SECDEF Corporate Fellows Program FINAL REPORT of the

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SECDEF Corporate Fellows Program FINAL REPORT of the Secretary of Defense Corporate Fellows Program 1999 -2000

SDCFP Background SECDEF Corporate Fellows Program l SECDEF concerns for future Service leaders – – – Open to organizational and operational change Recognize opportunities made possible by info tech Appreciate resulting revolutionary changes underway l l l Affecting society and business now Affecting culture and operations of Do. D in future Businesses outside Do. D successful in: – – Adapting to changing global environment Exploiting information revolution Structural reshaping/reorganizing Developing innovative processes 2

SDCFP Origin SECDEF Corporate Fellows Program l RMA Senior Steering Group recommended: - SECDEF Fellows Program - SECDEF Strategic Studies Group - Other (Concept Development Center, etc. . ) l Established by SECDEF memo - October 6, 1994 l Do. D Directive 1322. 23 - September 2, 1995 3

SDCFP Organization SECDEF Corporate Fellows Program l l Two officers from each Service (USMC one) - High flag/general officer potential - O-6 or O-5 - Senior Service College credit (except Army) Eleven months at Sponsoring Company Group Education Permanent Staff - SDCFP Director, Admin Asst. - USD(P), USD(A&T), Net Assessment for oversight - National Defense University for Admin support 4

SDCFP Objectives SECDEF Corporate Fellows Program l Report and Briefings directly to Sec. Def, others – – l Business insights relevant to Do. D culture/operations Recommended process/organization changes Build a cadre of future leaders who: – – – Understand more than the profession of arms Understand adaptive and innovative business culture Recognize organizational and operational opportunities Understand skills required to implement change Will motivate innovative changes throughout career 5

SDCFP Results SECDEF Corporate Fellows Program l Program objectives fulfilled - Education, education - More Sponsors than Fellows available - Inter/intra-group experience sharing l Unique corporate experiences - Strong corporate support - Executive/operational level mix - Mergers/restructuring 6

SDCFP Sponsors SECDEF Corporate Fellows Program l 99 - Prior – l American Management Systems, Andersen Consulting, Boeing, CNN, Caterpillar, Citibank, Cisco Systems, Direc. TV, Fed. Ex, Hewlett-Packard, Lockheed Martin, Loral, Mc. Donnell Douglas, Mc. Kinsey & Co. , Microsoft, Mobil, Netscape, Oracle, Northrop Grumman, Pricewaterhouse. Coopers, Raytheon Systems, Sarnoff Corp, Sears, Southern Company, Sun Microsystems 00 - 01 – ABB, Agilent Technologies, Andersen Consulting, Caterpillar, Enron, Human Genome Sciences, Northrop Grumman 7

1999 -2000 Fellows SECDEF Corporate Fellows Program l LTC Keith Armstrong Mc. Kinsey & Co. Houston, TX l RADM(S) Steven Enewold Lockheed Martin Gaithersburg, MD l Lt Col Brenda Johnson Sarnoff Corporation Princeton, NJ l Col Darren Mc. Dew Sun Microsystems Palo Alto, CA l CDR Burt Palmer Citigroup New York, NY l Col Art Sass Federal Express Memphis, TN 8

Mc. Kinsey & Company SECDEF Corporate Fellows Program l World-wide management consulting firm – 40+ countries; 86+ offices; 6500+ employees – $2. 0 B+ annual revenue; sustained growth > 15% since creation – Cradle for future CEO’s (IBM, AMEX, Delta Airlines, Starbucks. . . ) l Mission – – – l Create value; help clients make lasting performance improvements. Build a firm able to attract and retain exceptional people. 100%3 (Firm, Time, World) Corporate culture vs. Military culture – – Similar: Up or out, Very high attrition, Firm success at the expense of Quality of Life Different: Non-hierarchical, flat organization; Personal value creation; $$ based motivation 9

Mc. Kinsey & Company Observations SECDEF Corporate Fellows Program l War for Talent – – – Universal goal: find, recruit, develop, and retain the best l Demand for top talent is exploding…supply is not Talent becoming migratory / reduced loyalty to the institution l Over 70% passively seeking new employment l Small, start-up companies gaining share of the market Economic boom used as a crutch to explain away talent problems l Money is a player, but not the key lever in a decision to leave or stay Corporate culture is a major lever l Contact w/ leaders Flexible work schedules l Autonomy & responsibility Recognition & rewards l Dual income family accommodations Aggressive / innovative HR methodologies mandatory 10

Recommendations SECDEF Corporate Fellows Program l l Recognize we have a Talent/Human Resources problem Apply resources to solve the problem. . . or be prepared to pay a higher price – – l Revise the personnel selection and assignment process – l Longer tour length Create new recruiting and retention strategy – – – l Improve quality of life (food stamps, medical, housing, dual income families, stabilized assignments, selective telecommuting) Incentive programs for high priority skill sets Recruit early - take Do. D into the middle-school classroom Partner with industry to recruit like skill sets Vesting Options Bring full financial service to Do. D; outsource DFAS – One-stop shopping (Financial, Insurance, Investments ) 11

Lockheed Martin Mission Systems SECDEF Corporate Fellows Program l 4% of Lockheed Martin Corporation sales ($900 M) – – IT Company in an Aerospace Corporation Three business lines (Commercial, Defense, Space) l “Large Complex System” integration and support (US Census , GCCS, Space Ranges- West) l Environment- “Dealing with Adversity” l Do. D Mirror Image l Direct Applicability to Do. D 13

Observations/Recommendations SECDEF Corporate Fellows Program l Commercial v. government procurements – – – l Simplicity v. Complexity Trust v. Checks & Balances Continuous v. Staged Communication Speed v. Fairness Market Value Pricing v. Cost Breakdown Reputation v. Fee Structure Procurement Recommendations – – Establish commercial business model vision Determine “set” of changes to reduce complexity, open communications, and generate trust 14

Observations/Recommendations SECDEF Corporate Fellows Program l Process excellence – – – l Carnegie-Mellon Capability Maturity Models (CMM) - Industry Std Unique online Process Asset Library Recommendation: Endorse process excellence and web-based access to current Do. D documents. People Programs – – Effective Processes l Mentor’s role l Challenge and responsibility Recommendations: l l Develop individualized retention packages using non-pay related benefits. Conduct a "self evaluation" of the Do. D Personnel Management 15 System using CMM for People.

Sarnoff Corporation SECDEF Corporate Fellows Program l The Company – – – – Founded in 1942 as the RCA research lab For-profit subsidiary of SRI International since 1987 Innovative electronics-based research organization 750+ employees, $130 M revenue, two new patents every week 19 successful spin-offs, first IPO in May 00, more soon Contract R&D, manufacturing, and recently an Internet Incubator Balance in tech creativity and business discipline l l Scientists & engineers into entrepreneurs, PMs, and leaders Assignment: Life Sciences and Systems Business Unit – – All phases of technology venture development and execution Strategic planning, change leadership, & process improvement Biotechnology (two ventures, brainstorming, DSB Task Force) Do. D-Sarnoff R&D Strategic Supplier Alliance l Breakthrough Rapid Improvement Team (RIT) 17

Observations/Recommendations SECDEF Corporate Fellows Program l l l Technology = survival of the smartest Do. D not aggressive in tracking/contacting the marketplace Do. D access to technology is decreasing – – Intellectual Property is key - more security means less talk & pubs Do. D seen as a slow, unprofitable & fragmented market l l l l Intellectual property is only useful if it creates value sooner than later Can’t find the right Do. D customer, R&D rarely transitions to warfighter Marketplace going at hyperspeed; Do. D takes too long, too many stakeholders, untimely payments, full & open competition, low fees Cost sharing favors large, established companies- NOT new ventures Expand use of strategic alliances (R&D, National Technology Alliance), spin-offs (CIA’s In-Q-Tel), govt teaming, commercial-like contracts People are like PCs – bio-hacking, bugs, reprogramming, enhancers Concerns: Ethical use of technology, David & Goliath issues 18

Observations/Recommendations SECDEF Corporate Fellows Program l l l No integrated approach to biotech No real defense for bio attack Five key breakthroughs needed - Biosensors & Diagnostics - Sequence unknown pathogen DNA - Map protein molecular structure & find binding sites for drug molecules - Design and test antigens rapidly with confidence & safety - Go from experimental drugs to high volume production & delivery l l Need “National Strategy” with crossgovernment and industry cooperation One proposal (many out there): – – Pathogen Genome Detection and Countermeasure Process - Current “Bug to Drug” cycle is 5 -10 years - Need to get down to months or weeks The Engineered Pathogen Identification and Countermeasures (EPIC) Program Sarnoff working with Congress and briefing 2 DSB Task Forces 19

Sun Microsystems SECDEF Corporate Fellows Program l The company – A teenager in the Silicon Valley—founded in 1982 l – 35 K+ employees; $15 B+ revenue; #150 in fortune 500; $163 B market cap Undergone continuous innovation and reinvention since 1982 l "The network is the computer". . . and still is l Refocused: workstations to enterprise servers and software to services l Today: “We’re the dot in. Com” and… the “O in the Old Economy” l l Vision: #1 provider of products, technologies and services for enabling the net economy Assignment : Assistant to VP, Chief Information Officer (CIO) – Contributions to Sun l l Active member of Sun’s staff: Information Management Group, Leadership Council, Public Policy Forum Do. D ambassador; leadership “consultant”; disciplined perspective 21

Sun Microsystems Observations SECDEF Corporate Fellows Program l Technology big bets – – – l Business strategy – – – l l Focus on core competencies 1 st Acquire to build business position; partner to fill gap “e-” everything or mothball it! Strategic planning horizon: 20 months v. 20 years @ Do. D Innovation and speed to market valued and highly rewarded – l Service driven network: applications delivered to the browser Massive scale: bandwidth costs declining 30 -50%; usage up 3 -4 X Continuous, real-time availability mandatory Challenging work, compensation packages keep the best Greatest strength (agility) is also greatest weakness Leadership gaps negatively impacts retention and execution Being the UNIX employer of choice aids recruiting! 22

Recommendations SECDEF Corporate Fellows Program l Accelerate transition to electronic environment – – Use Do. D expertise to get security procedures right Partner to develop “My. Military. mil” portal l – Grant universal internet access to troops l l – Cell phone & laptop OR desktop PC w/ desk phone…not both “Smart card” must include additional applications l – Perfect for the Pentagon…billions in savings Totally Wireless for workers authorized cell phones l – Leverage economic position: FREE internet service and PCs Remove barriers: MILCON, financial, hardware, policy Invest in “thin client” architecture l – Personalized, content-rich service…anywhere, anytime Web enable ALL tools and processes Great way to “advertise” to present and future workforce Purchase card, Credit card, Club card, building access Outsource non core IT function; insist on interoperability 23

Citigroup SECDEF Corporate Fellows Program l World’s 2 nd largest full service financial firm – – – l Customer Trust – – l 100+ countries, 200 K+ employees, 100 M+ customers 1 trillion dollars in financial transactions daily Two Products: Money and Customer Trust Citicorp hacked in 1994 Can’t let it happen again Built financial industry’s best Info Security framework Elevated level of responsibility to top management Assignment: Corporate Information Security Office (CISO) – Global corporate business oversight 25

Citigroup CISO Observations SECDEF Corporate Fellows Program l Info security program based on informed risk, information ownership, top management responsibility – – l Industry facing same challenges as Do. D – l Information is an asset, not a resource A leadership, not just technical, issue Inherently insecure architecture Challenges harder as technology change quickens – Globalization, e-commerce, COTS, outsourcing, open architectures, wireless, miniaturization – Rush to market often more urgent than system security 26

Recommendations SECDEF Corporate Fellows Program l Can’t assume a system is secure until you test it. – – l Do. D needs to play a leadership role in driving national information infrastructure security – l Citigroup tests every system prior to fielding Info Security is an operational requirement Partnering Opportunity Hire, train and retain the best – – – Info Security personnel shortage; demand high Join because organization seen as the best Stay because: leadership, challenging work, QOL, pay 27

Federal Express SECDEF Corporate Fellows Program l World’s largest express-transportation company – – – l Serving 210 countries worldwide Employees: 156, 000 Revenues 1999: $17 Billion Ground Transport Vehicles: 44, 500+ Aircraft Fleet: 650 (air cargo fleet second only to USAF) Assignment: Fed. Ex Strategy Core Team – – – Embed strategic thinking throughout the company Identify potential future market spaces Validate market spaces against plausible realities (scenarios) 29

Federal Express Observations SECDEF Corporate Fellows Program l Strategic Planning (6 -18 Months) – l l Flexible budget process accommodates changes in strategic plan Recruiting/Retention Issues – – l Approximately 22% annual turnover (mostly lower levels) Morale among tenured employees (12+ years) Operate Independently- Compete Collectively – l Short-term, narrow scope Fed. Ex: Express, Ground, Custom-Critical, Logistics Transportation/Distribution/Information Network – “Best in the world”? 30

Recommendations SECDEF Corporate Fellows Program l Invest in an all out effort to integrate military logistics throughout Do. D -- REINVENT where necessary… – – – l l Emphasize distribution over transportation Integrated information network Continue to explore and invest in Web-based technology Don’t let best get in the way of better Do. D must posture itself for highly skilled personnel – Better to partner than compete with Corporate America 31

Common Observations/Recommendations SECDEF Corporate Fellows Program l Operational Change l Organizational Change l Transformation l Service and Do. D Implications 32

Common Findings SECDEF Corporate Fellows Program l l l l l Human Resources Dealing with Do. D Information Technology Information Security Technology Use/Access Strategic Planning/Resource Allocation Business Best Practices Partnerships/Alliances/Teaming Internal Organization 33

Andersen Consulting Human Resources Common Findings Observations/Recommendations SECDEF Corporate Fellows Program l Renew focus on Do. D strengths for recruiting – – l Ensure leaders understand impact; assigned HR accountability – – l l l Institutional values … duty, honor, country Leadership development, education and training Challenging work, significant responsibility at early age Gender & race-blind mentoring - diversity as a strength Performance report comment Help Do. D close cultural divide with civilian community Carefully manage the top 10% … and the bottom 10% Benchmark “Fortune 100” - become equivalent War for Talent EXISTS - no easy fix; apply all available resources now or experience greater costs later Intellectual property, intangible assets more valuable than fixed assets Talent migratory; long-term dedication, loyalty waning 34

Andersen Consulting Human Resources Common Findings Observations/Recommendations SECDEF Corporate Fellows Program l l Money NOT only key lever to attracting & retaining top talent Increase total compensation and benefits package – – – Tax exemption options Launch “Mileage Plus” frequent flyer program Match market value Reduce gap between officer and enlisted salaries Build “Perks@work” web site; leverage Do. D buying power l l Raise QOL attention to detail; use new methods and techniques – – Gen-X is different, not better or worse Recruit individuals; retain families Vet new ideas outside the Pentagon Pick “low hanging fruit”; do easy fixes … quickly l l Provides one-stop shopping for employees Robust health and dental plans, dual worker family plans, adult day care, telecommuting, on-site child care, hospice services, major signing bonuses, incentive pay, investment packages (TSP or 401 K for active duty) Develop military to civil service transfer plan 35

Dealing with Do. D Common Findings SECDEF Corporate Fellows Program l Dealing with Do. D – Companies: don’t care, can’t get in, frustrated l l l Don’t care - commercial business booming Can’t get in - funded sponsor identification Frustrated - complex burdensome system – – l – Recent DSB findings similar Reach out to industry (on their turf) l – Multiple customers and checkers Cost accounting standards with audits Funding instability Low fee structures Barriers to entry, fee structures, partnering enticements Determine “set” of changes to reduce complexity, open communications, and generate trust 36

Information Technology Common Findings SECDEF Corporate Fellows Program l Accelerate INFOTECH transformation to electronic environment – – Use Do. D expertise to get security procedures right Partner to develop “My. Military. mil” portal l – Grant universal internet access to troops l l – Perfect for the Pentagon!…billions in savings Totally Wireless for workers authorized cell phones l – Remove barriers: MILCON, financial, hardware, policy Leverage economic position: FREE internet service and PCs Invest in “thin client” architecture l – Personalized, content-rich service…anywhere, anytime Web enable ALL tools and processes Great way to “advertise” to present and future workforce Cell phone & laptop OR desktop PC w/ desk phone…not both Outsource non core IT function; insist on interoperability 37

Information Security Common Findings SECDEF Corporate Fellows Program l Information Security – – – Cyber attacks increasing Do. D and commercial systems similar Firewalls ONLY PARTIALLY effective l – – Information protection requires training and tools Commercial systems (banking) are the edge leading l l l – – “Off-the-shelf” hacking tools available Centralized IT management Network monitoring Intrusion detection and tracking Ethical hacking required before fielding systems Recommendation: Partner with industry for process, training and tools 38

Technology Use/Access Common Findings SECDEF Corporate Fellows Program l Do. D use of Technology (Infotech, Biotech, Nanotech) – Need Board/Council for the Ethical Use of Technology l l – – – l Personnel privacy/security concerns w/ DNA collection and use Partner with industry on potential use of Do. D DNA database Train personnel on biotech & nanotech just like for infotech Need new doctrine, strategy, tactics, international agreements Integrate approach for biotech & nanotech acquisition and use “David & Goliath” studies to look at vulnerabilities & asymmetrical attacks Outsource everything not core to Do. D needs Commercial Mindset to access Technology – – Consider R&D as a commercial service; max use of commercial-like contracting Conduct Entrepreneurial training for all personnel Provide all Do. D personnel online access to best business literature & tools Use “Commercial front door” l l – – Databases connecting Do. D with enterprises and vice versa Organization/infrastructure to support commercial interface Send 50% of Defense Leadership and Management Program (DLAMP) to industry Integrate Do. D personnel working in industry using common web umbrella l l Enhances interaction across programs and participating sponsors Use Change Management Center’s Commercial Business Environment? 39

Strategic Planning/Resource Allocation Common Findings SECDEF Corporate Fellows Program l Strategic Planning – – Everybody talks it, few actually do it “Strategic window” shorter than Do. D l l 6 to 20 months v. 20 years Short-term window drivers – – – l Competition Technology Business Environment Resource allocation – – Flexible processes support strategic plans Do. D’s resource allocation plan must be more flexible 40

Business Best Practices Common Findings SECDEF Corporate Fellows Program l “Executives” must understand more than profession of arms – – l No price is low enough for a bad buy; avoid “deal fever” – l – – l Create shared need: reason must be instilled In organization Shape vision: desired outcome must be clear, widely understood Fully Commit: key people must invest, demand attention Make change last: learning transferred throughout organization Monitor progress: set benchmarks, establish accountability Install trained CIO at wing/brigade level “Smart card” must include additional applications – l As important to kill a bad acquisition as to close a good deal! Treat change acceleration as a process: have a champion – l Military and civilian; officer and enlisted Initiate “business” training at commissioning source & PME Purchase card, credit card, club card, building access Leadership conferences reinforce values and vision 41

Partnerships/Alliances/Teaming Common Findings SECDEF Corporate Fellows Program l l l Determine core competencies first Build on TRUST; must be win-win Look for long term commitments for non-core competencies – Re-compete only if necessary l l Develop web-based business partnering database – – l Complicates planning and execution for all parties Accessible to government and Industry Facilitates inter-service/agency teaming and benchmarking Outsourcing is a partnership—not just a hand off 42

Internal Organization Common Findings SECDEF Corporate Fellows Program l Agile & fast are the most important attributes – – – l Flexible, task organized, not hierarchical Decision-making and execution mostly decentralized Business models keep pace with the marketplace Org structure keeps pace w/ new business strategies Dedicated change agents, top-line outside consultants Very customer oriented (internal and external) – Want repeat and new business l l – l Resolving issues quickly is key Quality check with customer surveys Automated support (pay, travel, legal, IT, financial, etc. ) Dynamic & very proactive top leadership – No transformation without it 43

SECDEF Corporate Fellows Program Backup Slides 44

(Backup) SARNOFF CORPORATION OBSERVATIONS AND RECOMMENDATIONS SECDEF Corporate Fellows Program Do. D-Sarnoff Strategic Supplier Alliance RIT (Research and Development Partnerships) Purpose: Make contracting with government more "commercial like" to encourage emerging firms and companies developing technology to provide government access to the new technology Why Sarnoff? • A dual use business model • A leading R&D company in both commercial and government markets • 18 Sarnoff Technology Ventures • Strong connections to the Venture Capital community RIT Proposed Solution: • Operationalize a “could be” process for working with both Sarnoff and its commercial spin-off/start-up technology ventures Implementation Action Plans: • Create training to apply O. T. and Commercial Contracting practice to R&D partnership • Develop contract template for O. T. and Commercial Contracting practice for Sarnoff • Establish basis for a commercial pricing model for R&D across Do. D • Target projects to test “Could Be” process and contract templates • Clarify requirements for making R&D a commercial item designation • Begin a web-based market outreach effort to match Do. D needs to start-up capabilities 45