Excerpt from Defense Acquisition Reform 1960-2009: An Elusive Goal.

Major Weapon Systems

Since World War II military research and development (R&D) has constituted a large share of the total federal R&D effort. In 1960, for example, the Defense Department's R&D budget was $5.6 billion, out of a total federal R&D budget of $8.7 billion, or 64.4 percent. By 2007, the defense R&D budget had risen to $69.3 billion, accounting for 50 percent of the total federal R&D budget of $137.2 billion.

In pursuit of its mission to direct and oversee the research, development, and production of weapon systems and equipment, DoD engages tens of thousands of prime contractors—including most of the major firms in the United States—and tens of thousands of suppliers and subcontractors. The importance of the DoD's huge acquisition projects over the years cannot be overstressed. The United States has often turned to cutting-edge technology solutions to solve strategic and operational challenges.

Military aircraft illustrate the complexity of modern weapon systems. The Air Force F-22 is an advanced fighter aircraft that replaces the F-15 as America's front-line, air superiority fighter. Thirty-nine percent of the F-22 aircraft is fabricated with titanium and 24 percent from composite materials. More than 240 firms in 37 states participate in the development and production program. The empty weight of the aircraft is 31,670 pounds and the wing area is 840 square feet. The aircraft has two engines generating 35,000 pounds of thrust, enabling the F-22 to travel at a speed of Mach 1.8 and perform tactical maneuvers at an altitude of 12 miles, twice the altitude at which other jets can perform tactical maneuvers. The F-22 was originally expected to cost $88 billion in 2009 dollars for 648 aircraft. In March 2009, the program was estimated to cost $73.7 billion for the much smaller quantity of 184 aircraft, more than doubling the unit cost of the aircraft.

The amount of electronics equipment in a modern fighter aircraft is astounding. An Air Force general captured the essential change: "In the past, the Air Force used to buy airplanes and add electronics. Today the Air Force buys computers and puts wings on them." Forty percent or more of the funds for DoD aircraft are spent on electronics equipment.

It has not been uncommon for weapon programs to take ten or more years to design, develop, produce, and deploy initial operationally capable units. Reported cost increases of 20 to 40 percent occur frequently on major weapon programs, with a significant number of programs delivering less capability than planned, often at two to three times the planned cost.

The acquisition of large defense development and production programs poses one of the most challenging business and technical management problems in the world. Controlling and reducing costs is difficult in any industry, but even more so in larger and more complex engineering development and production programs.

Costs tend to rise in all organizations unless managers and their staffs are skilled in industrial management and strongly motivated to control and reduce costs. Yet the Army, the Navy, and, to a lesser extent, the Air Force provide limited industrial management training for military officers whom they assign to key managerial positions in major acquisition programs. Outstanding military officers assigned to manage these programs often have years of combat arms training and experience (for example, as pilots, ship captains, armor commanders).

For decades, many have observed that government program managers and their staffs are intelligent and hardworking. They genuinely want to acquire advanced weapon systems that meet performance standards at reasonable costs. But in practice, too few government managers are skilled in understanding and using industry financial incentives or the process of controlling costs, schedules, and technical performance on large research, development, and production programs.

Defense Acquisition Reform Studies

Since 1960, more than twenty-seven major reform studies of defense acquisition programs (totaling more than $200 billion in 2011) were commissioned by presidents, Congress, secretaries of defense, government agencies, studies and analyses organizations, and universities. The reform studies arrived at most of the same findings and made similar recommendations to prevent or minimize future cost overruns and schedule slippages. But lack of political will, insufficient numbers of government personnel trained and skilled to make the desired changes, and few rewards for implementing the changes, have produced only limited improvements. The problems of schedule slippages, cost growth, and technical performance shortfalls on defense acquisition programs have remained much the same for the past 50 years.

Military officers are often generalists, who rotate their assignments as frequently as every two or three years, performing a variety of jobs in military operations activities. While these short-term job assignments are satisfactory for many DoD activities, assignments to large acquisition programs frequently experiencing several changes a month often require substantial industrial management skills and more than a year for a skilled military officer or other government manager simply to become familiar with an acquisition program, the contractors involved, the technical and financial challenges, problems, and possible remedies.

Most of the proposed solutions to defense management problems in the past have been undermined in one of two ways. The first is lack of continuity. When a Pentagon official introduces specific acquisition reforms, there is often a flurry of activity, and for a year or two progress is made. Then one or more sponsoring military or civilian officials are transferred to another assignment or leave the government. New officials take over and shift the focus to other activities, and the old problems begin to resurface.

Were there a more attractive government career in DoD acquisition management, it might then be possible to minimize the conflicts associated with frequent turnover of military personnel and widespread military retirements to industry, while preserving the rights of individuals to careers in acquisition management. The basic goal of any remedy must be achieving and maintaining outstanding competence and integrity to the defense acquisition system.

With respect to contractors, the Defense Department customarily does business with an inverted system of rewards and penalties. Contractors are often rewarded for higher than planned program costs with increased sales, higher contributions to overhead, and higher profits. The system also encourages government and industry managers to place higher priority on gaining congressional approval to begin new acquisition weapon programs or obtain additional funding for ongoing programs than it does on controlling cost. The U.S. Government Accountability Office as well as other defense analysts have observed that the acquisition cost overruns of the 1980s, 1990s, and 2000s are not aberrations; they are the result of many government and industry participants reacting in perfect accord with the distorted rewards and penalties inherent in the acquisition process.

Reluctance to establish more appropriate incentives has been a serious deficiency in most DoD improvement programs during the past five decades. Contractors should be rewarded with higher profits for complying with schedules, satisfying promised technical performance standards, and delivering goods and services at or below contracted costs. Prospects for obtaining future contracts should be closely linked to performance on existing contracts. New contract forms; better planning, control, and reporting systems; and improved cost estimating and change control systems are unlikely to be effective unless government managers are skilled in the implementation and use of these techniques and are rewarded, along with contractors, for effective results.

This book identifies important long-term trends, insights, and observations that provide perspective and context to assist current defense decision makers, acquisition officials, and trainers of acquisition personnel. The concluding chapter presents an analysis of why the defense acquisition system has been able to resist improvements frequently proposed during the past five decades. It also includes a description of much needed effective reforms of the acquisition process.

High federal deficits at the end of the first decade of the twenty-first century, the continuing need for a strong defense, and a growing awareness of the need to deal more effectively with the high cost of defense acquisition can provide the stimulus to bring about much needed improvements in the control of schedules and costs for large defense engineering development and production programs. This study suggests that correcting the shortcomings in defense acquisition management deserves urgent and concerted actions by the secretary of defense in conjunction with his key assistants. The goal should be to create and implement incentives throughout DoD acquisition organizations to ensure that the desired changes are made and endure.

Excerpt from Sleeping With Your Smartphone

It all began with an experiment that my research associate and collaborator, Jessica Porter, and I initiated in order to explore whether one six-person "case team" at one of the world's most elite and demanding professional service firms—The Boston Consulting Group (BCG)—could work together to ensure that they each could truly disconnect from work for a scheduled unit of time each week. This modest experiment generated such powerful results-not just for individuals' work lives but for the team's work process and ultimately the client—that the experiment was expanded to more and more of BCG's teams. Four years later, over nine hundred BCG teams from thirty countries on five continents had participated.

Sleeping with Your Smartphone shares BCG's story. It also serves as a guide for anyone who is on a team or leads a team—whether a junior or senior manager, from big organizations or small, in the United States or abroad—and wants to make the impossible possible: turning off more, while improving the work process itself. Sleeping with Your Smartphone proposes a way to make exactly that happen: a process tested successfully by BCG teams in North America, South America, Europe, Asia, and Australia. A process I have seen implemented with good and not-so-good managers; on big and small teams, with tight deadlines and less pressing deliverables. A process that I have come to call "PTO"—because at the core, when people work together to create "predictable time off," people, teams, and ultimately the organization all stand to benefit.

To be clear, PTO won't solve all your problems. Nor is it about being always off in a world that is always on. Rather, it is about incremental changes that promise to improve your work-life and your work in ways that make them notably better.

Creating Change Where No One Could Even Imagine It

I chose to conduct the original experiment at The Boston Consulting Group because there was widespread skepticism about the possibility of such hard-charging professionals turning off. "It has to be this way," explained one consultant, echoing many of his colleagues. "It is the nature of the work. Clients pay huge sums of money and expect—and deserve—the highest-quality service."

Most consultants simply accepted the resulting demands on their time as the price they had to pay for annual salaries of well over $100,000 for recent business school graduates to millions of dollars for the most senior partners, as well as for unequaled exposure to colleagues and clients of the highest caliber working together to tackle pressing problems faced by the world's leading organizations, not to mention résumé building work experience. Moreover, many actually thrived on the intensity of the work and did not want it to be different. Even those who wanted more time for their personal lives presumed they had no alternative but to leave the firm to achieve it, and many did, including some of BCG's most talented consultants. I figured that if change could be fostered here, it could be made to happen most anywhere.

Imagine my delight then, when four years after we conducted our first experiment at BCG's Boston office, 86 percent of the consulting staff in the firm's Northeast offices—including Boston, New York, and Washington, DC—were on teams engaged in similar PTO experiments. These team members were much more likely than their colleagues on teams not participating in PTO to rate their overall satisfaction with work and work-life positively. For example:

• 51 percent (versus 27 percent) were excited to start work in the morning
• 72 percent (versus 49 percent) were satisfied with their job
• 54 percent (versus 38 percent) were satisfied with their work-life balance

We also discovered that significantly more of those on PTO teams found the work process to be collaborative, efficient, and effective.

• 91 percent (versus 76 percent) rated their team as collaborative
• 65 percent (versus 42 percent) rated their team as doing everything it could to be efficient
• 74 percent (versus 51 percent) rated their team as doing everything it could to be effective

The happy result for BCG was that individuals engaged in PTO experiments were more likely to see themselves at the firm for the long term (58 percent versus 40 percent) and were more likely to perceive that they were providing significant value to their clients (95 percent versus 84 percent). BCG clients reported a range of experiences with PTO teams from neutral (nothing dropped through the cracks) to extremely positive (they reaped significant benefits). According to BCG's CEO, Hans-Paul Bürkner, the process unleashed by these experiments "has proven not only to enhance work-life balance, making careers much more sustainable, but also to improve client value delivery, consultant development, business services team effectiveness, and overall case experience. It is becoming part of the culture—the future of BCG."

The Cycle of Responsiveness: The Root of the 24/7 Habit

The reason PTO can be so effective for both individuals' work-lives and the work itself: busy managers and professionals tend to amplify—through their own actions and interactions—the inevitable pressures of their jobs, making their own and their colleagues' lives more intense, more overwhelming, more demanding, and less fulfilling than they need to be. The result of this vicious cycle is that the work process ends up being less effective and efficient than it could be. The power of PTO is that it breaks this cycle, mitigating the pressure, freeing individuals to spend time in ways that are more desirable for themselves personally and for the work process.

The initial discovery that illuminated all of this emerged from one of the surveys we conducted of sixteen hundred managers and professionals.

Of this sample, 92 percent reported putting in fifty or more hours of work a week. A third of this group was working sixty-five or more hours a week. And that doesn't include the twenty to twenty-five hours per week most of them reported monitoring their work while not actually working: 70 percent admitted to checking their smartphone each day within an hour after getting up, and 56 percent did so within an hour before going to bed. Weekends offered no let-up: 48 percent checked over the weekend, even on Friday and Saturday nights. Vacations were no better: 51 percent checked continuously when on vacation. If they lost their wireless device and couldn't replace it for a week, 44 percent of those surveyed said they would experience "a great deal of anxiety."

And 26 percent confessed to sleeping with their smartphones. Simply put, people were "on" a great deal.

We defined on as the time people spent working plus all the additional time they were available, monitoring their work in case something came up. And, we discovered that those whose workweek was more unpredictable tended to be on more. That was not surprising. What caught our attention was that the more people were on, the more unpredictable their work time seemed to become. By being constantly connected to work, they seemed to be reinforcing—and worse, amplifying—the very pressures that caused them to need to be available.

Our respondents were caught in what we have come to call the cycle of responsiveness. The pressure to be on usually stems from some seemingly legitimate reason, such as requests from clients or customers or teammates in different time zones. People begin adjusting to these demands—adapting the technology they use, altering their daily schedules, the way they work, even the way they live their lives and interact with their families and friends—to be better able to meet the increased demands on their time. Once colleagues experience this increased responsiveness, their own requests expand. Already working long hours, most just accept these additional demands—whether they are urgent or not—and those who don't risk being branded as less committed to their work.

And thus the cycle spins: teammates, superiors and subordinates continue to make more requests, and conscientious employees accept these marginal increases in demands on their time, while their expectations of each other (and themselves) rise accordingly. Eventually, the cycle grows (unintentionally) vicious; most people don't notice that they are spinning their way into a 24/7 workweek. And even if they begin resenting how much their work is spilling into their personal lives, they fail to recognize that they are their own worst enemy, the source of much of the pressure that they attribute to the nature of their business.

Imagine instead that people were not so accommodating and decided to find alternative ways to do the work. Imagine the upside of no longer having to accommodate to all the pressure to be on.

Imagine if in the process of making this possible, new ways of working were discovered that were more efficient and effective. Consider the win not just for individuals but also for the organization. The power of PTO is that it makes this all come true—by breaking the cycle of responsiveness.

The Trap of Marginal Thinking

In the late 1990s, Blockbuster dominated the movie rental industry in the United States. It had stores all over the country, a significant size advantage, and what appeared to be a stranglehold on the market. Blockbuster had made huge investments in its inventory for all its stores. But, obviously, it didn't make money from movies sitting on the shelves; it was only when a customer rented a movie that Blockbuster made anything. It therefore needed to get the customer to watch the movie quickly, and then return it quickly, so that the clerk could rent the same DVD to different customers again and again. It wasn't long before Blockbuster realized that people didn't like returning movies quickly, so it increased late fees so much that analysts estimated that 70 percent of Blockbuster's profits were from these fees.

Set against this backdrop, a little upstart called Netflix emerged in the 1990s with a novel idea: rather than make people go to the video store, why don't we mail DVDs to them? Netflix's business model made profit in just the opposite way to Blockbuster's. Netflix customers paid a monthly fee-and the company made money when customers didn't watch the DVDs that they had ordered. As long as the DVDs sat unwatched at customers' homes, Netflix did not have to pay return postage-or send out the next batch of movies that the customer had already paid the monthly fee to get.

It was a bold move: Netflix was the quintessential David going up against the Goliath of the movie rental industry. Blockbuster had billions of dollars in assets, tens of thousands of employees, and 100 percent brand recognition. If Blockbuster decided it wanted to go after this nascent market, it would have the resources to make life very difficult for the little start-up.

But it didn't.

By 2002, the upstart was showing signs of potential. It had $150 million in revenues and a 36 percent profit margin. Blockbuster investors were starting to get nervous—there was clearly something to what Netflix was doing. Many pressured the incumbent to look more closely at the market. "Obviously, we pay attention to any way people are getting home entertainment. We always look at all those things," is how a Blockbuster's responded in a 2002 press release. "We have not seen a business model that is financially viable in the long term in this arena. Online rental services are 'serving a niche market.' "

Netflix, on the other hand, thought this market was fantastic. It didn't need to compare it to an existing and profitable business: its baseline was no profit and no business at all. This "niche" market seemed just fine.

So, who was right?

By 2011, Netflix had almost 24 million customers. And Blockbuster? It declared bankruptcy the year before.

Blockbuster's mistake? To follow a principle that is taught in every fundamental course in finance and economics. That is, in evaluating alternative investments, we should ignore sunk and fixed costs, and instead base decisions on the marginal costs and revenues that each alternative entails. But it's a dangerous way of thinking. Almost always, such analysis shows that the marginal costs are lower, and marginal profits are higher, than the full cost.

This doctrine biases companies to leverage what they have put in place to succeed in the past, instead of guiding them to create the capabilities they'll need in the future. If we knew the future would be exactly the same as the past,that approach would be fine. But if the future's different—and it almost always is—then it's the wrong thing to do. As Blockbuster learned the hard way, we end up paying for the full cost of our decisions, not the marginal costs, whether we like it or not.

You End Up Paying the Full Price Anyway

Case studies such as this one helped me resolve a paradox that has appeared repeatedly in my attempts to help established companies that are confronted by disruptive entrants—as was the case with Blockbuster. Once their executives understood the peril that the disruptive attackers posed, I would say, "Okay. Now the problem is that your sales force is not going to be able to sell these disruptive products. They need to be sold to different customers, for different purposes. You need to create a different sales force." Inevitably they would respond, "Clay, you have no idea how much it costs to create a new sales force. We need to leverage our existing sales team."

The language of the disruptive attackers was completely different: "It's time to create the sales force." Hence, the paradox: Why is it that the big, established companies that have so much capital find these initiatives to be so costly? And why do the small entrants with much less capital find them to be straightforward?

The answer lies in their approach to marginal versus full costs. Every time an executive in an established company needs to make an investment decision, there are two alternatives on the menu. The first is the full cost of making something completely new. The second is to leverage what already exists.

Almost always, the marginal-cost argument overwhelms the full-cost. When there is competition, and this thinking causes established companies to continue to use what they already have in place, they pay far more than the full cost—because the company loses its competitiveness. As Henry Ford once put it, "If you need a machine and don't buy it, then you will ultimately find that you have paid for it and don't have it." Thinking on a marginal basis can be very, very dangerous.

An Unending Stream of Extenuating Circumstances

This marginal-cost argument applies the same way in choosing right and wrong: it addresses a question I discuss with my students: how to live a life of integrity—and stay out of jail. The marginal cost of doing something "just this once" always seems to be negligible, but the full cost will typically be much higher. Yet unconsciously, we will naturally employ the marginal-cost doctrine in our personal lives. A voice in our head says, "Look, I know that as a general rule, most people shouldn't do this. But in this particular extenuating circumstance, just this once, it's okay." And the voice in our head seems to be right; the price of doing something wrong "just this once" usually appears alluringly low. It suckers you in, and you don't see where that path is ultimately headed or the full cost that the choice entails.

Recent years have offered plenty of examples of people who were extremely well-respected by their colleagues and peers falling from grace because they made this mistake. Nick Leeson, the twenty-six-year-old trader who famously brought down British merchant bank Barings in 1995 after racking up $1.3 billion in trading losses before being detected, suffered exactly this fate and talks about how marginal thinking led him down an inconceivable path. In hindsight, it all started with one small step: a relatively small error. But he didn't want to admit to it. Instead, he covered it up by hiding the loss in a little-scrutinized trading account. It led him deeper and deeper down a path of deception.

He lied to cover lies; he forged documents, misled auditors, and made false statements to try to hide his mounting losses. Eventually, he arrived at his moment of reckoning. He was arrested at the airport in Germany, having fled his home in Singapore. As Barings realized the extent of Leeson's debt, it was forced to declare bankruptcy. The bank was sold to ING for just 1 pound. Twelve hundred employees lost their jobs, some of them his friends. And Leeson was sentenced to six and a half years in a Singaporean prison.

How could hiding one mistake from his bosses end up leading to the undoing of a 233-year-old merchant bank, a conviction and imprisonment for fraud, and ultimately the failure of his marriage? It's almost impossible to see where Leeson would end up from the vantage point of where he started—but that's the danger of marginal thinking.

As soon as he took that first step, there was no longer a boundary where it suddenly made sense to turn around. The next step is always a small one, and given what you've already done, why stop now? Leeson described the feeling of walking down this dark road in an interview with the BBC: "[I] wanted to shout from the rooftops … this is what the situation is, there are massive losses, I want it to stop. But for some reason you're unable to do it."

100 Percent of the Time Is Easier Than 98 Percent of the Time

Many of us have convinced ourselves that we are able to break our own personal rules "just this once." In our minds, we can justify these small choices. None of those things, when they first happen, feels like a life-changing decision. The marginal costs are almost always low. But each of those decisions can roll up into a much bigger picture, turning you into the kind of person you never wanted to be.

I came to understand the potential damage of "just this once" in my own life when I was in England, playing on my university's varsity basketball team. It was a fantastic experience; I became close friends with everyone on the team. We killed ourselves all season, and our hard work paid off-we made it all the way to the finals of the big tournament. But then I learned that the championship game was scheduled to be played on a Sunday. This was a problem. At age sixteen, I had made a personal commitment to God that I would never play ball on Sunday because it is our Sabbath.

So I went to the coach before the tournament finals and explained my situation. He was incredulous. "I don't know what you believe," he said to me, "but I believe that God will understand." Every one of the guys on the team came to me and said, "You've got to play. Can't you break the rule, just this one time?"

It was a difficult decision to make. The team would suffer without me. The guys on the team were my best friends. We'd been dreaming about this all year. I'm a deeply religious man, so I went away to pray about what I should do. As I knelt to pray, I got a very clear feeling that I needed to keep my commitment. So I told the coach that I wasn't able to play in the championship game.

In so many ways, that was a small decision—involving one of several thousand Sundays in my life. In theory, surely I could have crossed over the line just that one time and then not done it again. But looking back on it, I realize that resisting the temptation of "in this one extenuating circumstance, just this once, it's okay" has proved to be one of the most important decisions of my life. Why? Because life is just one unending stream of extenuating circumstances. Had I crossed the line that one time, I would have done it over and over and over in the years that followed.

And it turned out that my teammates didn't need me. They won the game anyway.

If you give in to "just this once," based on a marginal-cost analysis, you'll regret where you end up. That's the lesson I learned: it's easier to hold to your principles 100 percent of the time than it is to hold to them 98 percent of the time. The boundary—your personal moral line—is powerful because you don't cross it; if you have justified doing it once, there's nothing to stop you doing it again.

Decide what you stand for. And then stand for it all the time.