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Welcome to Apogee Consulting, Inc.

Culture Change

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We’ve all seen that meme on LinkedIn. You know, that Peter Drucker quote: “Culture eats strategy for breakfast.” It shows up every week, at least once. There’s a zillion memes and images, all saying the same thing. There’s even a book: “Culture Eats Strategy for Lunch”—but the book wasn’t written by Peter Drucker.

Who’s Peter Drucker, anyway?

Peter Drucker is a relatively famous author and consultant whose contribution to modern management theory is undeniable. Born in Austria and educated in Germany, Drucker fled the Nazis and emigrated to England, where his interest in the behavior of people (as opposed to commodities) distinguished him from other economists and management philosophers. He moved to the United States in 1937, where he taught economics and later became a professor of politics and philosophy at Bennington College. During the 1940’s he focused on management of the modern corporation. According to a website, “In 1954, he published The Practice of Management, widely considered to be the first book to organize the art and science of management into an integrated body of knowledge.”

In 1966, he published The Effective Executive. In essence, he was creating the field that many of know today as the philosophy of leadership. But more he was doing more than that. He was making predictions. In 1968, he wrote, “The impact of cheap, reliable, fast, and universally available information will easily be as great as the impact of electricity. Certainly, young people, a few years hence, will use information systems as their normal tools, much as they now use typewriters or the telephone.” That prediction was made 50 years ago.

I could go on, but you get the drift. Drucker was a widely respected and incredibly influential thinker, and we all would do well to read a couple of his many books.

So when Peter Drucker said, “Culture eats strategy for breakfast,” that is a powerful statement that resonates with many business leaders.

Unfortunately, he may not have actually said it.

Nobody can produce a citation for this widely circulated quote.

What he did say is less catchy: “Often, change management involves changing ways of thinking and doing and, in essence, changing culture.

Hard to fit that phrase on a meme.

He also said:

  • Management is doing things right; leadership is doing the right things.

  • There is nothing so useless as doing efficiently that which should not be done at all.

  • Whenever you see a successful business, someone once made a courageous decision.

  • Effective leadership is not about making speeches or being liked; leadership is defined by results not attributes.

  • Plans are only good intentions unless they immediately degenerate into hard work.

Strong quotes, to be sure. But not as strong as the apocryphal “Culture eats strategy for breakfast.

He didn’t say that; but he should have.

Because it’s true.

The greatest strategy in the world won’t lead to anything if there’s no execution; and to create execution you need a culture of execution. That should be obvious.

But now let’s talk about change and change management. As Drucker noted, change management is often dependent on culture. To create change, the company must be open to change. People must be open to change. People embedded in “the way it’s always been done” tend to be resistant to change. This is especially true in a successful company, where the company’s historical success may be a function of its early culture. Think about Microsoft, or Apple or Google or Facebook. Incredibly successful companies with a culture of success. Why would they even want to change?

Everybody with experience in change management understands that, to be effective, any change management initiative must have an executive sponsor. Without executive sponsorship, many if not most change management efforts are doomed to failure. How does one get executive sponsorship when the executives do not see a compelling business case for making change?

We wrote about this a few years ago, in this article. Our focus then was compliance (as it tends to be), and we wrote—

… the real issue is not the knowledge or expertise of the team; the real issue is that the actual practices may need to change to match the compliance requirements of the newer contracts. The company may need to make fundamental changes to the way in which it does business. … One problem is that the business may have become accustomed to how it has operated over time. It may not understand the need for change—or it may not want to change. “If the wheel ain’t broke, why fix it?” may be the reply to the consultant who recommends changes to business practices in order to better assure compliance with new contract terms.

Therefore, change management is tied to culture, and the culture may have been created over years of successful operation and growth. Assuming that it’s now time for a culture change, how does one even get started?

Moving back to compliance, let’s look at the notion of “tone at the top.” It’s a tough concept to define in a single sentence. One site says, it is “a term that is used to define management's leadership and commitment towards openness, honesty, integrity, and ethical behavior.” DCAA calls it “overall control environment,” and evaluates such things as integrity and ethical values, commitment to competence, management philosophy and operating style, and alignment of authority and responsibility. The DCAA Contract Audit Manual (2000 version) states “The control environment sets the tone of an organization, influencing the control consciousness of its people. It is the foundation for all other components of internal control, providing discipline and structure.”

Thus “tone at the top” is critical for compliance practitioners to understand. It is foundational. We would therefore assert that “tone at the top” is the single most influential aspect of culture.

If that’s true, and if you accept that change management is inextricably intertwined with culture, and you accept that change management may often mean culture change, then you are left with a problem when the culture is established by executive leadership and that leadership is resistant to change.

What do you do?

Well, here’s my take on it. Here’s a new meme for you all to consider.

Tone at the top is critical. It is so critical that changing the culture may require a change at the top.

In other words, in many cases culture change may need to start with a regime change.

regine_change

 

Employee Qualifications

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Some Federal government contracts contain requirements and directives regarding who can, and who cannot, charge reimbursable labor hours/dollars to them.

Did we say some? We meant to say all.

All of them do.

Whether you know it or not, every single Federal government contract that will be reimbursing your company for direct labor dollars (or direct labor hours) contains a statement or two (or more) delineating what labor will be reimbursed. If you don’t meet the contractual qualifications, your labor is not reimbursable.

(To be clear: you can always charge the labor to the contract; and in many circumstances you must charge the labor to the contract. However, the contract terms and conditions determine whether or not that labor will be reimbursed by the government customer.)

What happens if you bill labor to the customer that doesn’t meet the contractual definitions of reimbursable labor? Well, sometimes you might get away with it, but it’s likely that—sooner or later—you are going to get caught and then you may end up with an allegation of overbilling. That allegation may well be connected with an allegation that you violated the False Claims Act.

Some contract qualifications are very clear and expressly stated. Perhaps the most obvious example is a contract statement that all employees working on the project must hold the requisite security clearances. If they do not hold those clearances, then their labor is not reimbursable. This situation, of course, often leads to the question about where employees should charge time while awaiting their clearances. The answer to that question often depends on company policy or established practice. However, regardless of what that policy or practice is, that time cannot be billed as reimbursable labor—because it is non-compliant with contract terms and conditions.

The issue of employee labor qualifications is obvious when dealing with Time & Materials (T&M) contract types. In such contracts, each hourly billing rate is essentially a fixed price per labor hour, and a separate hourly billing rate is established for various categories of labor, as defined by the contract. Thus, the contract defines the qualifications associated with each hourly billing rate. For example, there may be separate hourly billing rates for senior engineers, mid-level engineers, and junior engineers. The differences between those three engineering levels will be defined by the contract, typically by parameters such as years of experience, education, and/or responsibility. Often, the contractor proposes its hourly billing rates in accordance with qualifying parameters defined by the Request for Proposals (RFP), and then has to “map” its employees to each hourly billing rate it is proposing.

That’s well and good—but what happens if, during contract performance, an individual employee gains sufficient experience or responsibility (or education) to then map to a higher labor category and associated higher hourly billing rate? The answer is (again) going to depend on what the contract says. Sometimes the contractor can simply remap that employee and bill at the higher rate without notification and without customer permission; but other times the contractor will need to notify the customer (at a minimum) and may even need a formal contract modification.

In other instances, the contractor will miss the opportunity to bill its employee at the higher rate, because nobody is monitoring the employees for such changes. Nobody is looking for the impact of promotions or additional years of experience. Oops! Opportunity missed.

Why are opportunities missed? Because nobody is looking. Nobody is looking because nobody has that responsibility. Is it the Program Manager’s job? Probably not, because most PMs have too many other things to worry about. Is it Accounting’s job? Probably not. If you work at a savvy contractor, you probably set forth the employee qualifications one time, at the beginning of performance, and document the qualifications and/or mapping in the Contract Brief. But many contractors don’t even do that. So how would Accounting know to change the employee mapping? You’re right; they wouldn’t know unless somebody tells them.

Maybe it’s Contracts’ job. Maybe the Contract Administrator or Contract Manager or whatever you call those folks have a responsibility to monitor employees to ensure that they are meeting contractual requirements. But I bet if you asked them, they would say “Not my job. That’s HR’s job.” And indeed, that may be the case—but if that is the case then HR needs to know what the contract qualifications are, and they need to know who’s working on that contract, and they need to know whom to inform when things change. In our experience, HR is busy doing other things (such overseeing the annual performance review process) and they are not likely to be thinking about how to partner with operations in the required area.

So we are left with the thought that it may be the job of Compliance to ensure that employee labor for which government reimbursement is being sought meets the contractual qualifications for doing so. It would seem that any robust compliance program ought to be testing to see whether billed labor meets contractual requirements. You test for cost allowability, why wouldn’t you test for labor allowability?

And if you did robust labor allowability testing you might identify opportunities to bill employees’ time at a higher hourly billing rate! Hopefully, though, you would (at a minimum) catch employees who didn’t meet contractual labor qualifications. You could then recommend that any non-compliant labor dollars be credited from customer billings and recorded as being unallowable direct labor.

That would be nice, wouldn’t it?

In order to accomplish that task, you would probably need some additional Compliance resources. Often, adding Compliance resources is a difficult conversation to have with your management team, because Compliance is seen as a necessary evil whose cost must be minimized to the lowest level possible.

One argument you might advance in support of your request is that government auditors are being trained to look for billed labor that doesn’t meet contractual qualifications. Several DCAA audit programs now include this area; and it’s relatively easy for them to identify non-compliant labor once they obtain resumes and other HR information. Employee interviews are a quick way to have employees confirm whether they have what the resume says they have. So you might consider telling your management team that DCAA is going to be looking for this, sooner or later, and it would be beneficial to the company if it looked first. Plus—maybe identify opportunities to bill at higher rates! (Now Compliance is a profit center.)

Another argument you might advance in support of your request to add more Compliance resources to look at this area is “what happens if we have been mis-billing for years, and we didn’t know it?” To answer that question, you should produce this press release from the Department of Justice.

In that press release, DoJ announced that it had reached a $6.4 million settlement with CH2M Hill, a large engineering services firm, “to resolve allegations that CH2M Hill overbilled the U.S. Air Force for environmental consulting work.” What was the nature of the overbilling?

According to the announcement, “CH2M Hill admits that it billed under the government contract for employees who did not meet the educational and work experience qualifications in the contract.” The subheadline of the press release is very clear: “CH2M Hill overbilled U.S. Air Force for work done by unqualified staff.”

Yeah, that’s not a good headline. More to the point, how many new Compliance resources could CH2M Hill have deployed for $6.4 million? We’re guessing quite a few.

But what makes this announcement interesting (to us) is that the $6.4 million settlement resolved the False Claims Act exposure but the settlement came after CH2M Hill had already refunded to the Air Force $10.5 million. (We believe that prior invoice credit was made pursuant to the mandatory disclosure requirement found in the contract clause 52.203-13.) Thus, this was not a $6.4 million issue; it was actually a $16.9 million issue.

And that value excludes the undoubtedly millions of unallowable dollars paid to attorneys to negotiate the settlement.

Now how many new Compliance resources would you add to mitigate that risk?

One more point. The DoJ announcement went out of its way to allege that CH2M Hill delayed reporting the overbilling for several years. According to the announcement, “CH2M Hill knew of the overpayment as early as 2011, but attempted to keep the information secret by claiming that an audit of its labor practices was privileged information” before finally self-reporting the issue (and refunding the non-compliant labor dollars plus interest on the associated overpayments) in 2017.

Those of you who have to contend with Legal Departments that insist that all internal compliance investigations must be undertaken under Attorney-Client Privilege may want to keep this settlement in mind. We’re just saying….

Employee labor qualifications. Easy to detect problems during an external audit; harder to manage during ongoing contract performance. Thus, an area of high risk to which government contractors should devote resources.

If their management permits them to do so.

 

So Then This Happened … Regulatory Changes

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I’m not a big fan of just linking to proposed and/or final rule changes, nor am I a big fan of simply recapping what they say. My thought is: You all can do that. You can read the rule and grasp what’s going on. Thus, I don’t normally just tell you what’s happening because you can all do that for yourselves.

Instead, I want to express a point of view about the regulatory change. I want to tell you what’s happening and then opine on why it matters—or should matter—to you. That’s the goal of this blog (even if it sometimes gets me into trouble.) I want to tell you what’s going on and why you should care.

With that being said, let’s discuss some recent regulatory rule changes.

  1. Effective 01 October 2019, the DFARS was changed via final rule to limit the use of Lowest-Price, Technically Acceptable (LPTA) source selection procedures. Going forward, the LPTA process can only be used when—

(i) Minimum requirements can be described clearly and comprehensively and expressed in terms of performance objectives, measures, and standards that will be used to determine the acceptability of offers;

(ii) No, or minimal, value will be realized from a proposal that exceeds the minimum technical or performance requirements;

(iii) The proposed technical approaches will require no, or minimal, subjective judgment by the source selection authority as to the desirability of one offeror's proposal versus a competing proposal;

(iv) The source selection authority has a high degree of confidence that reviewing the technical proposals of all offerors would not result in the identification of characteristics that could provide value or benefit;

(v) No, or minimal, additional innovation or future technological Start Printed Page 50789advantage will be realized by using a different source selection process;

(vi) Goods to be procured are predominantly expendable in nature, are nontechnical, or have a short life expectancy or short shelf life (See PGI 215.101-2-70(a)(1)(vi) for assistance with evaluating whether a requirement satisfies this limitation) ….

And the LPTA process must be avoided “to the extent practicable” in the following circumstances:

(i) Information technology services, cybersecurity services, systems engineering and technical assistance services, advanced electronic testing, or other knowledge-based professional services;

(ii) Items designated by the requiring activity as personal protective equipment (except see paragraph (b)(1) of this section); or

(iii) Services designated by the requiring activity as knowledge-based training or logistics services in contingency operations or other operations outside the United States, including in Afghanistan or Iraq.

And the LPTA process is “prohibited” in the following circumstances:

… items designated by the requiring activity as personal protective equipment or an aviation critical safety item, when the requiring activity advises the contracting officer that the level of quality or failure of the equipment or item could result in combat casualties. See 252.209-7010 for the definition and identification of critical safety items.

… to acquire engineering and manufacturing development for a major defense acquisition program for which budgetary authority is requested beginning in fiscal year 2019.

All of the above changes were driven by legislation—i.e., language found in the FY2017 and FY2018 National Defense Authorization Acts (NDAAs).

What was Congress thinking?

Well, we think Congress was reacting to the recent trend by the DOD in awarding major defense procurements to companies who are willing to “invest” in them by offering prices below estimated costs. See, for example, this article discussing Boeing’s ability to “invest” (in the words of its executives) “to create long-term valuable products and services franchises.” In that same article, we discussed news reports stating that Marilyn Hewson (Lockheed Martin’s CEO) had said that her company didn’t have the same cash resources as Boeing had, and that it could not compete if the competition is based on the size of the contractor investment. More explicitly, Lockheed Martin’s CFO was quoted as saying “Those [losses] were disappointing for a lot of reasons. But the fact they really decided, all three, on an LPTA (lowest price technically acceptable) basis, didn’t help the situation.”

Thus, we reckon that Congress heard those complaints (whether from reading them in the press, or via testimony at hearings, or via whispers of lobbyists into the right ears) and decided to tell DOD to knock it off.

And how is Boeing’s strategy working out for the company?

  • It’s winning orders for new aircraft.

So: a mixed bag. In the long run, Boeing’s strategy likely makes sense for the company and its shareholders (of which I am one). However, in the short-term Boeing has had to take literally billions of dollars in financial reserves to cover its cost growth on the program. As we have pointed out before, if the DOD’s penchant for awarding to the low-bidder were to continue, then only the very largest of contractors will end up with any future awards. Thus, we are pleased to see Congressional action in this area.

Speaking of Congressional action, as the result of a 2017 NDAA requirement, the FAR definition of commercial item was recently revised via final rule. The revised definition adds the following situation to the definition at FAR 2.101:

A nondevelopmental item, if the procuring agency determines the item was developed exclusively at private expense and sold in substantial quantities, on a competitive basis, to multiple State and local governments or to multiple foreign governments.

That should be helpful to a few folks out there.

There have been a number of proposed rules published recently. In the interest of brevity we won’t list them all. But one was “interesting” and we think worth bringing to your attention. See link here.

The proposed rule, if implemented as drafted, would provide notification to contractors doing business in Afghanistan that there are exemptions from liability for Afghanistan taxes, customs, duties, fees or similar charges. The rule does not add any new requirements for contractors; however, it is providing unified guidance for contractors performing in Afghanistan. The DFARS already has such language, but now it’s being proposed for inclusion in the FAR.

Regulatory changes continue to happen. For a long time, the rule-making process seemed paralyzed, but now it seems to be getting back on track.

 

Rule-Making Like Molasses

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Well, finally. On October 2, 2019, the FAR Councils finally published two proposed rules that would implement the statutory changes made by the 2017 and 2018 National Defense Authorization Acts (NDAAs). Hey, it’s good news!

It’s good news even though these mandated rule-making revisions should have sailed through like a hot knife through butter. Instead, like molasses, they moved slowly—leaving contracting officers and their contractors to rely on controversial theories (such as whether a statutory threshold trumped the regulatory threshold upon which it was based) and Class Deviations issued by individual Federal agencies.

Okay, what are we talking about?

  • FAR Case 2018-004 would increase the micro-purchase and simplified acquisition thresholds to $10,000 and $250,000 (respectively).

  • FAR Case 2018-005 would increase the threshold at which certified cost or pricing data is required to be provided to $2,000,000. In addition, the threshold at which Cost Accounting Standards is applicable is also raised to $2 million.

Right, good news.

But if you’ve read this blog before, you know it wasn’t easy getting these regulatory changes made. We devoted several articles (rants? pleas?) to this topic. Our last article was posted in June, 2018—about sixteen months ago. In that article, we discussed changes to the DOD Class Deviation implementing the statutory changes ahead of the regulatory changes. In the months leading up to that article, we posted article after article, documenting the situation faced by acquisition professionals when the statute changed but not the implementing regulations.

For example, see this one. In it, we wrote:

Do Contracting Officers need to follow the statute or the regulation? If they follow the statute and not the regulation, do they need an official FAR deviation? What about the sentence at FAR 1.602-1(b), which states “No contract shall be entered into unless the contracting officer ensures that all requirements of law, executive orders, regulations, and all other applicable procedures, including clearances and approvals, have been met.” How can a Contracting Officer comply with that requirement if a statute and its implementing regulation are in conflict?

The job of the two FAR Councils and the FAR Secretariat is to make sure those conflicts are few and far between.

So here we are, nearly two years later. And now—only now—have the two FAR Councils and FAR Secretariat published rules that would address the concerns noted above. And they weren’t even published as interim rules!

Like molasses, I tell you.

 

Reforming the Pentagon’s “Fourth Estate”

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The story (which may be apocryphal) goes like this:

Alanis Morissette’s 1995 album, “Jagged Little Pill,” was a huge hit (selling more than 33 million copies); it won five Grammy awards (including album of the year). The album spawned six singles, including “You Oughta Know,” “All I Really Want,” and “Ironic”. The lyrics of “Ironic” are famous for generating a two-decade long debate about whether, in fact, the situations described in the song were ironic. The consensus is that they were not. They were not ironic. Isn’t that ironic?

UK Interviewer: Ms. Morissette, let’s talk about your song, “Ironic.” The lyrics are puzzling. “A black fly in your chardonnay?” “rain on your wedding day?” “good advice that you just didn’t take?” Et cetera. None of those are ironic. Most are just coincidence.

Morissette: Okay.

UK Interviewer: Isn’t this misuse of the word ‘irony’ just another example of the failed American educational system?

Morissette: Actually, I was born and raised in Canada. I’m not American by birth or education.

UK Interviewer: Uh ….

Morissette: Isn’t that ironic?

Whether you call it irony or coincidence, we couldn’t help but notice that the very day after we submitted our most recent blog post—the one that included criticism of the Pentagon regarding its failed efforts to reform its own backoffice bureaucracy (the so-called “Fourth Estate”)—a new report was released from the Pentagon’s Office of the Chief Management Officer (OCMO) that addressed progress to reduce costs in that very area.

Why the report? Well, Section 921 of the 2019 National Defense Authorization Act (NDAA) requires it. Specifically, it requires the OCMO to reduce costs in certain “covered areas” by 25 percent by GFY 2020, or to justify why doing so would create unacceptable inefficiencies. And that same Section of the public law requires the OCMO to issue a periodic report on progress being made. So here it is…

Let’s cut to the bottom-line. Quoting from the report:

In order to meet Congressional intent, this report focuses on reforms and financial savings in the four covered activities within the Fourth Estate, including Defense Agencies and DoD Field Activities (DAFA). While the OCMO projects that it will not meet the 25 percent savings targets in all of the four covered activities in FY 2020 against the FY 2019 baseline, the OCMO forecasts an average 5 percent cost reduction for each of the covered activities in the Fourth Estate.

So: Mission not accomplished.

One thing that we noticed—which should be no surprise to those who follow Pentagon business reform efforts—is that a new group was created to oversee the reductions to bureaucracy. The new group is called “Fourth Estate Management Office” (FEMO). As noted in the report, FEMO is supported by outside consultants.

That’s right. The first action taken in the effort to reduce bureaucracy was to create a new bureaucratic entity.

We further noticed that the ability to reduce Fourth Estate costs was tied to the definition of which entities comprise the Fourth Estate. Thus, adding the Washington Headquarters Services to the definition of the Fourth Estate—and then declaring a goal to reduce WHS costs by 30 percent—means that the other functional aspects of the Fourth Estate don’t need to be cut as much.

That strategy is consistent with a bureaucracy protecting itself.

Is this a big deal? Not really. It’s just interesting to observe how the Pentagon protects itself. Former SECDEF Gates called for cuts in this area. Congress called for cuts in this area via public law. You’d think there would be some accountability for failing to deliver. Not so far.

The Pentagon bureaucracy seems to be avoiding the hard decisions in an apparent effort to protect certain fiefdoms, despite being told to make those hard decisions by people who would seem to have authority in the chain of command.

Isn’t that ironic?

 

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Newsflash

Effective January 1, 2019, Nick Sanders has been named as Editor of two reference books published by LexisNexis. The first book is Matthew Bender’s Accounting for Government Contracts: The Federal Acquisition Regulation. The second book is Matthew Bender’s Accounting for Government Contracts: The Cost Accounting Standards. Nick replaces Darrell Oyer, who has edited those books for many years.