I've worked extensively in "big industry". Companies will try to be good citizens, to a degree, if it benefits their bottom line, and only as a lesser priority. If all those conditions can be met and they can still be a good citizen, they will. However, they will not hesitate to gouge customers (commercial or military), commit fraud (how many hundreds of prosecuted cases can we cite?), mislead (manufacturer's claims for the F-35 or LCS or almost any other weapon system, large or small), overbill for hours, etc.

      I witnessed a major chemical manufacturer be fined and taken down by the government for price fixing and collusion related to vitamin sales while they were actively engaged in consumer PR campaigns and running programs to provide relief to needy customers. The "good" programs were operated as PR "screens" to cover the illegal activities. Without a doubt, the individuals involved in the "good" programs wanted to help people and believed that they and the company were good citizens - until the government raided the company headquarters!

      Any "good" that the military suppliers are doing is because they see a benefit to themselves. That's neither good nor bad. It's just they way our free market and stock market system work.

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  6. Thanks for the response ... We hear about this all the time and unfortunately, it does overshadow the good people trying to do the right thing. Greed and corruption has been around a while and again unfortunately, not going away any time soon. I try to do my part to set the good example and if I see waste, fraud and abusive, address it.

    All good points you make, good conversation and appreciate you taking the time to read and comment on my observations.

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