[4] Two Obstacles

There exist two obstacles, which prevent all defense contractors from adopting the highly effective management practices used successfully by Confluence and the others mentioned in the previous article. The first obstacle is insurmountable by any executive officer of any defense contractor. This obstacle is the complete lack of authority with which to prioritize and sequence the government programs performed within a contractor facility, particularly if those programs are funded by different government offices. The authority required for this cross-program prioritization simply does not rest with any defense contractor. It rests solely with government representatives, who are the customers of the defense contractors.

The second obstacle also appears to be within reach of the executive teams of defense contractors at first. But, in fact, it too is created by the government and can be overcome by willing executive teams only for the briefest of intervals and only very occasionally. To gain a necessary appreciation of this second obstacle, we need to understand the primary profit model of the defense industry.

The primary profit model of the technology development operations of defense contractors today may be described as an additive model. That is, the profit generated by each defense contractor is directly proportional to the number of contractor personnel that charge their time to government contracts. I refer to these employees as profit-contributing employees, as opposed to profit-draining employees. A contractor’s profit for any interval increases linearly with the number of profit-contributing employees, and it decreases rapidly as the number of profit-draining employees rises. Profit-draining employees are those with no billable project work. Through no fault of their own, these employees are unable to charge some significant fraction of their available time to government contracts; their salaries and benefits are subtracted entirely from the value of the defense contractor that employs them.

This additive profit model strongly motivates defense contractors to maintain very high levels of workforce utilization, even when maintaining high utilization levels requires occasionally that the employment of some workers be terminated. To maintain the high utilization rates, the financial officers of virtually all defense contractors monitor religiously the number of “overhead hours” accumulated by every employee. Employees who are unfortunate enough to accumulate any significant number of overhead hours become identified as profit-draining employees, and they often find themselves at risk of termination.

The additive profit model is one of two phenomena that are at odds with each other. The second phenomenon, which is involved in a conflict of gargantuan proportions with the additive profit model, is the nature of work flow within organizations that perform projects. Specifically, the speed (or lack of speed) with which projects flow through any system of resources is attributable largely to the interactions among those resources. Since the delivered output of defense contractors is directly proportional to the rate of project completion (speed), the output delivered to government customers (systems vitally important for homeland defense and intelligence acquisition) is largely the result not of the additive contributions of contractor employees but of the interactions among those employees.

These two phenomena, the interaction-based speed of output generation and the additive profit model, define the overriding conflict within which the nation's defense contractors exist today. The conflict is illustrated in Figure 1, below. As that figure shows, there are four operating possibilities open to the executive teams of defense contractors. These possibilities are represented by the four quadrants. Quadrant 1 is defined by high utilization levels and low speed; quadrant 2 is defined by high utilization levels and high speed; quadrant 3 is defined by low utilization levels and high speed; and quadrant 4 is defined by low utilization levels and low speed.

Figure 1: The conflict between speed and the utilization-level of available resources defines the governing parameter space within which defense contractors exist today.

Of the four possible quadrants, only quadrant 1 represents a sustainable environment for defense contractors, for two reasons. First, quadrants 3 and 4, which are defined by lower levels of resource utilization, are in direct conflict with the additive profit model of defense contractors. Given the additive profit model, defense contractors that are forced to exist within either of these two quadrants for extended periods lose money and risk bankruptcy. This leaves quadrants 1 and 2 as the sole remaining possibilities.

Second, the existence of defense contractors within quadrant 2 is precluded by the laws of physics. Specifically, queuing theory dictates that as the utilization level of any system approaches 100%, the queue of work before the system of resources increases without bound, and consequently the speed with which work flows through the system of resources approaches zero. Figure 2 illustrates this relationship between speed and utilization level. Therefore, the only logical solution to this widespread conflict, for any defense contractor today, is to operate profitably within quadrant 1, as illustrated further down by Figure 3.

Figure 2: Queuing theory dictates that maximum speed and maximum utilization are mutually exclusive conditions. Consequently, the executive teams of defense contractors are forced to choose between maximizing speed and maximizing utilization level. The additive profit-model, which is created by the current design of defense contracts, guarantees that the contractors always choose to maximize the utilization level of their workforces, since this also maximizes profitability.

Figure 3: The additive profit model guarantees bankruptcy for defense contractors that try to exist for any extended period within quadrant 3 or 4.

Queuing theory guarantees that no defense contractor, indeed, no product development organization, can exist within quadrant 2. Therefore, quadrant 1 provides the only possibility of sustained profitability for defense contractors. Indeed, today virtually all defense contractors strive to maintain maximum utilization of their workforces.

One powerful direction for improvement is for the government to adopt a more holistic strategy toward contractor management.
However, any solution sought in this direction must include two necessary (though insufficient) components. First, the government must define the cross-program prioritization that the defense contractors need for the more effective management of their development resources. Ideally, the cross-program prioritization defined by the government would be consistent with the government’s own strategy for national defense and homeland security.

Second, the government must resolve the conflict that today drives defense contractors to operate under the conditions defined by quadrant 1: maximum workforce utilization at the expense of speed. By designing new contracts in such a way as to significantly reward speed, perhaps while also penalizing grossly deficient schedule performance, the government can consistently motivate the executive teams of the defense contractors to shift their operations from quadrant 1 to quadrant 3, as illustrated in Figure 4, below.

Figure 4: Defense contractors are not inclined to move their operations from quadrant 1 to quadrant 3, given their ongoing conflict between speed of output generation and profitability. Their conflict must be resolved first by the government, in such a way as to make it more profitable for the defense contractors to operate in quadrant 3 than in quadrant 1.

The requirements for sustainable and effective multi-project management do not exist anywhere within the defense sector today. Further, without these requirements, any attempt to improve the multi-project logistics or even the single-project logistics of defense programs is doomed from the start.

A strategy with which the government can overcome the two obstacles and begin creating the requirements for effective multiproject management is the focus of the next article.