Congress Moves to Ban Lead System Integrator (LSI) Procurement

The latest defense authorization bill bans lead LSI contracts:

2008 defense authorization bill includes a provision -- section 802 -- that would prohibit the Defense Department from awarding new contracts for lead systems integrator functions beginning Oct. 1, 2010. The bill also would place an immediate ban on such arrangements for programs that are not yet in low-rate initial production.

This may seem to be a bit esoteric, but the basics of the LSI arrangement are the idea that the system is so complex that the military cannot contract management and oversight, so it gets handed off to a Lead Systems Integrator.

Shorter version: Fox, here are the key to the hen house.

The results:

• FCS:

The outcome has been less than impressive. In 2003, when the LSI contract officially kicked off, Future Combat was meant to be a $92 billion effort; today, that figures stands at $200 billion, minimum -- and maybe more than $230. An operating system that was supposed to require 33.7 million lines of code is now estimated to be 63.8 million lines big. "They're getting to the point they should've been in 2003," Francis noted.

• Coast Guard Deepwater Project:

Hull cracks, bad wiring, insecure network, and (of course) over budget.

• Air Force Transformational Satellite:

  Shrinking performance, the LSIs refusing to verify program requirements , and (of course) over budget.

Not a Surprise

When the Pentagon selected Lockeed Martin to make the JSF, Lockheed Martin got them to make sure that the program that would be the Hotel California for support and logistics. (You can check out any time you like, but you can never leave.)

It's no surprise that the Pentagon is looking to pay $½ Billion to get out of the logistics roach motel:

The F-35 program office wants $500 million so that it can harness technical data that will make it easier for the military services to manage F-35 spare parts instead of having to rely on prime contractor Lockheed Martin, the Pentagon’s F-35 program executive said today.

In order for the Air Force, Marine Corps and Navy to set up an organic supply chain, the services need “provisioning and cataloging data” associated with various parts, Lt. Gen. Eric Fick told lawmakers at a House Armed Services readiness subcommittee hearing.

“We have the rights to that data. It’s not a matter of data rights, it’s matter of data delivery — and being able to have that data delivered is going to cost money,” he said. “And that money is going to be somewhere in the neighborhood of about half a billion dollars, divided amongst the services.”

………

The debate on F-35 technical data rights have been a sticking point in negotiations between the Pentagon and Lockheed in recent years, as the department has shifted its focus to lowering the sustainment cost of the aircraft. When the F-35 program was conceptualized more than two decades ago, it was structured under a “Total System Performance Responsibility” approach that gave Lockheed an unprecedented amount of power to manage the sustainment of the aircraft.

It should be noted that Israel demanded, and got, better access to this data than did the US military, because the Pentagon, and L-M were concerned that if Israel was not in early on acquiring the platform, it would adversely sales worldwide.

“As a result, the government did not procure technical data that the government could eventually use, as needed and depending upon the circumstances, to promote vendor competition and increase government control over specific elements of sustainment,” the Government Accountability Office wrote in a report on F-35 sustainment released today.

 ………

When it became clear that the TSPR [Total System Performance Responsibility] model was inflating costs, the Pentagon began shifting to a hybrid approach where the Defense Department took additional responsibility for sustainment functions like storing or transporting parts.

It was always going to inflate costs.

This is a redux of the Lead System Integrator acquisition model that was so disastrous that Congress actually banned the the process.

Something important to note here, this is not incompetence, it is corruption.  This result, excessive cost and lack of operational capability, was foreseeable, but it was equally foreseeable that generals would get cushy and remunerative sinecures after they retired, so they did what Lockheed-Martin wanted.

Future Combat Systems NLOS-C Begins Planning for LRIP.

I worked on the program for three years, though not on the NLOS-C.

This variant is the only one I expect to see service service. At the urging of the US Army's "Artillery Mafia", this is entering production and service well before any other vehicles as a kind of "block zero".

This was the deal cut when the Crusader self propelled howitzer was canned.

Personally, I think that the lightweight XM777 towed 155mm howitzer is a better bet, since it's light enough (it weighs less than a typical 105mm howitzer) to be airlifted.

FCS Industry Team to Initiate Production Planning

ST. LOUIS, July 18, 2007 -- Boeing [NYSE: BA] and partner Science Applications International Corporation (SAIC), Lead Systems Integrator for the U.S. Army's Future Combat Systems (FCS) program, today announced that the Army has authorized planning for FCS low-rate initial production, including long-lead items for the first FCS capability Spin Out and Manned Ground Vehicle (MGV) early production units. The latter is focused on the Non-Line-of-Sight Cannon (NLOS-C) initial production platform, which will be fielded in 2010 according to a Congressional mandate.

"The Army's notification to proceed with early production planning for Spin Outs and Manned Ground Vehicles is evidence that FCS technologies are maturing according to plan and represents a crucial step toward meeting program production objectives," said Dennis Muilenburg, vice president-general manager, Boeing Combat Systems, and FCS program manager. "It underscores the significant accomplishments of the entire FCS One Team which continues to perform and is well-positioned to deliver these early life-saving capabilities to our soldiers as quickly as possible."

Three FCS Spin Outs to the current force will be initiated in two-year increments starting in 2008 when the FCS team delivers the first infusion of capability to the Army Evaluation Task Force (AETF) in Fort Bliss, Texas, for testing. The first, referred to as "Spin Out 1", consists of equipment and technologies that will provide enhanced situational awareness and communication capabilities for the Current Force through technology insertions to Abrams battle tanks, Bradley Fighting Vehicles and HMMWV vehicles. Spin Out 1 elements include network integration "B" kits consisting of an Integrated Computer System, System-of-Systems Common Operating Environment, Battle Command and Network Management software and communications system including the Joint Tactical Radio System Ground Mobile Radio. Also included are Tactical and Urban Unattended Ground Sensors to provide real-time threat information in complex terrain, and the Non-Line-of-Sight Launch System for remotely controlled precision fires.

A recent Critical Design Review of Spin Out 1 technologies confirmed that they meet design requirements and are ready for integration into current force vehicles and the AETF. Low-rate initial production for Spin Out 1 will support the procurement of 17 Brigade Combat Team sets to be fielded incrementally over a period of seven years, beginning in fiscal year 2008.

FCS MGVs, developed in partnership with BAE Systems and General Dynamics, will provide the Army with a new family of networked vehicles with enhanced armor and protection technology, and next-generation survivability and sustainability features that are required for successful and decisive future battlefield operations. Based on a common chassis, FCS MGVs will be more than 70 percent common, reducing spare parts and logistics costs. The NLOS-C will be the first of the eight MGV variants to be developed and fielded as part of the FCS program. It is designed to provide a networked, extended range precision attack capability against point and area targets in support of FCS Brigade Combat Teams.

Plans call for 18 NLOS-C initial production platforms to be delivered between fiscal years 2010 and 2012 at a rate of six per year, in advance of the Milestone C and low-rate initial production decisions in 2013.

The LSI, in partnership with BAE Systems and General Dynamics, plans to employ various sites for component subassembly, and final vehicle integration, assembly and test activities will be conducted, including Elgin, Okla.; Lima, Ohio; and York, Pa. Once integration and assembly are complete, the NLOS-C vehicles will undergo cannon verification testing at Fort Sill, Okla., then be transferred to Fort Bliss, Texas, and White Sands Missile Range, N.M., for system-of-systems verification testing conducted by the AETF.

Sometimes I Write Good

Images Wiki, click for full size

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FRMV (Recovery & Maintenance Vehicle)


NLOS=C (Cannon)


NLOS-M (Mortar)


ICV (Infantry Carrier/Combat Vehicle)


MCS (Mounted Combat System, AKA "Light Tank")


RSV (Reconnaissance and Surveillance Vehicle)


MV-E /T(Medical Vehicle, Evacuation/Treatment)

OK, so I was on the by invitation only Stellar Parthenon BBS, and there was a discussion of the first flight of the Airbus A400M, the subject of its merits vs. the C-130 came up, and I noted that it has twice the size and carrying capacity of the C-130, so it can do things that the C-130 can't like transporting medium combat vehicles in a relatively straightforward manner.

Someone asked if it might not just be easier to design a vehicle to the C-130, and I unleashed a stream of consciousness torrent on transporting an armored fighting vehicle on a C-130 born of my 3 years working on the (now canceled) Future Combat Systems manned ground vehicle program (FCS-MGV).

I got some attaboys, so I figured that it needed to be shared and I thought that it needed to be shared, with some minor cleanup and added footnotes ……… lots ……… and lots ……… and lots of footnotes:

I spent 3 years trying to get the now-canceled "20-ton class" (about 30T when I left)^* Future Combat Systems Recovery and Maintenance Vehicle (FRMV) into a f%$#ing C-130.

It rolled off the aircraft with the combat utility of a Hummvee with about 5 gallons of fuel in it.^†

On a brand new vehicle, specifically designed to fit on the C-130, you had to pull off all the armor, the antennas and communications boxes^‡, the guns^§, squat the suspension, and even then you had to use 3 sortees to transport 2 vehicles...Only the real number for vehicles was likely closer to 5 when you count consumables like fuel and a load of ammunition, AND you get a range (assuming no fuel on the far end) of about 200 miles.^¥

The Stryker barely fits in a C-130, and has to be reassembled on the other end (though to a slightly lesser degree), and it really cannot carry the advertised amount of troops, unless you are fielding the midget anorexic brigade.^Ø

For a medium (17T<x<35T empty weight without ammunition or fuel) vehicle, you can't get it on a C-130 without taking the motherf%$#er apart.

The C-130 can do a lot of things, but it was never designed to transport anything much larger than a 2-1/2 ton military truck.

Jeebus....I had forgotten how much the bulls%$# specifications for that pissed me off, even 3 years later.

I worked with some really top notch people, and no one beneath the senior management types thought that it could be made to work. The joke was ……… OK, my joke was ……… that if you could convert cynicism into fuel, we could power the state of Pennsylvania.

The program was doomed from the start, even without the clusterf%$# that was the lead system integrator (LSI) model of development and procurement.

^*The recovery vehicle had to be at least as heavy as the heaviest variant, because otherwise it could not reliably winch that vehicle out of a ditch.

^†One of the central ideas between operating the FCS-MGV was that the FRMV would be the first in, because it had a crane, which you needed to put the f%$#ing vehicles back together again, so you would be the first into a potentially hot LZ, without gun, a little 25mm grenade launcher, or armor.

^‡Remember, the core idea of the Future Combat Systems is that the network is so capable that you can use information awareness to defeat the enemy with lighter vehicles, only you roll off the C-130 blind, deaf, and dumb.

^§In our case, the little pop up 25mm grenade launcher, for the howitzer version, and the anti-tank gun version, the guns stayed on.

^¥It might have been 300 miles, I'm working from memory, and the army used the numbers that Lockheed Martin gave out for the aircraft, but he USAF maintained that you could not operate the aircraft at those weights, so it was a clusterf%$# from the start anyway. That being said, even using the Army's/Lockheed's numbers, it was faster to drive a unit of action^ß that distance than it was to dissemble the vehicles, ship them there, and reassemble them after the requisite few hundred sorties were completed.

^ßYeah, as part of this, they felt it was necessary to rename the "brigade" and call it a "unit of action", I guess because it sounded snazzy, and it would impress the budget weenies.

^ØIt should be noted that tracked vehicles are actually slightly more space efficient than an equivalent wheeled vehicle though, since you need more clearance around the wheels in order to accommodate their range of motion when steering, something that you don't need with a tracked vehicle, which steers by differential speeds between the treads, the troop variant, the Infantry Carrier Vehicle (ICV), actually carried a crew of 2 and 9 troops, which compared favorably to the 3+6 carried by the Bradley IFV.<sup>€

€</sup>Of course, if you put a completely remote controlled turret on a Bradley, and there are at least a half dozen of them on the market, and eliminated the gunner, you could get a full 9 man squad, just the the ICV.

Coast Guard Stops Payments to Eagle Eye UAV Program

The US Coast Guard has shelved the Eagle Eye UAV Program.

It appears that Bell, the manufacturer of the aircraft, billed it as being nearly ready for production, and it clearly is not.

First flight, which is yet to occur, was supposed to be in 2006.

Yet another clusterf$%# associated with the Coast Guard's Deepwater program, and another nail in the coffin for the Lead System Integrator (LSI) concept of government contracts.

It looks like the USCG will be going with an existing system.

Another Nail in the Lead System Integrator Concept Coffin

As I have said before, with the LSI model, you have the contractor supervising their own performance, which is almost literally a fox in the henhouse:

Defense contractors developing the Army’s largest modernization program — the Future Combat System — also were paid $91 million in 2007 to report back to the Pentagon on how well the program was performing, according to a new inspector general report, adding fuel to demands for tougher conflict-of-interest rules.

The Nov. 24 Defense Department inspector general report, reviewed by POLITICO, was sparked by an anonymous tip. The probe found that the $100 billion FCS program contained numerous conflicts that went unreported and that, between 1987 and 2007, the Pentagon increased its reliance on contractors for quality assurance and other tests by 375 percent.

……………

For instance, SAIC, a prime contractor doing systems engineering along with Boeing, received $2.2 billion for development of the FCS program, but in 2007 it also received $25.8 million for testing the program. Computer Sciences Corp., General Dynamics, Lockheed Martin and Northrop Grumman also received money to create elements of the FCS at the same time they were helping to test it, according to the report.

(emphasis mine)

I worked with folks from the SAIC when I was at FCS, and got very little "L" from the LSIs: they simply did not provide direction to the contractors.

It's no surprise that the inspector's report was marked "For Official Use Only", because the powers that be in the Pentagon want this buried, but someone, probably someone who actually thinks about the soldiers who use the product, leaked it.

Note that this is an artifact of a number of administrations:

In addition to pursuing specific allegations of conflicts of interest, the inspector’s report looked more broadly at the trend toward using services contracts for testing. The review found that before the 1990s — when the Pentagon embraced the trend of cutting government employees and instead contracting for services — the Pentagon spent about $8.9 million a year on contractors for testing. In 2007, it spent $42.6 million.

The Pentagon started doing this under Bush I SecDef Richard Bruce Cheney, though it is fair to say that it was expanded under Clinton, and went, as did defense procurement generally, completely haywire under Bush II.

The problem is that when you have contractors testing for you, they lie, they self-deal, and they cheat.

That's capitalism, baby: Cheating is a profit opportunity.

Unfortunately, the capabilities that the government has shed over the past few years will take much longer, but if the development of new systems is curtailed until the internal governmental testing capabilities, it will result in a exodus of people in private testing, because their jobs will be gone, and return to government.

GAO Report Savages Future Combat System

Seriously, the report is brutal:

Advocates of restructuring or cutting back on FCS will find ammunition in the draft report. In it, GAO asserts that FCS is “unlikely to be executed” for the $159 billion the Army says it will cost, a source said, citing the draft.

Moreover, and perhaps more relevant to the current decision-making within the Pentagon, GAO states that the Army has already spent 60 percent of its FCS development funds even though “the most expensive activities remain to be done before the production decision” in 2013.

GAO contends that the funding situation will deteriorate for FCS as the program’s costs will likely grow at the same time as competition for federal funds tightens, a source said.

The report also cites what it calls “actual immaturity” in the program, according to sources. Calling the network performance “largely unproven,” GAO says the Army has failed to convincingly demonstrate that FCS designs will meet their requirements, a source told ITA.

I am completely not shocked at this. I worked on the program, and it was over ambitious, and managed under the now discredited Lead System Integrator (LSI) concept, which been universally unsuccessful.

It's no surprise that this whole program has turned into a clusterf^%$.

Army Now Looking at FCS Replacement

And externally, at least, it will look an awful lot like the canceled FCS manned ground vehicle family of vehicles. (FCS-MGV)

After all, if you are looking for something smaller and lighter than existing systems, you still have a box on treads.

That being said, there are some lessons learned here, and hopefully they will be fixed:

• There was too much focus on commonality among vehicles. If you want a tank(ette) version, there is no reason to put it on the same wheelbase as an infantry combat vehicle or command vehicle. The M8 Armored Gun System, which I saw up close in my time at BAE systems,^* was much smaller and lighter, and had a lower height, and hence better concealment. Going with a completely common platform costs more than you save.
• Abandon the lead system integrator (LSI) concept of program development. This contracting concept has failed EVERY time it has been used, and there are already bills out there to ban the practice. It gives lunatics (defense contractors) the keys to the asylum.
• A better understanding on what the program is for. On the FCS-MGV, for example GD was responsible for propulsion and suspension, and BAE Systems was responsible for the track, not because of any special technical abilities of the respective companies, but because of a deliberate policy to spread the money around evenly.
• Implement technologies that are more mature.

^*Full disclosure, I worked on the Future Recovery and Maintenance Vehicle, FRMV, "wrecker" variant of the FCS-MGV^† from 2003-2006 at United Defense (later BAE Systems after the Carlyle Group sold me to buy Dunkin Donuts).
^†Future Combat Systems-Manned Ground Vehicle. These are the ones that are the tanks and APCs. As opposed to the various unnmanned vehicles, networking technologies, etc. that form the full FCS along with the MGVs.^‡
‡Yes, I have worked everywhere. Maybe I can't hold down a job, but more likely this has been my role as "technical hit man", where you are parachuted in to take care of a specific need.

SecDef Gates Unveals FY 2010 DoD Budget Proposal

You can read his speech, but here is the nickel tour:
Additions:

• More UAVs
• More ISR Assets
• More Helos
• More Spec Ops
• More Littoral Combat Ships
• More Joint High Speed Vessel (JHSV)
• Accelerate production of F-35
• More money terminal High Altitude Area Defense (THAAD) System and Standard Missile 3 (SM-3)
• More Cyber warfare assets.
• Will go ahead with tanker purchase.
• Start replacement program for Ohio SSBN.

Reductions:

• Delay next generation CGN aircraft carrier (Ford class) by shifting to a 5 year schedule.
• Delay CGX BMD missile cruiser and reevaluate the requirements.
• Delay amphibious ship and sea-basing programs.
• Reduce the number of contractors in the Pentagon, and replace them with government employees.

Surprise, he's saying that Dick Cheney's brainchild when he was Bush I's Sec Def, using the Department of Defense as a way to reward political contributions privatizing functions and expanding the number of contractors, does not work.

Kills:

• Retire 250 of the oldest Air Force tactical fighter aircraft in FY10.
• End production of the F-22 fighter at 187 (current 183 +4)
• End acquisition of C-17s in FY 10.
• Terminate the VH-71 presidential helicopter.
• Terminate the Air Force Combat Search and Rescue X (CSAR-X) helicopter program.
• Terminate the $26 billion Transformational Satellite (TSAT) program, and instead will purchase two more Advanced Extremely High Frequency (AEHF) satellites as alternatives.
• Terminate he second airborne laser (ABL) prototype aircraft, and move program to technology demonstation.
• Terminate the Multiple Kill Vehicle (MKV) program.
• Terminate the DDG-1000 and restart the DDG-51 Aegis destroyers.
• Terminate the Army's Future Combat Systems (FCS) program's vehicle,^* and fold in the technology developed elsewhere.

I love his money quote:

Sixth, and finally, we will significantly restructure the Army’s Future Combat Systems (FCS) program. We will retain and accelerate the initial increment of the program to spin out technology enhancements to all combat brigades. However, I have concluded that there are significant unanswered questions concerning the FCS vehicle design strategy. I am also concerned that, despite some adjustments, the FCS vehicles – where lower weight, higher fuel efficiency, and greater informational awareness are expected to compensate for less armor – do not adequately reflect the lessons of counterinsurgency and close quarters combat in Iraq and Afghanistan. The current vehicle program, developed nine years ago, does not include a role for our recent $25 billion investment in the MRAP vehicles being used to good effect in today’s conflicts.

Further, I am troubled by the terms of the current contract, particularly its very unattractive fee structure that gives the government little leverage to promote cost efficiency. Because the vehicle part of the FCS program is currently estimated to cost over $87 billion, I believe we must have more confidence in the program strategy, requirements, and maturity of the technologies before proceeding further.

(emphasis mine)

This translates to, "They are not worth much in a counter-insurgency scenario, and once again the Lead System Integrator (LSI) model of procurement has given us an overpriced piece of crap."

^*Full disclosure, I worked on the Future Recovery and Maintenance Vehicle, FRMV, "wrecker" variant of the FCS-MGV^† from 2003-2006 at United Defense (later BAE Systems after the Carlyle Group sold me to buy Dunkin Donuts).
^†Future Combat Systems-Manned Ground Vehicle. These are the ones that are the tanks and APCs. As opposed to the various unnmanned vehicles, networking technologies, etc. that form the full FCS along with the MGVs.^‡
‡Yes, I have worked everywhere. Maybe I can't hold down a job, but more likely this has been my role as "technical hit man", where you are parachuted in to take care of a specific need.

Another Indictment of the LSI Concept

Here is a good short article on the problems with the Lead System Integrator (LSI) concept from Bettina Chavanne , and I agree with his categorization of this as, "A Fox in the Henhouse".

She raises the concern that she is , "not sure the military can run its own acquisition programs any better than private LSIs," though, and I think that she is completely wrong here.

There is far greater accountability in the military, no golden parachutes, and the organizational imperatives are directed more towards military needs than to profits.

The real problem is that the entire defense procurement process is completely broken.

Spirit AeroSystems Snags Airbus A350 Fuselage Section 15

Sprint just signed a contract with Airbus to design and build this component. (See picture below)




The kicker is that until 2005, Spirit was Boeing, but they spun the company off to appease shareholders, and now the expertise, including experience with the complex composite structures it developed for the 787, will be benefiting Airbus.

Boeing's aircraft's current business model appears to be similar to the Lead System Integrator (LSI) concept that has consistently underperformed in all of its large defense related contracts so badly that Congress is looking to ban the practice.

Coast Guard Stripped of Acquisition Power

Following the Coast Guard's Deepwater modernization program, I am not surprised that the Department of Homeland Security has stripped the Coast Guard of acquisition authority, so that now the DHS will have to sign off on, and supervise all contracts.

To be fair, this is not entirely the Coast Guard's fault. Deepwater was managed under the Lead System Integrator (LSI) model, which is best defined as trusting the fox to manage the hen house.

Now, if only we could do the same with the USAF and Navy.

This:

Matt Stoller Makes a very good point, "Keep McKinsey Away from Biden's Infrastructure Push."

They are corrupt, and will make a dogs breakfast of everything that they touch: 

If there’s one striking feature of the Biden administration so far, it’s the rejection of Barack Obama’s policy framework by his own party. It is now the consensus that Obama’s lack of ambition led to Trump’s election. For instance, party leader Senator Chuck Schumer recently called the Obama stimulus a “mistake” and “a small measly proposal” on CNN, as a way of selling Biden’s much larger proposals.

Biden’s goal, and that of the Democratic Party that controls both houses, is to break from recent politics, and be “more like Franklin Delano Roosevelt (FDR) and the Congress of 1933, and less like Barack Obama and the Congress of 2009.” Biden wants to spend a lot, to go big, instead of the go small vision of Obama.

………

It’s a bold vision. One important question is whether it’s actually possible to spend that amount of money on so many things without immense amounts of corruption or waste. The difference between FDR and Obama, after all, was not just spending amounts. Obama didn’t spend enough, but he did spend a lot. FDR, however, actually built things, whereas Obama’s stimulus money for, say, California’s high-speed rail, evaporated into a cloud of consultants. (A particularly mean joke was that FDR won WWII in less time than it took Obama to build Obamacare web sites that didn’t work.) 

This might be the best business meme of 2019 so far. pic.twitter.com/hTXul3Muy3

— ArtkoCapital (@ArtkoCapital) March 5, 2019

The McKinsey Way

There is an important difference between Joe Biden and Barack Obama, Biden went to the University of Delaware and then Syracuse for law, and Obama went to Columbia University and then Harvard Law School, both of which are Ivy League institutions.

Obama spent his formative years at colleges where McKinsey was actively recruiting, and his fellow students, and likely many of his friends, were eager at the chance to get their start there.

As such, Obama placed a lot of trust in those consultants, because they were his people, a part of the "Clan of the Ivys," and we got less than stellar results when the consultants were called in on California rail, or Obamacare.

This is what normally happens when you bring in McKinsey:

Skipped an aside about mismanaging Puerto Rico.

………

So what has McKinsey been doing, if it hasn’t been running Puerto Rico? The answer is, McKinsey has been looking out for McKinsey. It has ensured that Puerto Rico will spend the mind-bogglingly large sum of $1.5 billion on professional services, meaning lawyers, bankers, and consultants (including McKinsey), which is five times what Detroit paid in services for its bankruptcy. I don’t know how much the firm will make, but according to the GSA schedule, just one recent college graduate working at McKinsey costs around $3 million a year. Beyond the straight fee extraction, the conflicts of interest are comical; McKinsey’s internal hedge fund actually owns Puerto Rican bonds.

Far from an anomaly, such a situation for McKinsey is common. McKinsey helped ruin the U.S. spying apparatus with a bloated, failed contract. They helped run Trump’s U.S. Immigration and Customs Enforcement; ICE even hired McKinsey to write its own contract. McKinsey structured France’s terrible coronavirus response, and that of New York state. McKinsey is so brazen that it was caught by the GSA Inspector General for cheating the government out of $65 million. It didn’t seem to matter. In 2019, McKinsey worked for more than 15 federal agencies and departments, and 25 states.

Unfortunately, the government has continued down this path for many decades, removing government capabilities, and even capability for government oversight, and turning it over the private sector. 

That was my experience working for over 2 years on a project run under a "Lead Systems Integrator" model that was so dysfunctional that future LSI contracts were banned by Congress.

………

Roosevelt’s first major infrastructure battle was over Muscle Shoals in Alabama, the great hydroelectric resource. The Morgan interests and the electric utility magnates wanted that resource privatized for their use. Roosevelt said no, and had the government directly build the Tennessee Valley Authority, a publicly owned and operated electric utility for much of Appalachia. TVA was part of a package of reforms to constrain and control Wall Street, to end what FDR called the ‘informal economic government of the United States.’

Over the rest of the New Deal, FDR transformed the physical plant of the country, and spent a lot of money on infrastructure. But Roosevelt first made sure Wall Street had little say over how public money or public resources were spent. Public institutions got bigger and more competent, and the financiers and monopolists lost power. One key result is that the government could do big things. During World War II, military procurement officers had immense capacity and power, imposing tight control over contractors, and ensuring that there were at least a dozen competitors for each major weapon system. They could peer into the books of contractors, and even claw back excessive profits.

America used this governing capacity for decades, constructing the national highway system, winning the space race, deploying the polio vaccine, landing on the moon and building the internet, and running the project Sematech in the 1980s to address foreign threats to semiconductors.

In the 1990s, however, Bill Clinton’s “Reinventing Government” initiative killed the public capacity Roosevelt had constructed. Clinton encouraged the big prime defense contractors to merge, shrinking them from over 100 to just 5 firms. Clinton’s procurement initiative, led by Steve Kelman, invented a whole new vocabulary for ways to let contractors steal. The details get complex, but the gist was a ‘light touch’ approach to negotiating by the government. Procurement officers stopped making hard-nosed demands for better prices, and were stripped of the ability to look at the books of the contractors to make sure there weren’t excess profits.

It actually started under Reagan, and then SecDef Dick Cheney massively expanded this at the Pentagon under GHW Bush, but Clinton took the idea, and ran with it in a way that no administration has before or since. (I will leave the determination of their motives as an exercise to my reader(s)).

We need to return core competencies to government, or will continue to be unable to efficiently do the business of government.

Reminds Me of Timothy Geithner Having a Financial Orgasm

Way back in 2011, there was an article in The New Republic, a profile of Timothy "Eddie Haskell" Geithner, that has stuck in my mind.

It was not because it showed how he was basically a brown-noser who achieved success by sucking up, though it did.  Rather it was because of the only time that Geithner showed any enthusiasm about anything beyond his own career:

Though Geithner had begun the transition from wartime to peacetime secretary successfully, I also wondered how well he would complete it. It had occurred to me that the same qualities that made him so effective in a crisis—his ability to craft solutions under enormous constraints—were less well suited to some of the tasks that followed, when a treasury secretary might have to reimagine the world rather than accept its limits as given. I asked Geithner if he had a grand vision for the postcrisis landscape—for, say, a less bloated financial sector with a smaller role in the economy—and a map for how to get there. Could he be a figure like George Marshall, who helped win the World War and then remade Europe so that it couldn’t happen again?

Geithner hunched his shoulders, pressed his knees together, and lifted his heels up off the ground—an almost childlike expression of glee. “We’re going, like, existential,” he said. He told me he subscribes to the view that the world is on the cusp of a major “financial deepening”: As developing economies in the most populous countries mature, they will demand more and increasingly sophisticated financial services, the same way they demand cars for their growing middle classes and information technology for their corporations. If that’s true, then we should want U.S. banks positioned to compete abroad.

“I don’t have any enthusiasm for ... trying to shrink the relative importance of the financial system in our economy as a test of reform, because we have to think about the fact that we operate in the broader world,” he said. “It’s the same thing for Microsoft or anything else. We want U.S. firms to benefit from that.” He continued: “Now financial firms are different because of the risk, but you can contain that through regulation.” This was the purpose of the recent financial reform, he said. In effect, Geithner was arguing that we should be as comfortable linking the fate of our economy to Wall Street as to automakers or Silicon Valley.

So, why am I bringing up this disturbing behavior now, 12 years later, because, once again we have a real world example of just how wrong this world view is, and this is important because many of the most powerful people in our society continue to follow this ruinious line of reasoning. 

One need only look at the impact of financialization on Cisco Systems, where the formerly dominant internet hardware supplier is now an also-ran:

Once the global leader in telecommunication systems and the Internet, over the past two decades, the United States has fallen behind global competitors, including China, in mobile-communication infrastructure—specifically 5G and Internet of Things (IoT). This national failure, with the socioeconomic and geopolitical tensions that it creates, is not due to a lack of US government investment in the knowledge required for the mobility revolution. Nor is it because of a dearth of domestic demand for the equipment, devices, and applications that can make use of this infrastructure. Rather, the problem is the dereliction of key US-based business corporations to take the lead in making the investments in organizational learning required to generate cutting-edge communication-infrastructure products.

No company in the United States exemplifies this deficiency more than Cisco Systems, the business corporation founded in Silicon Valley in 1984 that had explosive growth in the 1990s to become the foremost global enterprise-networking equipment vendor in the Internet revolution. In our Institute for New Economic Thinking Working Paper, “The Pursuit of Shareholder Value: Cisco’s Transformation from Innovation to Financialization”, we provide an in-depth analysis of the corporate resource-allocation decisions that have underpinned Cisco’s organizational failure.

Since 2001, Cisco’s top management has chosen to allocate corporate cash to open-market share repurchases—aka stock buybacks—for the purpose of giving manipulative boosts to the company’s stock price rather than make the investments in organizational learning required to become a world leader in communication-infrastructure equipment for the era of 5G and IoT. From October 2001 through October 2022, Cisco spent $152.3 billion—95 percent of its net income over the period—on stock buybacks for the purpose of propping up its stock price. These funds wasted in pursuit of “maximizing shareholder value” were on top of the $55.5 billion that Cisco paid out to shareholders in dividends, representing an additional 35 percent of net income. Besides absorbing all its profits over the 21 years, Cisco took on debt and dipped into the corporate treasury to fund these two types of distributions to shareholders.

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Within its own organization, Cisco was an exemplar in the integration of its personnel to serve the rapidly changing requirements of enterprise networking, thus limiting employee turnover in the hypermobile labor market for which Silicon Valley is known. To gain control over rapidly emerging enterprise-networking innovations, Chambers continued a practice begun under Morgridge of growth-through-acquisition. From fiscal 1994 through fiscal 2001 (years ending in the last week of July), Cisco made 71 acquisitions, gaining a reputation for its system of integrating the incoming employees into its organizational-learning processes.

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After listing on NASDAQ in its initial public offering in February 1990, Cisco’s shares became integral to Cisco’s growth. In the process of expanding from $70 million in revenues and 254 employees in 1990 to $22.3 billion in revenues and 38,000 employees in 2001, Cisco relied heavily on its stock as both a combination and compensation currency. The purchase price of Cisco’s 71 acquisitions from 1994 to 2001 totaled $34.2 billion, of which 98% was paid in Cisco shares. Especially in the last years of the 1990s to the end of fiscal 2000 (ending July 29), in doing acquisitions Cisco had the financing advantage of its soaring stock price. As for the compensation function, virtually all of Cisco’s employees were included in a broad-based stock-option program. With stock-market speculation becoming the key driver of Cisco’s stock price in the last years of the Internet boom, the estimated average realized gains per worldwide employee (not including the five highest-paid Cisco executives) from exercising stock options was $193,500 across 18,000 employees in 1999, $291,000 across 27,500 employees in 2000, and $105,900 across 36,000 employees in 2001.

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In the decade 2002-2011, Cisco spent $71.6 billion repurchasing its own stock, equal to 126 percent of net income, while paying its first dividends in 2011. In 2012-2021, Cisco’s buybacks totaled $72.5 billion, 81 percent of net income, along with $47.0 billion paid out as dividends, another 53 percent of net income. In 2022, Cisco’s distributions to shareholders were 117 percent of the company’s all-time high net income of $11.8 billion, with $6.2 billion in dividends and $7.7 billion in buybacks.

As we document in detail in our INET working paper, over the past two decades, Cisco’s “financial commitment” has been to boost its stock yields, not to invest in its innovative capabilities. As the company ramped up buybacks from $1.9 billion in 2002 to $10.2 billion in 2005, it largely abandoned its previous investments in optical-networking equipment, including its manufacturing plant in Salem, New Hampshire. Instead of moving toward a direct-sales model, which would be required to compete in the infrastructure-equipment segment, Cisco increased its reliance on VARs, which accounted for more than 80% of the company’s revenues by 2008.

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Despite financialization, Cisco has grown over the last two decades because of the greatly expanded demand for enterprise-networking equipment. In 2022, Cisco had 2.3 times the revenues and 2.2 times the employees it had in 2001. In terms of employees in the United States, the increase was 1.5 times, up from 27,000 in 2002 to 39,900 in 2022. The company has been a job creator.

Yet, the dominance of financialization over innovation within Cisco Systems over the past two decades has had a negative impact on its capacity to develop the capabilities needed to compete as a systems integrator in the infrastructure-equipment segment of ICT. As a result, as is widely recognized, the United States has fallen behind China and the European Union as a locus of innovation in 5G and IoT. Particularly in the case of China, the home base for world leader Huawei Technologies, it is all too easy and convenient to blame unfair competition for the innovation deficit of the United States.

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As early as 2006, Cisco removed optical networking from its group of “advanced technologies.” The company’s vice president and chief development officer at the time explained that this was because “optical is more of an access technology, where the market is not going to grow as aggressively as it had in the past.” Meanwhile, in 2009, the rising China-based company, Huawei, became the world leader in optical networking, which it integrated with wireless and Internet capabilities, succeeding in global competition, where Cisco failed. Despite numerous acquisitions in the area, Cisco’s focus on a radical ‘‘all-IP’’ solution combined with its lack of radio base stations and ‘‘account control’’ left it without the capability of becoming a systems integrator that could displace the incumbents and counter the growing competitive strength of Huawei.

More broadly, the impact of growing financialization in the sector has left the United States without the capability to innovate in the development of a communication-infrastructure network. While failing to recognize the role of financialization within the sectoral dynamics, US policymakers have chosen to respond to the US loss of competitiveness with aggressive protectionist measures against Chinese competitors and by attempting to introduce a new standard that will favor US, Japanese and Korean competitors without systems-integration capabilities. 

The path here is rather straightforward.  The company moves from investing in technology and knowledge to various schemes to pump up its stock price.

So, instead of new plants and equipment and technology, you get mergers and acquisitions and stock buybacks.

It's great for the executives, whose stock options soar as a result, but eventually you have a company where no knows how to build, or more importantly improve, their products, and so you have Huawei and its ilk taking over the market.

It's called eating your seed corn, and it is simply unsustainable.

H/T Naked Capitalism.