[Index]


NATIONAL DEFENSE PANEL

Tuesday, April 29, 1997 9:00 a.m
Hyatt Regency Crystal City Hotel
Regency A Ballroom
2799 Jefferson Davis Highway
Arlington, Virginia

PRESENTATION OF LIEUTENANT GENERAL McINERNEY
BUSINESS EXECUTIVES FOR NATIONAL SECURITY

LIEUTENANT GENERAL McINERNEY: Mr. Chairman, members of the National Defense Panel, thank you for inviting me to testify today. I'm Tom McInerney, president and CEO of Business Executives for National Security.

BENS is a national, nonpartisan organization of business and professional leaders dedicated to the idea that national security is everyone's business. BENS members apply their experience and commitment to help our nation's policymakers build a strong, effective, affordable defense. We work with the Congress, the Pentagon, and the White House to ensure the changes we recommend are put into practice. That is why I am here today.

Today, I would like to focus on one of the primary defense restructuring challenges facing you as you review the work of the QDR. That issue is the ratio of tail-to-tooth.

One of the 13 charges given to your Panel by the congressional legislators was to examine the "ratio of combat forces to support forces (tooth-to-tail)."

It is the only charge that specifically references support structure rather than force structure -- support structure rather than force structure. The tone of the legislative language on the tail-to-tooth would have us focus on the appropriate ratio and the structure of the supporting headquarters units and defense agencies.

BENS believes there is more to this issue than simply adjusting defense personnel and organizational arrangements. My testimony will refocus the debate toward correcting the imbalance in our force structure to infrastructure ratio -- the real problem tooth to tail -- with those savings redirected to force modernization, which we think is the major issue facing defense.

We believe that the current situation related to bloated defense infrastructure is quite similar to the debate in the 1980s about how to close military bases -- a process BENS actively championed.

Remember that, since the late 1970s, we had been unable to close any major bases due to congressional concern about losing public sector jobs. Overcoming congressional opposition posed a difficult challenge, requiring creation of the Defense Base Closure and Realignment Commission.

The BRAC process was not the most efficient way to go about closing bases, but it did get the job done. Its most important lesson was the recognition that closing bases poses a political challenge requiring a fair and impartial process that also offers a helping hand to communities affected by the closure.

We will need a similar approach as we address the broader problem of defense infrastructure. However we must remember that, since 1985, we have taken 1 million people out of uniform, 1.3 million people out of the defense industries, and only 200,000 DoD civilians. If we don't solve this problem quickly, we will have a hollow military by the year 2000.

We strongly support the efforts of the QDR and the work of this Panel. We believe the QDR may lead to significant changes in how the Pentagon organizes and prepares to fight. Yet, we are less optimistic about the QDR's impact on slashing unneeded infrastructure. Quite simply, the QDR is not focused on how the Pentagon manages the day-to-day business of national defense.

This omission will be unfortunate, since the need of the Defense Department to fix the way it manages its service and support infrastructure has never been more acute. While military leaders continue to downsize and reorganize the fighting force, spending on support functions and overhead costs remains stable and, in some cases, is growing.

Too much of limited defense dollars goes to support areas -- the "tail." In fact, the support and infrastructure now consume more than 70 percent of all defense dollars, an annual sum of roughly $150-160 billion per year. Such excessive overhead is inexcusable when many warfighting needs -- "teeth" -- remain unmet.

How can this problem be fixed? Achieving balance will involve adjustments in the way the Department organizes its support infrastructure, but it will also require the Pentagon to change the way it does business.

I believe the solution lies in showing the Pentagon how it can better, more efficiently service and support, at lower cost, by employing techniques pioneered in America's private sector.

As an example: In the private sector, and in state and local governments, nationwide, outsourcing and privatization have emerged as management innovations that promote efficiency but, most of all, improve service. Facing a "competitiveness crisis" in the 1980s, American industry restructured and reengineered itself and is now the envy of the world.

These experiences offer useful lessons for the Defense Department. To restore balance to its tail-to-tooth, the Pentagon needs to turn to quality providers in the private sector to take over much of its commercial-type activity.

BENS considers the problems to be so acute that we are setting up our own Tail-to-Tooth Commission. This Commission, whose members will include leading business executives and former senior military and political leaders, will examine how to inject the best of business practice into the business of defense.

Our work will focus on the "how" of fixing defense infrastructure. We all can agree on what problem areas should be addressed. How we go about fixing these problems is the most demanding challenge. The reengineering experience of American businesses in the 1980s and 1990s is the best model for the world's biggest business -- the U.S. Department of Defense.

What challenges face the Pentagon's effort to restructure?

I use the terms "reengineering" and "restructuring" interchangeably. Regardless of our terminology, it is clear that changing the defense infrastructure culture will not be easy. There are a number of indications that the Defense Department has not yet comprehensively addressed the problem of its Industrial Age support structure:

Number One. The General Accounting Office identifies no significant new infrastructure savings in the current Future Years Defense Plan between FY '96 and FY 2001.

Despite the 22 percent decline in overall defense civilian employment, the size of the senior civilian management team in the Pentagon has actually grown about 25 percent -- 33 in 1980 to 44 currently.

The Defense Science Board has identified 640,000 military and defense civilian "full time equivalent" positions in the Department engaged in activities that could be done by private business -- work that is already found in the Yellow Pages.

The Defense Department's present support structure wastes money that could be used to support the warfighter or be redirected to other requirements. Consider the following examples:

Official travel. DoD, in 1995, spent $1 billion simply to administer the paperwork for all travel by its employees -- which was a total annual bill of nearly $3.5 billion. If state-of-the-art private sector approaches were utilized, DoD could reduce these costs by nearly 80 percent and save up to $800 million a year.

Military family housing. Recent studies of military housing indicate that DoD-constructed housing costs, on the average, are twice as much to build and maintain, comparable to private sector housing. With an annual DoD budget of $4.2 billion, simple reforms could produce billions of dollars in savings.

Military and civilian payroll. DFAS -- the Defense Finance and Accounting Service -- presently charges an average of $8.50 per month to process a single paycheck. This cost is roughly $6 to $7 higher than comparable private sector savings. With more than 2.5 million DoD paychecks processed each month, even small reforms can produce huge savings.

Admiral Shanahan, it costs them $8.50 to pay my paycheck, as a retired three-star general, and yours as a retired three-start admiral. ADP, which does it for my company -- it costs $1. Is that the business of defense?

Defense Reutilization and Marketing Service, DRMS. This simply, ladies and gentlemen, is junkyards. Should the Department of Defense be in the junkyard business? They recover one penny on a dollar. The private sector can recover somewhere between 30 and 50 cents on the dollar.

Lessons from the private sector.

The U.S. private sector's restructuring experiences of the last decade yield an important lesson: concentrating on core expertise, and spinning off the rest, contributes to the bottom line. The Pentagon's bottom line should be measured in terms of military readiness and force modernization.

Outsourcing and privatization can do for defense what it did for America's leading edge businesses. That is, free up resources to concentrate on core competencies -- concentrate on the warfighter.

There have been DoD successes in emulating and using the private sector:

Vance Air Force Base, a pilot training base in Enid, Oklahoma, has had contractor-provided maintenance and base service support since the late 1960s. Why don't we spread this across other bases?

DLA employs direct vendor delivery for pharmaceuticals to reduce warehousing and second destination charges. Why don't they do that for a host of other issues?

The Air Force, for many years, outsourced its intra-service aircraft logistics support, moving high priority repair parts and equipment over a dedicated, contractor-run LOGAIR system. Today, it uses the global private sector network, FedEx, which now provides the Air Force with 24-hour delivery of priority parts anywhere in the world, and a much better service.

Private contractors provide about 30 percent of DoD's depot-level maintenance and overhaul work.

Furthermore, the Pentagon can learn from the experience of companies like IBM, AT&T, Chrysler, and others. As recently as five years ago -- you all remember -- the competitive future of such firms appeared in doubt. Popular media and business journals bemoaned the declining competitiveness of American business and pointed to the growing economic clout of Europe and Japan.

But, instead of the triumph of Japan, Inc., the U.S. has a revitalized and growing business sector that is the envy of the world over. The transformation was painful, but it created an American private sector that is the world's most efficient and competitive, with an unemployment rate of 5.2 percent, historically an all-time average low.

What happened? To survive, the private sector had to merge, consolidate, restructure, reengineer and, unfortunately, eliminate jobs. They also turned to outsourcing non-core operations in order to tap services and support from providers who were "world class."

The short-term restructuring costs and the realignment of jobs was the price for future competitiveness, and it was also the price for long-term job creation.

Let me give you one example. We've recently looked at the issue of DoD's inventory management practices. In comparing the private sector, Chrysler offers a useful model. Today, Chrysler is the best in its class in managing its supplier chain -- 60,000 items from over 1,100 different suppliers.

By studying and streamlining its supplier base, Chrysler has trimmed its vendor pool by 36 percent in the last five years and plans to cut it another 25 percent by the turn of the century.

Chrysler's best suppliers became team leaders in the design and manufacture of major automotive components. Chrysler then outsources entire processes to supplier teams.

In the case of driver and passenger seats, Chrysler employees used to assemble them right on the line, with components from 150 vendors. Today, the company buys fully assembled seats from manufacturers.

Supply chain management is not just the latest management fad. According to the Department of Commerce, U.S. companies have cut inventories by 9 percent since the 1980s, freeing up $82 billion for other purposes. These savings are the other bonus. Not only does American industry get more efficient, it also saves money.

Why outsource -- or privatize -- some defense functions?

BENS believes that, like American business in the '80s and the U.S. defense industry in the '90s, DoD should focus on "core competencies" and outsource activities not critical to its mission. For the Pentagon, the core mission is to deter threats to U.S. national security and, if deterrence fails, apply military force to win on the battlefield.

Activities that are not combat capable should be classified as non-core and be considered for outsourcing or privatization.

For the Defense Department, though, there are obstacles between the decision to outsource and privatize, and the realization. Unlike most private sector businesses, the Pentagon does not have complete control over its structure and internal operations. It must go to the Congress for permission. Here is where you can be of great assistance, as far as the Panel goes.

Let me give you some examples of these problems:

Congress requires the Pentagon to conduct exhaustive analysis before outsourcing any function performed by more than 45 DoD employees. That's absolutely ridiculous.

It stipulates that the Secretary of Defense identify core logistics functions which then cannot be outsourced unless Congress is notified.

It prohibits DOD from contracting out civilian guards and firefighters at most military bases. Again, that's ridiculous. They aren't going anywhere.

It requires a public versus private competition before a depot maintenance workload of more than $3 million can be outsourced.

It mandates that no more than 40 percent of the money allocated for depot maintenance be spent on private contractors.

It prohibits outsourcing any function of the McAlester, Oklahoma or Crane, Indiana Army Ammunition Plants, among others.

Such legislation only adds to the economic inefficiencies that Congress complains plague the Pentagon. Congress should work to eliminate rather than impose artificial restrictions on DoD management flexibility.

Other impediments are caused by inflexible internal Government management and personnel policies. For example, the requirement to conduct competitions between public and private sector entities before Government work can be outsourced -- known as "A-76" -- is cumbersome and time-consuming.

The principle is simple: the Government should not be in competition with its citizens for the right to provide commercial products and services. But the implementing policies all but reverse the intent of the procedure.

The average A-76 review takes some two to three years, and can cost many times more, as much as can be saved in the first few years of outsourcing. It comes as no surprise that the Government offeror is often the only one left standing at the end of an A-76 review -- the private sector has decided to look for business elsewhere.

Furthermore, unrealistic scoring procedures complicate and inhibit an already burdensome process -- and I know all the members of the Panel have experienced these burdensome processes, and I'm sure you share in our disdain for them.

What are the Defense challenge reforms? Here, we recommend six functional areas that you take on.

Competition provides the key to cutting the size of the defense tail. The NPR -- National Performance Review -- found that, in service delivery, "competition yields results." Competition is the one force that gives public agencies no choice but to improve.

Within DOD, competition against a standard can yield service delivery improvements. There are at least six major sets of DoD business practices to change:

Outsourcing/Privatization -- which I've mentioned; continue your base closure, BRAC; implementing Acquisition Reform; joint requirements redundancy; headquarters staffing, cut down; DoD's budget and planning, the PBBS system -- left over from the McNamara age -- no major corporation in the country today could run their business the way we run the PBBS.

Our observations:

Reengineering and implementing reforms in all areas mentioned above can yield significant efficiencies and savings for the DoD, but they cannot all be pursued simultaneously. Restructuring is a process. Success in one area opens opportunities in the next.

To begin the process, the Pentagon needs to get some early successes, and I would like to mention a couple of those. You've heard some of my complaints.

Let's go back to travel. Let's outsource travel. What the comptroller is going to do is, he is going to re-invent travel. He's got 43,000 people in DFAS today and he's going to reinvent it. Give me a break. Get out of the business. Every one of you here has private sector travel, and you never have a problem getting your money.

Military family housing. To date, the housing revitalization "authorities" granted by Congress have resulted in groundbreaking on only one privatization project -- Corpus Christi -- a project that was already under development in the Navy when the authorization was given. At this rate, the Pentagon will never achieve its 10-year goal of fixing the housing problem.

Military and civilian payrolls. You heard my complaint about that. I'll only say that ADP, which does mine, pays 22 million people a month -- 20 million in the United States, 2 million abroad. They do it for $1 for a little company like mine that has 25 people in it. You can imagine what they would do for two-and-a-half million civilians.

The chairman of that company happens to be the vice chairman of BENS, and he won't even go in -- ADP will not go in the Government business -- because it's too burdensome. But there are a lot of other people that will.

The Defense Reuse and Marketing Service, the junkyards. Today, we could outsource that where we're getting a penny on the dollar, ask the private sector and give them part of the profits, from somewhere between 30 and 50 cents on the dollar.

The Defense Inventory Management. You know, we have $70 billion worth of inventory today and, if we ran it like a company, we could probably have it down somewhere about $18-20 billion a year, $24 billion at the most.

Let's focus on advance inventory management. The private sector, just-in-time delivery is out there, and they can make it happen to us. No one is saying that the forces forward won't have to have a WRM of 30 days or something, but we don't need 180 or 240 days sitting back in inventory.

Let's buy off the shelf. Let's plan for lifecycle costs. Let's centralize inventory management.

Now, I'm going to reach out here. Let's talk about defense depots, the Air Force particularly. While the number of depot personnel has been reduced by over 40 percent from peak employment in 1987, depot facilities and equipment have not been similarly downsized. In 1995, according to the GAO, the DoD depot system had 40 percent overcapacity. I suspect it's somewhere about 50.

I was invited down to Tinker Air Force Base by the Government of Oklahoma and the Secretary of Commerce, and I went down there and I looked at that facility. They had 18,000 people at the height of the -- Dick, when you were in DoD -- 18,000 people at the height of the Reagan buildup. There are 10 now and, at the end of the PM period, there are going to be 6,000.

Now, they're comfortable. I mean, they are going to be comfortable until the last person there is the guard at the gate. But the real fact is that Kelly, which has privatized in place, which I initially didn't approve, at the end of the POM period, they're going to have 26,000 workers. Frankly, most of them will be non-defense.

But, when you ask the Governor or the Majority Leader or the local State Senator, "Would you rather have 26,000 workers or do you want 6,000 workers," they would rather have 26,000 workers. They want to create wealth.

So we have a good facility there, and we now say, "Let's immerse ourselves completely and privatize all the Air Force depots in place. Reach out. And then you may have 30 percent of DoD business in it. You may have 70 percent of non-DoD business, where the country is growing.

We've got many sectors of the business community today that are growing somewhere between 25 and 50 percent. They need these facilities. They need that workforce.

What people don't realize is, this nation has a shortage of skilled employees, and we cannot have them in DoD where they're in non-value-added positions.

Now, what I think that you all can do:

First, I would urge the Panel, in whatever form it makes recommendations to the Secretary on the QDR, to consider establishing metrics for determining "real" savings in the form of efficiencies achieved and dollars saved from any of the proposed reforms.

The dollar savings then need to be deposited into a "recapitalization" account -- a "lock box," so to speak -- lest they simply disappear into the Federal treasury. Bringing down the "tail" in the tooth-to-tail ratio is meant to readdress the current imbalance in infrastructure, modernization, and force structure, not result in smaller shares. We are going to have a hollow military in the 21st century, if we don't modernize.

Lastly, establishing metrics would also permit DoD to pay out real incentives to its subordinate elements for being innovative and taking risk. Let the Services reprogram savings within their own accounts.

They, in turn, should let commands and units below them keep a certain percentage of those, reward innovation and risk, then gradually take those savings and put them into modernization. The incentive system has worked in the private sector, and BENS believes it can work in DoD, as well.

The comment is made that, since the Cold War's end, the Pentagon has merged, but not consolidated. The private sector found huge savings in consolidating and refocusing efforts into areas of core competence. It outsources the rest to quality providers who are best-in-class in their own competencies. This is the model that DoD needs to emulate.

Finally, in today's Pentagon, projected savings from outsourcing look like paper profits only but, tomorrow, real value to the Department's bottom line will accrue, if:

There is "buy-in" at the top of the leadership -- which I believe is beginning to occur, and which I believe I know you all are intimately aware of, from your private sector business;

Incentives for first-time managers to risk new outsourcing and privatization opportunities; and

Acceptance that, when it comes to running commercial-type operations, the private sector has built a better mousetrap.

I thank the Panel for the opportunity to present BENS' perspective on these critical challenges to our nation's defense establishment. Thank you very much.

CHAIRMAN ODEEN: Thank you very much, General McInerney.

What we will do now is take a very brief break. We want to resume again at 20 minutes to 11:00. We'll start then with the questions from the panel.

CHAIRMAN ODEEN: Bob Kimmitt, do you want to start?

MR. KIMMITT: General, I would like to pick up where Rich Armitage left off, and ask your definition of the revolution in business affairs. I'm personally of the view that we're further along in that revolution than we are, perhaps, in the modern version of RMA, but I'm not sure that we've drawn the lessons from it that we could.

Secondly, I was interested and gladdened by the fact that your group is going to be looking at the infrastructure, to the detail issue, and particularly, you're going to have as much private sector involvement; because it seems to me that there are quite a number of other groups looking at this issue that perhaps don't have quite as much the outside perspective that you have.

The only note that I would put on this is that, given the fact that we are in that window of opportunity that is presented by the first year of an new administration, whether the first term or the second term, I would just urge that, whatever you do and whatever these other groups do is begun on an accelerated basis, that this not be something that we look at as a next year issue but, rather, a this year issue.

I don't know where either Secretary Cohen is going to come out on this issue or where this Panel is, but I don't think we should see '97 simply as a year of study. I think it also has to be a year for action.

So that's both a question and a comment.

LIEUTENANT GENERAL McINERNEY: Well, I agree with your comment, sir.

The revolution in business affairs I think, is further along, as you say, than the revolution in military affairs. Definitions, of course, are dangerous, because you can't really quite bound it.

Clearly, in business, where they have taken technology and utilized technology to meet the requirements of the business, the bottom line being, as far as the service, the product, whatever it is, to dramatically change your cycle time to get inside the consumer's cycle time or the competition's cycle time, the reduction and decision loop, to me, is what we're talking about in the business area.

FedEx. FedEx gets you a package. It get you better service. I remember when the Air Force went through this process, and we agonized a little bit about trying to replace LOGAIR and the logisticians, the people said, "It can't be done."

The Chief did it. I went up to Misawa, our most remote base, really, overseas. I asked the wing commander what he thought about it, because I knew he was going to tell me that "You guys are the dumbest people in the world; don't you understand what's going on out in the field; don't you care about us?"

So I asked him, Colonel Krittenberger, I'll always remember, and he said he loved it. I said, "What do you mean, you love it?"

He said, "Before, when that part left the depot, it would go to Travis, it would wait until the C-141 pallet was filled up, then it would go over to Yokota; then it would wait until the C-130 pallet was filled up; then it would go up to Misawa ." He never knew where it was.

The private sector always gave it to him the next day, day-and-a-half it took, and he always knew where it was enroute, so the private sector's revolution is to focus on the customer, to dramatically drive down the cycle time and response time, in using technology.

In many cases, they now outsource core functions to do this. So the private sector, in their revolution, is willing to trust a supplier or something like this and have confidence in them, because it makes good business sense.

The revolution in military affairs, I think, because I've been heavily involved with it, has many of the same factors. What we have not been able to do on the logistics side, because there is a revolution, potential revolution, on the logistics side, fundamentally we have an Industrial Age bureaucracy.

The warfighter side has moved into this, not fully, because if you look at the command and control and that, when I was a commander in Alaska, I had a division and, down to the battalion level, they could look in a laptop -- this is back in 1990 -- they could look at the air picture over them, there AWACs, through the 19 ground radars they had, there the E-2Cs. They could look at that ground picture. It was a commercial system that I just adapted and modified. They could also see where the subs were.

Why was this important to a division commander in Alaska? Well, the subs were the tippers coming out of Kamchatka and Pedder(?), and so they would come out three or four days in the old world, as we knew it, a week. So to reinforce the Aleutian chain, they had to know that.

That was the revolution of giving information right down to the battalion level of where it could get down to battlefield awareness.

The same in the business world, where you dominantly know you have an advantage over your competitor and you can get inside his cycle time. That's kind of a broad term. I don't mean to over-emphasize it.

But, fundamentally, what we're talking about in BENS and what our commission -- because we have to give things today.

And the Speaker has given us a Member -- I don't want to use his name right now -- that we are feeding information, just like we did in the BRAC process. I don't know if you all know, but BENS came up with the BRAC process. We gave it to Dick Armey when he was a freshman House member. Then he put the political spin on it.

Well, the Speaker has given us a Member in the House, and we're starting to feed information. Where we have it is well done. In many cases, we won't. The cases I've given you, clearly -- travel, pay -- these things are ready to go.

But we're talking about moving an Industrial Age bureaucracy into the information age.

CHAIRMAN ODEEN: Let me follow up on that, and then ask Rich Armitage to.

LIEUTENANT GENERAL McINERNEY: Yes, sir.

CHAIRMAN ODEEN: Could you talk more about the congressional side of it? Because, as you point out in your statement, there are a series of impediments -- laws, regulations, mostly legislation -- that bar much of the things you talked about.

LIEUTENANT GENERAL McINERNEY: Yes.

CHAIRMAN ODEEN: How do we work, or how does the Pentagon work that issue successfully? They've been unsuccessful, to say the least, the last couple of years.

LIEUTENANT GENERAL McINERNEY: Yes, sir. Well, first of all, I think the Pentagon has not had a unified focus on how they want to take that Industrial Age bureaucracy down.

You know, when we centralized and consolidated and put Ds in front of DFAS, DISA, DRMS, DLA, we, in fact, outsourced them from the services. I tried to, and got, Secretary Widnall and General McPeak for three weeks to hold off giving our DBOF funding to DFAS in fiscal year '94 and then, finally, the pressure was too much.

The fact was, where we were paying, in those days, $12 a paycheck -- and I still think it's probably up there, in spite of what they tell you -- $12, we could have gotten it from the Agricultural Department down in Louisiana ofor $4, and we could have gone to the private sector, we could have gotten it for $1. But the problem is, the way we do the DBOF, we can't do that.

What I'm saying is, OSD, now that they have control of these agencies, and the services no longer look at them, and the QDR, they aren't allowed to get into these areas. So the Pentagon itself has not been aggressive, in my opinion, in doing this. Frankly, they don't have businessmen running those, and those areas.

Next, the Congress, of course, and the same with the base closure, you couldn't close a base in Maine. No offense on the present Secretary of Defense, but he wasn't about to let a base in Maine be closed.

Until we came to the BRAC process, and when you took it away from localized politics -- and I'm afraid that's maybe what we'll have to do -- and then put it from a business perspective, and get business people like yourselves to look over it and say, "Look this is not a core function."

We measure the merit of what the private sector does. In travel, it's at least $6 to $7 cheaper -- it's probably even more, I think you'll find -- excuse me -- in paying civilian and military pay.

In travel, the factor is, the industry factor, is 6 cents on the dollar. DFAS claims 30 cents on the dollar. In other words, if you get $300, it costs them $100 to process the paperwork. Jack Welch does it for 3 cents. Now, why don't we use at least the industry standard?

The Congress will have to take these issues on. The way we're feeding it in, I clearly think there's leadership over there that understands that and wants to do it. But we must be unified at this, and I don't think -- clearly, BENS can't. We can work with certain members.

But if we don't come along together, if the NDP doesn't come out and say, "Look, the private sector has done this, we d have to go and reexamine and test it; do it" -- and the Secretary should, in fact, say these are, say, six areas that we should just fundamentally outsource. The industry has done it. We all know it.

I mean, Mr. Chairman, your company doesn't do paychecks. I don't know who does it, but the fact is none of your companies here do their paychecks. They couldn't afford to anymore.

So that's an area that we ought to be able to say, "Let's do it."

CHAIRMAN ODEEN: Okay. Rich.

MR. ARMITAGE: General McInerney, I think you've answered the question. I think this is more for the Pentagon now than -- I guess equally for the Panel, as well.

You've got a very formidable list of members listed here, geographically, in terms of their clout, et cetera.

If the Pentagon, these Industrial Age bureaucrats, were able to make up their minds on such things as DFAS and DRMS, et cetera, just the way that you articulated them, can you assure them that BENS is going to lean over backwards to lean on an Industrial Age Congress to try to get them to come along?

LIEUTENANT GENERAL McINERNEY: Well, I can assure you we'll lean on them.

CHAIRMAN ODEEN: I'm glad Armitage said that, and not me.

LIEUTENANT GENERAL McINERNEY: And we are leaning now, as you know. And clearly, because out of frustration, is why we have decided to create this Commission. I can't yet announce the commissioners, but they're very, very prominent Americans.

The fact is, these are leading edge corporations that have done this. If we felt it was a risk, I would not stand up here and tell you that, if we were to do these things, it's a risk. My experience is, in close association with the leadership, the military leadership, frankly wants to do it.

But, really, there is an entrenched bureaucracy there, and you know, as soon as they see a DFAS or a base or something, I mean, they're over to their Congressman or Senator, to the staffer, and they're formidable.

The military leadership clearly wants to move out of the Industrial Age. I mean, very few do not want to. But, aside, they are not given any encouragement and there has been a lack of leadership at the OSD level, to do this.

CHAIRMAN ODEEN: You had -- in your role as part of the National Performance Review, or the defense aspect of that, I'm sure you had a fair amount of interaction with the Executive Office of the President. You also need their support for these activities.

Do you want to talk a bit about, one, their attitude and, two, what can be done to make sure they get full support for these activities?

LIEUTENANT GENERAL McINERNEY: Can this be for non-attribution?

CHAIRMAN ODEEN: Pretty hard to do, I'm afraid.

LIEUTENANT GENERAL McINERNEY: Well, I'm a great fan of -- where I learned a lot of this was as director of the Defense Performance Review, in which I visited over 100 leading edge companies -- FedEx, Fred Smith, they welcomed us. Bob Galvin from Motorola; Ed McCracken from Silicon Graphics; Paul O'Neill from Alcoa; Ford, Chrysler, GM.

It was a revelation to me, because my background had been in the operational work, as a fighter pilot. It was an incredible education of what U.S. industry had done.

I must tell you that I was immensely impressed with the National Performance Review, with the goals that the Vice President had set up, with his personal knowledge. It has been tremendous.

What has happened, though, is, after the CORM, the position I had as director of the Defense Performance Review, the equivalent of the National Performance Review, and Admiral Ed Straw took over as director of DLA, also had this as an additional responsibility.

He, after a year, folded it into the bureaucracy. Well, that meant the bureaucracy won. And, frankly, these ideas, as you know, many of these ideas were in the CORM. These ideas are not new ideas. But there has not been a solid leadership at the top of this Government to pursue it, and I personally think it goes back to the jobs issue.

I could never tell you where the jobs would go with these people, and it troubled me in this period. What has not troubled me is, I finally found out, Government shouldn't worry about that. What governments need to do is create the environment for job creativity.

You have to move. I mean, the smithies, the stable owners, when we went from the horse age to the automobile, they're not here, but we created new jobs.

That's why, if you look at where we are, at 5.2 percent, and you have a hard time hiring people now. Because I know. I'm out on boards of different companies. We are having a hard time hiring skilled people. Yet, we're sitting in these huge megacenters at DFAS and all these other areas, that we could port these people over to the private sector.

Now, there is a way we can do it. It requires a little congressional legislation to anyone that's a civil servant prior to 1996, the Civil Service Act. After 1996, they have a 401K or a retirement established, the money is identified, those people could go over.

But if you go out to the industry today -- and one particular contractor gave me a briefing on this -- they had just taken over J.P. Morgan, outsourced it, where you can go up and talk, when I went up to Kodak -- and see what they do, because they take these people, and they give them a job.

Now, the fact is, in the Government, the experience is, you immediately need 30 percent less. Over the time frame of a contract -- say a 10-year contract, and it should be, so industry can invest capital -- they'll go down to 50 or 60 percent reduction in the workforce.

What they then do is, they move these people -- because these companies, particularly in the data automation, information technology are that we're talking about, are growing anywhere from 25 to 50 percent -- they move them into private sector business or other defense business.

So it turns out, these skilled people that leave defense are going to end up with a job, and a better job, and they're going to help the economy grow.

Getting back to your question, I have sensed, though, a lack of aggressive leadership at the highest levels in this country, when it comes to handling those 800,000 civil servants. We treat them different than the people that many of you here, we had to serve, or had to draw that force down that we did. We treat them different than your private sector companies that had to move and take them down.

CHAIRMAN ODEEN: Your point earlier about the dramatic, what, a million fewer military personnel --

LIEUTENANT GENERAL McINERNEY: That's correct.

CHAIRMAN ODEEN: -- 1.2 million industry --

LIEUTENANT GENERAL McINERNEY: 1.3.

CHAIRMAN ODEEN: -- they've all been absorbed in the economy, for the most part.

LIEUTENANT GENERAL McINERNEY: Exactly. We are at 5.2 percent unemployment.

CHAIRMAN ODEEN: The vast majority have. Exactly. And unemployment is at almost, you know, the lowest point in a long, long period of time, despite this. So, unless somebody is anxious to ask another question, why don't we turn to the audience at this point in time and let you ask some questions.

(No response.)

CHAIRMAN ODEEN: If they aren't anxious to ask them, we'll let the press ask them. Last chance here. Okay. Ed.

MR. BEAGLE: General McInerney, could you elaborate a little bit further on the question about congressional involvement? My experience with the Defense Department was that even the Secretary of Defense will not take on this long-term revolutionary change if he or she doesn't think they can finish it.

That would imply that you need to locate the engine of the change maybe on the Hill. Perhaps you could speak a little bit more about how that might be done.

LIEUTENANT GENERAL McINERNEY: Well, we have to form a coalition, just as the depot coalition is formed. I think that -- and it not only must be on the Hill, it must be in the industry, it must be in groups like yourself that come out. And that coalition must be formed, because clearly, we want a strong defense.

Throwing money at defense doesn't give you a strong defense. You could put another 10 or 15 billion dollars in defense, and you're not going to be stronger, particularly if you're putting it in the tail.

So what I think we have to do -- and this is what our process is -- we are going out and making alliances on the Hill, and those that we think that understand this, and that will stand up to the issue.

We're working with those key staffs. This is how we've got to operate. Clearly, we know, in the Pentagon that there are people, Ed, that you and I have worked with, that we know they're there, that want to do this. We know that there's military leadership that wants to do this. And, if they had their say, they could.

Finally, we've got to say there are key billets over there that could, in fact, make this. If the Secretary of Defense is committed to it, he can make it happen. But it will require this alliance of all.

So we're not trying to hit a home run. That's why we throw things out that will not take the union down if you outsource travel or if you outsource pay. See, I would go as far as outsourcing satellite launch.

Today, the private sector puts more balls up in the air than Defense. The fact is, that's now a commodity. We want the output. Why put a huge bureaucracy over the launch and the development and these type things?

But these are good people in Government. Don't misunderstand me. It's the system. As the Vice President says, it's the system that they operate under that isn't the best, that isn't the most flexible.

So they're the areas that I would work on and form this alliance and get the people, and I think that's the key. That's the key.

CHAIRMAN ODEEN: Also, I should have asked you to identify yourself. That was Ed Beagle, who is a former OMB and DOD official and an aerospace defense consultant. Other questions?

(No response.)

CHAIRMAN ODEEN: If not, we'll go to the press. Pat, do you want to identify yourself?

MR. TOWELL: Pat Towell from Congressional Quarterly. I was interested that you said you changed your mind about privatization in place. I'd like you to talk about your change of heart.

LIEUTENANT GENERAL McINERNEY: Well, business wouldn't do it that way. Business would cut it and cut it quick and go. That's part of that revolution, their leadership. You can say that they're heartless, et cetera, but let me say this -- they're still in business, and there are ones that are not in business. So they don't do anybody any good.

Our sector can be harsh sometimes. But I say go back and look at the unemployment, look at those 1.3 million people that came out of industry, out of defense industries. Look where they're working.

So I would give defense industries great credit for what they have done.

Now, the reason I changed is, because it's a political reason. Those depots in the Air Force are normally the largest employer in those states. They have enormous political clout. And, frankly, they are important to those states.

But what has happened is they have withered, and they're atrophied, and they're going to continue, because the way we're designing equipment and the way we're doing things in the future is we're going to have less depot time. We're putting the money up front.

That's why these systems cost more money. But, frankly, they're a lot more reliable. So the depots are going to get a lot smaller.

What my feeling is now is, let's immerse ourselves. Let's privatize them and help them through this transitory period. It will cost us money, but let them go, and then put the private sector environment where they can attract new business, like Kelly.

I mean, you've got railroads going to Kelly. You've got UPS. UPS is going to use its for its southern hub, the warehousing. They formed the right consortium there, and so they're bringing different skills to learn how to use the real estate, et cetera.

So they're going to create jobs. It still has the potential to do defense business, but they're going to create jobs, and job creation in this nation, nobody does it better than the private sector.

What we've decided is that, even though you have overcapacity in the private sector -- and, by the way, when I'm talking about depots, many of these depots will grow in non-aerospace, because we still have overcapacity in the aerospace.

They have to take it down about 400,000 more workers, three or four hundred thousand; so it's not necessarily going to be aerospace, but it could be other areas where the sector is growing, so that's our objective.

In other words, we're tying in a business approach with a political approach and a job creativity. And it clearly resonated with the Governor and the Secretary of Commerce down there. They would rather have, at Tinker, they would rather have 26,000 new jobs than 8,000.

CHAIRMAN ODEEN: Do you have any sense to what extent there is support for that? I mean, as you talked to people at Tinker, I mean, what kind of resonance did you get?

LIEUTENANT GENERAL McINERNEY: I get great resonance from some of the political leadership and the people in the non-defense business.

As you can imagine, their solution is, they want a partner. They still want the base commander. They want that guaranteed government. You see, they're afraid to cut the umbilical cord and get out in the private sector. So there is reluctance.

They'll tell you it costs more. In fact, it does. But, if you do it to all of them, and privatize them -- because frankly, we need to do the same thing for the shipyards. And, if there are certain skills that, even though it's private sector, I mean, you can still be subsidizing, and we do that, if we want to keep that skill.

But you go out, and I was in San Diego, you talk to the fleet, and the fleet commanders, they would much rather send their ships to San Diego than out to Pearl or to Bremerton, that are Government, because it's cheaper. They get the same product.

MR. KIMMITT: Another question. You've mentioned a couple times this need for skilled workers. Implicit in that is that there are skilled workers on some of these bases. What we need to do is reorient them toward future opportunities.

LIEUTENANT GENERAL McINERNEY: Yes, sir.

MR. KIMMITT: Do you have some statistics on that, other than just what you've picked up from your meetings with folks?

LIEUTENANT GENERAL McINERNEY: Well, I don't. Let's talk DFAS, for instance. DFAS, I think, if you go talk to them, they've got 24,000 or 23,000 people assigned to DFAS. They may be down a little bit. But then they borrow from the services, so it goes up to 42 or 43,000.

Now, these people, a lot of them, like on travel, there are 3,900 people committed to manually auditing the same old travel voucher that you did when you were in the Army, and Jim and I, it's the same old voucher, you know -- 3,900. That's a wing, a fighter wing, it's a bomber wing. It's an aircraft carrier or it's a brigade, manually auditing. This could be done with software. But frankly, don't even do it. Get rid of them.

Now, they're not high skilled. But they've got a lot of people, and so it doesn't hurt, because they're going to be retrained, anyhow. There are a lot of people, though, that are very high tech in DISA and in other areas, that are doing these megacenters, that are very skilled workers, but they're in an archaic system using archaic equipment.

I say archaic. You know, if it's four or five years old, it's old. I don't have the number.

MR. KIMMITT: That's the supply side.

LIEUTENANT GENERAL McINERNEY: Yes.

MR. KIMMITT: My question is, are there any statistics on the demand side?

LIEUTENANT GENERAL McINERNEY: Paul?

CHAIRMAN ODEEN: There are numbers on the IT professional side.

LIEUTENANT GENERAL McINERNEY: There are.

CHAIRMAN ODEEN: But I'm not sure beyond that. But there are certainly a lot of numbers. I don't know how good they are, but there are a lot of numbers around. I think I saw in the Washington Post, on the EDS earnings announcement the other day, 250,000. Those are the kind of numbers you hear.

LIEUTENANT GENERAL McINERNEY: Yeah.

CHAIRMAN ODEEN: 10,000 in Northern Virginia is a number bandied about in terms of demand for IT people.

LIEUTENANT GENERAL McINERNEY: But, Bob, you're talking in defense?

MR. KIMMITT: Well, no. There are so many companies on whose boards you sit and so forth. I sit on a couple of boards and I hear the same thing. But one of the problems today, particularly as companies go global, is trying to find both management and worker skills --

LIEUTENANT GENERAL McINERNEY: That's correct.

MR. KIMMITT: -- on a global basis, and that people have trouble hiring either mid or upper level managers, but also the intake. There's a tremendous fight for these young kids who are coming out with a set of skills.

Again, that's sort of the demand side, because if we focus just on the supply point, I think you can make a lot of statements about who has what critical skills and so forth. The fact is, they have jobs inside the Government.

The question is if there's a demand out here for the job, both that it be higher paying and longer term, because of the direction the economy is growing in. I think that would be very valuable.

LIEUTENANT GENERAL McINERNEY: We need to get that. I mean, you're absolutely right. And that's part of what we're trying to do. Paul, do we have that handy, or Eric?

A PARTICIPANT: We could submit something --

LIEUTENANT GENERAL McINERNEY: Yeah. We'll submit what we have, because that's a very important point, absolutely.

MR. KIMMITT: Because it seems to me, if you're talking about transitioning these people, making them more relevant to the future, that's in their interest and the community's interest, also. That's quite different than just looking at static demand -- excuse me -- a supply driven analysis.

My sense is that the economy is going in just the direction that you described, and there might be differentiation for workers who have been in for 30 years nearing retirement and those young people coming in.

I think in some cases it's tough to say to a 22-year-old person, "This is a place where you can really make your future" because, if it's not this year or five years from now or ten years from now, that is not necessarily an upward moving glide path, whereas, on the outside, it might be.

LIEUTENANT GENERAL McINERNEY: And that's one of Government's problems. They can't keep those people, because people come after them, and they come after the good ones, and so they're pulling them out, and so they're continually having to retrain people, have a high turnover in the pipeline, because some computer programmer goes out and starts at 70 or 80K.

MR. KIMMITT: If you want to either outsource or privatize, then part of the condition of that is that you still need the regional coverage, and what you might find is the person with whom you outsource or privatize needs precisely the skills that some of those people have.

LIEUTENANT GENERAL McINERNEY: And you will. They'll take them directly. As we see in the private sector, they take those people directly. They may keep them on that job. I mean, the private sector seems the same thing. It's not dramatically 30 percent, like when CFC took over J.P. Morgan or any of you here, when you do that. But they see 20 to 25 percent.

MR. KIMMITT: And my point is, it's very different closing an operational base, where people have been focused on warfighting, and looking at bases and functions that are primarily logistical and administrative, because we're still going to have a $250 billion enterprise going forward, so that we're still going to need to service that enterprise, either administratively, financially, accounting, logistically.

I can imagine any number of people on the outside who would like to bid for that service, and they're not going to go out and hire brand new people. They're going to want to use the folks who are there. And that again, it's a different issue, really, than classic BRAC, where you close a division, where the base's principal business was keeping a division or a fighter wing or something.

LIEUTENANT GENERAL McINERNEY: It is different.

CHAIRMAN ODEEN: Jim McCarthy, I think, had a question. Also, the other two speakers are fair game, by the way. We're not just picking on General McInerney.

MR. McCARTHY: The Tooth-to-Tail Commission, when will that report be ready, and will there be interim or data that might be available to us on that?

LIEUTENANT GENERAL McINERNEY: We have data already that we have prestarted. It will be kind of on a rolling scale, because the areas that I've talked to you about in outsourcing and privatization, in Acquisition Reform, in the PBBS -- PBBS will take a little longer, because no one has really looked at that.

In BRAC, of course, a lot of the BRAC is there. It's just the political courage. And the headquarters reduction requirements is a little hard. Those are going to come down.

We want to have our report finished, the whole thing, in 18 months. Much of this privatization and outsourcing, I think, Lou -- Admiral Lou Sheefer, who I just hired as my executive director. Lou, why don't you say when your first report is coming out?

MR. SHEEFER: We're going to set up task forces in all six areas you're talking about. One of them should be in privatization, outsourcing, and we'll look at BRAC issues. We expect to run it in four phases.

First, we'll gather all of that to assess it, find out what is out there, what can be privatized, how we can take that and look it from what the law says, and then look at best business practices to apply to that.

We are not looking for a report, as such. We are looking at an effort to make a change. And we expect the one task force to run just a little over a year. The last phase of actually putting it into effect are open-ended. But if legislation is required, obviously, that takes a little longer.

But if it can be done in-house, in other words, look at records, that should be easier.

LIEUTENANT GENERAL McINERNEY: Okay. But, of course, ours -- excuse me.

MS. NOLAN: This is a related question. Obviously, part of that is analysis of the existing legislative impediments and trying to target the specific legislative vehicles that would have to be changed to undertake some action.

MR. SHEEFER: That's exactly what we're looking at. We look at what are the impediments to making the change. If it is, in fact, legislation, we go after that.

MS. NOLAN: And then, in turn, working with some of the Members that you've been working with to look at strategies.

CHAIRMAN ODEEN: Janne, did you have a separate question?

MS. NOLAN: No.

CHAIRMAN ODEEN: No. Okay. Other questions from the press or the audience? One last chance here. Panel, anybody else?

(No response.)

If not, again, I want to thank the three speakers very much for joining us. It's been a very interesting, very useful discussion. We really appreciate your spending the time with us and sharing your thinking, and we've benefitted greatly from your thoughts.

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