Arnold Punaro has seen and lived both sides of the GovCon sector, having served a nearly three-decade career in the Marine Corps, retiring with the rank of major general, working in the U.S. Senate, including 14 years as staff director or minority staff director of the Senate Armed Services Committee and for 14 years as an executive vice president at Science Applications International Corp., one of DoD’s ten largest contractors.
Click here to register now and gain a forward-leaning look at the market from this esteemed group of leaders from industry, academia and the government.
Punaro recently caught up with Executive Mosaic, parent company of POC and ExecutiveBiz, to find out how he helps clients and partners navigate the uncharted waters of sequestration and what actions he recommends GovCon firms, particularly small businesses, take to stay ahead of trends and see business gains.
ExecutiveBiz: What makes sequestration different than some of the other challenges in industry and government previously seen?
Arnold Punaro: Historically, the Department of Defense budget and the elements related to national security have been driven by the threats as well as validated requirements and the resultant strategy needed to protect the nation at home and abroad. The sequester is driven by none of those. It’s driven by abject failure on the part of the Congress and other parts of the body politic to do their jobs.
It has nothing to do with the threats that we face, nothing to do with military requirements or strategy and nothing to do with what we ask our military to accomplish.
The sequester is a dumb way to govern that no one wanted to see happen. No one thought it would actually be put in place. Unfortunately, now that it is in effect, I don’t see a majority willing to make the compromises necessary to remove its most adverse impacts on national security.
A strength of the Department of Defense has always been their five-year planning system that provided stable, predictable top lines, with detailed plans beneath that for procurement, research and development, operations and maintenance, the size of the force, the missions the force would need to be prepared for, and the training establishment. Both the Congress and industry knew exactly where the Department of Defense was headed and what was needed.
An industry could size its factories and its technologies to work with the department because of that level of information and the level of predictability. The sequester has injected the most uncertainty we’ve seen in many years, and frankly, not even DOD knows what their short or long-term numbers are going to be. Here we are with five months left in the fiscal year, and the detailed sequester cuts for FY 13 are not public nor has DOD fully implemented the FY 13 sequester.
Everybody was holding their breath, hoping it would go away with most predicting it would go away. DOD correctly did not do a self-sequester, meaning starting to cut before there was a final decision. Yet the worst case has happened and DOD now has five months to implement some $37 billion in across-the-board irrational cuts that are, basically, degrading our military’s combat readiness every single day as well as baking in longer-term deficiencies.
ExecutiveBiz: What are your thoughts on the Pentagon having only five months to implement the FY 2013 sequester?
Punaro: It’s absolutely insufficient time. This is no way to manage the Department of Defense. First of all, the 7% percentage cut you saw from OMB if it happened, was only if you made the cuts over a 12-month period.
When OMB put out the sequester order on March 1 they said, “Well, the percentage now is a tick higher than 7 percent because it’s going to be implemented over six months, so it’s really going to be 13 percent.” The problem is, the DOD detail cuts weren’t even submitted until April 19 and now we’re going into the middle of May, with all the cuts yet to be finalized and having to be made by September 30th. The cuts now range between 16% and 21%.
They do not even have a half a year left to make these cuts. They have already spent at least 50 percent of their annual money. DOD was already short on O&M, so the reductions that they’re doing now are what yield the most money in the shortest timeframe—cutting the flying hours, the training hours, the ship steaming hours, the tank training miles, the numbers of complex training evolutions that the ground forces can do, and cutting the pilots’ ability to stay proficient in their airplanes.
We’re watching military readiness go from what we call C1 readiness, the necessary high state of readiness to go to war, down to C3, or not fully combat-ready. That’s a very dangerous situation for the non-deployed combat forces of our military with such an unpredictable, dangerous world.
ExecutiveBiz: How can small businesses navigate this new environment and still achieve gains in the GovCon market?
Punaro: Small businesses are particularly vulnerable in the sequester. The large primes have a greater ability to weather storms with quicker access to cash and larger amounts of cash on their balance sheets–which small businesses absolutely do not have. So small businesses have to be a lot more agile and nimble.
Small business needs to understand the battlefield as it realistically exists, rather than how we would like it to exist. In other words, don’t make the same mistake that others have made by saying, “Well, the sequester is not real; it will go away.” Right now, we’re living in a world for FY 14 where everybody’s pretending that sequester doesn’t exist with the submitted budget levels and the levels in the budget resolutions assuming the sequester for the next 9 years does not exist– yet it’s the current law.
Small businesses need to be realistic that the defense budget is going to be declining, and therefore, they need to adjust to that most likely outcome. That’s obviously easier to say than do. One way is to focus on those areas that are going to grow in a flat and declining budget such as cyber, intelligence and counterintelligence. Healthcare also continues to be a very robust area in terms of federal spending. Solutions that make the government more efficient and effective will be sought by customers at all levels.
If a small business is not in these spaces now, they should consider training or partnering with a larger business or even establishing a protégé program that helps them build their skills in these areas. One advantage a small business has is their overhead rates which are typically lower than the large businesses, so they should be more competitive. Keep your wrap rates down and don’t do anything to add unnecessary costs.
Even though the Better Buying Power 2.0 talks about how they’re going to be looking for best value, in today’s downward pressure on budgets that contracting officers face, price will almost always be king. Line up with potential teaming partners early on. Get on bids with the large primes as they go after some of the larger vehicles particularly those that have a small business requirement. Get with customers directly and find out what your customer really thinks is going to happen in their area
Sometimes it might be good news. Sometimes it might be bad news. Sometimes it may be no news, but at least you are better armed with first-hand information. If you have to make reductions in personnel, as many of the large primes are having to do because they don’t want to carry the indirects and non-covered people, obviously, you want to retain your very best employees because the government is attracted to highly-skilled employees.
Take the initiative. Don’t wait for the government to call you up and say, “Guess what? We’re not going to extend your task order.” Figure out ways where the government might be willing to restructure that contract with less money. These are a number of actions that small businesses can take.
You want to beat the law of averages. Everybody’s in the same boat, both the big companies and the small companies. The pot of money is going to be the same for all and those that can operate smarter, more efficiently, with more agility, in this marketplace are going to be the ones that are going to be the most successful.
ExecutiveBiz: How do you help clients both respond to and stay ahead of changes in the market?
Punaro: I’ve always been focused on what I call analyzing the Washington battlefield, meaning understanding the fundamentals of the decision-making. I taught a course in the graduate school at Georgetown on national security decision-making for over a decade. And from my many years on the hill, in uniform, in industry, and in the government, it is essential to understand the who, what, where, when and how the decisions are being made and be out in front with solid information about those decisions.
I kept my clients advised, starting as far back as August 2011 about the Budget Control agreement — I called one briefing the “Debt Deal for Dummies” — and explained both the mechanics and what was most likely to happen. I put out weekly updates, and then more detailed monthly and quarterly summaries on the multiple issues that would impact decisions and where the body politic and decision-makers were trending and what that would mean for their business. I came up with a long list of action-items for what companies should do and how to think through what their risks and exposures were and what they could consider to mitigate those risks – such as analyze your current set of contracts, determine the source of the funds, determine where your customers stand. I felt all along that O&M based contracts would be particularly vulnerable and this has proven to be the case.
This was all during the lengthy periods when most thought the sequester would never really happen.
I provided what I called the best case, the worst case, and then the most likely case. I was one who, despite the tremendous efforts by the defense leadership, always believed that the sequester was going to happen because I just did not see the various parties willing to make compromises that would have allowed us to avoid the sequester. I was advising my clients early on to be prepared for the worst case and that it was also the most likely case.
It’s very regrettable and sad that prediction has come true, but being realistic and assessing the upside and downside is critical when you provide both strategic and tactical insights for your clients.
I tend to breakdown my analyses and recommendations down into the same three categories that commanders use when assessing a battlefield. I call it the “close-in battle;” that’s the fire fight you’re going to be in over the next month. The next is the “near battle”, meaning that’s what you might face over the course of two to six months; and then the “far battle,” where you look out six months and beyond. When military people think about fighting a war and fighting a battle, you’re always looking at the battlefield in these three dimensions: What’s right in front of you– where the enemy’s could be inside your the wire and you’d better get your bayonet out and attack; what might happen over the next months; and then what the enemy may do to you over the next six months and beyond. Your strategy needs to be relevant and coherent for all three phases so you survive the close-in battle to prevail in the far battle.
ExecutiveBiz: What are some ways that companies and their government customers can work together to navigate this environment?
Punaro: We need to break down the barriers, particularly the artificial barriers the government lawyers have created, between the industry and government. When I first started in this business in the 1970s, there used to be a very collaborative, cooperative partnership between industry and government. It was called the two way street and worked very well for years.
But over the course of the last several decades, it’s become a one way street and an “us-versus-them” environment. You don’t have the dialogue at all levels of government that’s necessary, particularly in difficult and uncertain times like this. To their great credit, at the top of the Department of Defense, there’s tremendous dialogue and collaboration when you talk about Secretary of Defense Chuck Hagel; Deputy Secretary Ash Carter; USD AT&L Frank Kendall; and Deputy Assistant Secretary Brett Lambert, head of the industrial area. They totally get it and are doing everything possible to make needed changes in the way government buys goods and services, supplies and equipment, and works with industry
The industry leadership through our associations just had a big meeting with Secretary Hagel and his leadership team a couple of weeks ago. Great dialogue and understanding on all sides. But it also is needed below those levels. You need to have senior finance people talking to the government finance people, the senior contract people talking to the contracts people, the industry supply chain talking to the government supply chain, the logistics experts talking to logistics experts. You have to have this dialogue at all levels and not just at the very senior levels.
And it has to start at the working levels, and run through intermediate management levels and the senior management levels. That way, industry can better prepare to support the government customer, because they will be better informed and vice versa. That’s also what needs to happen if we’re going to ever really reform the acquisition process. We spend $400 billion a year on goods and services, supplies and equipment. And despite everyone’s efforts to make it better, the big blue arrow summary is: “spend more, take longer, get less.”
One reason is we don’t have the dialogue and the two-way street between industry and government that we should, particularly in these very unpredictable times where even the department is uncertain about what their top lines are going to be. We don’t share information about how to best meet the requirements, how technically difficult those requirements are and what the likely costs are. What is the best way to meet those requirements? What are the realistic budget levels that will be available? This informed dialogue is essential and among the three major “stovepipes” in the Pentagon—requirements, acquisition and budgets. The Department of Defense has replaced common-sense with what Gen. Jim Amos the Commandant of the Marine Corps has called “constipation.”
I’ve talked to many senior military and government decision-makers that would love to have a more meaningful dialogue with industry and they say, “Well, the lawyers won’t let us talk to you all.” That’s because they are so risk-averse in the department. When they have tens of thousands of pages of laws, rules, and regulations, and they have this hugely complex, three-tiered, stove- piped, unlinked, unstreamlined acquisition process, and the 154,000 people working the acquisition system and the tens of thousands more in the requirements and budget processes with their 11,000 lawyers have created a totally bureaucratic nightmare that does not produce the bang for the buck it should.
ExecutiveBiz: Is there anything you would like to add?
Punaro: As I said at the outset, the sequester is unprecedented. It is also a total break from the historic way that Congress and the Executive Branch have worked successfully to address the threats we face and to determine how best to meet the valid requirements and strategic objectives
The other development that’s not positive is the decreasing ability of Congress as an institution to do their work. Individuals there are still terrific, particularly in the national security area. These individual Congressmen, Senators and staff come to work every day, trying to figure out how to do the right thing. As an institution, however, Congress, is not just badly bent, it is broken. They don’t pass appropriations bills anymore. They don’t pass joint budget resolutions. They don’t work a full week even when pressing work is undone. They don’t do serious oversight of the executive branch in needed areas and they don’t hold themselves accountable for their shortcomings.
There are exceptions, and again I’m not talking about individuals. I’m talking about Congress as an institution. Congress is always quick to be a Monday morning quarterback on any subject. What Congress ought to be doing is looking in the mirror and admitting that they haven’t really adjusted that institution to meet the challenges of the modern era of increasing threats and decreasing resources.
In the last several decades they have proliferated committees and subcommittees, proliferated processes, proliferated ever-increasing numbers of staffs and support agencies and proliferate their recess periods. The size of the institutional bureaucracies goes up, and their output goes down. This must be connected. We need a strong and effective Congress.