How do cost and mgmt. systems create biases against innovators in DOD?

Many causes could be cited for the institutional bias against innovators – or what could be termed more broadly as entrepreneurs – in the Department of Defense. I will explore one cause from personal experience: cost and management systems. From the conceptual rationale and specific features of these systems imposed on contractors by the DOD, a more general root cause for the prevalence of bureaucracy over entrepreneurship is observed.

Over the 1950s and 1960s, two important contractor business reporting systems were developed. First is what is now called Earned Value Management (EVM), formerly under the acronyms PERT and C/SCSC. The essential feature of EVM, including its scheduling component, is that the full specification of deliverable end items are completely known before work begins. All major deliverables are specified, along with fully costed and time-phased activities to get there.

EVM requires a lot of up front planning and constant maintenance by the Control Account Managers. A network of every scheduled activity informs progress to plan. When coupled with work packages linked to financial data, managers hoped to target crucial problem-areas and predict total cost impacts. It intended to surface problems early for management to apply the proper pressures.

A second reporting system is the Cost and Software Data Reports (CSDR), formerly the CIR/PIR and ECIS. These sets of reports intend to provide the actual cost of production for all manner of component parts and subsystems, identifying further by various types of labor and material. The reports are intended for use in predicting the cost of the next program or contract.

These planning systems, required by DODI 5000.02 may seem like good practices from the Project Management Institute playbook. But they are rigid and inappropriate for today’s entrepreneurial activities. Not even Section 804 rapid acquisition programs are exempted from them without additional waivers.

The business systems were created under the assumption that all defense contracts would be like those from the industrial era. You have large, physical goods, the cost of which primarily goes to routine labor (e.g., riveting or welding), raw materials (e.g., steel, carbon), and physical capital (e.g., machine tools and molds). It assumed that most of the cost, and therefore the value, was in standardized operations and assembly line work.

In such an environment, the EVM and CSDR reports make sense. Outcomes are fully specified, and the best methods of achieving those ends are already known. All that is left is creating the single-best plan, executing, and measuring performance. It takes a linear view of technology development and business activity. There is little in the way of changes to direction, discovery of knowledge, feedback loops with the users, and so forth.

Even when the systems were created, it was recognized that they impeded progress. EVM, for example, was first used on the Polaris missile system. As Harvey Sapolsky discovered in his groundbreaking book, the EVM system was not used for most all of the project. Oskar Morgenstern believed that if it were actually used in the early stages, the project would have failed. Participants said EVM was useful in having the appearance of management, and justifying ever-higher funds.

It is increasingly obvious that such industrial era techniques have become irrelevant. Software, databases, platform design, lean manufacturing, employee training, and other intangible assets are what brings value to the table. The activities are not routine and involve knowledge-workers. It requires the genuine contribution of employees, rather than executing standing orders to the preordained plan.

While the rest of the economy moves away from such linear business planning, the Department of Defense remains committed. Defense officials attempt to trace every dollar the contractor spends to specific work activities related to a congressionally approved end item. Mountains of documentation are accepted as a substitute for oversight. It is imagined that the spending of dollars is the same thing as generating value.

When production of a known object using known methods is simply a technical problem of allocating scarce resources, money costs and product values usually have tight alignment. Yet when value comes from intangibles, such as found in new ideas related to R&D, then money costs and product values can diverge massively. It is obvious that an ingenious design and an unworkable design could both expend the same money costs in labor and materials, but result in completely different values for national defense.

Often times, it seems that the ingenious design is not the one that the innovator thought it would be when work first started. Instead, the innovator is guided by adaptive learning in which errors are corrected and new opportunities exploited. Knowledge work is non-routine. Yet this fact destroys any utility from measuring performance to a prespecified plan (EVM) and using money costs as a basis for predicting future outcomes (CSDR).

The contractual requirements to perform, and live by, EVM and CSDR business practices is what hamstrings the entrepreneurial types in the organization. They are forced to compromise, bottling up new information and sinking more effort into the erroneous plan. The contractor will be evaluated not on the value of the delivered product, but on how exactly the contract requirements were met; on performing the plan of a distant bureaucracy that knows little of the realities of the problem.

It is a commitment to Taylorist concepts of the industrial era that holds innovation back in the Department of Defense. This is expressed in the regulations imposed on business systems. It is related to other modernist ideas related to scientific determinism, reductionism, socialist ideology, neoclassical economics, and other concepts which focus on optimization rather than the growth of knowledge.