This probably isn’t much of a news flash, but a lot of people developing budgets in the federal government don’t think the budgets are producing results.
John Saaty, president of Decision Lens, shared with me survey results from a recent conference of the American Association for Budget Program Analysis. A core group of the attendees were budgeteers from the federal government. Budgeteers is Saaty’s’s word, but I like it.
- 58 percent see no clear link between budget outputs and outcomes.
- 5 percent don’t know what the outcomes are.
- 50 percent cannot produce the full cost of programs and activities.
- 32 percent say they have only a rough cost allocation method.
- 83 percent said the best place to find waste is in high and low priority programs.
Folks, those are some pretty distressing results, particularly in today’s tough budget environment because if you can’t do those things, how do you make budget cuts without unnecessarily damaging your agencies’ budget? The answer is, you can’t.
One of the culprits is that agencies don’t use a systematic process of prioritization, Saaty said. And yes, Decision Lens makes a product for that, but he and his company have produced a report that outlines seven criteria for making intelligent budget cuts, and prioritization is just one of the seven.
1. Target Setting
What is the impact of a specific topline target?
2. Budget Scrub
How will funds be spent?
What programs/activities are least important?
4. Results Analysis
Which outputs contribute the most to priority outcomes?
5. Cost Analysis
What is the cost of producing an output?
How efficient is each process?
What is the relative return on investment for outputs?
While Saaty didn’t say this, it seems to me that each of these areas represents a business opportunity for contractors who want to help agencies weather this budget cutting era.
While the seven steps seem logical and almost obvious, it doesn’t make them any easier to do, he said.
Part of the challenge is that the process blends qualitative and quantitative data, and it creates a system of prioritization and tradeoffs.
And it is different; “The biggest hurdle is cultural,” he said.
Decision Lens has customers across the government, including the Joint Improvised Explosive Device Defeat Organization at the Defense Department, the Army Special Operations Command, the Agriculture Department, Coast Guard and FAA. So, the idea does resonate.
Interestingly, the roots of Decision Lens, founded by Saaty and his brother Daniel, goes back to their father, who worked at the State Department on nuclear weapon treaty negotiations.
Thomas Saaty developed the analytical hierarchy process, or AHP, to use math and psychology to make complex decisions.
In a nutshell, it’s a process for identifying priorities, outcomes, criteria and other factors in making a decision. Numerical values are assigned, and then you can analyze the impact of different decisions on your outcome.
The Saaty brothers used AHP to found Decision Lens in 2005.
The process isn’t just for budgets. Decision Lens counts a few professional sports teams as customers, including the Green Bay Packers, the Oakland A's and the Arizona Diamondbacks.
Posted on Apr 25, 2013 at 10:29 AM0 comments
Listen to the earnings calls from Northrop Grumman and General Dynamics, and they will closely follow the themes struck by Lockheed Martin the day before: When it comes to sequestration, the impact so far is minimal.
But the key part of that question is “so far.”
The fact of the matter is, no one knows yet what sequestration will mean.
“Getting the full year 2013 budget was a major upside for our planning, but the final sequester impact by program has not been communicated by our customers,” is what GD Chairman and CEO Phebe Novakovic said on a call with analysts.
“Uncertainty remains on the implementation of sequestration,” said Northrop Chairman and CEO Wes Bush, during his analyst call.
The likely scenario is little impact in 2013, but 2014 is a different story. While Lockheed Martin put a $850 million price tag on sequestration in 2014, GD and Northrop only said it will have a negative impact. In other words, revenue will likely go down.
Some interesting observations:
Information systems businesses are considered shorter-cycle businesses compared to the aerospace and defense businesses. Shorter cycle means a quicker impact from sequestration, but also a quicker rebound when the market picks up.
Troubled programs, as well as programs that are in the developmental phase, are generally the first targets of cuts in a down market. The lesson here: The focus has to be on performance.
The hunt to suck out costs at all levels continues and is intense. This means more layoffs are possible.
The third and fourth quarters of 2013 – which are the fourth and first quarters of the government’s fiscal 2013 and 2014 – should bring more clarity to sequestrations impact.
Other factors that might have a negative impact on budgets include the upcoming debt ceiling debate expected this summer, and Defense Sec. Chuck Hagel’s strategy review.
The big takeaway for me is that sequestration is here, but what it means isn’t clear other than that people know it will have a negative impact. Those are tough conditions to run a business in.
With the diversity of their businesses, Lockheed, Northrop and General Dynamics might have more of a cushion right now in regards to sequestration. Some parts of their business may counteract cuts in other parts. As CACI, ManTech, NCI, SAIC and the other more IT focused companies report their earnings in the coming weeks, we should get a clearer picture of the potential impact of sequestration on the IT market.
But then again, maybe not.
Posted on Apr 24, 2013 at 12:55 PM0 comments
The quarterly reports for many defense and IT contractors will be coming out over the next couple of weeks, and we’re sure to get some more insights into the market and to the impact of sequestration.
One of the interesting things about quarterly reports is that they simultaneously give you a look back and a look forward.
First out of the gate is Lockheed Martin. Northrop Grumman, L-3 Communications and General Dynamics follow later this week. Others will be coming later this month.
Some highlights from Lockheed:
- Sales for the quarter dropped $200 million, falling to $11.1 billion from $11.3 billion.
- Sequestrations impact has been limited so far.
- Revenue for the Information Systems and Global Solutions is up slightly to $2.1 billion, compared to $2.09 billion for the quarter a year ago.
The engine behind IS&GS's positive results was work under the Defense Information Systems Agency's GIG services management and operations contract, as well as the National Science Foundation's Antarctic Support contract.
But there were lower sales in other areas, particularly the Next Generation Identification and Centers for Medicare and Medicaid Services' Consolidated IT Infrastructure Contract, and the Outsourcing Desktop Initiative for NASA contract.
That’s the "looking backward" portion of the quarterly report. Looking ahead, things get murkier thanks to the S-word – sequestration.
The company, and I expect the other contractors to sing a similar tune, haven’t been told yet by customers what specific sequestration decisions have been made, except in very limited circumstances.
In light of that, the company is using high level estimates of the impact. It expects a reduction in revenue in 2013 of $825 million. The company now thinks revenue to be on the low end of its $44.5 billion to $46 billion outlook.
The company makes an interesting assumption about sequestration, most likely based on conversations with customers.
Sequestration cuts will be achieved through delays and deferment of new program starts instead of modifying or restructuring contracts. Existing contracts have obligated schedules and delivery requirements. Makes sense to me. If the government cancels or restructures contracts, it could cost them more money than it saves. (My words, not Lockheed’s.).
“While the impact of sequestration on our business has been limited to date, we continue to work closely with our customers to better understand the future impact sequestration may have on our programs,” CEO Marillyn Hewson said in a statement.
Indeed, I expect that’s going to be a common refrain among executives for the next six months.
Posted on Apr 23, 2013 at 1:18 PM0 comments