U.S. Navy, Inc.

The business of the Navy is ships," said Alfred Thayer Mahan a hundred years ago. Today, we would add, "and aircraft, submarines, computers, complex weapon systems, and more." To make this growing statement complete, we also should tack to the end a paraphrase of President Calvin Coolidge: "and the other business of the Navy ... is business."

Big business. Our Navy's $115-billion budget would put it in the top ranks of Fortune 500 corporations. But though we know our ships well, our knowledge of the current management art is limited and even a bit naive, a protected view from behind barriers of culture and funding mechanisms that shield Navy people from business realities that inform the private sector every day.

From a distance, the Navy and big business look alike:

* Both have missions and cultures, ethics and rules.

* Both have product lines and back-office functions.

* Both must exert control across the seas and draw work from global assets.

* Both are concerned with the quality of their output.

* Both are always resource constrained.

And both seek to perpetuate themselves and grow-big business to increase shareholder value; the Navy to do its duty as a constitutional institution and, incidentally, to stay ahead of the other military services.

But contrasts abound between our Navy's business practices and those of successful private-sector firms, not so much in intent as in execution. Big business has valuable lessons for our Navy, and we can absorb them, provided we permit ourselves some humility tinctured with respect for free enterprise. Three areas stand out for scrutiny: efficiency, quality, and management of human resources.

Efficiency. Efficiency matters, whether we are conserving rounds to last the battle or preserving dollars to buy more. In business, inefficiency shows up as unnecessary expenditures. It is part of overhead, and in overhead, the difference between business and the military is stunning.

In a thorough review of this issue, the pro-defense group Business Executives for National security concludes that 70%—70%!—of U.S. defense spending goes to infrastructure and support, the "tail" that is supposed to be sustaining the "tooth" of actual military missions.¹ Contrast that with the real world of business. At the low end, a major corporation selling consumer products shows overhead of a bit under 5%; at the high end, another large company at the heart of new technology carries slightly more than 25% in overhead.² That is the general range of the tail part of tail-to-tooth figures in efficient large corporations, and it justifies the charge shouted at the military services: you are saturated with waste.³

This military inefficiency comes from many sources, most woven into the cultures and institutions of the services themselves, the Navy included. One area is what business executives call make-or-buy decisions. Loving control, the services much prefer in-house (make) solutions to commercial (buy) sources. This is slowly changing, but in both depot maintenance and installation management, we see sailors and government civilians doing many jobs that would be more efficiently contracted out.

Another cost-sink lies in the design of weapon systems and platforms, which generally are overspecified and overbuilt: in a phrase, gold-plated. But we do not goldplate the support for these systems, preferring to defer higher support costs rather than to design in cheaper alternatives, preferring labor-intensive, training-intensive, inventory-intensive maintenance systems over self-diagnosing and perhaps self-healing equipment that might be more expensive to buy, but far less costly to own. The Navy's design trend seems to be heading in the right direction to lower life-cycle costs, but we still let program managers chop off good support in our greed to scavenge funds for overblown capabilities.

Business is a hotbed of new invention; companies innovate or die. The military services are less innovative—at least in the creation and application of sound designs for the acquisition of new hardware and the purchase of support services. Performance-based contracting is the right way to shift design responsibility where best it is served, to the nation's private sector and the strengths of free enterprise. But the struggles of military program offices and field activities to establish even rudimentary performance-based contract relationships attest to the distance yet to travel for efficiency in design and contracting.

When we finally get what we think we wanted, we often do a poor job managing that asset. Look at the sad shape of our offices and bases-the Government Accounting Office says more than two-thirds are poorly maintained.⁴ Look at the poor quality of much of our information technology and the back-office functions it supports. Count the safety issues and starred deficiencies in a stack of reports from the Board of Inspection and Survey. all this, too, is inefficient, poor result from money that should have been used for our Navy's mission.

We are inefficient for four reasons.

* Too many of the management systems and business procedures we have in place do not meet the minimum standards of the business world.

* Our accounting system is so poor, much management inefficiency is invisible. The Defense Department cannot get a clean audit of its books.⁵ Were the Navy and its parent Department of Defense publicly held companies, the securities and Exchange Commission would shut them down for failing to keep their books as required by law.

* We mistakenly think we are managing costs when we manage budgets. We believe that if it is in the budget, it is an okay expenditure, and so each year we run all our budget lines to their limit, expecting Congress to refill them. No business could run this way. Budgets are not money; they are planning tools, never as useful to an enterprise as direct efforts to keep costs down and cultural values that encourage frugality.

Business accounting brings to bear a whole range of calculations and definitions to provide X-rays of fiscal health in real time: return on assets, sales, and investments; tracking of direct expenses and overhead; and myriad other financial computations. As important, all the key executives of a company know what these values are and where they are trending—much of business management is simply a pursuit to drive the numbers in the right direction, something nearly absent in the Navy. Contrast this with the availability and visibility of a typical ship or shore station's financial performance figures and the attention paid them by the Navy leadership team at the location and its superiors: in sum, poor, poor, and poor.

* Our ethics, both general and situational, are somewhat troubling. Navy culture relegates business matters to "management," usually derisively contrasted with "leadership," which Navy culture says we always should think is more important. So we go charging over the horizon in search of the enemy in ships we could have had more of, armed with weapons we could have had better of, had we paid management more attention and given efficiency its due. And we downplay our ethical and fiduciary duties to take good care of our nation's resources entrusted to us. In situations bearing directly on efficiency and spending, we make some poor choices, sometimes hiding the truth in program documents, fudging the results of weapon trials, diverting funds from intended use, and generally playing a bit free and loose with the taxpayers' money. People from the business world will tell you that some of the financial conduct regarded as acceptable in the Navy would get you fired in the business world. That is not necessarily because business has higher ethical standards, but because the conduct in question is harmful to the business. It is harmful to the Navy, too, and perhaps it is time to see and punish less than totally proper use of fiscal resources by Navy leaders.

Quality. In recent years in the business world, quality has become its own sphere, with powerful programs and tailored tools that go way beyond the casual know-it-when-I-see-it approach of the Navy. Why care? Because consistent products and services imbued with real quality reduce defects, lower costs, increase output, and permit expansion-of-scale for even greater efficiency.

Unfortunately for Navy mossbacks, quality systems also empower workers and hold leaders to standards. We have tried. When he was Chief of Naval Operations, Admiral Frank Kelso Initiated Total Quality Leadership. It foundered on the unwillingness of some admirals to relinquish personal power and prerogative to-mon Dieu!-a management system! It failed, too, for being mostly homegrown and uninformed by practices in the business world.

Quality programs sometimes are criticized as mere alphabet soup, but an enlightened corporation pursues a continually maturing understanding of quality that builds on individual programs tailored to the enterprise. In business, quality programs have certain characteristics: they are integrated, standardized, mandatory, and measured—attributes more needed in Navy business management.

Two quality systems stand out. One is the International Standards Organization's ISO 9001 Standard. The other is Six Sigma. Applying these to the Navy would be challenging, but so too for business. Yet, in spite of initial cost and effort, the business world has found a way to make the necessary investment, gaining objective excellence in their management, services, and product lines through ISO 9001 and finding tons of loose cash through Six Sigma. Businesses no longer carry on these challenging programs solely for their marketing value, though that may have started them on this path. Now most good companies rely on these systems or others like them simply to survive in the competitive world. The Navy's management system also needs the more disciplined, more structured framework of a good quality system, which might be less fun than the freewheeling we do today, but with more satisfying results.

What would change if the Navy did turn to the quality systems of the business world? Three things:

* Standardization would become universal. The Navy has much now that is standardized, but our biggest component, the surface Navy, traditionally has resisted improvements that would bring it up to the level of procedural standardization of the air and submarine forces.⁶ We also would better standardize how we ran our installations and how we manage our acquisition and support programs.⁷

* Unit assessments would change character. We now try to inspect-in quality, something W. Edwards Deming, the father of the quality management movement, called an impossible task. A true quality approach would look specifically at the production processes of intermediate maintenance activities, aviation depots, and shipyards and the day-to-day management processes of our ships, shore stations, training centers, supply depots, program offices, and systems commands. A new type of inspection—the management audit—would look at all the Navy's management systems, auditing their effectiveness as proved by objective measures. And for a ship grounding or collision, instead of the often-shallow analysis of root causes invariably faulting the captain, we would dig deeper, perhaps fixing equal blame on the commanding officer of the training center that trained the crew or on the immediate senior in command who certified it ready for its assignment.

* Continual improvement would become real. Businesses constantly mine their in-house experts for innovation and better processes, as well as benchmarking themselves against other successful businesses. Similar pursuit of innovation is not well done in the Navy—no standard, effective process exists to turn fleet experience and good ideas into Navy-wide improvements.

People. Most businesses are like the Navy: their major capital asset is their human capital—the leaders and workers who form the enterprise. Even in an asset-intensive military service such as the Navy, nothing works, no goals are met, no battles are won without good people. But our use of good Navy people is unfocused and wasteful.

Unfocused? The lessons business has learned from the quality movement are summed in a single phrase: Mission Matters Most. But for Navy people, careers intrude, as does unwillingness to sacrifice a unit's resources to higher mission need. We are especially greedy about body counts, from the Chief of Naval Operations who measures his merit on the number of active-duty sailors,⁸ to the unit commander seeking more-than-full staffing, to the office trying to pump up its civil-servant count to justify a higher paygrade for its supervisor.

In all these matters, we act less like a publicly held company and more like an employee stock ownership plan (ESOP), in which the employees are also the owners. ESOPs have strengths, but all have one weakness: their undying affection for their own employees. Most businesses regard their people as another necessary cost, fungible with other spending and to be shielded, enlarged, and nurtured only to the extent that hard-nosed mission requirements justify the expense. Parts of the Navy manage people as a resource on both the funding and the billet sides, but generally we treat our human capital as our most sacred holding, to be preserved and enhanced at all cost. How much better off we would be if we emulated industry and used people purely for their contribution to Navy output, making our personnel decisions on a dollar-and-cents accounting of mission impact. If we did that, we would see that more is not always better.

We also would quickly see how wasteful are the constantly churning reassignments of our personnel rotation system. Business does not move people around very much—it costs too much. Managers and leaders have some mobility, but the rank-and-file stays mostly at one location. Why not in the Navy? Careers. Careers drive rotations more than any other factor. But seen through a business lens, our insistence on regular rotations is much too expensive for its gain. There must be some other way to manage careers and best use our people during their service. The Navy is overdue for a cost-driven review of its rotation patterns.⁹ What is in place now would not last five minutes in the business world.

Careerist thinking also brings a second form of waste, the human toll of rejecting rather than protecting good people who fail to promote. No business with an up-or-out personnel system could do well, yet we think this approach is somehow a permanent fixture.10 Instead of casting aside good people who do their current jobs well, we should look for ways to continue using them without regard for their suitability for higher assignments. The Royal Navy has figured this out, deliberately keeping on active duty long past possible promotion the nautical equivalent of the Iron Major, never to be advanced but always there with dedication and unmatched expertise built through decades of experience.

The whole of our promotion and assignment system is ripe for challenge. These areas in the business world are profoundly different in their goals and their mechanization, putting mission ahead of individual careers, producing greater dollar savings, creating a stronger workforce that retains its true experts, and treating the enterprise's good people with kindness even if they are not striking to become the chief executive officer.

Recommendations

In business, the heavy lifting of change management is done through strategic planning. Good strategic planning is willing to state issues worthy of challenge even if their resolution is not clear, identifying important things to tackle and letting smart minds do the tackling. Applied to the Navy's management inefficiency, lack of a quality system, and painful personnel system, these proposals for action recommend themselves:

* Study business. Navy people now learn business only after they have retired-let's change that. Send our officers and civil servants into the private sector to learn, on exchange tours and scholarships. Make a complete foundation in business management a primary goal in both undergraduate and postgraduate officer education programs. Develop ways to hire people with business expertise earned in the private sector into management-intensive Navy programs and support organizations. Study business at the personal level, too, the way business leaders do every day. Read the Wall Street Journal, the business sections of the New York Times or The Washington Post. Read Business Week or Barron's or The Economist or Fortune or Forbes. Read The Balanced Scorecard and other seminal management books. Read.

* Fix the Navy first. The Navy is a military culture as well as a business unit of the holding company that operates it, the Department of Defense. And it has a terribly complex ownership structure, with 535 elected representatives on its board of directors and nearly 300,000,000 shareholders. We are seeing some movement toward greater efficiency in all three of these outside realms, but if we wait for these larger operations—the military mind-set, the DoD bureaucracy, and Congress—to straighten themselves out and hand us the Navy fix, change always will badly lag the need for it. In business, operating units that innovate well are treasured, serving as pathfinders for the organization as a whole. An innovative Navy that works hard to run a good business will lead the way for others—and always be where it wants to be: ahead of the competition, be that another service or the enemy's fleet.

* Fix the accounting system. If you cannot see it, you cannot manage it.

* Become penurious. Hammer down all costs everywhere all the time. Reward frugality. Put the money saved into mission-critical expenditures.

* Take another shot at a quality management system, and this time make it work. Total Quality Leadership failed, but the need that led to its creation remains. ISO 9001's rigor and Six Sigma toughness are what the Navy needs.

* Overhaul the Navy personnel system. Top to bottom. Challenge all assumptions. Change our thinking from careerist to mission based. End senseless relocations. Keep the smart people even if we cannot promote them. Cut end-strength to necessity. Use dollars to keep score.

* Get agile. Combat is the land of the quick and the dead. Business is, too. Business knows that what does not change is in the dead zone. Pursuit of perfection may be folly, but pursuit of the better way is the inescapable imperative. The Navy's vital mission does not permit complacency. The business world has answers. Go there. Change.