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26–498 PDF 2017

$125 BILLION IN SAVINGS IGNORED: REVIEW OF 

DOD’S EFFICIENCY STUDY 

HEARING 

BEFORE THE

COMMITTEE ON OVERSIGHT 

AND GOVERNMENT REFORM 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

MARCH 21, 2017 

Serial No. 115–19 

Printed for the use of the Committee on Oversight and Government Reform 

( 

Available via the World Wide Web: http://www.fdsys.gov 

http://oversight.house.gov 


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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

Jason Chaffetz, Utah, Chairman 

John J. Duncan, Jr., Tennessee 

Darrell E. Issa, California 

Jim Jordan, Ohio 

Mark Sanford, South Carolina 

Justin Amash, Michigan 

Paul A. Gosar, Arizona 

Scott DesJarlais, Tennessee 

Trey Gowdy, South Carolina 

Blake Farenthold, Texas 

Virginia Foxx, North Carolina 

Thomas Massie, Kentucky 

Mark Meadows, North Carolina 

Ron DeSantis, Florida 

Dennis A. Ross, Florida 

Mark Walker, North Carolina 

Rod Blum, Iowa 

Jody B. Hice, Georgia 

Steve Russell, Oklahoma 

Glenn Grothman, Wisconsin 

Will Hurd, Texas 

Gary J. Palmer, Alabama 

James Comer, Kentucky 

Paul Mitchell, Michigan 

Elijah E. Cummings, Maryland, Ranking 

Minority Member 

Carolyn B. Maloney, New York 

Eleanor Holmes Norton, District of Columbia 

Wm. Lacy Clay, Missouri 

Stephen F. Lynch, Massachusetts 

Jim Cooper, Tennessee 

Gerald E. Connolly, Virginia 

Robin L. Kelly, Illinois 

Brenda L. Lawrence, Michigan 

Bonnie Watson Coleman, New Jersey 

Stacey E. Plaskett, Virgin Islands 

Val Butler Demings, Florida 

Raja Krishnamoorthi, Illinois 

Jamie Raskin, Maryland 

Peter Welch, Vermont 

Matthew Cartwright, Pennsylvania 

Mark DeSaulnier, California 

John Sarbanes, Maryland 

JONATHAN SKLADANY, Staff Director 

WILLIAM MCKENNA, General Counsel 

CORDELL HULL, Senior Counsel 

BRICK CHRISTENSEN, Senior Military Advisor 

SHARON CASEY, Deputy Chief Clerk 

DAVID RAPALLO, Minority Staff Director 


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C O N T E N T S 

Page 

Hearing held on March 21, 2017 ............................................................................ 1 

WITNESSES 

Mr. David Tillotson III, Acting Deputy Chief Management Officer, U.S. Department of Defense 

Oral Statement ................................................................................................. 5 

Written Statement ............................................................................................ 7 

Mr. Scott Rutherford, Senior Partner, McKinsey & Company 

Oral Statement ................................................................................................. 14 

Written Statement ............................................................................................ 16 

Mr. Michael Bayer, Chairman, Defense Business Board 

Oral Statement ................................................................................................. 21 

Written Statement ............................................................................................ 22 

Mr. Robert ‘‘Bobby’’ Stein, Former Chairman, Defense Business Board 

Oral Statement ................................................................................................. 25 

Written Statement ............................................................................................ 27 

Mr. Kenneth ‘‘Kenny’’ Klepper, Former Board Member, Defense Business 

Board 

Oral Statement ................................................................................................. 29 

Written Statement ............................................................................................ 31 

Mr. Lawrence J. Korb, Ph.D., Senior Fellow, Center for American Progress 

Oral Statement ................................................................................................. 59 

Written Statement ............................................................................................ 61 


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$125 BILLION IN SAVINGS IGNORED: REVIEW 

OF DOD’S EFFICIENCY STUDY 

Tuesday, March 21, 2017 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, 

Washington, D.C. 

The committee met, pursuant to call, at 10:25 a.m., in Room 

2154, Rayburn House Office Building, Hon. Jason Chaffetz [chairman of the committee] presiding. 

Present: Representatives Chaffetz, Duncan, Issa, Jordan, Amash, 

DesJarlais, Massie, Meadows, DeSantis, Walker, Blum, Hice, Russell, Grothman, Hurd, Palmer, Cummings, Maloney, Norton, 

Lynch, Connolly, Kelly, Lawrence, Watson Coleman, Plaskett, 

Demings, Krishnamoorthi, Raskin, Welch, DeSaulnier, and Sarbanes. 

Chairman CHAFFETZ. The Committee on Oversight and Government Reform will come to order. 

And, without objection, the chair is authorized to declare a recess 

at any time. I appreciate you all being here. We have an important 

topic today to talk about the potential of $125 billion in savings 

that has been ignored, and we’re going to have a discussion about 

the review of the Department of Defense’s efficiency study. 

On December 5th of 2016, The Washington Post reported on a 

Department of Defense study that found the Pentagon could potentially save $125 billion over 5 years on back-office, noncombat expenses. The Post’s story detailed the desire of DOD leadership to 

squelch the findings of the Defense Business Board—sometimes referred to as the DBB, but the Defense Business Board—for fear 

that the Congress would ultimately end up cutting their budget. 

That is the concern. 

The DBB is an advisory board commissioned by the Pentagon to 

provide independent advice and recommendations with regard to 

governance and management at the Department of Defense. For 

the study, the Defense Business Board was charged with finding 

savings the Pentagon could recapitalize into more troops, more 

ships, and more planes. Enlisting the management consulting firm 

of McKinsey & Company, one of the premier consulting companies 

we have in this country, the DBB spent months analyzing the Pentagon’s business systems and back-office operations. The result of 

the report concluded the Department of Defense could save billions 

from overhauling its back-office functions, including contract management, IT, business processes, real estate, and human resource 

management. The savings could be reinvested to better equip our 


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men and women in uniform. But the Department of Defense leadership squelched the report. 

In response to the Post’s story, 31 members of this committee 

from both sides of the aisle signed a letter to then-Secretary Carter 

asking for answers. 

With the change in administration, the urgent need for reform at 

the Pentagon has not changed. There are a number of statistics 

that tend to support the DBB’s recommendation for rigorous oversight. First, the Pentagon continues to expand its use of contractors. From 2001 to 2015, the Department of Defense increased the 

number of civilian employees by roughly 14 percent. Compared to 

our men and women in uniform, government contractors are less 

likely to be subject to oversight of the Pentagon. Some of the government’s most effective tools for holding its employees accountable 

are not available when it comes to contractors. 

Second, the Pentagon study noted the potential $125 billion savings could fund 50 Army brigades or 10 Navy carrier strike group 

deployments or 83 Air Force F–35 fighter wings. So, while our 

troops are engaging the enemy in Iraq and Syria and patrolling the 

South China Sea and really helping make sure that this world and 

the United States is a safe place, the Pentagon is resistant to backoffice cuts that would better fund and equip these men and women 

who are doing the hard work on the front lines. 

Given how dangerous our world is, we really, truly have to get 

this right. And if we’re going to ensure our troops are the best 

equipped possible, it is our responsibility to oversee how this 

money is expended. It is a lot of money. It is the single biggest line 

item in our discretionary spending budget. 

The Constitution delegates the Congress the role of providing the 

training and equipment of the Army and to, quote, ‘‘maintain a 

navy,’’ end quote. It is our job to make sure that our warfighters 

are getting all the support that they need to do their jobs. We have 

a very astute panel, and we look forward to having discussions 

with them about this report and what can be done to save money 

at the Pentagon. 

With that, I will yield my time back, and I now recognize the 

ranking member, Mr. Cummings. 

Mr. CUMMINGS. Thank you very much, Mr. Chairman, for holding this critical hearing today. The Department of Defense is 

charged with the most serious mission there is: Protecting and defending every man, woman, child in our country. In this dangerous 

world, the readiness of our warfighters is essential to national security, and Congress has a duty to provide our military with all the 

necessary resources. 

However, we also have a duty to ensure that every taxpayer’s 

dollar is put to its most effective and efficient use. Every dollar 

that is squandered through waste, duplication, or fraud is a dollar 

not available for military training, advanced weaponry, and salaries and benefits for our uniformed and non-uniformed personnel. 

It is also a dollar we do not have for critical domestic programs like 

education, job training, and feeding the poor. 

In January 2015, the Defense Business Board, a panel that provides management advice from a private sector perspective, issued 

a study finding, and I quote, ‘‘a clear path to saving over $125 bilVerDate Nov 24 2008 09:51 Aug 24, 2017 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 H:\26498.TXT APRIL

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lion in the next 5 years,’’ end of quote. Last December, a Washington Post story written by Bob Woodward and his colleagues reported allegations that Pentagon leadership deliberately buried the 

study amid fears that Congress might reduce the defense budget. 

On December 8, all committee Democrats and 31 total committee 

members signed a bipartisan letter requesting information about 

this report and these allegations. The Defense Department disputes 

the amount in the report, the $125 billion over 5 years, but nobody 

disputes that the Defense Department could save billions of dollars 

by streamlining the way it conducts business. 

Senator John McCain and Representative Mac Thornberry, chairmen of the Senate and House Armed Services Committees, issued 

the following joint statement on the study, and I quote: ‘‘The Defense Business Board’s key findings, that the Department of Defense could save as much as $125 billion over 5 years by limiting 

unnecessary back-office bureaucracy, are not a surprise,’’ end of 

quote. 

Nor are the problems identified by the Board new. We have 

known for many years that the Department’s business practices are 

archaic and wasteful, and this inability to pass a clean audit is a 

longstanding travesty. In the United States of America, we have 

one department that just cannot get through an audit. That is 

amazing. This is also not new to this committee. We have done 

years of work examining wasteful spending at the Defense Department. Just last month, the Comptroller General of the United 

States testified before us that, and I quote, ‘‘probably a third of the 

areas on the high-risk list are DOD business management practices,’’ end of quote. 

The Defense Department is the only Federal agency that has 

never—never—passed an independent audit. I wonder if they’re 

spending too much money to be able to do an audit. And then we 

hear that the President wants another $54 billion, and here we 

have a report that says we can save $125 billion in 5 years. 

But President Trump’s new budget ignores all of this. He proposes boosting defense spending by billions and billions of dollars. 

He proposes funding this increase by slashing dozen of programs 

that promote our national security and our Nation’s most vulnerable communities, the elderly, children, and the rural working 

class. The President would slash funding for the State Department 

and the U.S. Agency for International Development, reducing contributions for U.N. peacekeeping, the International Atomic Energy 

Agency that monitors Iran’s compliance with the nuclear agreement, and the World Bank’s antipoverty programs. The President 

would decimate foreign aid for humanitarian efforts in Iraq, Afghanistan, and Nepal, as well as antidrug trafficking efforts in 

Latin America. 

Last month, more than 120 former generals signed a letter to 

Congress warning, and I quote, ‘‘the State Department, USAID, 

Millennium Challenge Corporation, Peace Corps, and other development agencies are critical to preventing conflict and reducing the 

need to put our men and women in uniform in harm’s way.’’ 

In 2013, Defense Secretary James Mattis, who was then serving 

as the Commander of CENTCOM, testified, and I quote: ‘‘If you 

don’t fully fund the State Department, I need to buy more ammuniVerDate Nov 24 2008 09:51 Aug 24, 2017 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 H:\26498.TXT APRIL

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tion ultimately. The more that we put into the State Department’s 

diplomacy, hopefully the less we have to put into a military budget,’’ end of quote. 

The President’s budget also weakens our maritime, border, and 

airport security by redirecting billions of dollars from the Coast 

Guard and TSA to constructing an outrageously expensive wall on 

the border with Mexico. But to me, the most disturbing cuts are to 

critical, domestic programs. The President would eliminate Community Development Block Grants, which fund antipoverty programs like Meals on Wheels, which feeds approximately 2.4 million 

of our elderly citizens, veterans, and other homebound individuals 

every year. The President would also eliminate funding for the 21st 

Century Community Learning Centers, which helps fund afterschool programs, serving more than 1.6 million children across the 

country, many of them in low-income neighborhoods. The President’s budget does not effectively serve our national security interests, nor does it serve the interests of the everyday American family. 

The United States must invest in a strong national defense to 

face our global challenges. This means not just spending more, but 

spending wisely. So I want to thank all of the witnesses for being 

with us today and for their valuable contributions toward improving the Defense Department’s effectiveness and the national security of all of our Americans. 

With that, I yield back. 

Chairman CHAFFETZ. The gentleman yields back. 

I will hold the record open for 5 legislative days for any members 

who wish to submit a written statement. 

We’ll now recognize our panel of witnesses. 

We’re pleased to welcome Mr. David Tillotson III, Acting Deputy 

Chief Management Officer, from the United States Department of 

Defense; Mr. Scott Rutherford, senior partner at McKinsey & Company; Mr. Michael Bayer, current chairman of the Defense Business Board; Mr. Robert Stein, former chairman of the Defense 

Business Board; Mr. Kenneth Klepper, former board member of the 

Defense Business Board; and the Honorable Lawrence Korb, senior 

fellow at the Center for American Progress. 

We thank you all. Pursuant to committee rules, all witnesses are 

to be sworn before they testify. So if you will please rise and raise 

your right hand. 

Do you solemnly swear or affirm that the testimony you are 

about to give will be the truth, the whole truth, and nothing but 

the truth, so help you God? 

Thank you. You may be seated. 

Let the record reflect that all the witnesses answered in the affirmative. 

Mr. Tillotson, we will start with you, and we will go right on 

down the line. You’ll each be recognized for 5 minutes. If you’d 

please limit your testimony to those 5 minutes so members have 

a chance to ask you questions. We have a big panel today. Your entire written statement and any attachments will be made part of 

the official record. 

Mr. Tillotson, you are now recognized for 5 minutes. 


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WITNESS STATEMENTS 

STATEMENT OF DAVID TILLOTSON III 

Mr. TILLOTSON. Thank you, Mr. Chairman, Ranking Member, 

members of the committee. As my written statement will be entered into the record, I will keep my remarks brief in the interest 

of giving you time to ask whatever questions the committee chooses 

to ask. I will say a couple of things very quickly, however. 

I think the one thing that I would take unequivocal issue with 

is that the report was in any way suppressed. It was actively discussed within the Department at the time. It has formed the basis 

of discussion since that time. It was posted in the public record. It 

was actually discussed with Members of the House and Senate 

back in 2015, shortly after it was issued, albeit not with this committee, but with the HASC and SASC. So the fact is this has not 

been suppressed. 

The actions that led to the results of the DBB report, among 

other things, were actually kicked off by the current Deputy Secretary of Defense acting through my office. Two actions were taken: 

One, we initiated a contract through the DCMO office to Ryan Consulting to do some work on understanding where the costs of the 

Department rested in terms of back-shop activity. So this was a deliberate attempt on the part of the Department to, in fact, identify 

the opportunity space, not associate with the—directly associated 

with Defense Business Board. Ryan Consulting in turn subcontracted to McKinsey. So that’s the relationship to that company. 

The second activity was that the Deputy Secretary chartered the 

Defense Business Board at the time to do a corporate-style review, 

looking at the information generated by McKinsey and coming up 

with recommendations about how the Department might proceed to 

address opportunities generated by whatever the cost opportunities 

presented us. So those were the actions that were taken. 

The question about moving forward on efficiencies is hardly new 

to the Department. Secretary Gates led a significant efficiency initiative that resulted in multiple billions of dollars repurposed within the Department. Secretary Hagel continued that tradition. Secretary Carter continues to do so. 

After the study was published, several things got addressed. 

There were two concrete areas for recommendations in the report 

and a third recommendation that basically said: Go do some more 

homework. We acted on the two concrete recommendations, which 

were to address some IT efficiencies. We have not gone as far as 

the report would suggest we could. I agree with that. We also 

pushed ahead on some services’ contract reviews, particularly on 

the OSD staff, the Defense Agencies and Field Activities, an area 

where, candidly, not as much attention had been rendered as needed to have been done in the past. When we look at the result of 

those sets of actions, that added an additional $7.9 billion in efficiencies to an already double-digit billions of efficiencies that we 

had put in place in prior years. 

Having said all that, there is more to do. There is ample opportunity. The DBB report, the supporting McKinsey material would 

suggest there are things we can do. 


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There are two challenges to moving forward. I will be candid 

about both. There is an internal challenge. That’s our job. We will 

go fight those battles. We have to have those discussions internal 

to the Department, and in some instances, we are assisted by actions on the Hill. So, in the most recent National Defense Authorization bill, in 2017, there was a very specific requirement for us 

to redirect and look at the management of the medical community 

in the Department of Defense. We agree from the DCMO’s office 

that that is worth looking at. We certainly would endorse moving 

forward with that, and we appreciate the support of Congress in 

doing that. 

Having said that, ‘‘efficiencies’’ means we take a look at moving 

money and activities from current activities into new activities. 

One of the areas that both the GAO and the DBB report and independent DBB reports have all pointed at is our use of leased property and owned real property. It’s intriguing to me that, when we 

opt to let a lease contract for a building lapse—not terminate it, 

let the contract run out—that we spend three trips to a State delegation explaining why we can’t close that contract. So I’m prepared 

and the Department is prepared to work on this going forward. 

Mr. Korb in a recent article has suggested five steps that the Department should build on, including build on the DBB report. We 

agree. But his fifth recommendation is a recommendation the Department brings forward with regularity and which, candidly, at 

least one member of this committee in a prior testimony has asked 

me if we thought we needed, and that is, do we need a BRAC? And 

the answer is yes. So there are actions that we need to take, working in conjunction with Congress. By the way, BRAC is not the 

only action. I’m going to say that right now. It is not the only thing 

we should do. Thank you for your time, Mr. Chairman. 

[Prepared statement of Mr. Tillotson follows:] 


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Statement of 

David Tillotson III 

Acting Deputy Chief Management Officer 

Department of Defense 

before the 

House Oversight and Government Reform Committee 

On 

"Findings of the Defense Business Board Study 'Transforming DoD's Core 

Business Processes for Revolutionary Change"' 

March 21, 2017 
8 


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Good afternoon Chairman Chaffetz, Ranking Member Cummings, and Members of the 

Committee. Thank you for this opportunity to discuss the Department's progress in addressing 

institutional reform and improved business practices and, specifically, to address the January 2015 

Detense Business Board (DBB) study related to transforming core business processes within the 

Department. 

My name is David Tillotson, and I am the Acting Deputy Chief Management Officer (ADCMO) 

of the Department of Defense (DoD). Shortly after reporting to Deputy Secretary Work in 2014, 

the Deputy Secretary (in his role as the Department's Chief Management Officer) met with me 

and the DoD Chiefinformation Officer to revitalize work in reforming the Department's business 

practices and to put forward recommendations that would help free up funding to meet emerging 

needs in the current budget-constrained environment. He asked the CIO and me to initially focus 

on the OSD staff and Defense Agencies/Field Activities, but also wanted to establish a foundation 

for broader Defense reforms. To that end, my office put in place a contract to assess the 

opportunity space for broader reforms in terms of both functions and resources. The Deputy 

Secretary of Defense also turned to private sector advice through the use of discretionary, Federal 

Advisory Committee Act (FACA) committees, in this case the DBB. The DBB, established in 

2002, is composed of private citizens with significant business experience, who volunteer their 

time to provide the Secretary and Deputy Secretary of Defense with independent advice on 

private sector best business practices for consideration and potential application to the 

Department. On October 15, 2014, the Deputy Secretary of Defense established a task group 

under the DBB to help determine the extent to which the Department could find opportunities for 

improved productivity and associated savings by applying applicable corporate business practices 

to the core business functions within the Department. 

2 
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On January 22,2015, the DBB task group's recommendations ("the 77-page summary report" 

referred to in the Washington Post article) were presented at a publicly-noticed meeting of the 

DBB 1 which was covered by the media. 2 Consistent with FACA, it has been (and remains) 

publicly available since that time on the DBB website and has been accessed over 2800 times. 3 

Additionally, the report was widely socialized with Department leadership and external 

stakeholders. For example, in February 2015, task group members discussed the Board's findings 

with professional staff members (PSMs) of the Senate Armed Services Committee (SASC). That 

same month, I discussed it with both SASC and House Armed Services Committee PSMs. 

On December 5, 2016, The Washington Post published an article by Craig Whitlock and Bob 

Woodward titled "Pentagon buries evidence of$125 billion in bureaucratic waste", citing the 

January 2015 DBB "77-page summary report". The article both misrepresented the details of the 

study and mischaracterized the Department's response to the study's recommendations. 

First, The Washington Post article's headline and its accompanying graphic implied that $125 

billion could be cut from the annual defense budget. This mischaracterized the potential savings as 

"waste" and misled its readers by presenting the potential savings as 23% of the Department's 

1 Meeting Notice, 79 Fed. Reg. 76991(Dccember 23, 2014). 2 Press coverage of the DBB presentation included: (I) https:/iinsidedefcnse.com/daily-newsidbb-pentagon-could-savel25b-early·retirements-contractor-reductions, and (2) http:I/W\\'W.defensenews.com/story/defense/policvbudget/budget/20 15/0 I /23/pentagon-budget-defense-savings-dbb-work -modemize-retirement-retrain/2221420 1/. 3 The report is available at http:l/dbb.defense.gov/Portals/35/Documents/Mcctings/20 15120 15· 

01/CBP%20Task%20Group%200ut-briel"lo20Siides F!NAL.pdf. The "77-page summary report" referenced is the full 

and complete report. The 77-page slide deck was bound and printed with the addition of the following sections: 

I) Cover letter from the DBB Chair to the Secretary of Defense (SD) and Deputy Secretary of Defense (DSD)-

dated February 9, 20 15 

2) Table of Contents 

3) Terms of Reference (the memo trom DSD directing the DBB to conduct the study) 

4) Executive Summary (27 slides from of the 77-pagc slide deck) 

5) 77-page summary report 

6) Task group biographies 

7) List of acronyms 

8) Bibliography 

9) List of DBB members 

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annual budget, when the study's projections were across the FYDP. Six days after the article, The 

Washington Post published an opinion 4 piece which acknowledged its misrepresentation of savings 

as waste and corrected the savings accumulation as FYDP versus annual. As acknowledged in the 

opinion piece," ... the plausible cuts are closer to 4 percent ... "Unfortunately, the opinion piece 

was not nearly as sensational as the original article. 

Second, the task group applied assumptions to arrive at 4% based on corporate business processes 

that did not account for the realities of the Federal budgeting process, including the annual budget 

review cycle that takes place across the Executive Branch and with Congress. The assumptions 

also did not account for various requirements in law affecting major budget and resource 

reallocation decisions, personnel, and organizational changes. Further, the savings projections 

assumed the Department could apply changes additively to ongoing initiatives so that the next 

round of reforms would result in cumulative reductions. While the DBB's assumptions and 

recommendations provide insight into what might be possible based on private sector modeling and 

experience, we know the private sector benchmark is one we might not reach. However, the DBB 

study's recommendations and the data exercise conducted by my office identified tor the 

Department a structured approach to defense reform, and identified the need for additional work. 

One of the immediate insights gained from the DCMO data work that supported the DBB effort 

was the need to have comprehensive, accurate, and available data on our core enterprise-wide 

business related functions. The task group looked at the number of personnel and budget 

resources dedicated to core enterprise-wide business functions, and elicited advice from senior 

business leaders on alternative ways to look at how the Department conducts its business. They 

4 https:/ /www. washingtonpost.com/opin ions/just -cutting-waste-at -the-pentagon-wont -cut· 

it/2016/12/11/8e16a61e-be45-11e6-91ee-ladddfe36cbe_story.html?utm_term=.4c36365928bl 

4 
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did not identify specific systems or processes that should be changed to increase the 

Department's productivity levels. Instead, the study identified metrics and benchmark levels that 

could be seen as efficiency goals for the Department based upon similar private sector goals. My 

office used the data and information collected by the task group, and its subsequent 

recommendations, to look into opportunities for actionable streamlining and efficiency actions. 

More specifically, the Deputy Secretary of Defense leveraged the recommendations to inform his 

approach to business process optimization and reform. I would like to share four examples of 

how the study's recommendations assisted in the development of specific efficiencies. 

First, based upon the Deputy Secretary's 2014 direction, my office has been conducting Business 

Process and Systems Reviews (BPSRs) along organizational lines to identify potential efficiency 

initiatives. The task group focused instead on six core lines of business within the Department: 

human resources management, health care management, financial flow management, supply chain 

and logistics, acquisition and procurement, and real property management. Capitalizing on the 

core business concept, the Department added two (2) additional lines of business: Defense Resale 

and Information Technology. By using this focus on core lines of business rather than 

organizations, the Department has improved select business practices which will result in cost 

savings over the next 8 years. 

Second, while not a specific recommendation from this study, the Department has adopted a 

comprehensive new definition of DoD major headquarters activities (MHA), which was 

subsequently codified in the FY 2016 NOAA, and the Department is working to ensure that MHA 

data is incorporated into authoritative data systems to increase information fidelity for accounting, 

tracking, and reporting. The new definition and revised baselines are being built into programming 

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and budget elements, enabling the Department to track headquarters costs consistently across 

organizations and over time; this was a broad data issue identified and thus validated by the DBB 

review effort. 

A third efficiency effort, which was informed by the study's recommendations on Contract 

Optimization, was the application of the practices similar to those in place in the Military 

Departments to review the requirements for, and assess potential redundancies of, service 

contracts supporting the OSD and DA/F As. This process, known as Service Requirements 

Review Boards (SRRBs), is aimed at validating requirements and streamlining contracts. The 

SRRBs require organizations to review their service contract requirements and find opportunities 

for efficiency by eliminating non-value-added services and duplicative requirements, better 

aligning requirements to mission, and using strategic sourcing opportunities. Savings can be 

realized over the FYDP and available to re-invest into higher priority requirements. My office 

is currently estimating that the Department can save $1.9 billion across the FYDP through the 

use ofSRRBs. 

As a final example, the DBB study recommended a focus on IT efficiencies. With the DoD CIO 

as the lead, we are conducting a dedicated review of the IT needs and assets of the Department to 

provide better service and integrated approaches across all mission areas. This approach consists 

of a top-down/bottom-up review of all IT enterprise licensing agreements to ensure the 

Department is obtaining software and hardware at a consistent cost; the consolidation and 

potential reduction of data centers as a means of focusing the Department's infrastructure support 

in a few targets areas versus multiple, underutilized locations; and the consolidation of disparate 

and redundant IT networks into a single Joint Service Provider approach. At present, the 

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Department is on track to reach its efficiency target of $1.9 billion by FY 2021. 

These are just a few ofthe efficiencies the Department is pursuing that have been informed by the 

DBB study. The Department is also preparing for horizontal, cross-component reforms that 

should yield additional savings and may allow the Department to see potential savings similar to 

comparable private sector mctrics and benchmarks. Such changes will require support from 

Congress and many will be sensitive and difficult because of the potential impact on jobs and 

resources. These new initiatives will consider divesting work the Department does not need to 

do, changing information practices to make better Department-wide decisions about resource use, 

and changing organization structures to perform at an enterprise level. 

Mr. Chairman, the Department is firmly committed to continuing efforts to improve our 

management practices and business processes. The Department has always taken its duty to be an 

excellent steward of taxpayer dollars very seriously. I thank the Chairman, Ranking Member and 

the Committee for the opportunity to address misunderstandings associated with the DBB's Core 

Business Process study and to provide tangible examples of the Department's accomplishments to 

date. This concludes my prepared remarks and I defer to the Chairman for further questions. 

7 
14 

Chairman CHAFFETZ. Thank you. 

Mr. Rutherford, you’re now recognized for 5 minutes. 

STATEMENT OF SCOTT RUTHERFORD 

Mr. RUTHERFORD. Chairman Chaffetz, Ranking Member 

Cummings, and members of the committee, my name is Scott Rutherford. I’m a senior partner at McKinsey & Company, and I’m the 

managing partner of the Washington, D.C., office. I’m pleased to be 

here today to discuss McKinsey’s work for the Department of Defense under contract with the Department’s Deputy Chief Management Officer. 

From the fall of 2014 to the spring of 2015, we were engaged by 

the Department to conduct a comprehensive assessment of its 

spending in six core business functions: human resource management; healthcare management; financial flow management; logistics and supply chain; acquisitions and procurement; and real property management. 

Our work began with the development of what we called a cost 

baseline, which assembled data on existing spending across the entire Department in these six areas. To our knowledge, that kind of 

crosscutting analysis of back-office spending at the DOD had never 

before been conducted. McKinsey’s work has since been used by the 

Department in a number of important ways. 

First, the Deputy Chief Management Officer shared our baseline 

with the DBB, and that baseline was used by the Defense Business 

Board in its own analysis and report released in January 2015. Although the McKinsey baseline was a starting point for the DBB’s 

efforts—and McKinsey is one of many inputs into their approach— 

the projections, assumptions, and analysis of the potential cost savings were those of the DBB. 

Second, McKinsey’s work for the DOD continued using the cost 

baseline into what we would call benchmarking, which compares 

the Department against other large companies, and roughsizing, 

which began the process of estimating the magnitude of the savings 

that might be achieved in different categories. 

So, in May of 2015, McKinsey estimated that the Department 

could achieve about $4 to $5 billion in new savings per year over 

a 5-year period across the six functional areas we examined. That 

translates into cumulative savings of between $62 billion and $84 

billion over a 5-year period. 

Third, it’s our understanding that the Department has used our 

baseline, our benchmarks, and our cost savings estimates to implement changes on its own that are generating actual cost savings. 

The projected cost savings we identified are somewhat different 

than those estimated by the DBB’s January 2015 report because, 

while both estimates started with the McKinsey baseline, 

McKinsey had the benefit of working collaboratively with the DOD, 

allowing us to drill down further and do additional analytic work 

for a couple months afterwards. Based on that work, we also assumed a somewhat slower pace of change than the DBB assumed. 

This resulted in a lower estimate of how much savings could be 

achieved over the first 5 years relative to the DBB’s projections. 

We’re very proud of our work. We have been helping private sector and government agencies identify opportunities to reduce costs 


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for many years and have accumulated a body of proprietary databases and methodologies that allow us to bring that experience to 

bear in very concrete ways. And in this case, we provided the Department with a set of tools and approaches to move forward on realizing cost savings opportunities, and we believe the Department’s 

potential return on that investment it made in our effort is substantial. 

Thank you for the opportunity to be here today, and I’m happy 

to answer any questions you might have. 

[Prepared statement of Mr. Rutherford follows:] 


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McKinsey&Company 

Statement of 

Scott Rutherford 

Senior Partner, McKinsey & Company 

before the 

Committee on Oversight and Government Reform 

U.S. House of Representatives 

March 21,2017 

Chairman Chaffetz, Ranking Member Cummings, and Members of the Committee, I am 

pleased to appear before you today to discuss McKinsey's work for the Department of Defense, 

and our work with the Department's Deputy Chief Management Officer to evaluate the 

Department's spending on core business processes. 

In the fall of20!4, McKinsey was engaged by the Department of Defense to conduct a 

comprehensive assessment of the Department's spending in six core business areas. From the 

fall of2014 through the spring of2015, a team of McKinsey consultants developed a detailed 

compilation of the Department's spending in these areas, assessed the overall potential for cost 

savings in these areas, and conducted two targeted proofs of concept to demonstrate an approach 

to achieving savings in services contracts. We are very proud of this work, and we continue to 

believe that the Department of Defense and the public sector can benefit from McKinsey's 

unique skills, developed through decades of private sector experiences, in evaluating 

organizational efficiencies with a goal of reducing costs. 

Our work with the Department began with the development of a cost "baseline" that 

assembled data on spending across the entire Department in six important areas: human resource 

management; healthcare management; financial flow management; logistics and supply chain; 

acquisitions and procurement; and real property management. The McKinsey baseline was, we 

believe, a more comprehensive look at spending in these areas than previously existed. 

The McKinsey baseline has been important to the Department's cost cutting efforts in a 

number of important ways: 

First, the Deputy Chief Management Officer shared McKinsey's baseline with the 

Defense Business Board, and the baseline was used by the Board in its own analysis and report, 

released in January 2015, which estimated $125 billion in potential cost savings over five years. 

Importantly, although McKinsey's baseline was used by the Board as the baseline for its effort, 

the projections, assumptions, and analysis related to potential cost savings are those of the Board, 

not McKinsey. 

Second, under the Deputy Chief Management Officer project, McKinsey's work 

continued into the areas of"benchmarking," to compare the Department to other large 

enterprises and identify potential areas for savings, and "roughsizing," where we began the 

processes of estimating the savings that might be achieved. At the end of that process, which 
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extended to May of2015, McKinsey's roughsizing analysis estimated that the Department could 

achieve savings between $62 billion and $84 billion over the five years between 2015 and 2020. 

Third, we understand, from informal conversations with the Department since concluding 

our work in 2015, that the Department has used our baseline, benchmarks, and cost savings 

estimates to implement changes that have put them on the path to generating actual cost savings. 

Mr. Chairman, I would like to focus for a moment on the different cost savings estimated 

by the Defense Business Board in its January 2015 report, and the cost savings estimated by 

McKinsey in its work delivered to the Deputy Chief Management Officer in May 2015. Given 

that both estimates were based on the McKinsey baseline, it may seem strange that the Defense 

Business Board estimated $125 billion in savings over five years, and McKinsey estimated 

between $62 billion and $84 billion over five years. 

There are two primary factors that underlie this difference: 

First, from reviewing the Defense Business Board's report, I understand that its cost 

savings estimates were based on metrics of productivity improvements that have been observed 

and achieved in past cost savings efforts, primarily in the private sector. This is understandable 

and appropriate given the Board's role- it was created to give the Department advice that 

reflects a private sector perspective on effective best business practices. Although McKinsey's 

process similarly included benchmarking against existing metrics, we had the additional benefit 

of several months more work within the Department, where we performed additional analytical 

work that informed our projections, particularly with respect to the pace of achievable change. 

Second, specifically regarding that pace of change, the differences between the Board's 

projection and McKinsey's projection are largely driven by the projected pace of change. 

Because both projections encompass a five year period, a total savings projection is highly 

sensitive to savings predicted in the early years. For example, if a projection includes an 

estimate of a large saving in the first year which would accrue again in year two, three, four, 

and five because it has been achieved- the total cumulative savings over the five year period can 

be significantly higher than if the estimated initial savings are more modest. 

Finally, it is important to distinguish between the cumulative cost savings and the 

reduction to the amount that the Department spends on these costs in any given year. 

McKinsey's projection of$62 billion in savings, for example, was based on a projected reduction 

in annual spending of about $4 billion each year. Over five years, the annual spending in that 

scenario would reduce from $134 billion (in 2015) to $113 billion (in 2020). 

McKinsey & Company 

McKinsey is a global firm that, for almost I 00 years, has helped leading businesses, 

nonprofits, governments, and others achieve their most important goals. We have more than 

10,000 consultants and experts, along with about 2,000 research and information specialists 

working across the globe. Our people include doctors, business managers, engineers, research 

scientists, civil servants, and entrepreneurs. We focus on high-value consulting, supporting 

organizations' most high-value, high-risk, and complex priorities for organizational change. 
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3 

McKinsey takes a team-based approach to our projects. When we are engaged, we 

identify a team to work on the project and identify an estimated time frame for completion. In 

addition to the teams assigned to the project and the partners leading the effort, our clients have 

access to our worldwide network of experts and support staff and to our proprietary know ledge, 

tools, and analyses on which we invest more than $400 million annually. McKinsey contracts 

with clients for a firm fixed price we do not bill by the hour. 

McKinsey is recognized for its leadership and expertise. We are thought leaders in both 

the public and private sector. Our consultants often help organizations identify problems and 

provide input on options for solving them, including sharing best practices and possible 

approaches. We also frequently publicize our views. For half a century, we have published the 

McKinsey Quarterly, which sets the agenda for top global managers. We also publish materials 

specific to key sectors, such as McKinsey on Government, McKinsey on Defense, and others. 

We operate the McKinsey Global Institute, a business and economics think tank, and McKinsey 

Center for Government, a global hub for research, collaboration, and innovation in government 

performance. 

McKinsey has served the U.S. government for many years, and we founded our firm's 

U.S. government-serving entity about a decade ago, specifically focused on serving the U.S. 

public sector. As with our private clients, our public sector practice focuses on solving the big 

problems. In serving our public sector clients, we use our proprietary research, tools, and 

approaches as well. For example, the McKinsey Center for Government performs independent 

research on management in the public sector that we can apply in our public sector work. 

McKinsey's Approach to Cost Savings Studies 

One of McKinsey's key strengths is conducting cost savings studies. For both private 

and public sector clients, we apply a series of phases for cost savings studies. A McKinsey cost 

savings project can encompass some or all of the phases, as determined by the client. Our 

contract with the Defense Department covered phases one through three. 

Phase one is "base lining." The baseline is the starting point for a cost savings analysis. 

McKinsey works closely with the client and the client's data to determine the types and amounts 

of costs that currently exist. Base lining includes analyzing the costs, resources, and assets that 

are responsible for delivering a particular function or capability. For some clients baselining can 

be simple and straightforward; for others, such as the Department of Defense, it is highly 

complex and more challenging. 

Phase two is "benchmarking." In benchmarking, McKinsey compares the client's 

efficiency and effectiveness to other relevant businesses or industries, to McKinsey's view of the 

best practices, and the client's internal organizations. McKinsey's proprietary processes and 

databases add significant value because they reflect years of institutional knowledge and 

experiences. Frequently, McKinsey's broader view across a variety of industries is unique and 

not replicable from other sources. 

Phase three is "roughsizing." In this phase, McKinsey develops a high level estimate of 

the savings that may be possible. In broad strokes, this estimate reflects the difference between 
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4 

the existing actual costs (quantified in the baseline) and the best practices in the applicable area 

or industry (developed in the benchmarks). Roughsizing results in high level estimated savings, 

and it gives an organization the ability to quantify the potential and prioritize the actual cost 

savings initiatives to be pursued. Roughsizing may also include conducting some targeted proofs 

of concept to validate the opportunities and refine the savings estimate. 

Phases four and five, which the Department of Defense did not ask McKinsey to perform 

(as it was not in the contract), would have involved the development of a specific set of 

recommendations of cost savings initiatives to pursue to achieve the estimated savings, and the 

implementation of those initiatives to achieve actual cost savings, respectively. 

Contract with the Department of Defense 

In September 2014, McKinsey and Ryan Consulting entered into discussions about 

subcontracting under Ryan on a project of the Department of Defense's Deputy Chief 

Management Officer to conduct a core business process cost evaluation. 

Earlier, in August 2014, members of the Defense Business Board who were familiar with 

McKinsey's expertise in cost savings studies had asked McKinsey for perspectives on 

conducting a cost savings analysis of the Department's core business activities. McKinsey 

provided perspectives on best practices in the industry concerning cost savings studies. 

McKinsey's work with the Department of Defense provided for phases one and two 

(baselining and benchmarking) and an option for phase three (roughsizing). McKinsey 

performed this contract, with Ryan as the project manager, using our GSA-approved MOB IS 

rates ($2,734,227.05 for phases one and two, and $5,693,323.45 for phase 3, following the 

exercise of the option). 

McKinsey conducted phase one from approximately October 20 14 to January 20 15. 

McKinsey delivered its final results for this phase in January 2015, identifying a baseline of 

more than $130 billion in annual costs, including $40 billion in contracted services, $45 billion 

in civilian salaries, $29 billion in military salaries, $11 billion in contracted goods, and $7 billion 

in information technology. This baseline included costs associated with more than 260,000 

contractors and about 450,000 civilians. 

McKinsey conducted phase two, which developed the benchmarks, primarily in January 

2015. Benchmarking an institution as unique as the Department of Defense is very challenging. 

In some cases, McKinsey recommended that the Department benchmark against its own 

productivity metrics, particularly in areas where no private sector comparison is possible. 

Additionally, McKinsey excluded some portions of the baseline from the benchmarking because 

we could find no reasonable analogs to those spend categories in the public or private sectors. 

In February 2015, the Department exercised the option for phase three, and McKinsey 

began work on the roughsizing process to estimate potential savings. McKinsey delivered the 

results of this phase in May 2015, which estimated potential savings in a range of$62 billion to 

$84 billion over five years. McKinsey also provided two targeted proofs of concept to 

demonstrate the approach and offered perspectives on approaches to further phases designed to 

achieve the potential savings. The Department did not extend the contract for these purposes. 
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5 

Defense Business Board 

In the early parts of McKinsey's work for the Department of Defense under the contract, 

the Deputy Chief Management Officer requested that McKinsey keep the Defense Business 

Board apprised of our base lining efforts. At the request of the Secretary of Defense, the Board 

was conducting its own cost savings study. We understand that the results of McKinsey's 

development of a baseline was shared with the Board, and the McKinsey baseline is thus also the 

baseline underlying the Board's report on projected savings, which it issued in January 2015. 

As noted in the Board's report, the Board interviewed dozens of current or former 

military leaders, civilian leaders, and others familiar with cost savings efforts, such as private 

sector leaders, academics, and think tanks. In this context, McKinsey also provided the Board 

with its perspectives on best practices and advice concerning cost savings models. 

The Board's report reflected its own analysis and projections regarding the potential for 

cost savings. The Board delivered its report in January 2015, and McKinsey continued with 

phases two and three of our work for the Department through May of2015. 

* * * 

Mr. Chairman, thank you for the opportunity to appear before you today, and I would be 

happy to answer any questions that you or the Committee Members have for me. 
21 

Chairman CHAFFETZ. Thank you. I appreciate it. 

Mr. Bayer, you’re recognized for 5 minutes. 

STATEMENT OF MICHAEL BAYER 

Mr. BAYER. Thank you, and good morning, Chairman Chaffetz 

and Ranking Minority Member Cummings and members of the 

committee. 

My last engagement with this committee was many years ago 

when my then-boss, Bud Brown, was the ranking minority member 

of the then-named Government Operations Committee. But today 

I appear before you as the fifth chairman of the Defense Business 

Board. 

As are all the members of the Business Board, I am a private 

citizen, not a paid government employee. We all volunteer our time 

to serve the Department of Defense by offering our collective advice 

on how to manage the Department more efficiently in order to enable the Secretary and the Deputy Secretary to maximize the allocation of scarce resources for the warfighter. 

The men and women of the Business Board and its sister advisory boards, Policy and Science, who donate their time and energy 

to help the Department, each consider it a tremendous honor and 

a great responsibility. 

As I’ve communicated to you and your staff, I have no direct 

knowledge about the effort at hand. My first meeting after returning as chairman of the Defense Business Board was in July of 

2015, more than 6 months after this study had ended and its presentation publicly in January of that year. As this was under the 

direction of a previous chairman and long before I became chair, 

I have no particular insight or access into the actions and decisions 

made about how this effort was conducted or delivered. 

I can say in the year and a half since I became chairman, the 

board has been very busy. It has completed eight studies, and our 

most recent effort, ‘‘Focusing a Transition,’’ was a product of every 

member of the board, of the Defense Business Board, and it was 

very well received by the Department’s leadership at the time and 

the incoming leadership of Secretary Mattis’ team. 

But there is more work to be done in the months and years 

ahead as we all strive to support Secretary Mattis’ priorities, particularly his third, and I quote, ‘‘bringing business reforms to the 

Department of Defense,’’ which we believe are essential for his ability to deliver the other two. 

I will close with saying that this hearing appears from its title 

to be focused on what the Department did or did not do with a particular study. And speaking for the Department is an inherently 

governmental function, and I as a private citizen am strictly prohibited from assuming that role, which makes appearing before you 

to discuss a study of this which I wasn’t part of a bit challenging. 

My duties include speaking for the Business Board to the Department and others but not speaking for the Department of Defense 

to anyone. 

Thank you, Mr. Chairman. This concludes my opening remarks, 

and I look forward to your and Mr. Cummings’ and the rest of the 

members’ questions. 

[Prepared statement of Mr. Bayer follows:] 


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Statement of 

Michael J. Bayer 

Chairman, Defense Business Board 

before the 

House Oversight and Government Reform Committee 

On 

"$125 Billion in Savings Ignored: Review of DoD's Efficiency Study" 

March21,2017 
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Good morning Chairman Chaffetz, Ranking Member Cummings, and members of the committee. 

I appear before you today as the fifth chairman of the Defense Business Board. 

As are all the members of the Defense Business Board, I am a private citizen; not a paid 

government employee. We volunteer our time to serve the Department of Defense by offering our 

collective advice on how to manage the Department more efficiently, in order to enable the 

Secretary and Deputy Secretary to maximize the allocation of resources to the warfighter. The men 

and women of the Business Board, and its sister boards, Policy and Science, who donate their time 

and energy to helping the department, consider it a tremendous honor and responsibility. 

As I have communicated to you and your staff, I have no direct knowledge about the study at 

hand. My first meeting after returning as chairman was in July 2015, more than six 

months after this study was completed and presented publicly, in January of 2015. As this study 

was under the direction of the previous chairman, and long before I became the chair, I have 

no particular insight or access into the actions and decisions made about how this study was 

conducted and delivered. 

I can say that in the almost two years since I became chairman, the Board has completed eight 

studies. Our most recent effort- Focusing a Transition- was a product of every member of the 

Board and was very well received by the Department's leadership and the policy community. There 

is more work to be done in the months and years ahead as we strive to support each of Secretary 

Mattis' priorities- particularly bringing business reforms to the Department of Defense. 
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I will close with saying that this hearing appears, from its title, to be focused on what the 

Department did or did not do with a study. Speaking for the Department is an "inherently 

governmental" function. As a private citizen, I am strictly prohibited from assuming that role, 

which makes appearing before you to discuss a study that I was not part of, particularly 

challenging. My duties as chairman include speaking for the Defense Business Board TO the 

Department of Defense. It does not include speaking FOR the Department ofDefcnse; ever. 

This concludes my opening statement. 
25 

Chairman CHAFFETZ. Thank you, Mr. Bayer. 

I now recognize Mr. Stein for 5 minutes. 

STATEMENT OF ROBERT ‘‘BOBBY’’ STEIN 

Mr. STEIN. Chairman, Ranking Member, and members of the 

committee, thank you for inviting me to provide testimony today. 

Congressman Cummings, it is great seeing you again since our 

time on the Naval Academy Board of Visitors. 

My name is Bobby Stein, and I’m here to discuss the Department 

of Defense efficiency study commissioned by Secretary Hagel and 

created under my leadership as former chairman of the DOD Defense Business Board, known as the DBB. 

I was honored to serve as a member of the DBB between 2010 

and 2014, and chairman from 2014 to 2015. As you know, the DBB 

is an advisory panel comprised of a select group of our Nation’s 

business leaders. Our purpose was to provide advice to the Secretary and Deputy Secretary of Defense and other senior leaders on 

best practices that could be applied to DOD. My priority for the 

DBB was that members be not selected for any partisan reasons, 

but based on tried and true experience results in the business 

world. 

I was honored to serve because I understood our mission to be 

strengthening the defense of our country. I was appointed as chair 

of the DBB by then-Secretary Hagel in 2014. After becoming chair, 

I went on a listening tour of senior retired uniformed and non-uniformed leadership to determine areas where the DBB could support 

the agency. 

During the listening tour, we took note of key facts and figures 

about how money was being spent. It generated concerns because, 

as a retired Chairman of the Joint Chiefs of Staff said, the biggest 

threat to our national security is our national debt. Key takeaways included our national debt is $20 trillion. Our 

Federal Reserve has taken their balance sheet from 800 billion to 

4.5 trillion. At the Pentagon, overhead and support comprise 40 

percent of spending, or $240 billion. This equals twice the combined 

total budgets, defense budgets, of France and England. The expenses on DOD headquarters alone amounts to $40 billion, more 

than the German defense budget. 

At the same time, since 2001, DOD civilian personnel has increased over 15 percent, but military personnel has decreased by 

5 percent. While everyone wants reform in the Pentagon, the status 

quo remains. The antibodies get you every time. Indeed, clean audits and services continue to fail. In some estimates, we have spent 

$6 billion to try to get clean audits in our different departments. 

This listening tour predated the commissioning of the efficiency 

study but highlights the importance of the effort. The DBB efficiency study was one of many reports undertaken by the DBB 

under my leadership. This study was the first effort ever in DOD 

history to comprehensively evaluate labor cost data and create a 

picture of how much money is being spent on noncombat operations 

at the agency. 

As the chair of the DBB during the study, I felt that my role was 

to help ensure that the study was done accurately so we could meet 

our ultimate goal of identifying inefficiency and cost savings that 


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could then be moved to better uses. In particular, I helped to identify the people with the right experience to handle this type of 

project. For something like this, you need a heart surgeon if you 

have a heart problem, not a country doctor, as said by one of the 

retired CNOs. And I’ve spent time looking for who that right person is and who can help that path to work with the Department 

of Defense to get these savings. And the name that kept coming up 

was Kenny Klepper. Kenny has done this in a Fortune 50 company. 

He understands that the DOD is not a business. It is government, 

and there’s not easy efficiency opportunities. So, with that, we got 

Kenny to lead this study. 

The study succeeded in its goal in highlighting inefficiency that, 

if remedied, could generate significant cost savings to the Department. This cost savings could then be transferred to other priorities, like improving readiness, modernizing our defense, and creating jobs. 

The study was presented to the full DBB at public hearing January 25 and won a unanimous approval for its findings and recommendations. 

The General Accountability Office also reviewed the study and 

found the methodologies and analysis adequate to confirm its conclusions. At the completion of the study, along with other members 

of DBB, we were ready to move forward to assist the DOD in reviewing the study’s findings and recommendations. I believe the 

DBB efficiency study represents a quality analysis of costs and inefficiencies at DOD, and it is my hope that it will be useful to the 

agency’s efforts to streamline. 

It was an honor to lead the DBB during the creation of the 

study, and I’m proud of the work achieved in support of a strong 

national defense. Thank you for your time, and I’m pleased to answer any questions the committee may have. 

[Prepared statement of Mr. Stein follows:] 


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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM 

U.S. HOUSE OF REPRESENTATIVES 

115lH CONGRESS 

HEARING CONCERNING 

$125 BILLION IN SAVING IGNORED: REVIEW OF DOD'S EFFICIENCY STUDY 

WRITTEN TESTIMONY OF ROBERT STEIN: 

Chairman Chaffetz. Ranking Member Cummings, and members of the 

Committee, thank you for inviting me to provide testimony today. 

My name is Robert ("Bobby") Stein, and I am here to discuss the Department of 

Defense (DoD) efficiency study commissioned by Secretary Hagel and created under 

my leadership as former Chairman of the DoD Defense Business Board (DBB). 

As you know the DBB is an advisory panel comprised of a select group of our 

nation's business leaders. The DBB was established to provide the Secretary and 

Deputy Secretary of Defense, and other senior leaders, with independent advice rooted 

in private sector perspective for application to the agency. 

I was honored serve as a member of the DBB between 2010 and 2014 and 

Chairman from 2014 to 2015, and I brought a strong business background to the job. 

Throughout my career I have founded the successful investment and growth of many 

businesses in a variety of sectors, including real estate, oil and gas, technology, and 

healthcare. 

The DBB efficiency study was one of many reports undertaken by the DBB under 

my leadership. The purpose and ultimate goal of the efficiency study was to help grow 

and protect the landscape of our nation. This study was the first effort ever in DoD 

history to comprehensively evaluate labor cost data and create a picture how much 

money is being spent on non-combat operations at the agency. 

The efficiency study was commissioned at the request of then Secretary Hagel 

and carried out with the support of both military and civilian leadership. DBB member 

1 
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Kenny Klepper led the project along with other DBB members, and was supported by 

some of the best business minds in the country. To conduct this study, the DBB set 

about to identify areas of productivity and measure accountability, no small feat. It is 

important to note that there are not many people in this country capable of effective 

transformational change of business processes, and we were very fortunate to have 

had Kenny Klepper on board who has successfully undertaken similar tasks at Fortune 

500 companies. 

After twelve months and many hours of commitment, research, data analysis, 

interviews, and briefings the efficiency study was completed in early 2015. The study 

was presented to the full DBB at a public hearing in January 2015 and won unanimous 

approval for its findings and recommendations. The Government Accountability Office 

also reviewed the study and found the methodology and analysis adequate to confirm 

its conclusions. 

After the completion of the study, I along with other members of the DBB were 

ready to move forward to assist the DoD in reviewing the study's findings and 

recommendations and begin the process of applying them to the agency's systems. I 

believe that the DBB efficiency study represents a quality analysis of costs and 

inefficiencies at DoD, and could be useful to the agency's efforts to streamline 

operations. In 2017, I met with current Defense Secretary Mattis to discuss the 

efficiency study, and hope that its findings and recommendations can be used to 

support the DoD in the future. 

It was an honor to lead the DBB during the creation of the efficiency study, and I 

am proud of the work achieved in support of a strong national defense. Thank you for 

your time, and I am pleased to answer any questions the Committee may have. 

2 
29 

Chairman CHAFFETZ. Thank you. 

Mr. Klepper, you’re now recognized for 5 minutes. 

STATEMENT OF KENNETH ‘‘KENNY’’ KLEPPER 

Mr. KLEPPER. Good morning. 

Chairman CHAFFETZ. If you can move that microphone up close. 

Just straighten it out. There you go. Thank you. 

Mr. KLEPPER. Thank you. Good morning, Chairman Chaffetz and 

minority Ranking Member Cummings. It’s a pleasure to be here. 

I’ve served as adviser on the CNO’s executive panel for five CNOs, 

and this is a first for me for over a decade. So I am happy to be 

here to tell the story of the work that we have done. 

The effort that we embarked on for the Defense Business study 

is something I took very, very seriously. Just briefly, a little of my 

background: I spent 40 years with the tradecraft of organizational 

modernization and change. I spent about 20 years in chemical 

plant refinery operations out in Texas. And I spent the second 20 

years in health care. And I chose in my written remarks that I submitted to the panel an example that I think has a lot of stark parallels. Even though, as Bobby said, I understand that the Defense 

Department is not a business, there are some very strong parallels. 

I was asked to come in and help do a turnaround for a company 

in New York called Empire Blue Cross Blue Shield. It was financially insolvent at the time, not enough reserves to pay for claims, 

the largest health plan in the Northeast of the United States. One 

of the things we did as part of the recovery of that company was 

understand that we had no money, and we had an obsolete legacy 

infrastructure running it, and we were losing millions of members 

a year. The company was in a death spiral. Since we didn’t have 

cash to spend, the only way we could fund the things that urgently 

needed to be addressed to improve the performance of the business 

was to self-fund those things through productivity. 

So we put in place an opportunity to take productivity savings 

as a way to generate the money to invest in the platforms and automation and the improvements to recover the company, which we 

did, and we were doing really well. And then, on September 11, we 

were the second-largest tenant in the World Trade Center. And 

through all the things that we did to improve speed, agility, optimize our operations for the private sector, to improve our service 

to our members and the physicians, we never recognized the inherent ability that it gave us to survive a devastating disaster for our 

facility. We had over 2,000 people in the building at the time, and 

with great pride I can tell you, if we can separate the human tragedy for just a moment—we lost 11 people that day—that when the 

Tower collapsed, we were able to maintain the operation of the 

business. We lost three call centers, two large server farms. They 

all failed over to other operations, and the company continued to 

operate. 

The Kennedy Business School did a case study that we included 

in my written remarks. And the reason I bring that up is, when 

you look at the state of the operation of DOD, the obsolescence of 

the legacy infrastructure is not just a bad cost situation and not 

just creating bad service. I think it increases the vulnerability of 

the operation to other threats. Whether it is a kinetic attack, an 


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EMP attack, cyber attack, it is almost impossible to harden those 

types of legacy cores. So part of what I hope that we can achieve 

through the modernization of these assets is not just improve the 

cost basis and not just improve the service, but to also harden and 

provide a much more resilient infrastructure for the Department of 

Defense. 

The last thing I would mention is the $125 billion savings. We 

did something that had never been done before—and I give great 

credit to the Deputy Secretary, Bob Work—is, whenever I talk to 

him, that the one thing that we had to have to really start was we 

had to have transparency of where the money was, where the cash 

flows were. He did something I think has never been done before. 

He sponsored presentations by Bobby and myself to the DEXCOM, 

the Defense Executive Committee. He described the process of evaluation that we wanted to do and that we advised him to do, and 

to his credit, he got approval from all the civilian leadership to let 

us get the money. And we brought in—I actually asked to have 

McKinsey brought in because I’ve done this study before with 

them, and they did a great job for me. We had over a hundred people pulling data out of these systems. And people before that had 

said: The data is not there. The data is no good. The antibodies will 

get you. 

What we found was the data was there, and the data was not 

perfect, and believe me, the study is not perfect, but I believe that 

the savings that we identified are there with a high degree of certainty. 

So I think the debate and the big question for us is, and I think 

it was stated by Mr. Tillotson and Mr. Rutherford, is—the money 

is there—it is, can we get the institution out of the way to help us 

do the things that can obviously help us improve the operation of 

the business? And that’s the purpose of us being here. Thank you. 

[Prepared statement of Mr. Klepper follows:] 


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Testimony of Kenneth Klepper 

Former Member of the Defense Business Board 

Before the 

U.S. House of Representatives 

Committee on Oversight and Government Reform 

For a Hearing Concerning 

$125 Billion in Savings Ignored: Review of DoD's Efficiency Study 

March 21,2017 

Chairman Chaffetz, Ranking Member Cummings, and members of the Committee, thank you for 

inviting me to discuss my work as a former member of the Defense Business Board ("DBB"). 

My name is Kenneth Klepper, and I was honored to serve as a member of the DBB from August 

2014 to May 2015. As you know, the DBB was established in 2001 under the provisions of the 

Federal Advisory Committee Act to provide the Secretary and Deputy Secretary of Defense, as 

well as other senior leaders, with independent and objective advice on effective best business 

practices for application to the Department of Defense ("DoD"). The DBB is comprised of 

private sector leaders with proven track records in leading large organizations and top-level 

experience in executive management, corporate governance, audit and finance, human resources, 

economics, technology, or healthcare. 

In joining the DBB in 2014, I brought significant private sector experience in organizational 

efficiency and resiliency. As an Executive with three Fortune 500 companies, I have practiced 

the tradecraft of enterprise business transformation in both the energy and hcalthcare industries 

for over 40 years, and specialize in large-scale organizational change. 

My experiences in bringing private sector practices to our nation's defense efforts began on 

September II, 2001. l was serving as the Senior Vice President for Systems, Technology and 

Infrastructure of Empire Blue Cross and Blue Shield, a major insurer with offices in the World 

Trade Center. Prior to the attacks, we had put in place a business operations technology 

foundation designed for speed, agility, and resiliency that held up in the face of the attacks that 

day, demonstrating the utility of bringing private sector practices to the defense and homeland 

security spheres. I am including a Case Program created by the Kennedy School of Government 

discussing these events to supplement my testimony. 

Based on this experience, I became involved in nationwide disaster preparedness initiatives in 

both the private and public sectors, including becoming a member of the Chief of Naval 

Operations Executive Panel in 2002 and serving until this year. In this role, I worked to provide 

independent advice to the Secretary of the Navy and the Chief of Naval Operations on issues 

related to the effectiveness and efficiency of that branch of our Armed Forces. 
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Testimony of Kenneth Klepper 

Former Member of the Defense Business Board 

It is with this background that I became a member of the DBB and joined with private sector 

leaders to bring our collective experience to bear in the furtherance of smart, efficient DoD 

policies and processes. 

DBB Core Business Processes Study 

After joining the DBB, I became a member of a Board Task Group charged with undertaking an 

agency-wide study to evaluate the DoD's core business processes. The goal of the study was to 

assess the agency's bureaucracy to identifY inefficiencies and areas for improvement so that 

resulting savings could be transferred to combat operations. The DBB Task Group was 

comprised of me and a number of other DBB members. We were assisted by consultants from 

McKinsey and Company. 

To conduct the study, the DBB Task Group needed to understand how DoD funds were allocated 

and used, and we requested access to financial data throughout the agency. This request was 

approved by Deputy Secretary of Defense Robert Work and the Defense Executive Committee. 

Financial data was provided by numerous DoD employees representing all of the separate noncombat business units within the Department. The DBB Task Group requested and received 

confirmation from DoD leaders throughout the agency that the data sets used in the study were 

comprehensive and accurate. 

Using this data we utilized a proven private sector approach to analyze it. We also reviewed 

relevant literature and past DoD studies and reports, interviewed approximately 85 private 

industry and current/recent DoD senior military and civilian leaders on business processes, and 

researched best business practices. We identified outdated and inefficient structural and 

management processes, and developed actionable recommendations to address these 

inefficiencies. Our ultimate recommendation was to present a clear path to saving DoD over 

$125 billion over five years. 

The study report was completed and presented to the entire DBB during a public meeting held on 

January 22, 2015. The DBB unanimously approved the recommendations developed during the 

study, which included recommendations to modernize agency business processes, create an 

enterprise shared services organization, and leverage industry practices. among others. 

Following the public meeting, I along with other DBB members, began meeting with DoD 

leaders to discuss the study and answer questions, and our findings and recommendations 

received positive feedback from military leadership. However, to the best of my knowledge, no 

further significant action was taken to review the study or its application to the existing DoD 

structure or processes at the time. 

In 2017, I was pleased to join a positive and constructive discussion on the DBB study with 

current Defense Secretary Mattis. It is my hope that the DBB's work will prove helpful to any 

future DoD efforts to become more effective and efficient. 

*** 

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Testimony of Kenneth Klepper 

Former Member of the Defense Business Board 

I am extremely proud of the work undertaken by the DBB during my tenure, and am honored to 

have had the opportunity to serve our country in this role. It would be my pleasure answer any 

questions that the Committee may have. 

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Kennedy School of Government 

Case Program 

"The Worst Thing That Could Happen": 

How Empire Blue Cross and Blue Shield Survived 

September 11 

C16-02-1654.0 

On the morning of September 11, 2001, some 1,900 employees of Empire Blue Cross and 

Blue Shield reported for work at the World Trade Center in lower Manhattan. There, on ten floors 

it leased in the North Tower, the firm housed its corporate headquarters, as well as its development 

center for web-based technology, three customer service call centers, its membership and billing 

operation, and a battalion of over 260 servers that formed the hub of its internal networks and its 

internet-based operations. Altogether, Empire occupied over 480,000 square feet of space, filling 

hundreds of offices and cubicles, which were outfitted with thousands of desktop computers, 

monitors, telephones, and other equipment. 

By mid-morning on that terrible day, all of it had disappeared forever. As the world 

watched in disbelief and horror, the landmark twin towers of the World Trade Center were struck 

full force by two hijacked commercial jetliners and erupted into flames. Soon after, they collapsed 

into gigantic heaps of rubble, taking with them thousands of lives and hundreds of businesses. Like 

many of the firms with offices in the World Trade Center, Empire was faced with two agonizing 

uncertainties: whether it had lost any of its employees in the inferno, and whether its business had 

been destroyed. 

In the anxious hours following the terrorist attack, the grim facts slowly emerged: nine 

employees of Empire, and two long-time consultants, had been killed; several more had been 

severely burned. The rest of those who had been in the North Tower when it was hit were reeling 

from the chaos they had witnessed, displaced from their offices and widely scattered throughout 

the city as they literally ran for their lives. Every scrap of Empire's equipment in the World Trade 

Center was lost, leaving a gaping hole in the company's technology grid. 

This case was written lnj Esther Scott under the direction of Howard Husock, Director of the Kennedy School Case 

Program, for use at the fohn F. Kennedy School of Government, Harvard University. Funds for the case were provided 

by Empire Blue Cross and Blue Shield. The Kennedy School of Government is solely responsible for its content. (0502) 

Copyright© 2002 by the President and Fellows of Harvard College. To order copies or request permission 

to reproduce materials, call 1-888-640-4945, fax 215-682-5092, email ksg@docnet.com, or write the Case 

Program Sales Office, DocNet, Inc. 411 Eagleview Boulevard, Suite 116, Exton, PA 19341. No part of this 

publication may be reproduced, revised, translated, stored in a retrieval system, used In a spreadsheet, or 

transmitted in any form or by any means-electronic, mechanical, photocopying, recording, or otherwisewithout the written pem1ission of the Case Program Sales Office at the John F. Kennedy School of 

Government 
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Yet, on September 11, most members or health care providers who called the company 

with a question about benefits or payments reached a customer service representative with little, if 

any, delay; claims continued to be processed and mailed out in clockwork fashion; Empire's stateof-the art website-whose nerve center was located in the North Tower-was up and running, 

offering customers an array of "self-service" options. In short, Empire Blue Cross and Blue Shield 

was still in business. "If it hadn't been in the papers," says David Snow, Empire's president and 

chief operating officer, "[customers] would never have known we were hit at all." 

Later, Empire officials offered a variety of reasons for the company's remarkably quick 

comeback: luck, teamwork, sheer will power, and, above all, a management philosophy that 

stressed reliability and "operational excellence." Whatever the precise reason, however, all agreed 

on one thing: if the September 11 attack had happened just a few years earlier, it would have had, 

in Snow's words, "devastating consequences for us." 

Background: A Faltering Giant 

For much of the preceding decade, Empire Blue Cross and Blue Shield had been in terrible 

shape. One of the oldest of "the Blues," as the member plans of the national Blue Cross and Blue 

Shield Association were known, it traced its lineage back to 1934 as a pre-payment plan that 

provided hospital coverage for group members in New York City. In 1935, it joined 16 other plans 

in adopting the Blue Cross logo, later adding the shield when it merged with a local Blue Shield 

plan in 1974.1 Under state enabling legislation, Empire was established as a not-for-profit firm, and 

became essentially the "insurer of last resort," providing indemnity coverage to individuals 

regardless of age, sex, or medical history in return for exemption from state and local taxes and 

deep discounts, set by statute, in hospital rates. By the end of the 1980s, it had grown, aided in part 

by a merger with another local Blue, to encompass 28 eastern New York counties, from Albany to 

the metropolitan New York City area. With 11 million members-or about 60 percent of the state's 

population-and almost 10,000 employees, it was the largest nonprofit health insurer in the us2 It 

was also one of the most troubled. 

Like many other Blue Cross and Blue Shield plans, Empire found itself struggling to adjust 

to major changes in the health insurance industry that began cropping up in the 1980s. The most 

notable of these was the advent of pre-paid managed care and new competitive pressures from for-

''The Blue Cross and Blue Shield Plans: Past. Present and Future," Conning and Company, 2000, pp. 14,20: 

Empire Blue Cross and Blue Shield website, online at 

http://W\'M'.empireblue.com/about_empire/company_info/our ... lhistory.shtm, 2/14/2002. The name ''Empire'' was 

not adopted until 1985, when two Blue Cross and Blue Shield companies merged. 

Milt Freudenheim, "Empire Blue Cross seeking to become for-profit group," New York Times, September 26, 

1996, p. lA. Jane Fritsch and Dean Baquet. "Big insurer's path to crisis is study in mismanagement.'' New York 

Times, March 29, 1993. p. lB. 

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profit insurers-such as Aetna, CIGNA, US Healthcare-who specialized in providing it.3 As the 

advantages of their nonprofit status started to erode-beginning with the repeal of their federal 

tax-exempt status in 1986-Blues across the US found themselves losing ground to commercial 

insurers who, thanks to ready access to capital, grew aggressively and soon dominated the 

burgeoning managed care market. By 1992, with Blues' enrollment declining nationwide, about a 

dozen Blue Cross and Blue Shield organizations were placed on a "financial watch list" when their 

reserves-essentially, a pot of money put aside to cover excess losses-dipped below minimum 

standards set by the national association.4 

Empire was nearly at the top of that list. 5 In 1992, its reserves tumbled to $40 million, 

millions of dollars below the minimum set both by the state and by the Blue Cross and Blue Shield 

Association, which threatened to strip the company of its much-prized cross and shield logos. Over 

the previous six years, according to a 1993 Senate staff report, Empire had lost a whopping $600 

million; and in 1993 alone, over one million dissatisfied customers left the company-an exodus 

that showed no sign of slowing down.6 

While Empire's CEO at the time, Albert Cardone, blamed the commercial insurers' practice 

of" cherry-picking" the healthiest customers, leaving the company to cover the sickest, oldest, and 

most expensive individuals, critics pointed the finger at Empire's own managers for its dismal 

performance. In a series of scathing critiques in 1993-by the New York Times, which spotlighted the 

company in a three-part report; by state officials; and by the Senate Permanent Subcommittee on 

Investigations-Empire was assailed for its "extraordinarily poor management" and "abysmally 

poor service."? The company's initial foray into managed care, the Times reported, was a fiasco, 

thanks in good part to a "failed computer system" that led to "huge losses"; other computer 

problems were blamed for Empire's mishandling of "national accounts" -i.e., businesses based in 

New York but with employees stationed across the US. These and other misadventures created an 

aura of incompetence that only hastened the departure of valued customers8 

Empire's reputation took a further beating over ethically questionable practices. In its 

series on the company, the Times devoted an entire article to the "high corporate living" of its 

senior management, particularly CEO Cardone, detailing his lavish office furnishings and 

expensive perquisites while Empire was tottering on the edge of financial ruin. Another piece 

scrutinized the company's "sweetheart contracts" with board members, former executives, and 

4 

5 

6 

Conning, pp. 20-21. 

Fritsch and Baquet, March 29, 1993. 

According to a May 13, 1994 report in the New York Times, only the Washinb>ton DC area Blue plan was in worse 

financial shape than Empire. 

New York Times editorial, July 2, 1993, p. 14A. 

Jane Fritsch, "Review panel calls insurer poorly run," New York 7/mes, September 25, 1993, p. 28; Elizabeth 

McCaughey, "Pricing healthcare: A Blue gets the blues," Wall Street Journal, September 16, 1994, p. A 10. 

Fritsch and Baquet, March 29, 1993. 

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other insiders. Worse still, the company became mired in scandal in 1993, when its chief financial 

officer at the time, Jerry Weissman, was dismissed on charges that he had falsified financial reports; 

the following year, Weissman was indicted by a federal grand jury, and ultimately convicted of 

perjury and obstruction of justice and sent to prison. To add to its woes, one of its major clients, 

AT&T, dropped Empire in 1993, reportedly after accusing the company of fraudulently 

overcharging it for hospital bills9 

The cumulative effect of bad news and bad publicity eventually caught up with Cardone, 

who was dismissed by Empire's board-itself excoriated in the press-in May 1993.10 He was 

replaced in August of that year by Robert O'Brien, a former executive with the for-profit insurer 

GGNA, who, with the aid of new board chairman Philip Briggs, began tackling the company's 

many daunting problems. But O'Brien's tenure at Empire proved short-lived: in August 1994, he 

abruptly resigned as CEO to take a position elsewhere. Two months later, Empire announced that 

Michael Stocker, MD, also an executive at CIGNA, would take the reins of the troubled company. 

The Road to Recovery 

When Stocker arrived at Empire's headquarters, then on Third Avenue in midtown 

Manhattan, in November 1994, he found a workforce that was both demoralized and rudderless. 

"They had a really wounded management team," he recalls, "that had been through three CEOs 

and a bunch of acting CEOs, so morale was really terrible." Senior and middle managers had seen 

a number of strategic initiatives come and go in recent years, and were left with a sense that 

"whatever they tried to implement was a failure." Top managers had been aloof from the rest of 

the organization; the management style at Empire, says John Remshard, an 18-year veteran of 

C!GN A who joined the company in early 1995 as its chief financial officer, was "very autocratic" 

and secretive. Below them, employees were disaffected and urunotivated. "People had jobs for 

life," Remshard notes. "There was no pressure: they would get around to doing things. It wasn't a 

company known to be able to execute promptly and accurately." Even the "basics" got botched. 

"We couldn't get ID cards out on time," recalls Gloria McCarthy, who joined Empire in 1974 and 

became senior vice president for operations under Stocker- one of the few Empire veterans to be 

named to the new CEO's senior management team. " ... We weren't paying claims accurately or 

timely .... We couldn't answer telephone calls. We were a fat organization, in terms of number of 

employees, but we just didn't have a discipline." The company still did not have a viable managed 

care plan, and continued to lose market share at a rapid clip. By early 1995, membership had 

declined by 60 percent from the 1980s, dipping below five million, and reserves fell to $35 million, 

bringing Empire to the brink of insolvency. "The place," Remshard sums up, "was really a mess." 

9 

10 

Elisabeth Rosenthal, "Empire is emerging from a cloud," New York Times, September 26, 1996, p. 20D. 

One August 1993 Times editorial, entitled "The Sound of Snoring at Empire." castigated the board for its failure to 

monitor Cardone's perfom1ance. 

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In view of this bleak picture, Stocker scratched his early efforts to "set a strategic direction" 

for Empire. "I started off to do that," he says, "and it just became obvious that we weren't in a 

place to really talk about strategy initially." Instead, he concentrated on restoring the organization 

to a basic level of competence. "Early on," Stocker explains, "we installed a very elaborate 

continuous quality improvement system," which became known within Empire as SMI-strategic 

management and implementation. SMI was essentially a project management system which 

provided a standard format for organizing and closely monitoring a project, and keeping the 

company informed of its status along the way to completion. Each project came up for regular 

review in weekly senior management team (SMT) meetings that included not only top-level 

managers, but project leaders and members-as many as fifty people could sit in on an SMT 

meeting. In addition, once Empire acquired the technology, the SMT sessions were broadcast to 

desktop computers, so that every employee in the company could listen in. 

Stocker recruited Kenny Klepper, who had worked with him at CIGNA, to be the "process 

champion" at Empire, promoting SMI and its goals within the organization. It was not, initially, an 

easy job. "A lot of people," recalls Stocker, "didn't believe it was worth it." This was especially true 

of jaded veterans. "I was one of the people who had been here a long time," admits Gloria 

McCarthy, "who said, 'What do we need that for?"' It was, in her and others' eyes, just "another 

management program ... the flavor of the week." But McCarthy quickly changed her mind. SMI, 

she says, turned out to be "a phenomenal system," bringing structure and accountability to 

Empire's operations, and a new openness to its proceedings. In the past, she explains, "we were 

very much siloed. People were just focusing on their own little piece." Another company veteran, 

Grace Messina, who worked her way up from Grade II clerk to become Empire's chief information 

officer under Stocker, believed that the policy of broadcasting SMT meetings had a transforming 

effect on the organization. "It opened doors," she reflects, "for people at all levels to say, 'We are 

one, and we're going to function this way."' Finally, Stocker notes, the discipline of SMI made it 

possible for employees at all levels to take initiative and act independently. "Everybody knew what 

their priorities were," he says. "... So people relatively low in the organization from multiple 

disciplines could work on projects without a lot of interference from senior management." This 

would later prove to be an indispensable element in Empire's ability to bounce back from disaster. 

in the near term, however, SMl was "hugely critical," as Stocker puts it, in providing a framework 

for recovering from years of decline. 

Stabilizing Empire. Looking back on the first couple of years of Stocker's tenure, john 

Remshard recalls "working seven days a week, till two, three o'clock in the morning. We had hotel 

rooms across the street; we'd go over there and sleep for an hour and come back. ... It was not like 

a job-it was more like some kind of crusade." Almost every aspect of Empire's operations needed 

fixing, but the areas requiring most urgent action were the company's product line and its 

processing systems. 

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When Stocker took charge of Empire, its "book of business" was still largely "indemnitybased"-i.e., most of its offerings were traditional fee-for-service health plans, which, Remshard 

points out, were no longer" affordable" in an era of soaring medical inflation. This was particularly 

true after the New York state legislature rescinded Empire's special hospital discount rate, which 

had helped it compete with lower-cost managed care plansll "The entire product list of Empire 

had to be redesigned," says Remshard. The company scrapped its first, failed HMO plan and 

embarked on a feverish effort to put together an array of new managed care plans that provided a 

range of options for members; it also worked to build up its physician "networks" to make its 

products more attractive to customers12 

Meanwhile, Kenny Klepper, whom Stocker would later name senior vice president for 

systems, technology and infrastructure, took charge of an initiative, already in progress, to 

rationalize Empire's "core systems" -membership, billing, claims, and managed care. In part 

because of various "merger activities" in the 1980s, the company operated separate systems for 

each process13 Moreover, within each function, there could be several different systems; so, for 

example, Klepper notes, "we had six claims engines-one product was on one, another product 

was on another. They were all different. It was spaghetti." Over the next several years, Klepper and 

his staff worked to complete the "migration" of Empire's core operations into one "consolidated 

enterprise system," and to simplify individual processes (including reducing the number of claims 

engines down to two). The new streamlined system, says Grace Messina, "brought a lot of economy 

to the table. People don't have to know this system and that system." The simplification reduced 

errors, saving time and improving Empire's woefu 1 customer service record. After a few years, 

according to McCarthy, the company began "getting better at the fundamentals. We had gotten to 

the point where we could manage claim inventories, we could answer telephones, we could pay 

claims. We could do the things that were really our core business." 

By 1997, as Remshard recalls, Empire had succeeded in stanching the flow of customers 

and red ink. "We stabilized the enrollment of Empire," he says. "No longer were we losing 

business." Its new managed care products had been well received and were beginning to attract 

new customers. After years of operating losses, Empire began showing modest gains; in 1997, for 

the first time in its history, the company sought a credit rating from Standard and Poor's, and was 

pegged at B+-between "weak" and "marginal." It was a start. Reviving a company "the size of 

Empire," says Remshard, "is sort of like turning an aircraft carrier around in a harbor. It's a huge 

task." 

II 

12 

13 

The 1996 Health Care Reform Act deregulated hospital rates in New York and also required all health insurers in 

the state to offer coverage to individuals, including the chronically ill-a group that previously only Empire was 

obligated to insure. 

Most of those who bought Empire's products were employers who provided health insurance coverage for their 

workers. Of Empire's roughly 4.4 million members-i.e., insured individuals and their families-only 250,000 

purchased their health coverage directly from the company. 

Geoffrey E. Bock, "Empire Blue Cross and Blue Shield Delivers Customer-centric Services over the Web,'' draft 

case study, The Patricia Seybold Group, 200 I, p. 2. 

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Empire was by this point a much smaller organization. "We turned over, forcibly, ... 

probably 25 percent [of Empire's workforce]," Remshard estimates. From a high of about 10,000 

employees, the company had slimmed down to about 6,500. Its board had shrunk as well, 

decreasing from 44 to 14 members. At the same time, there were new faces at the top level of 

management. "We moved out the [former] senior management pretty much," says Stocker. Empire 

had repaired its soured relations with the state Department of Insurance, and rehabilitated its 

reputation in the press. "Things were on the road to recovery," says Public Affairs Vice President 

Deborah Bohren, who came to Empire in 1996, "in the sense that it was a new management team; 

there was a commitment to ethical behavior, sound management, no excesses ... and at the same 

time, a very open management process." It was at this point in its still shaky recovery that the 

company's leaders made a bold decision: they would sell Empire's building on Third Avenue in 

midtown Manhattan and move into new quarters at the World Trade Center. 

New Digs, New Tools 

In a sense, there were two distinct views within Empire on the purpose of the move. There 

was general agreement that it was a good time for Empire to sell its high-rise property. Midtown 

Manhattan real estate was "sizzling," says Klepper. "We sold a building that was [about $92 

million] on the books for $174 million. Downtown [where the World Trade Center was located] 

was giving incentive packages to go in." But there was debate within the company over how best to 

use the financial windfall from the sale. To General Counsel Linda Tiano and others who kept an 

anxious eye on the company's bottom line, the money was needed to shore up Empire's reserves, 

which were, she points out, "still very low. And really, the primary reason we were doing the sale 

was to give our reserves a bump they very, very badly needed. So finances were just a huge issue 

at that point. Obviously, the whole model doesn't work if you end up spending all the money." For 

Klepper and others with a role in Empire's systems development, however, the sale and the move 

provided a golden opportunity for capital investment-to "refresh [old] technologies." In its old 

building on Third Avenue, he says, "they had every piece of old junk PC. Nothing was standard; 

the network was not very good; all kinds of different phones-just this gobbledygook of stuff that 

had accumulated over all the years." Klepper wanted to use some of the funds from the sale to 

modernize the company's technology; he and his staff envisioned a complete infrastructure 

overhaul, upgrading every system and piece of equipment to "state-of-the-art technology," and 

bringing Empire, in Klepper's words, "from the Flints tones to the jetsons." 

Behind the debate over how best to use the proceeds from the sale lay some stark truths 

about Empire's position as a nonprofit in a largely for-profit world of health insurers. "It's a very 

competitive marketplace," Klepper observes. " ... When you go to talk to Merrill Lynch about 

[insurance] products, you're right in there with the for-profit companies. It's dog-eat-dog. There's 

no, 'Oh, you get a little bit of slack because you're a nonprofit.'" Health insurance-particularly 

managed care-in the 1990s was a capital-intensive industry, requiring large infusions of cash to 

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develop and manage good data systems and-in order to take advantage of significant economies 

of scale-to grow through acquisitionsl4 In this intensely competitive environment, Empire 

struggled to keep up with commercial insurers, who could raise capital by selling stock. "We don't 

have access to capital," Tiano observes. " ... We have virtually no source of capital other than a 

regular loan and, as a nonprofit with no source of capital, our credit rating is lower than it would 

be if we were a for-profit, so we'd have to pay more for a loan." 

Empire, in fact, hoped to put an end to its handicap in the health insurance marketplace. In 

September 1996, Stocker announced that the company would follow in the footsteps of several 

other Blues and seek for-profit status. This would be no easy task: Empire would need the approval 

of the state insurance department, the state attorney general, the state supreme court, the federal 

Securities and Exchange Commission and-late in the process-the state legislature15 Ahead lay 

years of negotiation and lobbying, and an uncertain outcome. ln the meantime, whatever capital 

Empire had to spend would have to come from its premium revenues or itS investments. This 

meant, notes Deborah Bohren, that the company had to "make hard decisions on where you're 

going to put your resources." The proposed technology upgrade was one such decision. "Some of 

the discussions got a little testy," recalls Tiano, "because the amounts of money that were being 

looked at were just mind-boggling." 

Empire's financial watchdogs were most concerned with building up the company's 

surplus-i.e., the cushion on top of the minimum mandatory levels of reserves required by the state 

and the national Blue Cross and Blue Shield Association. The surplus, says Tiano, was "the money 

you can use to invest," but at the same time, she adds, the question remained: "how close do you 

want to get to your minimum reserves, knowing that anything can happen in this industry?" While 

there was widespread agreement that the consolidation and streamlining of Empire's core systems 

had been a good use of scarce resources, skeptics at Empire were less persuaded of the need for a 

comprehensive and costly infrastructure upgrade. "During the period of our recovery," Remshard 

notes, "we made do with what we had. We didn't have any capital that we could invest in 

modernizing our systems, ... but people did an incredibly good job of keeping the stuff running .... 

If your system is good enough that you get the claims in ... and you pay the right amount and the 

member never hears from the doctor again about the bill, that's fine. And that's what we were 

doing. We were doing it very well." 

To Klepper, however, the expense of the upgrade would be more than offset by the 

improvements in service it would bring- and, by extension, the new customers it would attract. He 

viewed himself as "very much a change agent," who came to Empire as a "process champion for 

customer service, because in the beginning, customer service was an issue," and he argued that a 

focus on good service made sound business sense. "The cash you invest in these systems," he 

!4 

!5 

Conning, pp. 27-29. 

Frcudenheim, September 26, !996. 

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maintains, "has to yield return .... [But] economic value is not always, 'it's cheaper.' Sometimes it 

helps you sell; it helps create revenue." In the end, the company decided to fund the infrastructure 

modernization. The proceeds from the sale were enough to allow Empire to put aside some money 

for its surplus, and spend some on the upgrade. "Financially," says Klepper, "it was a home run." 

Empire signed its lease with the World Trade Center in December 1997. The ten floors it 

would occupy were just "cement slabs," in Klepper's words. "We built the whole thing out."16 The 

infrastructure modernization was laid out in a three-year plan drawn up by Mike Galvin, vice 

president and chief infrastructure officer at Empire. The plan encompassed all aspects of Empire's 

technology systems, from the "wide area network," which provided connections to both internal 

and external users, to the "server environment," to individual workstations. When the work was 

done and employees "walked into the World Trade Center," Klepper says, "everything was stateof-the-art. All the machines were standard; standard software; high performance network; brand 

new phone system .... It was just like they went to a different universe." 

Settling In. By 1999, Empire was well established in its new quarters, where its corporate 

offices and a few "dedicated" call centers, among other things, were housedl7 The World Trade 

Center was, however, only one of eleven sites occupied by the company. Its Albany offices, which 

it had acquired as part of a 1985 merger, were home to Empire's main customer service center and 

its claims processing center, as well as its medical management operations.18 National accounts 

were handled in its Middletown site, north of New York City. A new facility in Melville, Long 

Island, housed a nurse call center as well as a customer service center. A number of other Empire 

offices scattered around the state, and in Connecticut, handled specialized pieces of Empire's 

business, such as Medicare.19 In addition, the company's mainframe computer was located in a 

secure, undisclosed site. 

The "decentralization" of Empire had been going on since the 1985 merger, but had 

accelerated in recent years. Some considerations of "disaster recovery" entered into the company's 

decision to maintain multiple sites-i.e., if some catastrophe or major malfunction should hit one 

location, its functions could be transferred to another. But for the most part, economics had been 

the driving force behind decentralization. "We have been moving more and more jobs out of New 

York City, probably for the last five or six years," says McCarthy, to take advantage of lower rents 

16 

17 

18 

19 

Empire leased the following floors at the World Trade Center: 17, 19. 20, 23, 24. and 27-31. It also leased two 

·'sub-floors," one in each of the two towers. 

One of the call centers served New York City employees: two others served two separate labor union accounts. 

The Medical Management Division \V'dS responsible for '"oversight of utilization activities,'' according to Angelo 

Dascoli, vice president for medical management at Empire. Essentially, this meant approving, or denying, medical 

services and monitoring patient care. Empire employed a staff of physicians and nurses. and operated a 24-hour 

nurse call center for members. 

After the World Trade Center, which housed 1,900 employees, Albany was the largest site, with about 1,800. The 

rest ranged in size from several hundred to as few as ten employees. 

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and lower prevailing wages outside the metropolitan area. But, she adds, in light of events to come, 

that would prove to be "the best decision we ever made." 

Meanwhile, Empire's financial health continued to improve so that, in 1999, Standard and 

Poor moved its credit rating a notch higher- to BB, or "marginal." It was still in the "vulnerable 

range," but now within shooting distance of S&P' s "secure range." Things had stabilized enough to 

prompt the company to declare in a 1999 strategic plan that the time had come to "shift our focus 

from recovery to leadership." 

Choosing Operational Excellence 

In April1999, David Snow joined Empire as its president and chief operating officer. Snow, 

who had most recently spent five years at Oxford Health Plans, a commercial insurer, had worked 

with Stocker in the 1980s at US Healthcare, another for-profit firm that had since merged with 

Aetna; Stocker, says Snow, knew that "part of what ... I brought to the table was a strategic kind of 

change mentality" that would be "compatible with [his] own views." When he arrived at Empire, 

the company had "just finished executing on a strategy to stabilize [it]"; it had done "a lot of gutwrenching downsizing," and had its first break-even year. "It was time to develop a new strategic 

vision,"' Snow continues, " ... so the timing couldn't have been better for me to come in." 

Despite the strides made over the last few years, Snow saw considerable room for 

improvement in Empire's operations. "My harshest criticism when I came to Empire," he recalls, 

"was that we were not a customer-facing company. We tended to focus inward, so that attorneys 

wrote the customer-facing documents, and they were unintelligible." The company's many 

different insurance products and physician networks led to confusion among members and doctors 

alike, and created "huge inbound phone volume, and total dissatisfaction"-not to mention high 

error rates. Empire's 40 call centers were "segmented"-specializing in specific accounts and 

therefore unable to "support each other because they had [only] their unique knowledge." 

Customer service representatives leafed through voluminous manuals-what Stocker calls 

"praying hands books" -to answer questions on products and benefits. Although Empire's 

enrollment had stopped declining, it "hadn't had net new growth in years," Snow says. "It enrolled 

people, and it lost people out the back door .... I knew to get forward growth we had to work on 

retention. We had to work on our pricing. We had to work on customer satisfaction to drive topline growth." 

With these concerns in mind, Snow asked Empire's senior managers to consider three 

different "value disciplines," or models, and adopt one to be the company's "primary focus": 

"operational excellence," which had as its goal "executing business flawlessly"; "product 

leadership," which emphasized new and cutting-edge product designs; and "customer intimacy," 

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which specialized in knowing and meeting the particular needs of customers20 By all accounts, 

there was little argument about which discipline was right for Empire at that point. "We couldn't 

survive," Stocker observes, "by being intimate with the customer, having boutique design plans, 

because we couldn't even implement a simple plan. And we were never going to be product 

innovators, because we could hardly do the ones we had." In short, Snow says, "it was pretty slamdunk. It wasn't a heavy debate." Operational excellence was, in Stocker's words, "really our only 

option." 

Becoming Operationally Excellent. As articulated in Empire's strategic plan, the quest for 

operational excellence meant being able to "deliver our products better, faster, and cheaper than 

our competitors" -or, as Snow puts it, "let's [make] it simple; let's make it error-free." In part, this 

involved streamlining the company's products and processes. Over the years, Empire had 

accumulated a large and unwieldy inventory of health insurance offerings. "We provided every 

kind of health insurance product in the market," says Stocker. " ... We had piled product on 

product on product ... and never got rid of the old products." Led by Snow, the company began 

"winnowing out the bad products," in Stocker's words, "and simplifying." In place of "hundreds 

of variations and special arrangements," as one annual plan put it, Empire would offer a smaller 

number of standardized products with "well-defined options"; some types of coverage were 

dropped altogether. The winnowing process was not without cost, especially for the company's 

sales force, who had to break the news of canceled products to unhappy customers. "It's painful in 

the short term," says Bryan Birch, senior vice president and chief sales officer at Empire, "to 

dissatisfy customers to the point where they leave the company." In all, Stocker estimates, "we lost 

about 25 percent of the business," though the losses were generally balanced by gains elsewhere. 

But, he adds, "when we got done, we could manage [the products]. The phones stopped ringing. 

When people did call, the customer service (representatives] knew how to answer their question." 

In addition, Empire boiled down some eleven different provider networks to two, and simplified 

its confusing lD card system, which, says Snow, had comprised "185 different cards with different 

[product] names." 

The operational excellence initiative also launched a new round of process redesign. All of 

Empire's "major processes/' says Snow~ 11 claims, customer service, enrollment, sales, billing" were 

"re-engineered" to meet the "better, faster, cheaper" imperative. One of the most highly touted of 

these was the "first pass" rate for claims-i.e., the percentage of claims that could be paid 

automatically, without the intervention of a claims examiner. At the beginning of Empire's odyssey 

in operational excellence, the company's first pass rate was, according to Gloria McCarthy, a 

dismal 35-40 percent. McCarthy's staff sat down with information technology (IT) employees to 

review claims processing at Empire, searching for situations that caused claims to "suspend" and 

20 Quotations are dravm from Empire's 1999 strategic plan. The models themselves were taken from The Discipline 

of Market Leaders. by Michael Treacy and Fred Wiersema. In preparation for their discussion, Empire's senior 

managers were asked to read the book. 

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for ways to program the system to handle them automatically. As a result, by 2001, the first pass 

rate had shot up to about 89 percent. 

For the most part, streamlining and re-engineering efforts like these, while challenging, 

were uncontroversial within Empire. This was not the case with the other major initiative 

associated with operational excellence: an ambitious plan to become a "world class" company 

through "the rapid adoption of technology."21 

Becoming "Technology-centric." For Snow and for Kenny Klepper, his chief ally in 

promoting a "zero-defect mentality" at Empire, technology was a means both to improve the 

company's performance to and build its "brand equity" in a marketplace dominated by 

commercial insurers whose products were often less expensive. Operational excellence, says 

Klepper, was a "customer-facing approach that says if I'm providing a service, that service should 

be reliable, it should be 24 by 7, it should always be available." The implications of this "operating 

philosophy" were profound for the organization. It meant, for one thing, building "a lot of 

redundancy" into its systems. Redundancy-essentially, back-up capacity-and its correlate, "failover," ensured that, in the event of an outage, a system would continue to operate "seamlessly."22 

"We kind of built this religion: operational excellence, redundancy, faiJ...over, reliability," says 

Snow. But, while prudent, redundancy and fail-over were expensive precautions, requiring 

duplicates of major system components, such as servers and telecommunications equipment. 

Snow and Klepper defined reliability to mean more than undisrupted service, however. 

The term also embraced the notion of continuous accessibility. To achieve this, they looked chiefly 

to a relatively untried approach: "e-business." Using "web-facing technology," Empire could be 

available to its customers- brokers, physicians, members, and employers- 24 hours a day with an 

array of "self-service" options on its website23 Anything that could be done "over the phone or by 

fax," the premise was, customers "should be able to do through an e-business portal."24 Snow was 

eager to see Empire stake out an early claim in the new world of e-business. Empire had "missed 

the managed care curve" a decade earlier, Bohren observes. "Dave came in ... and said, 'The next 

industry curve is e-business, and we need to get on that curve .... We need to get out in front."' The 

combination of e-business capabilities, sophisticated new telecommunications systems, and other 

cutting-edge technologies would, Klepper and Snow believed, catapult Empire into a leadership 

position in the local health insurance community. "We think," Klepper says, "that obsessivecompulsive demand for high performance, reliability, being there when the customer comes to you 

is a differentiator in the marketplace." 

21 

22 

23 

24 

Empire strategic plan, 2000-2002. 

If, for example, one machine were to shut down, its functions would be automatically picked up by its back-upi.e., it would "'fail over" to another machine. 

Brokers function as intermediaries between insurers and employers. particularly small ones. [Bock, p. 4.] 

Bock, p. 6. 

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But the proposal to take Empire to the leading edges of technology- particularly the ebusiness initiative-sparked renewed debate over the right use of the company's limited resources. 

If approved, the project would be expensive. The web technology needed to power the e-business 

end of it would cost over $60 million; other parts of the project- primarily telecommunications 

technology- would run to $20-$30 million. For any health insurer, let alone Empire, an outlay of 

that magnitude would give pause to some. "Very few companies have tried to do all of that all at 

the same lime," Tiano points out. "Even ones with far more capital than we have haven't really 

tried to go that far. It was a lot to bite off." 

The opposition from some quarters was strong. Listening to Snow's presentation of his 

three-year plan for installing new technologies at Empire, CFO john Remshard recalls, "I just said, 

'I don't get it. How are you going to pay for that? ... We don't have the capital. We can't build this 

into our rates. And how do you know we can even do that? This is a company that just came out of 

its grave."' The possibility that a company could get in over its head technologically was not a 

remote one. Skeptics could point to the recent example of Oxford Health Plans which had 

developed a massive new computer system in the late 1990s, only to have it crash during the "cutover" from the old system. Oxford "developed all new systems," says Remshard, "and boom! They 

blew up on them. They lost control of the business .... All the technology that Oxford did just sank 

the company."25 

Remshard was preoccupied with nursing Empire's finances back to health and readying 

the company for an initial public offering when, and if, it received the go-head to convert to forprofit status. "I have a very clean balance sheet," he says. 'Tm aiming to have the simplest and the 

cleanest financial set-up available. And I wasn't going to mortgage the company's future for a 

systems project that, at the end of the day, may or may not work. You never know about these 

things. No matter how careful you are, sometimes they may not work; or they may work, but the 

market changes." While Empire's fiscal condition had steadily improved since 1994, it was still in a 

"turnaround" stage, with little margin for error. "We kept our expenses Jean," Remshard observes, 

"and that's what !like. You watch your profit margins; you ... keep your rates competitive. And 

the first thing I worry about is how our management group is controlling administrative costs. You 

don't spend it unless you have to." 

For their part, Klepper and Snow argued that the new technologies, along with process 

redesign, would ultimately reduce administrative costs by improving productivity, as measured by 

the number of members served by each employee. While acknowledging that "we are more 

technology-centric than probably a lot [of other companies]," Klepper maintained that the system 

being proposed would "yield value in the marketplace." It was, he concedes, the duty of the 

company's fiscal watchdogs "to be frugal and not just buy gadgets," but at the same time, their 

insistence on an adequate "return on investment" (ROl) could stifle innovation. "Yes, it has to show 

25 According to a March 2, 1998 New York Times editorial, Oxford's losses in the last months of !997 "exceeded the 

total of all its previous profits.•· 

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some ROI," Klepper says, "but how much accounting do you have to do? Because you can grind 

yourself into dust in some of !hose ROI analyses .... In some way, you have to believe !his is what 

you have to do, because ... management is not purely an accounting exercise." 

Presiding over !he debate in the summer of 1999, Mike Stocker was acutely aware !hat if he 

chose to go wilh !he leading-edge technology, he'd be taking his company down a path whose end 

he would not see for years to come. "The strategies !hat you devise and carry out," he reflects, 

"really take you down lhree or four-year courses; and you'd better have !he right strategy, because 

if it's !he wrong [one] and you go in !he wrong direction, it's very hard to change. It takes a long 

time to change." Nonelheless, he gave !he project the go-ahead. "The e-business investment," 

Stocker acknowledges, was "frankly, really a bet," but he was willing to put money on it, 

essentially for two reasons. "Part of it stems from what we lhink !he market is going to look like," 

he explains, "and part of it . . . was a way I could keep good people." Wilh "e-business just 

exploding" in !he late 1990s, he points out, "I could see my good IT people saying, 'What am I 

doing working on a claims system?"' Lacking other means to reward valued employees-such as 

stock options or "huge bonuses" -!he technology projects were a way, Stocker concludes, "to keep 

people here, because I could keep !hem intellectually interested." 

Going to the "Leading-Edge" 

The massive, multi-stage technology project was implemented lhrough Empire's by now 

well-oiled strategic management and implementation process. "We would never have been able to 

make the volume of change from 1999 to [late 2001]lhat we made," Snow observes, "wilhout the 

SMI process." The centerpiece of the project was !he e-business initiative, which got underway in 

October 1999 as a collaboration between outside vendors and Empire's own "advanced technology 

engineering center," a team of about 100 IT specialists. They would essentially be starting from 

scratch, according to Shevin Conway, who, as chief technology officer, was responsible for !he 

development of web-based technologies at Empire. "All [!he company had in place] was a contentbased website," he says, " ... !hat basically just showed brochure wear .... It was static information. 

No transaction-based processing going on at all." 

It was !he opportunity to start from a "white board wilh no markings on it," in Conway's 

words, !hat fired up !he staff of !he advanced technology center. "Our passion," says Klepper of !he 

group, "is innovation. That's what keeps my team really motivated." They envisioned a huge 

technological leap forward: a website with "a very large set of features," Conway explains. "It 

wasn't like, are we going to go out wilh these five or six [features], and let's see how it goes from a 

marketing perspective, and then we'll add on lhe rest. ... It was, here are lhe 30 things !hat we need 

to do, and let's get !hem out !here." 

Over roughly !he next two years, !hey launched four web portals: for brokers, for 

members, for physicians, and for "mid-tier" employers-i.e., !hose wilh up to 250 employees. Each 

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portal was designed, says Conway, with the "self-service paradigm" foremost in mind. A wide 

range of critical transactions could be conducted online: physicians, for example, could submit 

claims which would be "auto-adjudicated" on the spot; brokers could select health insurance 

products to offer clients, and enroll members; employers could handle registrations and changes in 

benefits; members could record changes of address and other similar data, or check on the status of 

claims26 "What was unique about what we did," Klepper notes, "was we provided some 

technology that allowed you as a non-technical consumer to sit at home on a PC with no software 

to load, just with a browser, and to literally look into our mainframe [computer] and see your 

claims." In addition, customers on any portal could make use of a "click to talk" feature that would 

connect them by phone to a customer service representative, who could provide assistance with 

online transactions, by "co-navigating" the screen with the customer27 Empire's competition had 

nothing like this to offer. "We have," Klepper proudly declares, "a very industry-leading set of eservices." 

Call Center Technology. The introduction of web technology also helped transform 

Empire's management of its inbound calls, through the use of an "intelligent contact management" 

(ICM) system. It began with "web calls" -i.e., phone calls originating from customers using the 

"click to talk" option on the company's website. Based on a caller's web log-in number, the ICM 

would direct the call to the appropriate customer service representative. The ICM, moreover, was 

"constantly talking to the voice switches out there," as Mike Galvin puts it, so that it could route 

the call to the next available agent at any location-whether, for example, in Empire's offices in 

Albany or those in Melville. The system also provided agents with what Klepper calls a "screen 

pop," which filled them in on the customer's identity and benefits package, as well as notes from 

recent contacts. "They know who it is," Klepper says, "before they ever pick up the phone." 

Impressed by the "suite of tools" offered by JCM, Empire's technology staff decided to 

widen its application. "After we saw what we could do with the ICM when it came to web calls," 

Galvin explains, "we said, why not leverage this thing for our voice calls." Empire already had in 

place an IVR-or interactive voice response-system for inbound calls; customers could punch in 

their ID number and then select from a menu of choices, which included an automated self-service 

option. Empire linked its IVR (voice) system with its call management technology by building an 

IVR "server farm," which the ICM could "talk to"; as with web calls, the ICM could "load-balance" 

phone calls "across the whole enterprise;' Klepper says, "versus just in a single call center." 

The advent of web technology fundamentally altered the way phone inquiries were 

handled at Empire. Previously, customer service representatives essentially specialized in a single 

account. "Each contract has its own little nuance and complexity," Gloria McCarthy explains, "and 

prior to 2001, people had to be trained and commit that either to memory or to paper documents." 

26 

27 

Bock. pp. 8-10. 

Ibid. 

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But in 2001, all of the benefits for Empire's different accounts were put online, which meant, says 

Carl Tesoro, vice president for customer service, that Empire could "not only bring up the 

individual's record, but very easily bring up the benefit profile [as well]." It was "a major 

breakthrough," says McCarthy, "for us to put [benefits] online." Customer service representatives 

began to be trained to "handle eight or ten different contracts," Tesoro notes, "whereas before they 

would have typically handled one." While some dedicated service centers remained, due to 

contractual arrangements-including those for New York City employees and labor unions at the 

World Trade Center-most of the 40 call centers at Empire were consolidated into five "virtual call 

centers," able to handle most accounts. 

By this time, most of Empire's operations had been transformed by advanced technology. 

In addition to the web-based systems, the company had introduced new imaging techniquesknown as optical and intelligent character recognition (OCR/ICR)- which scanned paper claims 

directly into digital form. What was once a paper-driven operation had become almost entirely 

electronic. In the mid-1990s, McCarthy observes, someone who went "on a tour of a claim shop 

would see paper, lots of paper. You go there today, you see no paper. Everything is online." 

Reliability. But, as McCarthy notes, an increased reliance on digital and web technologies 

meant an increased vulnerability to system failures. In an effort to minimize disruption, Klepper 

introduced a policy of" aggressive self-reporting" on failures and outages. The centerpiece of these 

were "reliability meetings," held three times a week, in which Empire's IT staff-and later, at 

Klepper's suggestion, members of the operations staff-discussed, via videoconference connecting 

all of the company's sites, any system glitches and problems that had arisen. Even "very minor" 

problems got "senior level attention," Klepper says, "because reliability is not finding out what the 

problems are and [then] you fix them; it is all about how you prevent them from happening 

again."28 The staff brought "intensity," as Klepper puts it, to its quest for reliability. It was "almost 

like it's unacceptable to have an outage anymore," says Galvin. "You had to have that mindset." 

Reliability also meant closer monitoring of Empire's operations, with the aid of new 

technology. For example, through a "corporate event monitor" on Empire's intranet, managers 

could track the performance of all the company's call centers, in terms of "speed to answer" and 

other measures, in real time-i.e., witl1 only a 5-10 minute delay. This turned out to be a strong 

selling point with corporate customers. "When a major account comes in," explains Birch, "and 

says, 'Customer service-how good are you? I want performance guarantees on these things,' we 

show them [the call center monitoring system], and we say, 'Here's your guarantee.' ... It's not 

measuring performance every quarter-it's literally right there in front of you on a real-time basis. 

When a customer sees that, plus all the other technology that is tangible, they are wowed by it." 

28 To chart it' progress in preventing outages, the company established a new measure: "mean time between failures.'" 

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Finally, reliability meant building in redundancy and fail-over in the new technologies at 

Empire. Redundancy and fail-over features had been included in the systems upgrade that the 

company had undertaken when it moved into the World Trade Center. "We had redundancy all 

the way down to the [wall) jack/' says Galvin. The same philosophy was followed as new systems 

and capabilities were introduced. So, for example, two separate ICM machines were installed, one 

in Albany and one in the secure site where the mainframe computer was located; one IVR server 

farm was housed in the World Trade Center, with a back-up in the company's secure site. In 

addition, the data from every server-as well as from the mainframe computer-was regularly 

backed up on tape and stored at a secure location. And, in the event that one facility suffered an 

outage, various routing technologies, such as the JCM, would redirect traffic to other Empire sites. 

"We engineer[ed) for failure," says Galvin. "We engineer[ed) for the worst thing that could 

possibly happen." 

This was not to say that Empire did not have formal "disaster recovery" plans in hand. At 

about the same time the company moved into the World Trade Center, it hired a consultant to help 

put together plans that would keep it operating in the event of what David Snow calls "a big-bang 

disaster." All of Empire's divisions were required to formulate their own recovery plans, which 

were folded into a larger company-wide document. The plans were "operationally focused," Tiano 

explains. Typically, they included provisions for setting up command centers and appointing 

employees to staff them; but beyond that, Tiano says, they were short on specifics. They were 

"high-level documents," Galvin notes. "Didn't have detail, exact detail [that said] push this button 

and do this and that." The reliability initiative, by contrast, was designed to deal with smaller 

crises, according to Snow, such as system crashes or power outages. "It just so happened," he 

notes, "that reliability had been taken so far" that it would prove to be "a massive disaster recovery 

tool beyond our wildest dreams." 

Upswing. By the end of August 2001, most of Empire's new web services were in place. 

The broker portal was the first to be launched, in October 2000, followed by the member portal in 

December 2000 and the physician portal in August 2001; the employer portal would be completed 

a few months later, in December 2001.29 The broker portal was an instant success. After a little less 

than a year in operation, almost 1,800 brokers-out of some 4,000 in Empire's database-had 

registered to use the portal30 Use of the other portals, however, lagged behind. By November 

2001, 74,000 of Empire's 4.3 million members would have registered to use the member portal, and 

8,500 of 70,000 doctors, the physician portal. Klepper expected the numbers to rise over time. "It 

takes awhile to get people up the curve," he says, "and [for) people to get used to [using the 

website)." 

29 

30 

Bock, p. 6. 

All figures on portal registration are drawn from Bock, pp. 9-10. 

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Meanwhile, other key performance indicators rose significantly between 1999-2001. 

Enrollment figures, notably for Empire's managed care plans, grew steadily over this period, 

netting the company its largest new membership increase in over 20 years, according to Snow. 

Productivity, as measured by the average number of members served by each employee, had 

grown as well. In 2000, the number served increased by over ten percent, from 579 to 643; in 2001, 

the company reported a 9.8 percent productivity gain-Empire served 320,000 more members with 

nearly 200 fewer employees31 At the same time, the company was consistently operating in the 

black; the years 1999-2001 were, says Snow, among the "three most profitable years in the 

company's history." Its surplus skyrocketed from a low of $35 million in the mid-1990s to a healthy 

$839 million in 2001. It was such figures that prompted Standard and Poor to raise Empire's credit 

rating from BB ("marginal") to BBB ("good") in 2000, and to BBB+ in May 2001. Empire had gone, 

says Remshard, from being" a company that was technically bankrupt to [one] that's considered 

investment grade." 

There were signs of qualitative improvement as well. In August 2001, the BlueCard 

Performance Index-a measure of each Blue's level of service in the national BlueCard programgave Empire a score of 100 percent.32 It was, Snow notes, "the first time in the company's history" 

that it had received the highest possible score. In addition the National Committee for Quality 

Assurance, an accrediting body, gave Empire's HMO plan-once a dismal performer-a rating of 

excellent, the highest rating it awarded. No longer pilloried in the press for poor management, 

Empire had won the editorial support of the New York Times in its bid to become a for-profit 

insurer. It was little wonder that the company's strategic and annual plans had largely dropped the 

language of recovery and turnaround, and instead looked optimistically to the future and 

achieving its ambitious goal of "bridging the gap to world class." 

September 11, 8:48 a.m. 

When American Airlines flight 11 slammed into the North Tower of the World Trade 

Center, Empire employees in the building felt the powerful jolt. "The building swayed so much," 

recalls Grace Messina, "that my desk drawers opened up, and when it swayed back, my desk 

drawers [closed]." While some initially thought that an earthquake might have struck, most soon 

concluded that a plane had hit the building. But, says Angelo Dascoli, vice president for medical 

management at Empire, "we thought it was a small plane that had hit the building, because lots of 

smaller planes would fly at about the 100th floor level, down the Hudson." At the time, Dascoli had 

just finished a meeting with Dr. Alan Sokolow, head of Empire's Health Services Department, at 

Sokolow's office on the 28th floor, and had been about to take the elevator down to his office on the 

23'd floor; instead, however, he decided to stop by the office of one of the company's lawyers. This 

31 

32 

Empire Blue Cross and Blue Shield Annual Plans, 200 I and 2002. 

The BlueCard program allowed members access to any Blue Cross and Blue Shield provider nationwide. The 

resulting network, Birch points out, was twice the size, in number of physicians, of Empire's nearest competitor. 

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turned out to be a lucky move: when the American jetliner crashed into the tower, it sent flames 

shooting down the elevator shaft and into the lobby, which was then engulfed in flames. Anyone 

who was in the elevator or the lobby at the moment of impact suffered severe injury or death. Mike 

Galvin, too, would normally have been in the lobby or on the elevator up to his office at about that 

time, after his regular Tuesday morning workout; but his gym partner had called to say he would 

be unable to join him, so Galvin skipped the gym and was instead in his office on the 30th floor. "I 

thank God," Galvin says, "that he called me." 

Looking out the window after the impact, Galvin saw debris falling from the plane, and 

immediately began shepherding Empire employees out to the emergency exits, where they joined a 

stream of people making their way down the stairwells. By all accounts the descent was orderly, 

though there were increasingly ominous signs of a major disaster: the smell of jet fuel saturating 

the air, gray smoke filling the corridors, water from the emergency sprinkler system pouring over 

the stairs. Later, many recalled meeting firefighters coming up the stairs. "That's something that 

will be etched in my mind forever and ever," says McCarthy. "l really felt for the firemen," Dascoli 

recalls. "By the 20th floor, they were exhausted. They all had packs on; the [oxygen] tanks looked 

like they weighed about 40 pounds .... The thought ran across my mind that these guys have to go 

another 50 flights more." 

Once out of the stairwells and into the lobby area, evacuees confronted a terrifying scene of 

pandemonium. The lobby, once paneled in marble, was unrecognizable-both McCarthy and 

Dascoli remember thinking that they had come out into an unfinished basement area. From there, 

people were directed out of the tower by emergency personnel. For some, this turned out to be the 

most harrowing part of the ordeal. "What exit you got out of the building," says Messina, "really 

determined what you were going to see, what you were going to experience, and where you were 

going to go." Dascoli was "led out a kinder way," he notes, a route that took him through an 

underground mall and then up a stairwell that brought him some distance from the World Trade 

Center when he resurfaced. Galvin was less fortunate. While descending to the lobby from the 

mezzanine, he "came around to the windows where the plaza was, where I first realized how 

serious this was," he recalls. "All the carnage was out in the plaza. [There were] burning bodies; a 

body had fallen right next to me." Galvin was "a little bit in shock," he says, "but I also couldn't 

help but think about all the guys I was seeing going up the stairs, and the people around us, 

helping us. We saw the firemen and the policemen, the Port Authority guys helping everyone." 

Out on the plaza level, the situation grew increasingly chaotic. A second jet, United 

Airlines flight 175, struck the South Tower at 9:03 a.m., showering debris on people still fleeing the 

North Tower. "There was glass flying," Deborah Bohren remembers. "I put my briefcase over my 

head .... Plane pieces were falling." Emergency personnel were hurrying people away from the 

towers." As we got out through the [Marriott Hotel] bar," Bohren says, "the policeman at the door 

kept saying, 'Run, get away from the building. Don't look back. Just run."' 

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Not knowing what was happening, evacuees imagined the worst. "! didn't know if we 

were at war, or what," Bohren recalls." ... l didn't know if planes were hitting every place." When 

the South Tower collapsed at 9:59a.m., "people started screaming, They're shooting again.' We 

thought planes were buzzing us." Bohren had "an out-of-body experience," as she raced away 

from the World Trade Center. "I can see myself with my purple Patagonia bag, serpentining, not 

knowing, am I safer in a building or out of the building?" As Dascoli, who was by then several 

blocks away, watched people running by, ahead of the huge cloud of smoke and debris billowing 

out from the destroyed South Tower, he believed there might have been another attack. "! 

thought," he says, "there were troops on the ground shooting." 

Not everyone who was in Empire's World Trade Center offices that day made it out safely. 

One of the most poignant stories to emerge from the September 11 attack concerned two Empire 

employees, Ed Beyea and Abe Zelmanowitz. When Beyea, a quadriplegic, could not be evacuated 

without the assistance of firefighters, Zelmanowitz insisted on staying with him until help 

arrived-despite "desperate phone calls," the New York Times later reported, "from his brother 

begging him to leave.''33 They died together when the North Tower collapsed at 10:28 a.m. 

"Nobody," says Bohren sadly, "expected the building to fall." There were other acts of heroism by 

Empire employees. "One of our security guards," Bohren says, " ... went back into the building to 

help. He [was the father of] a five-year-old son." In all, nine Empire employees died in the attack, 

along with two long-term consultants. Three others were hospitalized with severe burns. 

Those fortunate enough to escape unhurt still faced a perilous journey to safety. In the 

scramble to get out of range of falling debris, people began to trip and fall over each other. "That 

was the first time I felt panic," Galvin says, "because I had people lying on top of me, and there 

was a big pile of them." Galvin managed to extricate himself, and help an injured woman to safety, 

and then continue running up West Street away from the crumbling towers. He was unable to 

make calls out on his cell phone-a problem many ran into as intensely heavy cell phone use 

throughout the city jammed the airwaves-but a friend managed to get through to him. Galvin 

asked him to "please call my family first," and then to call his brother and instruct him to contact a 

colleague at Empire's Albany offices "and tell her to invoke disaster recovery" -i.e., begin 

implementing the company's disaster recovery plans. Eventually, Galvin made his way to his 

parents' house. "I had dinner with them," he says. "1 was just very grateful to spend time with 

them. But 1 went from there to Albany that night. Because 1 had to get this company back." 

Out of Hann's Way. Many of Empire's senior managers were far from the scene when the 

World Trade Center was attacked. Mike Stocker and Linda Tiano were on a train to Washington, 

DC to attend a Blue Cross and Blue Shield Association meeting. Tiano remembers that she and 

Stocker had both tried calling their offices from the train, just to check in" "We started calling and 

33 Mark Lander, "A nation challenged: survivors; sharing grief to find understanding," New York Times, January 17, 

2002, p. lA. Later, President George W. Bush made mention of!he two men in a speech at the National Cathedral 

in Washington. 

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calling, and we couldn't get a line. And then I'm getting through, and nobody's picking up the 

phone. I'm going, 'What are these people doing?' And I'm leaving nasty messages for people." The 

mystery was cleared up when Tiano's daughter called her cell phone with news of the attack, 

which she had watched on television. Helpless, Stocker and Tiano sat on the train en route to 

Washington, unable to find out the fate of their colleagues at the World Trade Center and fearing 

the worst. "It was hours," says Tiano, "before we were able to really conclude that probably not 

everybody was dead." 

When they finally pulled into Union Station, which was shortly afterward evacuated, 

Stocker and Tiano managed, with the help of a colleague, to hire a car and a driver to take them 

back to New York. During the long drive back, they were still unable to get hold of co-workers at 

Empire to find out "who was alive," Stocker recalls. In frustration, he called his real estate broker. 

"It was clear that we needed [office] space," he explains, to replace what had been lost at the World 

Trade Center, and there would soon be a "huge rush on space." He instructed his broker to start 

looking into office availability in Manhattan. "It was," he says, "the oniy useful thing I could think 

to do." 

Dave Snow, along with Bryan Birch, was in a Florida resort, The Breakers, attending an 

awards event for top-performing sales staff. He was on the golf course with them when "cell 

phones on the golf carts all around us started ringing." Snow raced to the pro shop where, on its 

large-screen TV, he saw "our building on fire," and watched as the second plane hit the South 

Tower. With the help of the staff at The Breakers, Snow was able to set up "kind of a disaster 

recovery center" equipped with phones in one of the hotel conference rooms. By chance, he had 

with him a list of all of Empire's senior managers, with their home and office phone numbers, as 

well as their cell phone numbers. "Immediately;' he says, "I started making outbound calls." 

By this time, Empire employees had begun to scatter as they made their tortuous way out 

of danger. Grace Messina and some colleagues boarded the Staten Island ferry; Deborah Bohren 

was walking north to the Bronx on her way home to Westchester County. Gloria McCarthy was 

"stumbling up the West Side Highway," as Snow puts it, when he was able to make contact with 

her34 McCarthy had taken nothing with her when she fled the North Tower. "I didn't have a 

pocketbook," she says. "I didn't have a phone. I had nothing." When she finally managed to call 

home and speak to her children, her daughter told her that "Dave Snow had called from Florida, 

and that it was important that I get onto a conference call." That afternoon, using Snow's calling 

card number-she had no cash or credit cards-McCarthy stood at a pay phone on the West Side 

Highway and joined in a conference call with other senior managers whom Snow had succeeded in 

tracking down. 

34 Snow also reached Mike Galvin on his cell phone as he was running up West Street. 

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Farthest away from the scene was Kenny Klepper who, with Shevin Conway and senior IT 

staff, was in Bangalore, India, working with IBM to evaluate its Global Services India operation for 

offshore development. There was "a knock on the door," he recalls, "and [someone] said, 'Turn on 

the TV."' Using Conway's worldwide cell phone-which had been restored to working order only 

a few hours earlier-Kiepper was able to get through to Empire before the towers fell. "The first 

outbound call," he says, was to his wife, who worked on the 19'" floor of the North Tower. The next 

one was to Albany, where he was soon linked up with Dave Snow in Florida. 

First Steps. Later, both Snow and Klepper would talk of the guilt and frustration they felt 

at not being with their colleagues in New York when the towers collapsed, but they also came to 

believe that their distance from the scene had been a help as the company tried to regroup. "We 

kind of agreed," Klepper says of his group in Bangalore, "that we were there because that's where 

God wanted us-to not be in the middle of the conflagration, so we were able to fairly objectively 

start taking some actions ... and begin to move ahead with the planning." 

The "first priority," says Klepper, "was to locate and identify our employees." Using an 

employee database, they "swung around" the Albany customer service call center and began 

making outbound calls to trace the whereabouts of employees who worked at the World Trade 

Center. They also set up an 800-number, publicizing it on television, for employees and their 

families to call in, either to let the company know where they were or to get information on family 

members and colleagues. Staff members in the Albany office, says Stocker, "stayed up all night for 

several nights taking calls," or making them, "trying to figure out where [World Trade Center 

employees] are, if they're okay." Some of what they learned was painful. There was especially grim 

news for Klepper-eight of the nine employees who died had worked for him. Still, by the end of 

the second day, the list of missing people, once in the hundreds, had shrunk enough so that, 

Stocker recalls, there was a growing sense of relief that "we were going to make it, ... that we were 

going to basically be okay." 

The second priority, says Klepper, "was to assess business damage and move into business 

recovery." Clearly, the physical damage was massive. "I had ten full floors in Tower One," Klepper 

points out, "which was just under half a million square feet. All those assets went down." This 

included, according to Empire's inventory, 263 servers and 2,255 desktop computers along with 

"all the data in those machines." Faced with the loss of a huge "hunk of infrastructure," the 

question on everyone's mind was, as Klepper puts it, "what's still running?" The short answer was, 

just about everything. 

Open for Business 

In the confused hours immediately following the attack on the World Trade Center, 

perhaps the greatest worry for Empire's senior managers-apart from the welfare of employeeswas whether customers would be able to contact the company. "The first concern," says Birch, 

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"was telephonic capability." McCarthy agrees. "l [was] thinking," she recalls, "we have to be able 

to answer the telephones. We have to serve the customers." Like others at Empire, she "was afraid 

that people would think we were destroyed as a company, and then we would not be able to 

recover because people would begin to leave us." Second on the list of concerns, according to Birch, 

was "[would] there be any claims disruption" -a matter of paramount importance to Empire's 

members and providers. As information filtered in from Empire's various sites, fears that key 

services would be affected were quickly allayed. "We didn't lose the call centers," says Klepper. 

"We didn't lose the claim systems. We didn't even lose our website." The delivery of services was, 

in Bohren's words, "seamless to our customers." Amid the sadness of loss and destruction, the 

company's resilience became a source of deep pride shared by all. The reasons offered for its 

recovery, however, revealed a variety of perspectives. 

There was widespread agreement at Empire that the continuity of its operations in the 

wake of the attack was not largely attributable to its disaster recovery plans. "The discipline of 

that," Bohren maintains, "did not prepare us for what happened" at the World Trade Center. To 

Klepper and Snow, Empire's recovery was the direct result of the company's quest for operational 

excellence and reliability. "Most of the systems that were available," says Klepper, "that made the 

loss of the World Trade Center fairly invisible to the customer, were not disaster recovery per seit was high reliability design." In particular, he cited the key role played by fail-over provisions. 

Once the World Trade Center "literally left the grid," he notes, the traffic normally routed to it was 

automatically redirected to other facilities.35 When, for example, the ICM began getting no 

response from the IVR server farm at the World Trade Center, it began rerouting calls elsewhere. 

"The ICM-which was talking to the IVR farm," Galvin explains, "saying, 'Are you there, are you 

there, are you taking a call?' -says, 'My God, there's no IVRs out there; send all the calls to the 

other IVR farm."' Customers, he notes, "never even saw a blip on that." Meanwhile, the 263 servers 

that contained corporate intranet and e-business applications, as well as the company's Lotus Notes 

environment, failed over to back-up servers in Albany36 The installation of the back-up server 

farm in Albany, Klepper points out, had been completed just weeks before September 11. "That 

really saved our cookies," he says. 

To some, the decentralization of Empire's operations played a crucial role in getting the 

company back on its feet quickly. Many of its most critical operations-claims processing, customer 

service, medical management-were located either in Albany or Melville. Moreover, Conway 

notes, "all of our key [computer] systems" -such as claims processing-"were maintained outside 

the World Trade Center," in the company's mainframe computer. Had the site of Empire's 

mainframe been hit, Bohren observes, the consequences would have been "much more serious." As 

it was, despite the destruction of huge amounts of equipment and data, Empire's most critical 

35 

36 

The exception was the dedicated call centers in the World Trade Center, which had to be manually reprogrammed 

to direct calls to other sites. According to Carl Tesoro, it took about a day to reroute those calls. 

"The insurance plan that came to the rescue," PC Magazine, January 29. 2002. 

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functions could be carried on with little or no disruption. "We were paying claims the same day 

that [the towers] went down," says Snow. "We could pay all our claims." 

Other technological or organizational improvements also helped keep the work on track. 

Paper claims coming into the World Trade Center were routinely imaged and the data stored 

elsewhere, which meant, says Carl Tesoro, that "even though the paperwork was gone, we could 

bring up the images in Albany and Melville, and keep processing." Only about two days' worth of 

claims, which had not yet been imaged, were lost.37 The effort to streamline Empire's product 

offerings, and to replace unwieldy benefits manuals with web technology also paid off. When calls 

that would normally be routed to the World Trade Center were directed to Albany or Melville, 

customer service representatives "could service the business," Stocker says, "because we'd 

simplified the products. That was huge." Moreover, service representatives had easy access to 

information on these accounts via the intranet. 

For some, the habits ingrained through years of SMI and reliability meetings carried 

employees through in the face of unimaginable destruction. Empire's recovery was "really about 

the people and the technology," says Galvin. As an example, he points to the quick thinking and 

independent action of "a lead server guy in Albany" right after the North Tower was struck. "He 

promoted all the profiles"-information about individual employees which enabled them to log on 

to Empire's computer systems-from the World Trade Center servers to the back-up servers in 

Albany before the towers collapsed, thereby saving the company "a lot of manual effort. We would 

have had to rebuild all those profiles manually." People "knew what they had to do," Galvin says. 

"That was not something that was in a plan. That's something he just did." To Galvin, it was "the 

discipline and the structure and the process and accountability that saved the company." That 

discipline, Grace Messina notes, continued to sustain employees in the days following the 

devastating attack. "Here's the beauty of who we became," she says. As she and her staff struggled 

to keep the company's systems running smoothly, "our mantra [was]: you do not break the process 

because of this crisis .... Accelerate everything you're doing because of the crisis, but don't break 

the process." 

Finally, the commitment of employees to the company was, to some, the key to its 

recovery. After surviving the terrors of September 11, Stocker points out, "a lot of people got home 

however they could, took a bath and packed their clothes and drove to Albany or Melville or 

Middletown and went to work." They built new servers to replace the destroyed ones, or hunted 

down new office space, or holed up for weeks in a hotel doing software development. "When the 

building went down," John Remshard observes, "everybody went off and started organizing 

themselves .... Everyone had a mission. Everybody knew what they had to do." The role of 

37 Imaging and other advanced technologies were, however, largely limited to Empire's "customer-facing" operations, 

such as claims processing. Most administrative areas, such as the legal department, kept paper files and, a.s a result, 

lost many of their documents. Among the "lessons learned" from September 11, says Birch, "are mainly [that there 

should be] document imaging across the board.'' 

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technology, while important, was in his view eclipsed by the contributions and resilience of 

Empire's employees_ "All the systems [failed over];' he says. "That was all great, but the people 

pitching in, trying to overcome , , . what had happened to us all" impressed him more. "While we 

were trying to figure out who made it out [of the World Trade Center], and who didn't, people 

were still talking to customers, people were still paying the bills." Remshard believed that 

employees' commitment grew out of their earlier experience of helping to bring the company back 

from the brink of insolvency and the taint of scandal. "People [were] real enthused about working 

for the company, real enthused about the turnaround," he says. "It was a heck of an 

accomplishment ... for everybody." 

On October 12, 2001, Empire held a "remembrance service" at St. Ignatius Loyola Church 

for the employees who had died on September 11. The company's workforce was still scatteredsome had set up temporary quarters in Melville or Albany, but about one-third were either 

working from home when they could or waiting for office space to be found. There had been 

several grief counseling sessions offered at different locations, but this would be the first time 

employees could gather in one place to commemorate their lost colleagues and reflect on the 

terrible events they had witnessed and survived. Ahead lay many challenges, and triumphs, for the 

company: leasing and building new space for all of its workers; convincing worried customersand hungry competitors-that Empire was a going concern; preparing for conversion to for-profit 

status, which would finally receive the formal go-ahead from the state legislature in january 2002. 

But on this October day, Empire's employees paused to look back 

When the service was over, the 2,000 or so people in attendance spilled out onto the steps 

of the church and then into the street-Park Avenue-for an emotional reunion."! happened to be 

at the top of the steps at that point;' Bohren recalls, "and [there was] a sea of people," greeting each 

other with hugs and cries. There were employees who "had been working nonstop;' and displaced 

employees "who wanted to come back, who needed to be around [their colleagues]." The crowd 

was reluctant to disperse. "People needed to see and touch each other," Bohren says, " ... We 

stopped traffic for half an hour." This image, both sorrowful and celebratory, stayed with Bohren 

long after the commemorations were over and employees had returned to the business of Empire. 

"There was a strength that came from our workforce," she reflects. 'T m not sure where it came 

from, but it was amazing." 

25 
59 

Chairman CHAFFETZ. Thank you. 

Mr. Korb, you’re now recognized for 5 minutes. 

STATEMENT OF LAWRENCE J. KORB 

Mr. KORB. Chairman Chaffetz, Ranking Member Cummings, 

thank you very much for inviting me here today. 

I think this hearing comes at a very critical time. As Ranking Member Cummings mentioned, President Trump wants to add $54 

billion to the fiscal year 2018 budget. It’s also important to keep 

in mind that they’re proposing to add $30 billion to the fiscal 2017 

budget, and then the Congress last year added $23 billion in the 

National Defense Authorization Act. So we’re talking about adding 

$100 billion to the defense budget compared to what we thought 

about a year ago. 

It’s also important to keep in mind, as has been very well documented and even people in the Pentagon admit, that the overseas 

contingency budget, or the warfighting budget, about half of it is 

used to fund items from the enduring items or from the base budget, and then the Pentagon has gotten relief for the last 5 years 

from the budget cap. So I want to put that into perspective. 

Now, in terms of what the Defense Business Board recommended, let me give you some examples from my own career 

that I think buttress the points that they made. Basically, I’ve been 

working on these issues ever since I was in the service in the sixties; at AEI in the seventies, working with former Secretary of Defense Melvin Laird, who I think was probably the most effective 

Secretary we have ever had; the privilege I had of serving for 5 

years in the Reagan administration administering about 70 percent 

of the defense budget; and then continuing to focus on these areas 

at Brookings, the Council on Foreign Relations, and now the Center for American Progress. 

When I was Assistant Secretary of Defense, my title was Manpower, Installations, and Logistics. Right now, you do not have 

anybody in that position. They have taken the manpower or personnel part of it, elevated it to an Under Secretary, even though 

he or she does not have responsibility for installations and logistics. 

During most of the Cold War, we had one Assistant Secretary 

serving in the policy area. It was called the Assistant Secretary for 

International Security Affairs. Now you have seven confirmable positions in the policy area. All of these men and women have their 

own staffs. 

When I was working in government, the Congress took the lead 

in proposing the Goldwater-Nichols Reform Act, which was really 

very, very critical to get the Department to really be unified for the 

first time. All of my colleagues fought it because they felt that it 

was saying that they were not doing their job. I thought, having 

based on my own research and testifying on it, I supported it. What 

we did is we empowered the Chairmen of the Joint Chiefs of Staff 

and the Joint Staff, and so they increased their staffs. The service 

chiefs did not decrease their staffs, and so what you ended up with 

was an increase in the staff. 

Similarly, when we set up new commands, like the Africa Command and the Central Command, you did not decrease the staffs 

of the commands that used to have responsibilities for those areas. 


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And then, finally, and this is very, very critical, and in the Bob 

Woodward article, they quote the former Secretary of the Navy Ray 

Mabus talking about the fact that he says 20 percent of the budget 

goes to overhead in agencies, and he mentioned the Defense Intelligence Agency and the Defense Logistics Agency. Well, the fact of 

the matter is, when those agencies were created, the idea was that 

the services would transfer those functions to a unified organization, and they would cut their own staffs. They didn’t. 

And I mention in my testimony when I did my dissertation and 

wrote my book on the Joint Chiefs of Staff, when I asked a former 

Chief of Naval Operations, you know, how did you handle this? He 

said: Oh, we never cut the size of our own logistics organizations 

or intelligence. 

Let me conclude with this point. I can assure you that if you add 

the additional funds that have been proposed by President Trump, 

you will ensure that those reforms do not get made. The best way 

to ensure that it happens is don’t give them any more money. 

Thank you. 

[Prepared Statement of Mr. Korb follows:] 


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TESTIMONY OF LAWRENCE J. KORB 

SENIOR FELLOW, CENTER FOR AMERICAN PROGRESS 

BEFORE THE HOUSE COMMITTEE ON OVERSIGHT AND GOVERNMENT 

REFORM 

MARCH 21,2017 

Chairman Chaffetz, Ranking Member Cummings, and Members of the House Committee on 

Oversight and Government Reform, I appreciate the opportunity to appear before you today, and 

I commend you for attention to the Defense Business Board "Transforming DoD's Core 

Business Processes for Revolutionary Change" before the public so that the Congress and the 

new administration can have a full and fair debate about the subject of what may be $125 billion 

of administrative waste in the Department of Defense. 

Discussing this report by the Defense Business Board, which was briefed to Defense leadership 

starting in early 2015, comes at a critical time for the Department of Defense and the nation. 

Despite the fact that the U.S. spends more on defense than the next seven nations in the world 

combined (five of whom are our allies) and that the U.S. defense budget is three times larger 

than that of China, and more than ten times that of Russia, and, according to experts like General 

David Petraeus, our military is "awesome." The new administration has already proposed to add 

$84 billion to the FY 2017 and FY 20 !8 top line. Moreover, the National Defense Authorization 

Act for 2017, which has been passed by the Congress and signed by former President Obama, 

has already added another $28 billion to the FY 2017 request. Finally, the Obama administration 

and the Congress have already given the Pentagon over $100 billion in relieffrom the caps 

imposed by the Budget Control Act of2011, and the Pentagon, with the acquiescence ofthe 

Congress, has used the Overseas Contingency Operation (OCO) budget, or warfighting budget, 

to spend another $150 billion over the past five years on programs having nothing to do with the 

wars we are fighting, something the Pentagon comptroller has publicly admitted. 

The statements by President Trump now and while a running for office that the U.S. military is a 

"disaster" are totally without basis. The military does face substantial challenges in terms of 

readiness and modernization, but these require a clear strategy supported by the administration 

and Congress before adding more money. When the report in question was commissioned, I 

believe the leadership in the Department understood that systemic inefficiencies pose a threat to 

the future of our national defense, not an inability to pay for what we need. 

In looking at the report by the Defense Business Board, we need to ask at least three questions. 

Why did the Pentagon commission the report, what is the basis for this large back office staff, 

which now consists of over one million people to support an active duty force of only 1.3 

million, and why did the Pentagon try to bury the report? 

The Pentagon, under the leadership of then Secretary of Defense, Chuck Hagel, who in my view 

was the most qualified person ever to be selected for the Secretary of Defense position (a war 

veteran, political appointee in the Reagan administration, distinguished and long-serving Senator 

from Nebraska, and successful businessperson) recognized that the Department of Defense 

needed to improve its tooth to tail ratio especially after the B.C.A. stopped the massive growth in 

defense spending which saw the defense budget increase from less than $300 billion to nearly 

$700 billion between 2001 and 2010. 
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I base my analysis and recommendations before you today on decades on managing and 

analyzing the defense enterprise. Having served on active duty in the 1960s, I worked at the 

American Enterprise Institute in the 1970s with former Secretary of Defense Laird, a highly 

effective leader and excellent Secretary of defense. I served as Assistant Secretary of Defense in 

the Reagan administration in the 1980s. I have analyzed and written about defense issues at the 

Brookings Institution, the Council on Foreign Relations, and the Center for American Progress 

since then, and it has become clear to me that the overhead in the Department of Defense has 

grown too big, especially when compared to the size of our active force Secretary Hagel was 

correct to ask the Business Board to undertake this study, especially since the Pentagon has to 

date never been able to pass an audit. 

Let me give four examples of this bureaucratic bloat which I have personally observed. First, the 

proliferation of senior positions with fewer responsibilities over the past 40 years has done more 

harm than good. When I had the privilege of serving in the Reagan administration, my office at 

the Assistant Secretary level had responsibility for manpower, installations and logistics. Today 

that job has been elevated to the undersecretary level, even though the occupant is responsible 

only for manpower and has no responsibility for installations, or logistics. 

Similarly, during much of the Cold War, the Pentagon had only one Assistant Secretary handling 

policy issues (the Assistant Secretary of Defense for International Security Affairs). Today you 

have an undersecretary with a principal deputy, and five assistant secretaries all with their own 

staffs and all serving in confirmable positions. 

Second, when Congress, over the opposition of the Pentagon, enacted the Goldwater-Nichols 

Reform, (which I supported in testimony before the Congress), it increased the power and 

responsibilities ofthe Chairman and Joint Staff. Consequently, the size of the Joint Staff which 

supported the Chairman increased. However, this increase was not met with a reduction in the 

size of the staffs of the individual service chiefs. This created bloat across back office 

organizations throughout the uniformed services. 

Third, when the Pentagon established new unified commands, like the African Command or 

Central Command, which took over some of the responsibilities of the existing commands, like 

the European Command, the existing commands did not reduce their staffs proportionately. 

Indeed, Combatant Command staffs have grown and massively increased the use of contractors. 

Fourth, when Secretary of Defense Robert McNamara consolidated functions, like intelligence 

and logistics by establishing organizations like the Defense Logistics Agency (DLA) and the 

Defense Intelligence Agency (DIA) the services did not reduce the size of their own logistics and 

intelligence organizations. In fact, when I was working on my dissertation and subsequent book 

on the Joint Chiefs of Staff, I interviewed several service chiefs about the impact on the services 

of Secretary McNamara transferring functions from the services to the office of Secretary of 

Defense. One told me it had no impact because he kept his intelligence and logistics organization 

intact. And during my five years in office, this point was brought home to me when I constantly 

had to battle the individual services to transfer logistics from them to the Defense Logistics 

Agency. 

In June, 2015, then Navy Secretary Ray Mabus, made this point in a speech at AEI. Mabus, who 

served as Secretary of the Navy for all eight years of the Obama Administration, complained that 

20% of the defense budget or about $120 billion went to the so-called "Fourth Estate," that is, 
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defense agencies like DLA that provide support to the armed services. He called this pure 

overhead. What he did not say was the fact that the Navy and the other services maintain 

parallel organizations is part of the problem. 

Finally, according to the New York Times, the Pentagon effectively buried the report because 

they were afraid that the Congress would use this report as a rationale for not adding additional 

funds to the defense budget. I urge the Congress to employ this rationale and not add the 

additional defense funding that is being sought by the administration. Analysis of Pentagon 

spending, to include a review and plans for implementation of this report, should come before 

any major increases in defense spending. Indeed, if the President wants to bring best business 

practices to government, he should spend this year analyzing current defense spending and 

instituting an audit of the Pentagon as well. This is something that the new administration 

should embrace given the President's statement about eliminating wasteful military spending. 

This is also what our warfighters need and deserve: every dollar of waste is a dollar that does 

nothing to help the men and women we send into harm's way and ask to make the ultimate 

sacrifice. Adding funds before doing rigorous analysis of studies like this almost ensures that 

reforms will not be made. 

Thanks again for the invitation to appear before you. !look forward to your questions as you 

deal with this critical issue. 
64 

Chairman CHAFFETZ. Thank you all for your testimony. 

I’ll now recognize myself for 5 minutes. 

Mr. Tillotson, let’s go back to the study. You originally awarded 

the study to—name the company again. 

Mr. TILLOTSON. Ryan Consulting. 

Chairman CHAFFETZ. Do you happen to know R. Keith Harding, 

the president, I believe. 

Mr. TILLOTSON. I do not know. 

Chairman CHAFFETZ. If I have the right website. 

Mr. TILLOTSON. You may, but I’ll be honest with you. No. I do 

not know. 

Chairman CHAFFETZ. And how much money was paid to Ryan 

Consulting? 

Mr. TILLOTSON. For the two elements of the contract that were 

executed during the DBB study, about $2.9 million. There was a 

third deliverable that was not incorporated in the DBB study, and 

that was another, I think it was, $3 million; so overall about $6. 

Chairman CHAFFETZ. Six million? 

Mr. TILLOTSON. Yes, sir. 

Chairman CHAFFETZ. And how much of the work did they actually do? 

Mr. TILLOTSON. I can’t tell you. I do know that the McKinsey 

team lead, the lead for the study was from McKinsey, and I don’t 

know what the actual work split is. 

Chairman CHAFFETZ. Mr. Rutherford, how much were you paid 

to do this study? 

Mr. RUTHERFORD. $8 million. 

Chairman CHAFFETZ. So you got $8 million, but you let out this 

contract for $6 million. How does that work? 

Mr. TILLOTSON. I don’t know. That’s not how the numbers—— 

Chairman CHAFFETZ. Where did the other $2 million come from? 

Mr. RUTHERFORD. I was just referring back to what—looked at 

our contracts for the totality of the full contract. I thought it was 

$8 million. 

Mr. TILLOTSON. Excuse me. Let me correct myself. I think it was 

closer to $9, is what we actually wound up with. Sorry. It was an 

additional 6. That’s why I’m remembering a $6. 

Chairman CHAFFETZ. Oh, an additional $6? 

Mr. TILLOTSON. Yes, sir, $6 plus $2.9. So it’s about $9. That 

sounds about right. 

Chairman CHAFFETZ. So $8.9- or $9 million, and McKinsey gets 

$2 million—or $6 million. 

Mr. TILLOTSON. Right. 

Chairman CHAFFETZ. Or $8 million, and we don’t know what percentage of the work Ryan did. 

Mr. TILLOTSON. I do not know percentage of the work Ryan did. 

Chairman CHAFFETZ. Is that something you can figure out and 

get back to this committee? 

Mr. TILLOTSON. I can certainly go ask. I’ll have to go ask Ryan. 

Chairman CHAFFETZ. Yeah. How in the world did you select 

Ryan Consulting? With all due respect—I’m sure they’re nice people—if I have the right website, they got three senior people. Their 

head of human resources has a grand total of 6 years, and I’m sure 


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that Tiffany Hollis, again, if I have the right website, is a very nice 

person. 

Mr. TILLOTSON. I will get back to you with the answer. 

Chairman CHAFFETZ. But how do they get such a contract? I mean, the Pentagon, we’re talking about $600 billion or something 

in annual expenditures, and I’m rounding by big numbers here. 

Mr. TILLOTSON. Yes. 

Chairman CHAFFETZ. McKinsey & Company is a huge, massive 

company with a great reputation. I really am curious because I 

think we’re starting to see where a lot of waste starts to go, right? 

What did we get for the $900,000 or million dollars that Ryan kept 

if the math you gave me already was working? 

Mr. TILLOTSON. Sure. 

Chairman CHAFFETZ. You give them 9. They give McKinsey 8. 

What did we get for that other million dollars? 

Mr. TILLOTSON. I will get back to you and let you know how 

much work they put in. 

Chairman CHAFFETZ. That’s what I worry about. Even just doing 

a study, we can’t figure out what we cost and what it didn’t cost 

and who got paid and who did the work. And then we give a contract to somebody, with all due respect—and I’d love to look at 

their background, and we will—but how in the world did they even 

get the contract to start with, because you’re going to need the expertise and the depth and the knowledge of a McKinsey to actually 

get it done? So if you could let us know. 

Mr. TILLOTSON. Sure. 

Chairman CHAFFETZ. I also want to know specifically from the 

time you decided to do this study to the time you actually let out 

the contract and actually McKinsey started working on it, because 

that’s part of the problem: whether you’re buying an F–35 or 

whether you’re buying a study, again this is the problem in the bureaucracy of the Pentagon. 

Let me go to you, Mr. Stein. I only have a minute left here. 

What’s your biggest takeaway from all of this? You’ve got a lot of 

expertise. What’s your biggest takeaway and maybe add to that 

what your biggest frustration is? 

Mr. STEIN. The biggest takeaway is that the focus has to be on 

the warfighter, and the process has got to be a partnership between Congress and DOD. And I think we’re all in this together, 

and there’s a lot of work that needs to be done. And this is critical. 

The $20 trillion that one of the retired Chairman of the Joint 

Chiefs says is we got a $20 trillion—— 

Chairman CHAFFETZ. Yeah, but specific to this study. Come on. 

We’ve spent all this money. You’ve looked at this. You were the 

chairman. Now you’re former chairman. What’s working, and 

what’s not working? 

Mr. STEIN. Well, the key thing that works is you got to have 

heart surgeons, as I said, to help the DOD. There are only certain 

people that can do this type of work. And you need their help, and 

I will say that McKinsey did a great job, and I will say that there’s 

a lot of work around—both uniformed and non-uniformed people in 

the DOD that did great work. But you need people like Kenny 

Klepper. If not Kenny Klepper, you need people that understand 

this process to make change. And once you figure out what those 


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changes are, you got to coordinate between Congress and DOD, and 

you’ve got to change culture, and culture is tough to change. 

Chairman CHAFFETZ. Thank you. 

I now recognize the ranking member, Mr. Cummings. 

Mr. CUMMINGS. Thank you very much. 

Mr. CONNOLLY. Would the ranking member just yield for 1 second before he starts? 

Mr. CUMMINGS. Of course. 

Mr. CONNOLLY. I thank my friend and not to count against his 

time. I want to welcome a lot of my constituents from Herndon, 

Virginia, who are here watching a hearing, and we are delighted 

to have them here today. 

Chairman CHAFFETZ. We welcome you all for being here, and 

you’re very sharply dressed. Let the record reflect how sharply 

dressed, well, at least row four is. Thank you. We appreciate your 

attendance. 

I now recognize the ranking member, Mr. Cummings. 

Mr. CUMMINGS. Thank you very much. 

Mr. Stein, you all volunteer for this, right? 

Mr. STEIN. Yes. 

Mr. CUMMINGS. That’s what I thought. And how confident are 

you about the potential savings? You know, you were the chairman 

of the Defense Business Board when the study was conducted. Is 

that right? 

Mr. STEIN. Yes, sir. 

Mr. CUMMINGS. And I know how dedicated you are to these kinds 

of causes. But, you know, it just seems like we talk about this all 

the time, but it seems like we never get a hold of it. In other words, 

we talk about it, savings. We talk about overspending, but it seems 

that we can never—you know, we get a lot of good recommendations, but we never get there. Do you follow me? So, first of all, I 

guess, you feel pretty comfortable that the potential savings are 

there? 

Mr. STEIN. I absolutely feel that the savings are there, number 

one. Number two, when we looked at this, our focus was, how do 

we do this without firing people? You know, you have almost 30 

percent of the workforce retiring in the next 5 years, which, you 

know, this was 2 years back. You have 1 percent of the contracts 

is 65 percent of the—is a spend. You got 1,500 data centers in today’s world of the cloud. And the big thing, Congressman, is everybody says that, you know, we are—the number is too low or the 

number is too high, but nobody sat in the room with us and with 

Kenny. And this is a process that I hope comes out of this, is people 

sit in the room and sit down with Kenny and go through the numbers, and we have to update the numbers. 

But the numbers don’t lie. And what we have got to do is adults 

sitting around—because this is for our kids and grandkids to get 

this right. There are not many times that we will have to get this 

thing right. And what I was saying is we do have $20 trillion of 

debt, and if interest rates go up 3 points, that wipes out the defense budget. What I’m saying is what I would love to come out of 

this is we have got very bright people in Congress, in DOD, and 

Kenny spent a year talking about—this was an unpaid job—he 

spent a year on this. And I think if we can work toward what he 


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has done, his process, and seeing how we take advantage of that 

process, I think this country will be better off. 

Mr. CUMMINGS. And I got that. Well, let me go back. You know, 

we have had all of these—I’m going to come to you in one second, 

Mr. Klepper, and you may want to answer this too. We have had 

all these instances—I haven’t heard about any recently—where we 

are paying like $500 for a trash can. I mean, is that kind of waste 

and fraud—I see you laughing, Mr. Korb—I mean, are we still 

doing that? 

Mr. KORB. When I was in government I had to handle the $500 

toilet seat. I had to deal with that before Congress. 

Mr. CUMMINGS. Must have been a hell of a toilet seat; $500 you 

said? 

Mr. KORB. Yes, that was a big issue, and Senator Grassley and 

I were able to work together to stop that type of stuff. 

Mr. CUMMINGS. Is that a large part of the problem, Mr. Klepper, 

do you think? In other words, you got a system that’s just, it’s almost on automatic—let me finish—then you got some old boys in 

there, too, hello, and they’ve been used to getting these contracts. 

And nobody, everybody wants folks to make a profit, but we don’t 

want to be ripped off either. So I’m trying to figure out, do you see 

a lot of waste? What are you seeing? Anybody else on the panel 

that might be able to answer that? 

Mr. KLEPPER. So we focused on, in the study, as far as the analysis, trying to find the areas where we thought there was the biggest opportunity to get savings quicker. You don’t see big IT reengineering kind of things or multiyear projects. There’s lots of savings through automation that you could have there. So we focused 

really on two areas: contract optimization and restructuring and an 

early retirement opportunity to avoid having to fire people. Big 

numbers on both sides. 

Two key areas that we saw in the contracting piece, and it is 

there—the data is there. It’s inescapable. One, and I think you 

heard some conversation, is there’s a lot of tiered contracts. So 

somebody has a contract, and the only way you can get on the contract is you have to be a sub and maybe a sub of a sub and a sub. 

So what happens is, in the subs, it’s like a credit card transaction 

fee. So, when you get down to the bottom, what did you actually 

pay for the service by the time it went through this bureaucracy, 

forgetting even the cost of the bureaucracy and all the people that 

worked all of those contracts—— 

Mr. CUMMINGS. That’s what the chairman, that’s what you were 

alluding to, right? 

Chairman CHAFFETZ. Yes. 

Mr. KLEPPER. So it’s rampant, and it’s massive. And so, when we 

looked at that, we went in specifically looking at those things because you can get at that, not necessarily even reducing contractors’ services, looking at what you end up paying and going out and 

rebidding large-scale bids for like-type services and getting a much, 

much bigger rate, better rate at the same kind of services. So that 

was one of the key deliverables in the contract optimization component. 

Mr. CUMMINGS. I see my time is up. Thank you. 

Chairman CHAFFETZ. I thank the gentleman. 


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I now recognize the gentleman from Ohio, Mr. Jordan, for 5 minutes. 

Mr. JORDAN. Thank you, Mr. Chairman. 

Mr. Stein, you were chairman of the DBB when the Department 

of Defense commissioned you guys to do the study. Is that accurate? 

Mr. STEIN. Yes. 

Mr. JORDAN. And the goal was to look at how to make back-office 

operations more efficient, save money? That was the objective of 

the study? 

Mr. STEIN. Yes, sir. 

Mr. JORDAN. I just want to walk through the basics here, and as 

I understand it, you felt like you needed some help on a study of 

this size, so you worked with McKinsey. They did a lot of the work 

to come up with the findings. Is that right? 

Mr. STEIN. No. The way it worked is I asked Kenny to lead this 

effort. 

Mr. JORDAN. Okay. So the DBB led the effort. 

Mr. STEIN. The DBB led the effort. 

Mr. JORDAN. McKinsey helped. 

Mr. STEIN. McKinsey helped. 

Mr. JORDAN. Okay. And the conclusions were that you could save $125 billion in taxpayer dollars over 5 years at the Department of 

Defense. Is that accurate? 

Mr. STEIN. Yes, sir. 

Mr. JORDAN. And that savings meant that you could save money 

in back-office operations. That money could then go to upgraded 

weapons systems and to our troops in the field. 

Mr. STEIN. Yes. 

Mr. JORDAN. Great objective. I think that’s exactly what we all 

want to have happen. 

Now, so you get this study that says you can save $125 billion 

over 5 years and put the money in troops and better weapons systems. All sounds good. My guess is this wasn’t the first study that 

the DBB had authorized the commission to do. You probably do 

studies all the time and have reports. Is that accurate? This wasn’t 

your first study? 

Mr. STEIN. This was not our first study. 

Mr. JORDAN. So you do this all the time, right? 

Mr. STEIN. Yes. 

Mr. JORDAN. So all these other studies—you commission a study. 

You work with some outside group, maybe or maybe not. You get 

back the report. What typically happens with the report and all 

those other studies? What do you do with the report? 

Mr. STEIN. They’re put on the website, and they’re distributed, 

bound and—— 

Mr. JORDAN. The DOD website, right? 

Mr. STEIN. Yes. 

Mr. JORDAN. Are they typically printed out, lots of copies published, wide dissemination? Does that all happen? 

Mr. STEIN. Yes, sir. 

Mr. JORDAN. Every other time you’ve done a study and got the 

conclusions, that’s the normal course of business? 

Mr. STEIN. Yes, sir. 


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Mr. JORDAN. Okay. Well, that sort of raises the obvious question: 

Did that happen with this report? 

Mr. STEIN. I think it was taken off the website. 

Mr. JORDAN. So all the other times, you use taxpayer dollars, you 

do a study, find out something important for taxpayers and potentially savings, there’s a normal, normal way that information is 

presented to the public. DOD puts it on their website. They take 

that report; they print it. They make several copies; i.e., it’s published. And it gets wide dissemination so we can learn the valuable 

information that we spent a lot of taxpayer dollars to get? 

Mr. STEIN. Yes, sir. 

Mr. JORDAN. In this case, was the report put on the website? 

Mr. STEIN. It was put on the website and taken down. 

Mr. JORDAN. Oh, so it didn’t stay on the website? 

Mr. STEIN. After I left the DBB. 

Mr. JORDAN. And that’s not the normal course of business, right? 

Mr. STEIN. No, sir. 

Mr. JORDAN. Okay. Was it printed? 

Mr. STEIN. I think their people were told not to print the report. 

Mr. JORDAN. So it wasn’t printed. Mr. Tillotson looks like he’s 

disagreeing based on his hand motion over there. 

Mr. TILLOTSON. There’s your printed report. 

Mr. JORDAN. Okay. Was it widely disseminated, Mr. Stein? 

Mr. STEIN. Kenny, you can talk—— 

Mr. JORDAN. Mr. Klepper? 

Mr. KLEPPER. I don’t know if it was widely disseminated. I know, 

after I left the board, I called back in and asked if I could get a 

printed copy, and they told me they were told not to print it. That’s 

the first printed copy I’ve ever seen. 

Mr. JORDAN. Mr. Tillotson, is that the only printed copy, or were 

there lots of copies? 

Mr. TILLOTSON. There were lots of copies. 

Mr. JORDAN. Really? 

Mr. TILLOTSON. Yes, and they were distributed at the time and 

were available—— 

Mr. JORDAN. Why does the guy who chaired the DBB at the time 

the report was commissioned and at the time that the report was 

actually completed say that it wasn’t widely disseminated, it wasn’t 

printed, and was taken off the website? 

Mr. TILLOTSON. So I have no idea why he wasn’t given a copy 

of the printed report. 

Mr. JORDAN. Why did The Washington Post report what Mr. 

Stein seems to be and Mr. Klepper seem to be saying here today 

and not what you’re saying? 

Mr. TILLOTSON. Because they also believe, as Mr. Stein believes, 

that it was taken off of the website. It was not. To be accurate, it 

was moved from one location to another location. It was never 

taken off the website. 

Mr. JORDAN. Was it moved from a high-profile location to a somewhat less high-profile location? 

Mr. TILLOTSON. It was moved to the meeting minutes location, 

which is publicly available. It’s been downloaded 2,800 times since 

January of 2015. 


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Mr. JORDAN. Mr. Stein, is that consistent with how things are 

normally done with the other reports, the many other reports 

you’ve commissioned? 

Mr. STEIN. This is to the best of my knowledge. I’ve not checked. 

Kenny, do you have any comment there? 

Mr. JORDAN. Well, let’s just assume you guys are—assume that 

what you are saying is exactly right, because I’ve got just a few seconds here. Tell me why; why the difference? Why was this report 

treated different? 

Mr. Stein, why would it be treated different? 

Mr. STEIN. I don’t understand it. 

Mr. JORDAN. Maybe it was the magnitude of the findings. Could 

that be? Seems logical to me. 

Mr. Chairman, if I could just read one, we have an email from 

Deputy Secretary of Defense, Mr. Work, that he sent to the Secretary of the Navy, Mr. Mabus, and he says this. He criticizes a 

speech that Mr. Mabus made where he referred to the very report 

we’re talking about right here. And he said: ‘‘There were problems 

with your speech.’’ And let me just quote: ‘‘Senator McCain believes 

we can take a 30-percent reduction in management headquarters.’’ 

He says to Mr. Mabus: ‘‘Your comments could easily be used by 

him and his staff as justification for the size of the cuts referenced 

in the report.’’ 

So maybe the reason it was treated different is because some 

folks at DOD didn’t actually want this out there, this $8 million 

study that shows $125 billion in savings over 5 years? Could that 

be a logical explanation why it was treated different, Mr. Stein? 

Mr. STEIN. I have no idea. I really don’t. I left the DBB, and after 

I left DBB, I had no responsibility on what happened to the report. 

All I know is, if I was still chairman of the DBB, that report would 

have been—— 

Mr. JORDAN. Treated like it normally—like all the reports are 

treated, right? 

Mr. STEIN. Yes, sir. 

Mr. JORDAN. Thank you, Mr. Stein. 

Thank you, Mr. Chairman. 

Chairman CHAFFETZ. I thank the gentleman. 

I now recognize the gentleman from Virginia, Mr. Connolly, for 

5 minutes. 

Mr. CONNOLLY. Thank you, Mr. Chairman. 

And welcome to the panel. 

Mr. Tillotson, it’s your contention in response to Mr. Jordan’s 

questioning that there was no attempt to downplay or hide or suppress the results of this study. Is that correct? 

Mr. TILLOTSON. That’s correct, Congressman. 

Mr. CONNOLLY. How many copies of the report were, in fact, 

printed? 

Mr. TILLOTSON. I can’t tell you, but I will find out and let you 

know. I don’t know I’ve been dropping them off every place I’ve 

gone since The Washington Post article came out because people 

have been asking. So we have a stack of them. They’ve been available throughout the period. 

Mr. CONNOLLY. So have copies been made available to the current members of the DBB? 


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Mr. TILLOTSON. Yes. 

Mr. CONNOLLY. You have one, Chairman Bayer. 

Mr. BAYER. Yes, sir, I do. 

Mr. CONNOLLY. So were copies made available to former members and the former chairmen of the DBB, such as Mr. Stein. 

Mr. TILLOTSON. This is the first I’ve heard that anybody had not 

been given a copy when it was requested. So I can’t answer. 

Mr. CONNOLLY. So maybe we can accomplish something here 

today. Would you promise under oath, Mr. Tillotson, to make sure 

Mr. Stein and company have copies of the report? 

Mr. TILLOTSON. Yes, Mr. Congressman. 

Mr. CONNOLLY. I thank you so much. 

Mr. Tillotson, in your testimony, you identify potentially $1.9 billion in savings under the IT rubric. 

Mr. Rutherford, I believe the comparable number in your report, 

McKinsey’s report, is actually $5 to $9 billion. Is that correct? 

Mr. RUTHERFORD. I believe so, sir. 

Mr. CONNOLLY. So, Mr. Tillotson, why the discrepancy? Why are 

you so low and McKinsey so high? And as you may know, this committee is pretty interested in the IT management and procurement 

issue, and DOD is the one agency that’s been, from our point of 

view, a reluctant partner in compliance with FITARA, also known 

as Issa-Connolly. 

Mr. TILLOTSON. The answer to your question, Mr. Congressman 

is I don’t disagree with the numbers from McKinsey. I also don’t 

disagree with the DBB report that suggests there are many more 

billions to find. What we have provided in the response to date is 

what we have actually put in place to date as opposed to other activities that we need to do. 

Mr. CONNOLLY. Okay. 

Mr. TILLOTSON. So we put $1.9 billion worth of initial work in 

the 2017 budget. In the 2018 budget, we added another 250 million, which I would acknowledge, by the way, to this committee is 

not anywhere close to what’s possible. But there was a deliberate 

decision made as we constructed our discussions in 2018 to allow 

headroom for new administration to walk in and make decisions. 

Mr. CONNOLLY. All right. Fair enough. 

Mr. TILLOTSON. I think there is ample more dollars to be saved 

in the IT space alone that would even actually come up close to the 

total number McKinsey is suggesting we could achieve. I think we 

can achieve those numbers, which are kind of more in line with the 

DBB numbers. 

Mr. CONNOLLY. Well, let me ask this, I would ask that you submit to the committee that potential plan. We would be very interested to see a little fleshed-out plan in terms of what are the savings we think we could strive for, not for the purpose of making 

you face the inquisition, but from the point of view, we want to get 

better compliance for FITARA across the entire Federal Government; you’re the biggest. 

Mr. TILLOTSON. I understand, Mr. Congressman. We agree with 

you. 

Mr. CONNOLLY. Terrific. 

Mr. Korb, I mentioned to you before the hearing, but for the av- erage citizen, looking at a relatively indisputable number of $125 


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billion over 5 years, maybe at least, but all right, that is wasted 

in Pentagon spending or grossly inefficient. Why in the world 

would we want to add $54 billion to the Pentagon’s budget this 

year when we haven’t addressed the critical issue of efficiency? 

Why would we want to throw more good money after bad? If this 

were a civilian agency, I know my friends on the other side of the 

aisle would be all over it. 

Mr. KORB. I agree with you, Congressman. In fact, my feeling is, 

if you give them the extra money, and as I mentioned in my testimony, it’s not just the 54; they want to add $30 to the 2017 budget 

in addition to the $28 that the Congress has added in the 2017 

NDAA. They won’t do it. If you really want them to do this and 

make a full-faith effort to implement these recommendations, you 

cannot give them more money, because if you do, there will be no 

incentive to do it. And I think that’s really the key issue. 

I mentioned in my testimony about my work with former Secretary Laird. If you go back and you take a look at the Nixon administration when the defense budget was cut substantially, in today’s dollars, it was like $350 billion. Look at the reforms they 

made under the leadership of David Packard. That’s the point I’m 

trying to make, and I couldn’t agree with you more. 

Mr. CONNOLLY. And I would just add, because my time is up, but 

I mean, there is a huge opportunity cost too. So, in addition to 

throwing good money after bad potentially—I’m talking about by 

leaving waste unaddressed, this waste—we’re also taking away 

from civilian domestic investments that are all so critical. So it’s 

a double cost when we do this if we don’t address this issue. 

Mr. Chairman, I thank you for having the hearing today. I think 

it’s a very important one. And I appreciate very much all of our 

witnesses being here. 

Chairman CHAFFETZ. I thank the gentleman. 

I will now recognize the gentleman from Florida, the chairman 

of our Subcommittee on National Security, Mr. DeSantis of Florida, 

for 5 minutes. 

Mr. DESANTIS. Thank you, Mr. Chairman. 

Thank you to the witnesses. 

Mr. Tillotson, when the results of the study indicating these potential savings were revealed, what was your reaction? 

Mr. TILLOTSON. My reaction was that the potential for the savings was certainly there, but the timetable was not going to be executable in a Federal Government setting. And I had long conversations with Kenny, with Mr. Klepper, at the time. Recognizing that 

the basis of his recommendation was largely a corporate model, he 

agreed. And part of that issue is because we have an interaction 

in the process that occurs both within the executive side of the Federal Government and then a subsequent interaction that occurs 

with Congress in decisions of significant magnitude that involve 

changing organizations and structures. 

Mr. DESANTIS. I understand that. But at bottom, though, you do 

welcome—you did welcome the opportunity to try to save money 

and make the operations better? 

Mr. TILLOTSON. Unequivocally. I think the study was well done. 

I think the work done by McKinsey was significant. In fact, we followed on from the McKinsey work to try and put better cost repetiVerDate Nov 24 2008 09:51 Aug 24, 2017 Jkt 000000 PO 00000 Frm 00076 Fmt 6633 Sfmt 6633 H:\26498.TXT APRIL

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tion in place so that we can get a better handle on these issues. 

So everything that was done in the study has actually now allowed 

us to form the basis of how we approach the problem going forward. 

Mr. DESANTIS. To your recollection, who briefed the Deputy Secretary on the results of the study? 

Mr. TILLOTSON. It was Mr. Klepper and Mr. Stein. 

Mr. DESANTIS. Were you there when he was there? 

Mr. TILLOTSON. Yes. 

Mr. DESANTIS. What was his reaction? 

Mr. TILLOTSON. His reaction was also positive. 

Mr. DESANTIS. It was positive? 

Mr. TILLOTSON. Yes. 

Mr. DESANTIS. Then why did he ultimately dismiss the findings? 

Mr. TILLOTSON. He did not. In fact, when the reference that was 

made to the email exchange in which he allegedly referenced or 

dismissed the findings, he was—he, Secretary Work, was actually 

addressing the fact that Secretary Mabus was raising the issue in 

public rather than bringing it forward as an internal conversation. 

And in the same email, I quote, from Secretary Work to Secretary 

Mabus: ‘‘There is absolutely nothing wrong with your call for the 

Department to get more efficient. It is timely and on point. I’d simply request that you continue to push internally to get the Department more efficient and focus your public comments on the Department of the Navy.’’ 

Mr. DESANTIS. And I did see that, and I appreciate that. So let 

me ask this: The Washington Post article claims that Deputy Secretary Work suppressed the DBB study from wider dissemination 

and tried to keep—now you have disputed that Washington Post 

story. Is it your testimony that this report received the fullest possible dissemination within the Department? 

Mr. TILLOTSON. The report was discussed within the Department 

at the highest levels. It was discussed with all the senior leaders 

of the Department at the time. I will tell you I think there 

were—— 

Mr. DESANTIS. You said say it was widely disseminated. 

Mr. TILLOTSON. Yes, sir. 

Mr. DESANTIS. Is that your testimony? 

Mr. TILLOTSON. Yes, sir. 

Mr. DESANTIS. Was this study shown to the Secretary of Defense? 

Mr. TILLOTSON. Yes, I believe it was at the DEXCOM meeting; 

it was discussed at the DEXCOM with Secretary of Defense at the 

time. 

Mr. DESANTIS. Okay. And what was the reaction from the 

SecDef? 

Mr. TILLOTSON. I think he was positive at the time. 

Mr. DESANTIS. Okay. 

Let me ask, Mr. Bayer, have you read the study? 

Mr. BAYER. What I have read are the slides. I have not read 

the—it was never formalized into a completed study report. 

Mr. DESANTIS. That was there—since you’ve become chairman, 

has there been discussion about limiting the distribution within 


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DOD? Have you been privy to—obviously, you read The Washington Post article, I am sure, when that came out. 

Mr. BAYER. Yes. Absolutely not. It’s never been limited. It’s been 

available on the website from the moment it was briefed to the 

board and the public in January. 

Mr. DESANTIS. You don’t have a role? Your testimony would be 

you have no role in limiting it in any way? Is that correct? 

Mr. BAYER. I didn’t limit it in any way. 

Mr. DESANTIS. Okay. And you didn’t have any discussions with 

anybody at DOD about limiting the report, the dissemination. 

Mr. BAYER. It was—having been on the Defense Business Board 

for a decade—perhaps a little context here is that we are—the 

board is tasked by terms of reference to do a particular piece of 

work: in this case, this effort, this effort. When that effort is completed, it is briefed to the public, and the chairman and the members of the committee then brief the other senior leadership in the 

Department, at which point, the board moves on to other work. 

From the time in which this board is—this effort was completed, 

the effort at hand, the board has done nine other pieces of work 

in the normal progression of things. 

Mr. DESANTIS. So what is your response to the questions that 

were asked? You have some of these things that are publicly available, more prominent? This one is, I would say, a little bit harder 

to find location. Why is that? 

Mr. BAYER. Well, very simply, there are three places on the Defense Business Board website where previous work is displayed. 

When you dial on to the website at the beginning, there is a banner 

of work that flies by. That’s always the most current work. For a 

while, this effort was there, but it was—— 

Mr. DESANTIS. For how long? Do you know? 

Mr. BAYER. I don’t. I’d have to go back and look at—— 

Mr. DESANTIS. Was it still on when you took over? 

Mr. BAYER. When I took over, it was on, but it was replaced by 

the next piece of work: ‘‘Fostering an Innovative Culture through 

Corporate Engagement and Partnership.’’ It was always available 

on the minutes of that board meeting in January of 2015. It was 

erroneously listed as a report because, with the greatest respect, 

this is what a report looks like. It has all the context and the verbiage associated with the briefing and the deliberation of the board. 

What was on the board’s site at that time was this, which is now 

hardbound. That is a collection of slides. There is no narrative, no 

explanation, no discussion. And, further, every single page of this 

thing says on it: ‘‘The full DB report will later contain detailed text 

which will reflect the totality of the points discussed and modifications.’’ Those were never delivered, and it was never put into final 

form. So that’s why it stayed on the report section—on the minutes 

section of the meeting and not a report. It was never a report. It’s 

a collection of slides. 

Mr. DESANTIS. Well, my time is up. I think there will probably 

be some followup to that for some of our other members. 

Chairman CHAFFETZ. Yeah. With the committee’s indulgence 

here, Mr. Rutherford, was there ever a final report written? 

Mr. RUTHERFORD. From the DBB’s report? 


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Chairman CHAFFETZ. From the work you did, did you ever write 

a final report? 

Mr. RUTHERFORD. Yes. So our deliverables from the final report 

we did in May were delivered to the DCMO; that was the work we 

did. The DBB report leveraged our baseline. We continued on after 

2015. 

Chairman CHAFFETZ. Those taxpayers paid you $8 million. Did 

you write a final report? 

Mr. RUTHERFORD. We delivered a number of deliverables, both 

the baseline tools for them to leverage that going forward to actually measure the effectiveness. We gave them actually the breakdown of where the cost savings would be, where they should—— 

Chairman CHAFFETZ. I asked a pretty simple question: Is there 

a final report out there? 

Mr. RUTHERFORD. There is a set of deliverables that we gave. 

Mr. CUMMINGS. May I ask one question? 

Chairman CHAFFETZ. Go ahead. 

Mr. CUMMINGS. Did you complete the contract? 

Mr. RUTHERFORD. Yes, sir, we did. 

Mr. CUMMINGS. And how do you define completion of the contract? How is that defined? 

Mr. RUTHERFORD. The contract asks for a number of deliverables. 

Number one was a baseline assessment of all of the six comprehensive support functions to the business board. So what we did is we 

provided a view of all of the numbers for the DCMO for them to 

measure on a go-forward basis where to spend across these six 

areas. In addition to that, we gave them a set of efficiency metrics 

they can use going forward to measure this baseline as they go forward. 

Thirdly, we provided them a number of things when it came to 

where the cost savings may be. 

Mr. TILLOTSON. If I may offer a point of clarity here, Mr. Rutherford is speaking accurately. The contract that was let was between 

the DCMO office and Ryan/McKinsey to deliver a series of information products, which includes a database, which included a number 

of documents. Those documents were there. They were not on contract—they were not on contract—to write a DBB report. 

The DBB report, as Mr. Stein has indicated, is the responsibility 

of the Defense Business Board, and we delivered information from 

the government that we generated through McKinsey to the Defense Business Board for them to use as the basis of evaluation. So, 

when you ask if the—Mr. Chairman, respectfully, if you ask if they 

delivered a DBB report, the answer is no, they did not, but it was 

not their job to do so. Did they deliver the things we requested in 

the contract? Unequivocally yes. I have those documents. Those are 

separate documents. 

Mr. CUMMINGS. I just have one more question. 

Mr. Klepper, do you agree with this, this report slide thing? See, 

I’m confused—— 

Mr. KLEPPER. I can offer some clarity. 

Mr. CUMMINGS. Yes, offer some clarity, because I’m used to a 

contract says you do certain things for a certain amount of money 

and you deliver them, period. So is this something that’s openended, by the way? 


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Mr. TILLOTSON. No, sir. There were specific clean deliverables. 

We got those deliverables, and those were delivered. 

Mr. CUMMINGS. And then—— 

Mr. KLEPPER. Some of this is new information to me. I can tell 

you about the report. The final report was being written. It was almost completed. I was waiting for it, and then I had made a decision to leave. And they were very close, because I was going to 

proofread, go ahead and do a proofread. So we were very close; they 

were working on it. So I called back, and I said—it was a few 

weeks later—I said: ‘‘Have you finished your report? Can I take it?’’ 

And the officer that was working it said they were told to stand 

down. So never got it. 

Now this document that David’s got, that’s the first time I’ve 

seen it. I can’t answer what happened after that. 

Chairman CHAFFETZ. So I think it is safe to say that this thing 

you were waving around, Mr. Tillotson, this is not the report, is it? 

Mr. TILLOTSON. That is all I have is a report. 

Chairman CHAFFETZ. Yeah. It’s not a report. It’s a slide deck. In 

fact, it refers to a report that’s forthcoming that never—didn’t get 

produced. And we spent $9 million and never did get a report. Is 

that accurate? 

Mr. TILLOTSON. No, that’s not accurate. 

Chairman CHAFFETZ. Where is the report? Where is the report? 

Mr. TILLOTSON. So, with all due respect, Mr. Chairman, again, 

the contract wasn’t to deliver a DBB report. There is no—— 

Chairman CHAFFETZ. You can keep going in circles. We paid $9 

million of taxpayers’ to get a report. You started flailing around 

saying, ‘‘Here it is; it’s printed.’’ This is a slide deck; it’s not a report. 

Mr. TILLOTSON. With all due respect, Mr. Chairman, the contract 

specified—— 

Chairman CHAFFETZ. No, don’t give me—did you report—did 

they develop and produce and publish and put on the internet a report? Yes or no? 

Mr. TILLOTSON. McKinsey did not put a report on the internet, 

nor were they—— 

Chairman CHAFFETZ. This is why we’re having this hearing, and 

this is why you’re overseeing a Department that is in chaos. 

Mr. TILLOTSON. —nor were they contracted to do so, with all due 

respect, Mr. Chairman. They were not—— 

Chairman CHAFFETZ. I will now recognize Mrs. Watson Coleman 

of New Jersey. 

Mrs. WATSON COLEMAN. Thank you, Mr. Chairman. I thank you 

for holding this hearing today. 

The topic of waste within the Department of Defense is vitally 

important, and it deserves our utmost consideration, especially considering that President Trump’s budget proposal is stripping other 

parts of the Federal budget to fund the Defense Department by an 

additional $52 billion. 

Dr. Korb, during your January appearance before the Senate 

Armed Services Committee, you began your written remarks by 

noting that, in the defense budget, and I quote, ‘‘dollars are policy.’’ 

Shifting $52 billion from other Federal programs speaks loudly 

about policy priorities, does it not? 


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Mr. KORB. Yes, it does. 

Mrs. WATSON COLEMAN. Thank you. This committee has a duty 

to ensure that we are effective stewards of the taxpayer dollars, 

and that also includes ensuring the effectiveness of the programs 

that Congress funds. 

Mr. Klepper, it sounds like one of the findings of your study was 

that the Defense Department has significant inefficiency and waste 

in its business processes. Is that correct? 

Mr. KLEPPER. Yes, ma’am. 

Mrs. WATSON COLEMAN. Dr. Korb, do you agree that Defense Department could implement changes that would result in billions of 

dollars of efficiency savings? 

Mr. KORB. Yes. It is. And I testified before that, before the Senate Armed Services Committee, and one of my colleagues here, Mr. 

Tillotson, mentioned a report that I just did last week on this. 

Mrs. WATSON COLEMAN. Thank you. 

Instead of looking for efficiency savings at the Defense Department, President Trump’s so-called skinny budget released last 

week slashes critical domestic programs to provide more than $50 

billion in additional funding to the Defense Department. Despite 

the President’s claim that this budget ‘‘puts America first’’—and I 

put that in quotes—based on recent reporting, the budget would actually hurt some vulnerable communities, such as low-income and 

elderly Americans. For instance, the budget would eliminate funding for the Appalachian Regional Commission, a program in 13 

States that has, since 1965, provided funding used to promote economic growth. Most recently, it has helped to retrain coal miners 

who have lost their jobs. 

Dr. Korb, would you agree that it is important for the Federal 

Government to spend its dollars wisely? 

Mr. KORB. I certainly would. 

Mrs. WATSON COLEMAN. And one way to do that is to measure 

a program’s effectiveness. Is that not correct? 

Mr. KORB. That’s correct. 

Mrs. WATSON COLEMAN. The Appalachian Regional Commission 

cites a dramatic decline in poverty rates in Appalachia from 30 percent to under 17 percent between 1960 and 2017, a substantial reduction in the number of high-poverty counties from 295 to 84 during that same period. 

Dr. Korb, assuming those numbers are correct, that sounds like 

the program has been working for America, does it not? 

Mr. KORB. It certainly does. 

Mrs. WATSON COLEMAN. The President’s proposed budget would 

also eliminate funding for the Low-Income Home Energy Assistance Program, which helps low-income people pay for heat in the 

winter. It would also cut funding for the 21st Century Community 

Learning Centers, which helps fund afterschool programs serving 

more than 1.6 million children nationwide, and reducing Meals on 

Wheels, where millions of meals have been delivered to the vulnerable and the elderly. 

Mr. Chairman, while I agree that we should provide the 

warfighter with everything that he or she needs, I do not believe 

that should come at the expense of critical domestic programs that 

serve our Nation’s most vulnerable. 


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I agree that the dollars are indeed policy. So some of these dollars should go to the neediest of Americans. 

And, with that, I yield back. 

Thank you, Mr. Chairman. 

Chairman CHAFFETZ. I thank the gentlewoman. 

I will now recognize Mr. Issa of California for 5 minutes. 

Mr. ISSA. Thank you. 

I’m going to pick up a little bit where the chairman left off, no 

surprise. Yes, sir, it’s you. You said there was a contract for a report. Who determines when you put the word ‘‘report’’ onto a 

PowerPoint stack? I know that terms are loose, but this thing purports to be a report in hard printing, right? 

Mr. TILLOTSON. Yes. 

Mr. ISSA. But it’s not a report? 

Mr. TILLOTSON. It is the report to the extent that one exists for 

this study by the Defense Business Board. And the answer as to 

who owns that is the Defense Business Board owns that product, 

and we provide support, administrative support, to the board when 

they do that. The information from McKinsey was government information that we would provide to the Defense Business Board as 

we would to the Defense Science Board or anybody else. 

Mr. ISSA. Okay. 

Let me go to the chairman for a second. This is a new era, and 

I think we’ve got to ask some tough questions. And I support this 

money being used. If I calculate it roughly, right, as an old Army 

guy, those 50 brigades would be over 100,000 men that we would 

be able to add in end strength. That’s basically a full rotation, a 

whole group of people that don’t have to redeploy in a given year 

if we had that many more in the Army. So this is the difference 

between Army people finding themselves coming and going back 

and forth to combat when you look at 50 brigades. I didn’t focus 

on the other two branches; I’m not as familiar with them. 

So, Chairman, let me ask a couple of questions. One of them was 

it was stated that they lost focus. Mr. Tillotson, I think, said that. 

How do you lose interest in $125 billion once you identify that 

number? 

Mr. BAYER. Which of us do you want to answer that question? 

Mr. ISSA. I’m sorry, Chairman Bayer, I thought—two chairmen, 

but only one has a title underneath there. But I’ll take both of you. 

How do you lose interest once you recognize, even if it’s not in a 

report but a stack of PowerPoint, how is it you lose interest in saving $125 billion? 

Chairman Bayer, I’d like you first. 

Mr. BAYER. Well, Mr. Chairman—I’m sorry. Mr. Issa, we don’t 

lose interest in saving money. The board was formed 15 years ago. 

It’s done far more than 100 pieces of work, all of which the great 

sweep of that work is about how the Department can do things 

more efficiently. 

Mr. ISSA. Let me go through a question then because, obviously, 

this is a little bit like—it is an economic 9/11, if you will. On 9/ 

11, we didn’t connect the dots; so the bad guys bombed our country 

with our own aircraft. 

So let’s talk about $125 billion. Did you connect the dots between 

you and the appropriators or any other Members of Congress so we 


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would know there is $125 billion in savings in your report—in your 

nonreport—that we could have had? 

Mr. BAYER. That would have been done under the previous chairman, who served for an additional 90 days after that effort was 

voted out of the—— 

Mr. ISSA. No. My question is did anyone, not—are you saying you 

don’t know? 

Mr. BAYER. Well, I prefer to defer that to Chairman Stein at that 

time. 

Mr. ISSA. Chairman Stein, did you report to Members of Congress, who would have been able to reprogram 125 billion if they 

took advantage of these savings? 

Mr. STEIN. Well, first of all, there’s—and this is the first time I 

have heard this, the difference between slides and a report, but we 

fully approved a report, this—I left after 90 days, and we started 

to move out to make—talk to Congress, and then we were stopped. 

Mr. ISSA. Okay. Who stopped you? Who stopped you from telling 

Congress there were 100,000 men that could be deployed with this 

money? 

Mr. STEIN. The best I—and remember these numbers are 

compounding. So, if you save a billion this year, it will be $2 billion—— 

Mr. ISSA. You mean eventually a billion here, a billion there, it 

adds up to real money? It’s still true—— 

Mr. STEIN. It adds up to real money. This is real money. 

The thing I want to make sure of, first of all, I will say, and I 

want to make this clear, this was the first ever that a—the work 

that McKinsey did was important. It’s the first time it was ever 

done. So I just want to make sure that that is said. 

The second thing is we had full approval in a public hearing on 

this report and Ash Carter or you know, we were told that—— 

Mr. ISSA. But I asked you who stopped it. 

Mr. STEIN. We don’t know. I was asked—— 

Mr. ISSA. Let me ask more than a rhetorical question because I’m 

going to run out of time, Chairman. How do we on this side of the 

dais ensure that never again are there tens or hundreds of billions 

of dollars in savings that the American people are denied because 

some unknown person in the Department of the Defense puts a kibosh on it for whatever reason and Congress doesn’t find out about 

it? How do we stop that from happening? What law do we have to 

pass to guarantee the transparency to that gentleman or to the appropriators or to whoever in Congress so that in fact the American 

people never get a raw deal after good money has been spent to 

study something that could save the American people or at least 

save American lives by plussing up our military? 

Mr. STEIN. I will say two things: Look, when I left, Mr. Bayer 

took over as chairman, and he didn’t want to continue this. Secretary Carter did not want to continue this. So let me say the second thing here is that we have—and you’re a businessman, Congressman. You know, having a great plan is one thing; having people that can implement it is another. You have one of the great 

people here that spent a year working on this. And you have 

McKinsey who spent a year and the people Scott had involved were 

as good as you can get. What I’d like to do is get people in the same 


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room with Kenny Klepper, whoever that might be—and that’s the 

one thing that frustrated me is not the same people would sit in 

a room, and they disagree or agree, but we’re talking about very 

important things and nobody will get in the same room. And I’m 

saying that Dave Tillotson is as good a person as you can find. Bob 

Work is as good a person as you can find, and the antibodies got 

us. And the antibodies is going to kill this country if we don’t stop. 

We have got to change culture, and we have got to make things 

happen. 

Mr. ISSA. Mr. Chairman, I only ask that you and the ranking 

member and all of us commit ourselves to make sure that we never 

again allow the absence of this body knowing that there is an opportunity on a study like this and never again allow it to be buried. 

Certainly this is an example where I wish an IG had brought it to 

you, Chairman and Ranking Member Cummings. But since they 

didn’t, I look forward to working with you on mandating that in the 

future so it can’t happen again. 

Chairman CHAFFETZ. Thank you. 

And, Mr. Stein, just to clarify with the questioning from Mr. Issa, 

was there a final report that you had approved that did not get 

published? 

Mr. STEIN. The best I know—and this is process now, and I want 

to make sure—we approved in a public hearing this report. It was 

fully vetted, fully—right now, you know, these guys are saying 

something different. I’m not technicalities, but when somebody 

talks about $125 billion, you had a change of Secretaries and you 

had change of chairmen. This chairman didn’t want to pursue it, 

and the Secretary didn’t want to pursue it. I can follow that. What 

I’m saying is we spent a year. We met with almost 80 executives 

in and out of the Department. We worked well with Dave Tillotson, 

and I give him a lot of credit. I give Bob Work a lot of credit, and 

I give the McKinsey team a lot of credit, and I give the most credit 

to Kenny Klepper. These guys bled their life for this for a long 

time. 

Chairman CHAFFETZ. Mr. Stein, I’m trying to get real clear here. 

This is a slide deck. Is this the final report, or was there a different 

report that was not published? 

Mr. STEIN. I have not seen that. I have not seen that. 

Chairman CHAFFETZ. We’ll hand it to you. 

Let’s now go to Mrs. Demings of Florida is now recognized. 

Mrs. DEMINGS. Thank you so much, Mr. Chairman. 

Mr. Tillotson, in your testimony, you indicated that, after the recommendations from the study or report came out, that you did address some IT inefficiencies but that you did not go as far as the 

study recommended. What are some examples of some of the other 

recommendations that you chose not to implement? 

Mr. TILLOTSON. So, actually, it’s not so much that we didn’t 

choose to implement. There’s a time interval to get the work done 

to do the implementation. So, in the report—slide deck, whatever 

version you’d like—in the report, there is actually work required to 

be done to go put the details into place. We started on some of the 

obvious things that actually Mr. Klepper and Mr. Stein have already mentioned, like data center consolidation. There is a broader 

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ronment that we would need to pursue. We did look at contracts 

for enterprise license agreements. So we looked at some of those. 

So part of this is just time phase for implementation. 

We did take on consolidation of some of the medical IT systems. 

We abandoned some of those. So there was reduced—cost savings 

in that activity, and there is more to be done in that. We are actually continuing to work that. So we viewed this much—by the way, 

the recommendation the DBB did, that this was going to take a period of time to do. Again, commercial time schedule one thing; government time schedule another. But the answer is it is not work 

that ends; it is work that goes on. 

Mrs. DEMINGS. Mr. Klepper, you said: ‘‘The money is there, but 

can we get the agency out of the way to move forward?’’ What did 

you mean by that? 

Mr. KLEPPER. You know, as I go in there and look at this enormous waste at a time where, no matter where you want to spend 

the money, we see this happening. And there is this sense of helplessness; we can’t fix it. I just have to believe that if we could show 

the aggregate economic impact to the Nation, not just the Defense 

Department—but these budgets are fungible; as you know, they 

bleed over into other areas—that if we could identify the savings 

and with clarity show the roadmap to fixing things, to getting to 

the savings, and identify for Congress those things that we need 

Congress to help us with. A lot of this is unintended consequences 

of policies and laws to solve one problem that created big inefficiencies and bureaucracies; it just happened. Nobody has ever measured this. So nobody has ever seen the aggregate historical financial consequence of those things over many years. So my belief— 

maybe I’m an optimist—I just believe that there is so much money 

here, and we are so desperate in need for these funds, if we can 

make the case to Congress and to the leadership of the Defense Department of the things that we need help with, that people will 

help us. Now, are we going to go from the very little savings that 

we had in the 2 years since this study was published to 125? 

There’s more than that. Or is there going to be somewhere—I think 

the answer to that range between Scott’s 60 to 80 and where I 

think we have a real possibility is in, can we work together to move 

self-imposed barriers out of the way to let us do that? And I just 

believe we can. I’m not ready to give up. 

Mrs. DEMINGS. Mr. Korb, as you know, last week, the Trump administration released the budget proposal that would increase defense spending by 54 billion. At the same time, the budget would 

cut the State Department and U.S. Agency for International Development’s base budget by 28 percent, the largest cut of a department the size of the Environmental Protection Agency. As you 

know, our national security is paramount, but the Trump administration fails to recognize how these draconian cuts make America 

less safe. 

Last month, 120 retired generals and admirals wrote a letter 

urging Congress not to slash the funding for diplomacy and international development. They stated, and I quote: ‘‘The State Department, USAID, Millennial Challenge Corporation, Peace Corps, and 

other developmental agencies are critical to preventing conflict and 


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reducing the need to put our men and women in uniform in harm’s 

way.’’ 

Mr. Korb, would you agree with that statement? 

Mr. KORB. I certainly would agree, and I would also add the Environmental Protection Agency because our military leaders have 

said climate change is a threat to national security. And essentially 

the Defense Department is not the only agency that provides for 

national security. As you pointed out, all of these other agencies do 

contribute as military people know full well. 

Mrs. DEMINGS. Thank you. When he was Commander of Central 

Command, Secretary James Mattis spoke to Members of Congress 

stating, and I quote: ‘‘I would start with the State Department’s 

budget. Frankly, they need to be as fully funded as Congress believes appropriate because if you don’t fund the State Department 

fully, then I need to buy more ammunition ultimately.’’ Mr. Korb, 

would you agree with Secretary Mattis’ assessment? 

Mr. KORB. Absolutely. And I hope that he continues to make that 

case to the President now that he’s a Cabinet officer. 

Mrs. DEMINGS. Is it fair to say preventing military conflict 

through diplomacy would cost less than engaging in it? 

Mr. KORB. Very definitely. 

Mrs. DEMINGS. Foreign aid is a popular target for those who say 

they want to seriously cut down on waste. However, many Americans may not realize foreign assistance makes up less than 1 percent of Federal budget. 

Mr. Korb, is that right? 

Mr. KORB. That’s correct. 

Mrs. DEMINGS. Are there national security implications that result from slashing foreign aid for our allies or humanitarian efforts? 

Mr. KORB. Very, very definitely. 

Mrs. DEMINGS. The Trump administration says that these extreme budget cuts for diplomacy are about putting America first, 

but America has a lot to lose if we stop making smart investments 

for our own global security. 

Thank you very much. 

And I yield back, Mr. Chairman. 

Mr. PALMER. [presiding.] I thank the gentlelady. 

The chair now recognizes the gentleman from Oklahoma, Mr. 

Russell. 

Mr. RUSSELL. Thank you, Mr. Chairman. 

And thank all of you gentlemen for being here today. 

Mr. Tillotson, in the course of evaluating savings and a lot of the 

other things, I want to try to get back to some of the evaluations 

that were examined. How many positions currently filled by contractors could be filled by uniformed Active-Duty personnel? 

Mr. TILLOTSON. I can’t give you a number. And I would also answer that I would not necessarily fill those positions with uniformed personnel. In some cases, if we were going to replace them, 

we would fill them with contractors—pardon me, with civilians. 

I’ll be honest with you, Mr. Chairman—or Mr. Congressman— 

the issue that we are faced with in the Department is to look at 

the appropriate labor mix, and I do think one of the things that I’m 

in complete agreement with Mr. Klepper and Mr. Stein on is an agVerDate Nov 24 2008 09:51 Aug 24, 2017 Jkt 000000 PO 00000 Frm 00086 Fmt 6633 Sfmt 6633 H:\26498.TXT APRIL

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gressive review of our contracts to just see whether we need them 

at all. 

Mr. RUSSELL. Well, I think there’s a whole array of issues: 

nondeployability, efficiency, base salary. I mean, there’s a number 

of things that we can see for efficiencies. And I’m just surprised 

that you would not have any type of estimation of a number. I 

mean, since we’re saving money by keeping contractors, which I 

would dispute, we ought to have some idea of what percentage or 

what numbers some of that might be. 

We see a continued decline on our military personnel, and yet we 

see a continued increase in bloat of the bureaucracy. Do you not 

see that as a problem, Mr. Tillotson? 

Mr. TILLOTSON. I do see that as a problem, Mr. Russell. And I 

agree with you that—what I don’t agree with is I don’t see that the 

contractors are necessarily a savings. I think if I hire a contractor 

for a very finite job and they are done, then that’s cheaper than 

hiring a full-time employee of any kind. 

Mr. RUSSELL. Unless they can’t perform the mission. 

Mr. TILLOTSON. Unless they can’t perform the mission, in which 

case it is inappropriate; I agree. 

Mr. RUSSELL. Mr. Rutherford, in your analysis with McKinsey, 

you looked at a wide array of things. Did your baseline show any 

savings by replacing contractors with uniformed personnel or what 

those mixes might be, or did you examine any of that? I know you 

did examine both military and contracting personnel. Did you see 

any savings there? 

Mr. RUTHERFORD. When we did our comprehensive assessment 

on the actual savings and we looked at the different business processes, we looked at changing demand management, changing actually the contract, the contracts within themselves, and renegotiating those, where you could do automation like Mr. Klepper talked 

about. We did not look at whether or not you could replace contractors and military personnel. What we looked at is where the compressible spend was within those different areas and that there 

was opportunities for savings within the contract services. 

Mr. RUSSELL. Secretary Korb, if you don’t mind me using that 

title in deference to your long service to our country—and I actually remember when you were in that capacity as a young soldier— 

when you were serving in the Navy, was it possible for a seaman 

to do a contracting personnel job more efficiently with less expense? 

Mr. KORB. I would say very definitely. 

Mr. RUSSELL. I suspected you might say that. And I guess, Mr. 

Klepper, I’m just amazed at your background and how you’ve been 

able to rescue what should have been destroyed and yet is resurrected from, unfortunately, the ashes. As you evaluated the structural and management processes of this problem, did you determine that there would be any efficiency in savings by replacing 

contractor functions with military personnel as a way to get at net 

saving? 

Mr. KLEPPER. No, sir. What we actually did was a little bit the 

opposite. We looked at productivity and savings, and we did not 

touch any uniformed positions. So, if you look at all the savings 

that we listed, they were all nonmilitary—non-uniformed—— 


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Mr. RUSSELL. Was this assuming though a steady line of military 

units, or did it take constant folding of flags and mothballing of 

ships and parking of aircraft? 

Mr. KLEPPER. I’m not sure I understand that. 

Mr. RUSSELL. Well, okay. So, as you’re studying this, and you are 

looking at maybe we want to keep this contract, but as you lose a 

unit, then—would you take that into account, or was it a steady 

state of end strength that you made these evaluations on? 

Mr. KLEPPER. We made it on a steady state of end strength. So 

we took—if I may, just for a second—the math, was we took the 

prior year—which, by the way, an important point here was 2013 

actual; so the study needs to be updated. But we took 2013 because 

I needed a full year’s savings, and we extrapolated that over a 5- 

year period for productivity. 

Mr. RUSSELL. I would argue, and having been in the military myself, from 2013 to 2017, we’ve diminished our Armed Forces a great 

deal, and we are putting our Republic at risk in its defense. I 

would be the first to say that we need to reform contracting; we 

need to find saving. But I also think that when you pay a specialist 

E–4 or a seaman E–4 something like that, a sailor, at $24- to 

$30,000 a year, they can probably do the personnel job cheaper 

than a contractor. Would you agree with that or not? 

Mr. KLEPPER. I would. And just if I could build on that point, the 

other piece that is the really big lever here is automation and compute power, where you have a higher intellectual worker versus 

low-end people doing papers and things, and I think there the opportunity for military personnel to self-serve is sort of an aspirational state that you would design to. So they can configure the 

changes they need without filling out forms and sending it back to 

come back months and months later to put self help. If I were 

going to improve, increase the amount of service that uniform did, 

I’d do it through upping the intellectual level of value and providing the automation tools that they could interact with much, 

much more efficiently. 

Mr. RUSSELL. Thank you. 

And thank you for your indulgence, Mr. Chairman. I yield back. 

Mr. PALMER. I thank the gentleman. 

The chair now recognizes the gentleman from Maryland, Mr. 

Raskin, for 5 minutes. 

Mr. RASKIN. Mr. Chairman, thank you very much. 

Mr. Korb, let me start with you. Is there an inspector general at 

the Department of Defense? Is that a person that we would rightfully expect to be doing the kind of work that the volunteers with 

the Defense Business Board have been doing? 

Mr. KORB. Well, they would do some of it, but when you bring 

in groups like the Defense Business Board, they are people who understand how big organizations run. I mean, the inspector general 

a lot of times deals with waste, fraud, and abuse or, you know, people are not behaving themselves. You could ask them, but I do 

think and these gentlemen all—and men and women serve on 

there are nonpaid, and they bring—my experience has been they 

bring great expertise to help us because, a lot of times, you need 

somebody from the outside to—— 

Mr. RASKIN. To take a look from the outside. 


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Mr. Tillotson, let me ask you, did we waste $8- or $9 million of 

the taxpayers’ money on a report on identifying waste in the Pentagon? And if we didn’t waste it, what have been the savings that 

have come out of this report? 

Mr. TILLOTSON. I don’t believe we wasted the money. I think the 

work that was done that was actually contracted has been high 

payoff, and we continue to build on it. My direct answer to your 

question is to date we have loaded in approximately $7.9 billion 

worth of savings over the next 5 years based on the results of that 

study alone and eliminating any other savings that we’ve been 

doing in prior years? 

Mr. RASKIN. So it’s a good start, you are saying, around 7- or 8 

billion. 

Mr. TILLOTSON. And I will continue to reiterate my position that 

this is not a one-and-done activity. 

Mr. RASKIN. Okay. Forgive me for interrupting; we just have limited time. My concern is I represent the Eighth Congressional District in Maryland, which includes NIH, which is now slated for a 

$6 billion cut. These are the scientists who are trying to rescue the 

population from lung cancer and breast cancer and colon cancer 

and cystic fibrosis and asthma and these killer diseases. And just 

cavalierly we would just slash $6 billion from the NIH when we 

have a report 2 or 3 years old now saying we could save $125 billion just by reducing bureaucratic bloat and contractor fraud and 

waste and abuse and overruns. I looked into the history of that last 

night. This goes back to the 1960s, the cost overruns, and the 

1980s, with the $2,500 coffee makers and $600 toilet seats, scandal 

after scandal after scandal. 

I want to ask someone—maybe, Mr. Korb, let me come back to 

you, you have a long history in the military—you know, when you 

have that kind of systemic repeat dysfunction over the decades, 

you’ve got to believe it’s not totally pathological; it’s working for 

somebody. Who is this system of bloat, waste, fraud, and corruption 

working for? 

Mr. KORB. Well, unfortunately, it works for the individual 

groups. The real problem you have obviously—— 

Mr. RASKIN. When you say ‘‘groups,’’ you mean which groups? 

Mr. KORB. You have organizations, and in the Department of Defense and the history, the services have not wanted to give up functions to the Office of the Secretary of Defense to the extent that 

they should. You have basically—you have people, as I pointed out 

in my testimony, you’ve got a Defense Logistics Agency, but the 

services won’t give up a lot of their logistics function. I used to 

argue with them all of the time to let us manage that. I think you 

have—and I mentioned this, too, creating all these Under and Assistant Secretaries. My goodness, I mean, why do you need that 

many people up there in the Office of the Secretary of Defense, and 

we keep creating them. 

And as I’ve looked at that, the real key to running it correctly 

and making the savings is when you have a strong Deputy Secretary of Defense. As I mentioned earlier, David Packard came in 

from Hewlett-Packard, and Google back and you look at the fact we 

didn’t have the cost overruns. Our budget was half of what it is 

now. And I tell you who else was very effective; when Dick Cheney 


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was Secretary of Defense and brought in Don Atwood from General 

Motors. It was very well done. But when you don’t have that strong 

deputy in there, it becomes very, very difficult. 

Mr. RASKIN. Okay. 

Mr. Klepper, you talked about changing the culture at the Department of Defense. What are the concrete steps that can be taken 

legislatively by Congress to help shock the system and change the 

culture so the taxpayers are getting their money’s worth and we 

are not wasting our money in this way? 

Mr. KLEPPER. As the guy that’s had a life as a change agent, that 

may be the biggest question I’ve heard today because, when you 

look at large cultures that have—often an organization as big as 

DOD is not one culture; it is a whole bunch of tribes out there that 

have their own cultures because the size of it—there are three key 

things I will always say to focus on, is that, if you want to change 

the behaviors, it starts with leadership, and it is what gets recognized, reinforced, and rewarded. And to the extent as we worked 

our study across the institution, there is almost no trace—there are 

no metrics of productivity or reliability. There are mastery skills in 

appropriations. So I would say the key would be start with the 

head, and it would be that there is accountability for real measures 

of productivity. 

And as a leader in an organization, the most important people 

that you can influence are your direct reports because, as you look 

through the chain of command—and it is a long one in an organization the size and complexity of Defense—anywhere in the chain of 

command you fail to get the support, the recognizing, reinforcing, 

and rewarding of these kind of values, it creates a black hole in the 

organization. A black hole is where change goes to die. So I would 

put enormous emphasis at that part. 

The mechanics, the operation, the skill sets: we can get that. 

There’s lot of talented people that we can bring in to do that. But 

if it is not driven from the top, reinforced, recognized, and rewarded, its odds of sustaining fall really, really dramatically. That 

is certainly true in the commercial, and I think that’s human nature. 

Mr. RASKIN. Thank you. 

And I yield back, Mr. Chairman. 

Mr. PALMER. I thank the gentleman. 

The chair now recognizes Mr. Blum from Iowa for 5 minutes. 

Mr. BLUM. Thank you, Mr. Chairman. 

Thank you to the panel for being here today. I’d like to read 

something to you; in fact, I’ll read it twice. The Department of Defense remains the only Federal agency that can’t get a clean audit 

opinion of its statement of budgetary resources. Once again, the 

Department of Defense remains the only Federal agency that can’t 

get a clean audit opinion of its statement of budgetary resources. 

I’m from the private sector. I am a businessman. I’m a CEO of 

a public company. I understand audits. I understand clean audits. 

Taxpayers have invested $6 billion of their money over the last decade trying to fix the audit problem at the Department of Defense. 

We did a little research, and I found out that the Department of 

Defense has the world’s largest accounting and finance organization of any company, any organization, in the free world, the largVerDate Nov 24 2008 09:51 Aug 24, 2017 Jkt 000000 PO 00000 Frm 00090 Fmt 6633 Sfmt 6633 H:\26498.TXT APRIL

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est. It doesn’t seem to me to be a lack of resources. Will somebody, 

anybody—maybe we’ll go one by one—please tell me, please tell the 

taxpayers, please tell my constituents in the State of Iowa why we 

can’t have a Department of Defense that has a clean audit? Mr. 

Tillotson, let’s start with you. And I’m very interested in these answers. 

Mr. TILLOTSON. No problem, Mr. Congressman. And the direct 

answer to your question is I find the situation to be unacceptable 

as well. I have been working very steadily since I was moved up 

to OSD to try and put a lot more stick and rudder into getting the 

audit position cleaned up. I agree with you: it is an unacceptable 

position. 

Mr. BLUM. Who do you report to? 

Mr. TILLOTSON. I report to the Deputy Secretary of Defense. 

Mr. BLUM. Do they agree it is unacceptable? 

Mr. TILLOTSON. Yes. 

Mr. BLUM. To your knowledge. Who do they report to? 

Mr. TILLOTSON. The Secretary of Defense. 

Mr. BLUM. Do they agree it is unacceptable? 

Mr. TILLOTSON. The current Secretary agrees it is unacceptable. 

And so the answer to your question is the very size of that organization—this will go to the point that I’m sure Mr. Klepper will 

build on—when we look at the business practices of the Department within financial management, when we did that research 

with the McKinsey folks, it is the very size and kind of age of that 

process and the skill set of the people who are doing it that actually stand in our way, coupled with, candidly, our failure—and I’m 

going to say it this way—to enforce sound business practices in the 

nonfinancial community. We have very good rules, and sometimes 

we don’t follow them. So I’m not going to sit here and make an excuse for you. The answer is we are working to fix that, and I agree 

with—— 

Mr. BLUM. Thank you for not making an excuse. I appreciate 

your candor. 

Mr. Rutherford? 

Mr. RUTHERFORD. Thank you, sir. We are not an accounting firm, 

and the focus of our effort was really on the cost savings potential. 

But with that said, when we came in, one of the big deliverables 

that we did—with any cost savings effort—is having an authoritative data set, to having real numbers that everyone can agree to 

that this is the baseline. We spent an inordinate amount of time 

making sure we developed that so we could leverage it on a go-forward—— 

Mr. BLUM. Does the Department of Defense pay their bills with 

checks, or do they pay their bills with cash? They use checks I assume, right? How can we not know where the money goes? How 

does that happen? 

Mr. RUTHERFORD. We had to pull from 20 different data sets, one 

view on this, and on that view, it had over 5 million lines. 

Mr. BLUM. Does that go back to the tribes we were talking about 

5 minutes ago? 

Mr. RUTHERFORD. And also to this, where the IT and where the 

data sits—it is a part of what Mr. Klepper was talking about as 

well—is just, how do you actually have a view of what the true 


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spend is, and how do you actually take metrics on a go-forward 

basis to measure that over time to see if you’re making—— 

Mr. BLUM. If we started cutting people’s pay at the top, not the 

enlisted man, would this problem get solved? Maybe that’s what we 

need to do. 

Mr. Bayer? 

Mr. BAYER. Mr. Blum, I had a substantial career on being on 

boards of directors of publicly and privately traded companies. So 

my diagnosis of the situation is that it is appalling, and it’s all a 

direct result of leadership. If you—I would encourage you to take 

a look at the transition report that we offered the incoming administrations. We offered it to the team of Hillary Clinton. We offered 

it to the team of Donald Trump. We said that the challenge in the 

Department is getting a hold of its fiscal destiny, and the way you 

do that is put people who have business training expertise in these 

jobs. 

Mr. BLUM. How many years have you been saying this? 

Mr. BAYER. A long time. 

Mr. BLUM. Is anybody listening? Is Congress listening? 

Mr. BAYER. Trying to find some light in the darkness, the current 

Secretary, Jim Mattis, was at the time, when I chaired the Business Board the last time, was the chairman of Joint Forces Command. The Business Board felt very strongly that the Department 

had an excessive command infrastructure, one of which was Joint 

Forces Command. And we recommended to the Secretary of Defense at that time, Bob Gates, that he shut down Joint Forces Command. The Commander was General Jim Mattis. He embraced it 

and thought it was a spectacular idea and led the reformation. 

What I find now is that he has picked an individual, if press is 

accurate, that he has picked an individual to be the deputy who 

has had a lifetime of being a chief operating officer and, frankly, 

a very tough customer about wringing out costs and achieving accountability in a very large defense aerospace company. I haven’t 

met this guy; wouldn’t know him if he came in the room. But what 

I have read about him on the internet leads me to believe that, perhaps, General Mattis is in, fact, embodying the recommendations 

that we made, picking really tough people to run these positions. 

The deputy is critical in that—who is Mr. Tillotson’s boss. So I 

think it’s all about leadership. It’s all about toughness, and it’s all 

about making it important. If it’s not important, it’s not going to 

get done, and you know that. 

Mr. BLUM. I’m happy to hear that. Maybe there is light at the 

end of the tunnel. 

Mr. Chairman, can I have—would you indulge just to have the 

rest of them answer, very briefly? 

Mr. PALMER. The witnesses may answer. 

Mr. BLUM. Try to keep it brief. 

Mr. STEIN. I’ll go quickly and answer your specific question. It’s 

responsibility, and it’s: Be determined to get this done. If it is determined to get it done, it will get done. 

Mr. KLEPPER. I would repeat the leadership emphasis. I would 

also say that one of the things that we see that is a confounding 

issue is a culture where almost anyone can say no and very few 

people can say yes to the changes that you need to connect a lot 


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of those dots. So that’s part of it, but that still goes back to leadership—— 

Mr. BLUM. Culture. 

Mr. Korb. 

Mr. KORB. I think it requires a strong deputy. The Secretary, he 

or she is very busy running around the world and doing things. But 

you need someone like a David Packard; or Charles Duncan, who 

came in from Coca-Cola; Don Atwood, who came in from General 

Motors. When I have looked at this, that’s when the Department 

has been run well because they are the chief management, and 

they also have the gravitas to make things happen that you suggest. 

Mr. BLUM. Thank you, gentlemen. 

And thank you for your indulgence, Mr. Chairman. I yield back. 

Mr. PALMER. The gentleman yields. 

The chair recognizes the gentlelady from the District of Columbia, Ms. Holmes Norton, for 5 minutes. 

Ms. NORTON. My thanks to the chair. 

We’ve looked at the Trump budget, which purports to achieve 

huge savings that it says can be done by looking at inefficiency and 

waste. Now the largest budget in the domestic budget is, of course, 

the defense budget. So let’s begin, as I think anybody would, by 

looking at the largest first. I might ask this to any of you, to all 

of you; let me begin with Mr. Korb: If you were making a serious 

effort to target inefficiency and waste in the Federal Government, 

could you possibly exclude the Defense Department budget? 

Mr. KORB. Absolutely not, and I made that point: If you give 

them money, they will have no incentive—if you give them more 

money—to make the reductions that they should. 

Ms. NORTON. Do any of you believe that you would exclude the 

Defense Department, set it aside, if you were looking at your entire 

domestic budget and not look at the Defense Department? Do any 

of you believe that that’s how you would proceed? 

Hearing none, as they say. 

Well, if we look at the budget of the administration, far from 

looking for inefficiency and waste there, what we see is an unheard 

of increase, a $50 billion increase, in that budget, taken of course 

out of the flesh of the rest of the domestic budget. 

So let’s look at the State Department budget, for starters. You 

look at the State Department and the Agency for International Development; it’s a 28-percent cut. Some might say: You cut that 

much, you starve the agency to death. Mr. Korb, you believe there 

would be any agency left standing if you took 20 percent out of a 

combination of USAID and the State Department? 

Mr. KORB. I think if you do that, you will jeopardize national security. And as has been already pointed out by your colleagues, 

most military people have objected to that, including the current 

Secretary of Defense. 

Ms. NORTON. Do you think you would get a more efficient State 

Department, for example, and USAID by cutting them 28 percent? 

Mr. KORB. I don’t think so. For example, you have more people 

in military bands than you do in the Foreign Service. So the idea 

that somehow or another you can cut back really just doesn’t make 

a great deal of sense. 


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Ms. NORTON. So I ask you to look at this combination because 

I was interested in how all this adds up. You take—the USAID and 

the State Department has a 28-percent cut. Then you look at the 

rest of the domestic budget. Look at the EPA; that’s a 31-percent 

cut. Or the Labor Department, that’s a 21-percent cut. Perhaps it’s 

a coincidence, but you get a total there of $58 billion, which is 

about the same as the increase proposed in the Defense Department budget. So let’s assume you could get such a huge amount 

pouring into one budget so quickly. Is that the way—could you get 

that amount used efficiently so as to justify lobbing in such a huge 

amount at one time on one agency? 

Mr. Korb. 

Mr. KORB. I don’t think so. Particularly, as I mentioned earlier, 

the new administration is adding $30 billion to their 2017 budget. 

So they are going to put that in, and the fiscal year ends 1 October. 

So we’re already a good way through it. And then adds another 

$54; I think we’ll find it very tough to do it in an efficient—efficient 

way. That’s why I commend the Business Board here because they 

talked about the savings over 5 years, not having them all right 

in the first year. 

Ms. NORTON. Mr. Tillotson, this is an increase over 1 year. Can 

you cite me any precedent where such a huge amount got spent efficiently over a single year? 

Mr. TILLOTSON. I can’t cite a precedent, but I can cite the concern 

of the Secretary of Defense that we not ask for something that is 

not executable. And I can also cite the fact that the Secretary of 

Defense is internally on record with the tasking to the Department 

through the DepSecDef to look for additional efficiencies. And I can 

also state that the White House and the Office of Management and 

Budget is still holding the Defense Department accountable for offsetting part of the proposed increase in spending by continuing to 

find efficiencies within the Department. I don’t think anybody is 

letting the Department off the hook in this conversation. And I will 

defer the rest of the prioritization of the budget to the White 

House. That is their decision, and I’m not privy to that conversation. 

Ms. NORTON. Of course. And the way to do credible savings is to 

do across-the-board savings. Then maybe somebody will believe 

your budget. 

Thank you, Mr. Chair. 

Mr. PALMER. I thank the gentlelady. 

I will now recognize myself for questions. Mr. Tillotson, The 

Washington Post article, investigative report actually, said that the 

Pentagon knew their back-office bureaucracy was overstaffed and 

overfunded. If you knew that, why didn’t do you anything about it? 

Mr. TILLOTSON. So, respectfully, we have been doing something 

about it. Since Secretary Gates, we have been continuing to draw 

down the headquarters’ staffs at the Department of Defense. That 

was an initiative from Secretary Gates years ahead even of the 

DBB study. We continue on that trend, and we’re meeting those 

goals. We have reviewed the defense agencies. I would take a bit 

of issue with the so-called back shop that we talk about in some 

cases because we talk about the defensewide account, includes the 


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Defense Logistics Agency, which does central purchasing and procurement—— 

Mr. PALMER. Sir, I want to continue on with some other stuff. 

And I appreciate the detail, but we have only got a few minutes. 

Or we can take as long as we need to, I guess. But you said you 

did something about it. I would assume that the fact that Chairman Bayer, Mr. Stein, Mr. Klepper, Mr. Rutherford are here, is 

that that was part of the actionable effort, this study. Would that 

be correct, Mr. Rutherford? 

Mr. RUTHERFORD. Our study finished almost 2 years ago, and in 

that study, we laid out a path forward with the DCMO on how to 

measure this on a go-forward basis with line of sight into what is 

due the savings. 

Mr. PALMER. Now how much of that has been implemented? 

Mr. RUTHERFORD. You’d have to ask Mr. Tillotson. 

Mr. PALMER. Mr. Tillotson, how much of that has been implemented? Can you give me a percentage amount? 

Mr. TILLOTSON. Yes, sir. I will go and say that $7.9 billion worth 

of efficiencies have been laid in, which includes—— 

Mr. PALMER. Less than 8 percent. 

Mr. TILLOTSON. Less than 8 percent. But as acknowledged in the 

DBB study itself, we needed to start; we needed to put some pieces 

in place; and then we needed to continue and sustain the effort. 

And that’s our intent 

Mr. PALMER. How much of your recommendations, Mr. Rutherford, do you think could be implemented? 

Mr. RUTHERFORD. We think all the recommendations—— 

Mr. PALMER. That’s a great answer. Thank you very much. Do 

you think that they could have quickly implemented 20 percent? 

Mr. RUTHERFORD. The speed is the biggest issue. So what we 

have laid out with the DCMO is that the speed in which you would 

do this would actually have to be quite deliberate of year-over-year 

productivity, which is around, from our estimations, a 3-percent 

productivity gain every year, which would only be about 4- to $5 

billion every year. To get something so quickly upfront would take 

something much more robust than we laid out. 

Mr. PALMER. I want to ask you something else about—and I will 

stick with you, Mr. Rutherford. The investigative article also made 

this: the average administrative job at the Pentagon was costing 

taxpayers more than $200,000, including salary and benefits. Was 

that salary and benefits, or are there other costs in there? I mean, 

I find that shocking that that was the average cost. 

Mr. RUTHERFORD. My understanding of the salary and benefits, 

but I should go back and get that for you. 

Mr. PALMER. I would like for you to provide some answers to 

some questions to the committee because I’m not sure you’ll be able 

to answer them right now. But I’d like to know how many people 

overall were in those administrative positions? How many were civilian versus military? And if you know the answer, I’d love to hear 

it. And I’d like to know how many of those earned over $200,000 

because, if the average is $200,000, including salary and benefits, 

frankly, that’s shocking to me. And how many are over $250,000? 

We’re seeing this throughout the Federal Government. This is 

something I’d like to know. Could you provide those answers? How 


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many total people are working administrative jobs, and how many 

are civilian versus military? How many of those earn over 

$200,000, and how many of those earn over $250,000? 

Mr. RUTHERFORD. Since our work ended 2 years ago, I can go 

back and look at those numbers and pull together what our view 

was at that time. 

Mr. PALMER. Mr. Tillotson, I would request the same information 

from you. You should be able to provide. 

Mr. TILLOTSON. I was going to say, I think respectfully, Mr. 

Chairman, I’m the accountable agent for answering your question. 

And I understand the question. We’ll be happy to take it on. 

Mr. PALMER. Do you think we could get that next week? 

Mr. TILLOTSON. I see no reason why not. 

Mr. PALMER. Thank you. I’ve only got a few seconds here. Here’s 

the thing that bothers me about this. You realize that the appearance—even the appearance of a coverup of a report like this undermines the Pentagon’s credibility. It undermines your credibility, 

frankly. You hurt personnel that work at the Pentagon who show 

up for work every day and do their job. You hurt the taxpayers. 

You add to their burdens. You hurt the finances of the United 

States government. Every dollar that’s wasted is another dollar, because we’re doing deficit spending, that we’re having to pay interest on. You know, the total amount of waste is more than 125 billion when you take that into account. 

Finally, by wasting the resources committed to our national defense, I think you compromise the military’s ability to carry out its 

mission. That’s what is so troubling here. You look at the total financial picture of the United States Government and the path that 

we’re on. I mean, we’re at $20 trillion in debt. If we’re having to 

pay interest on that entire debt, a 1-percent increase in interest on 

that, Mr. Stein, is $200 billion. So you begin to understand why everybody on this committee is so sensitive to this because you’re 

adding to the burden of the American taxpayer. 

I think it was the Joint Chiefs of Staff Chairman, Admiral 

Mullen, that said that the single greatest threat to our national security is our debt. So I appreciate the seriousness with which this 

hearing has been accorded by each one of you, and I appreciate it 

very much. But we have got to get a handle on this, not just at 

the Pentagon, but throughout the Federal Government, but particularly at the Pentagon because that’s—constitutionally that’s our 

first obligation, is our national security. 

With that, I’ll yield back and recognize—sorry. The chair recognizes Mr. DeSaulnier from California for 5 minutes. 

Mr. DESAULNIER. Thank you, Mr. Chairman. I want to thank the 

chair and the ranking member for this hearing. 

I’m reminded of many conversations I used to have with my father-in-law, who was a highly decorated Air Force general in World 

War II, who ended his career, near the end of his career, he was 

the auditor general of the Air Force, major general. He won a Distinguished Flying Cross, but he also won something, if memory 

serves me, called a Zuckert Award, which at its time was the highest achievement for management. He used to say that was harder 

to get than the Distinguished Flying Cross flying over Germany. 

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fense were more interested in keeping their jobs than doing their 

jobs well. 

So, Mr. Korb, you mentioned the Packard Initiative. I often think 

back to Peter Grace and the Grace Commission. Why were those 

effective in having business people being able to make observations? This is not new: having business people come in and look at 

the public sector, acknowledge that they’re different, and be able 

to get both Congress and the bureaucracy to change their culture 

and implement those. The frustrating thing, as you have said, is 

it doesn’t seem sustainable. Although I do want to congratulate the 

Department of Defense in this instance for bringing Republicans 

and Democrats together in common cause. Mr. Korb? 

Mr. KORB. I think it’s because of the fact that they’ve managed 

large organizations, and they understand how to make them work; 

plus they have the gravitas to be able to stand up to generals, admirals, and other people. And I think that’s the key thing. When 

I worked in government, we had—things got pretty bad, and it was 

mentioned earlier about the toilet seats and all of that. We had to 

bring David Packard back to help straighten things out. I think if 

you take, as I’ve looked at this all the time, when you have a deputy like that, and many times the Presidents will pick the deputy 

even before the Secretary. Before Dick Cheney took the job, Brent 

Scowcroft had picked up Don Atwood from General Motors. So I 

think that’s the key because you have a lot of people, military people, like your father-in-law, done all these distinguished things. So 

you’re going to need a big presence to be able to tell them, you 

know, what to do. And I think that’s how it’s worked best. 

I mean, after all, David Packard, and everybody knew Hewlett 

Packard, and back in the seventies, because of how important that 

company was, when he said stuff, he made it happen. Just to give 

you an example, the services didn’t want to have a single transportation command, okay. He was able to get that done. 

Mr. DESAULNIER. So here’s the struggle, and, Mr. Klepper, to 

you—and you’ve gone from different industries and been able to 

look at cultures, and as the McKinsey report says very clearly, that 

culture is a big thing, the willingness to accept criticism, to acknowledge that you need to accept that criticism in a manner that 

would be corrective, but it seems to be uniquely difficult in this environment. One quote from the McKinsey report, as acknowledged 

through The Washington Post investigation, said McKinsey noted 

that, while the Defense Department was, in quotes, ‘‘the world’s 

largest corporate enterprise,’’ end quotes, it had never, in quotes, 

‘‘rigorously measured the cost effectiveness, speed and agility, or 

quality of its business corporation.’’ It seems rather striking that 

that hasn’t happened. 

So, both on that comment and then on a comment you made in 

the same article where you’re quoted as saying, ‘‘You’re about to 

turn on the light in a very dark room’’—and I won’t read the rest 

of the quote. It’s quite colorful. But it strikes me that that’s really 

the essence of it, and there have been different periods of time 

where your kind of effort has worked in the Department of Defense 

or in large public agencies. But this keeps coming up, that the culture is the most resistant to changing. And oftentimes, as my faVerDate Nov 24 2008 09:51 Aug 24, 2017 Jkt 000000 PO 00000 Frm 00097 Fmt 6633 Sfmt 6633 H:\26498.TXT APRIL

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ther-in-law said, the rewards and promotion within that culture is 

more about just getting by than actually performing well. 

Mr. KLEPPER. Well, I haven’t been in a number of organizations 

where the task was a major disruption, a major change from the 

status quo and some of the business direction. A couple of things— 

look, this isn’t a study; this is sort of what Kenny’s learned, you 

know, along the way—is I talked about leadership as sort of the 

irreplaceable. Without that, you’re sort of lost. But the other two 

things that I think are vitally important, and I do think they apply 

here, and we have heard different versions of it, is transparency 

and accountability, whether it’s the audit system that we talked 

about, because you can’t have an accountable organization without 

a transparent organization. I understand there’s a lot of classified 

stuff, but the things that we’re working on here, this is not classified stuff, and I do believe that sunshine is a good disinfectant. 

One of the greatest things that we could do is to make the kind 

of inefficiency information more available to third parties and have 

ideas and have innovations to do that. But even then, if you don’t 

deal with the tribal, cultural, who gets promoted in and for what— 

that’s the recognized, reinforced, and rewarded—you got to go really, really hard on that. And at some place, efficiency and productivity have to become a more dominant marquee in that story. And 

I think if you start there from the top, and if we can successfully 

begin to bring transparency, we’ll attract good practices, and 

there’s an unbelievable amount of talent. 

And the other thing I think where the article misrepresented 

somewhat the Pentagon, almost all the senior military people that 

we talked to were extremely supportive. I outbriefed General 

Odierno, and he was going up to testify during sequestration, and 

there was a whole roomful of people. It was like you’re going in the 

coliseum. Is Kenny and Bobby going to get their head chopped off, 

or this is not—and we outbriefed to General Odierno. And he 

looked at us, and he said: ‘‘You know, I think you guys did a good 

job on this study, and I think the savings is there.’’ And he paused 

and he said: ‘‘Your timing is not perfect.’’ But he tasked people to 

move ahead, and then we weren’t able to follow through. 

So the talent is there. Transparency and leadership I think are 

the starting place, and I think it is something that we can do. This 

is an achievable goal, and there’s lots of reward for us if we do it. 

Mr. DESAULNIER. Thank you. Thank you, Mr. Chairman. 

Mr. DUNCAN. [presiding.] Thank you. I’ll recognize myself now. 

Let me just say a couple things. 

First of all, the easiest thing in the world to do is to spend other 

people’s money. Secondly, you can never satisfy any government 

agency’s appetite for money or land. They always want more. And 

I have wondered for many years whether there are any fiscal conservatives at the Pentagon. I’ll tell you a little story. I’ve been here 

a long time. This is my 29th year. When I first came here, I believed everything the Defense Department said. And I voted for the 

first Gulf war because I went to all the briefings and heard how 

great a threat Saddam Hussein was. And then I watched that war, 

and I saw his same so-called elite troops surrendering to CNN camera crews and empty tanks. So, by the time the second war rolled 

around, I had a lot more questions. And I got called to a meeting 


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in a little room at the White House with Condoleezza Rice and 

George Tenet and John McLaughlin, the top two people at the CIA, 

and I asked them that day many questions. But I asked them: 

Lawrence Lindsey, the President’s main economics adviser, had 

been on the front page of The Washington Post saying a war with 

Iraq would cost us $200 billion. I asked about that, and 

Condoleezza Rice said, oh, no, it wouldn’t cost nearly that much; 

it would be 50- or 60 billion, and we would get some of that back 

from our allies. Now we’re up in the trillions. That must have been 

the worst estimate in the history of the Federal Government. 

And I can tell you that when I was one of the six Republicans 

who voted against going to war in Iraq, it was the most unpopular 

vote that I ever cast in my district because I’d seen a poll the night 

before saying 74 percent of the people in my district favored the 

war, and 9 percent were against, and the rest undecided. But slowly over the years, that most unpopular vote ended up becoming the 

most popular vote that I ever cast. As I sit here now, I hear all 

these people say that the Defense Department has been decimated 

or it’s underfunded, and yet I look at the historical tables of the 

official budget, and it says that, in 2002, the defense budget was 

348 billion. By 2010, it had gone to 693 billion. And it’s just gone 

up every year. And this past year, in the budget, we spent 177.5 

billion on new equipment. Well, we spend that much or close to it 

I guess just about every year. Well, that equipment doesn’t wear 

out in 1 year’s time. And the defense—the military construction 

budget is a separate budget. You can’t go to any military base in 

this U.S. or in the world that there’s not all kinds of new construction going on. 

We somehow have got to bring this under control. We have got 

to get some more fiscal conservatives at the Pentagon, and I mean, 

I believe and I think most of us believe that national defense is the 

most important function or certainly one of the most important 

functions of our entire Federal Government, but it’s getting kind of 

ridiculous when the Pentagon has done a masterful public relations 

job in convincing people all over this country that they’re underfunded or been decimated, and I think it’s almost gotten to the 

point that it’s, in my opinion, it’s pretty ridiculous. I am a very conservative Republican, but I think conservative Republicans should 

be the ones most horrified by the excessive overspending that’s 

going on at the Pentagon. 

And I commend the work that your board has done. I mentioned 

this 125 billion in the last newsletter a few months ago, a couple 

months ago, that I sent out to my constituents. We need more work 

that will go on like that. 

And now I yield to Mr. Lynch for 5 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. 

And I associate myself with much of what you have just said. I 

don’t think you need to be a conservative, but I do think your outlook needs to be fact-based, and I think that’s where the differential comes in. 

I just have one bone to pick, not necessarily with you, and I want 

to thank all the witnesses here. You’ve all been very, very helpful. 

I appreciate your report. I haven’t gone through all of it yet, but 

I will. 


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President Trump came in, and one of the first things he did was 

to put a freeze on all Federal hiring. And, Mr. Tillotson, DOD is 

the biggest employer of returning veterans and veterans in this 

country. The Federal Government is collectively the largest employer of our veterans coming back from Iraq and Afghanistan and 

those who have served this country. First of all, the economics, we 

have had two other hiring freezes—one under Reagan, one under 

Jimmy Carter—and both of them, according to the GAO, increased 

spending in the Federal Government because we went to contracting, private contracting, and it boosted up the cost. And I 

think that’s going to continue here. I don’t think we’re going to 

save any money. 

The other thing is, because we are such, in the Federal Government, such a large employer of veterans, what this hiring—so 30 

percent of our Federal employees are veterans, about 30 percent. 

So what this does now is it puts a freeze in. So, as these kids are 

coming back from Iraq and Afghanistan, the Federal Government, 

which normally would hire them, is saying no. And so we’re already dealing with an elevated suicide rate. We have got substance 

abuse problems. We have got big, big problems with transition coming back in because of the multiple deployments that these kids 

have done. I was over at Camp Leatherneck there in Afghanistan, 

and I asked some of those kids how many tours. I got all the way 

up to seven tours. One of those young men was on his seventh tour. 

So that’s got to cause some psychological problems. In the meantime, when they come home, we’re telling them we can’t hire them. 

And also it’s costing us more money. So that’s just a statement I 

got that is in opposition clearly to what the President is doing. 

Now my background—here’s where the question comes in—my 

background is in construction, steel erection. I used to build 

bridges. I was an ironworker for about 20 years. My degree is in 

construction management. So this stuff with DOD is infuriating to 

me. It really is. And from my own experience, transparency, Mr. 

Klepper, right on the money; that’s what it’s all about. In my business, my prior business, transparency and competitiveness in bidding, that whole process was really what gave the end user, the 

taxpayer, the biggest bang for their buck. When there was no 

workaround, our contractors would come in and sharpen their pencils, and, boy, that dollar would go a long, long way. And when 

there was a lot of work and people could just throw a number at 

you, things were much more expensive. 

This process that we have with DOD, and we have got 36 major 

defense laboratories all around the country, including my own, 

where I can’t figure out how to get a person who wants to bid on 

some of that work into the process. It’s all smoke and mirrors. You 

need a secret handshake or something. I can’t get people on the job 

who want to offer a lower price for those services. You know, it 

looks like to me—I have to say this—that a lot of retired generals 

have gone to work for these contractors and are in the system now, 

and it’s like this good old boy network where the smaller companies can’t get in there and offer lower prices. It’s a problem. There 

are exceptions. I know Raytheon brings in all these subs, and they 

try to help with competition, and they’ll educate the smaller subs 

so they can use them. They use the sub to the sub to the sub. 


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But is that at the heart of this problem? That’s the question I 

have. Is that the heart of this problem? To make this—and I do 

agree with you, Mr. Klepper, some of this stuff is confidential; some 

of it is classified. But a lot of it is not, and we should throw it out 

there and make people bid openly, publicly, and competitively to 

make our government run more efficiently and at a lower cost to 

the taxpayer. 

Mr. Klepper. 

Mr. KLEPPER. Sir, the answer is yes. I think that’s a significant 

part. If you look at contracting, I was just thinking as you were 

talking: You know the way that you get in is you find a sub of a 

sub of a sub, and you get on somewhere, which means you’ve got 

to know somebody that knows somebody generally to find them. 

Then there’s a big, you know, by the time the government pays the 

tab, there’s a lot of additional cost on it. 

The other thing there’s a practice here that’s been around for a 

long time that drives all the worst possible behavior for spending. 

And it’s a process—I don’t know what the official. Maybe David 

could help—it’s use-it-or-lose-it. If you don’t spend all your money, 

then you get your budget cut. And one of the things we saw in the 

study, at the end of the year, there’s a tsunami of contracts that 

completely overwhelm the contracting unit. There were anecdotal 

conversations with the McKinsey team where a single contract officer had to sign 60 contracts in one day because, if they don’t get 

them signed, whoever the authoring contract, it’s going to be heck 

to pay because now you’ve got my budget cut. So you have that 

practice, and that’s a practice I just have to believe—I’m not smart 

enough to know how you guys could fix it. There has to be a way 

to fix it because that’s driving an insane waste of money, use-it-orlose-it. And I think the contracting structures are where there are 

some quick hits. 

And I would add, lastly, the key to getting the numbers at the 

level that we are talking about is we need a large mobilization. To 

go at this study should take a mobilization of 4- or 500 people that 

we’re putting in teams, and we’re training them or deploying them, 

and they got targets and goals. Until we scale up how we even 

think about attacking this problem, we’ll continue to just get dribs 

and drabs of savings. 

Mr. DUNCAN. They tell me we have got to speed this up because 

we have got votes coming up, but I will tell you I have a bill in 

that gives an incentive award that lets the Department keep half 

the money that they save, and half goes back to the budget. 

Mr. LYNCH. Mr. Chairman, if I could, I also have a bill that 

would allow veterans to be exempt from this hiring freeze so, at 

least when our kids come home from Iraq and Afghanistan, the 

government can hire them if they’re qualified for those jobs, and 

the jobs are available. 

Mr. DUNCAN. All right. Thank you very much. 

Mr. Grothman. 

Mr. GROTHMAN. Thank you. I have a question for either Mr. 

Stein or Mr. Klepper. What steps have the DBB team taken to ensure that benchmarks are applicable to the Department? 

Mr. KLEPPER. I really can’t answer that. We intentionally in our 

study try to avoid benchmarking because we were looking at such 


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a high level. In benchmarking, you end up spending all your time 

arguing about apples-and-oranges comparisons. So benchmarking, 

I think, has an appropriate—I don’t know, David, if you can answer 

that, but I can’t speak for the Department there. 

Mr. TILLOTSON. Mr. Congressman, one of the deliverables that 

we asked for from McKinsey was, in fact, benchmarking in some 

of these business areas compared to commercial sector. And it’s 

what points us to some of the first areas to look at. So, specifically, 

financial, IT, and human resource management were identified as 

areas where the departments spend on certain activities, which has 

a good commercial analog, which is the first question we asked, 

which suggests we could find additional savings. So we are, in fact, 

using it. 

Mr. GROTHMAN. How would you characterize your overall level of 

confidence in the cost and savings presented in the report? And I 

guess that’s really more for Mr. Stein. 

Mr. STEIN. Ask the question one more time. 

Mr. GROTHMAN. Okay. How would you characterize your overall 

level of confidence in the cost and savings presented in the report? 

Mr. STEIN. Until you have a full process of mobilization and a 

commitment to this process, one of the things that was talked 

about—I think this study by McKinsey was done 2 years ago—and 

I think you are going to have to update those numbers to see what 

actuals are, and I think you have a full commitment from the Secretary of Defense that this is what’s going to happen. 

Mr. GROTHMAN. Okay. There were a number of individuals interviewed as part of the report. Were those same individuals providing the preliminary findings from the report, and if so, what 

feedback did they provide on the data sources used as well as the 

magnitude of the savings identified? 

Mr. KLEPPER. The primary feedback—and I could yield to Mr. 

Rutherford from McKinsey because I wasn’t personally present 

during the actual data pool. But we knew that when we build the 

base case—I’ve done this type of work and know that the data always gets attacked. For anybody, if it makes something look bad, 

the first thing you do is say the data is not good, and that’s often 

where you get stopped at. So we took extraordinary effort in the 

data pool to be sure that, when the data was pulled from the system and it was arrayed against the core processes, that there was 

a local signoff within the agency or the military department that 

said that the way that the data was stacked was reasonable, because we also wanted to be able to do, to rerun the models on an 

annual basis so you can track financial performance over time. So 

those are the two things that we put a lot of rigor in that. And 

when we got into the data pool, we found some of the same issues 

that may affect the audit systems, financial systems, et cetera. 

But I have to say the McKinsey team, working with Dave 

Tillotson and the people he provided us—and there were over 100 

people involved in this data pool; it is the biggest one that, I believe, has ever happened at DOD—that the foundational data is 

pretty solid. And we also offered a challenge process that, if somebody saw the data and said, ‘‘Hey, this is wildly wrong, your analysis is bad,’’ that we could actually come in, audit the numbers, 

and if we found an error—look, if it was wrong, we want to know 


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that the model is wrong—we could correct it. So the model came 

through, and today I don’t think we have had any substantial challenges, at least that I’ve heard, that the base case model is wrong. 

The real debate, and maybe to your earlier question, is there’s two 

parts of it: Is the savings there, the potential? And I would say it 

is absolutely there, and it’s probably conservative. The big question 

is, can all of us together resolve, move the barriers, and get the implementation of the leadership? How much of it can we get and 

how fast? And I think that’s sort of the wild card answer. And I 

believe we have a shot at the numbers that we published. I really 

do. But we certainly would need help from you and others like you 

to get some of the barriers out of the way. 

Mr. GROTHMAN. I guess I have time for one more question. Mr. 

Tillotson, what level of independence was given to the McKinsey 

team? 

Mr. TILLOTSON. The McKinsey team was basically on their own. 

Other than the assistance it took to get them into the databases, 

their analysis then was their own. And the DBB analysis, which 

was also done, was also independent. We did not influence either 

outcome. 

Mr. GROTHMAN. Okay. Thank you. 

Mr. DUNCAN. Thank you. 

Ms. Kelly. 

Ms. KELLY. Thank you, Mr. Chair, and thank you for holding the 

hearing today. 

The topic of waste within the Defense Department is extremely 

important, and it deserves our attention, especially considering 

President Trump’s budget proposes funding a $52 billion increase 

in the Defense Department by cutting other parts of the Federal 

budget. While I definitely agree that we should support the Nation’s warfighters with everything they need, I am concerned that 

this budget proposal would hurt our national security in other 

ways. 

Dr. Korb, our national security depends on more than just a 

properly resourced Defense Department, does it not? 

Mr. KORB. Yes, it certainly does. As we have talked about here, 

several other agencies that are being cut to pay for this are actually going to undermine national security. 

Ms. KELLY. Thank you. And we have talked about, I know, the 

State Department and the contributions it makes on national security. 

I would like to ask about another cut. Under the President’s proposal, Federal funding for the National Institutes of Health would 

fall by 5.8 billion, roughly a 20-percent cut. As chair of the Congressional Black Caucus Health Braintrust, this is very concerning 

to me. The President’s proposed cuts would halt cancer research 

and other invaluable medical research among the more than 2,600 

institutions that receive NIH funding. The cuts would also affect 

research of infectious diseases, which respects no national boundaries. According to The New York Times, over the last 50 years, 

700,000 Americans have died from AIDS; 1.2 million died from the 

flu; and 2,000 died from the West Nile virus; and 1 died from 

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During a television appearance on March 17, Republican Congressman Tom Cole stated: ‘‘I don’t favor cutting NIH or Centers 

for Disease Control. You’re much more likely to die in a pandemic 

than a terrorist attack, and so that’s part of the defense of the 

country as well.’’ Congressman Cole called the President’s proposed 

cuts very short-sighted. Do you agree that short-sighted cuts 

should be avoided? 

Mr. KORB. I certainly do, and I’d like to quote my favorite President, Eisenhower, who said you can’t be strong abroad if you’re not 

strong at home. And if you don’t deal with these diseases, you’re 

going to have a difficult time getting enough people to volunteer for 

the military who meet all of the requirements that you need. 

Ms. KELLY. Thank you. Anybody else care to comment? 

No? Okay. 

Mr. Chairman, while I fully support providing necessary resources again to our Nation’s warfighters, we need to carefully consider whether we hurt our national security on other important 

fronts like global health. 

And I yield back the balance of my time. 

Mr. DUNCAN. Thank you. 

Mr. Sarbanes. 

Mr. SARBANES. Thank you, Mr. Chairman. 

I thank the panel. 

I want to commend you for the incredible amount of work that 

you’ve all put into this. You’ve bled for it. I commend you for not 

just sitting there and engaging in a primal scream for the last 2 

or 3 hours. A couple things, and I know my colleagues have been 

reading from some of these quotes, but we have talked about how 

the President’s budget is going to impose draconian cuts on a lot 

of domestic programs, things that we have all acknowledged are 

important, as well as foreign aid and so forth. NIH, I know my colleagues have spoken to those cuts. 

This quote from OMB Director Mick Mulvaney, though, is just 

priceless, where he, in regards to the NIH cuts, said: ‘‘These were 

made because of the tremendous opportunity for savings at NIH 

and’’—I’m sure someone else has read this quote, but I just want 

to repeat it—quote, ‘‘the President’s businessperson view of government is focusing on efficiencies and focusing on doing what we do 

better.’’ I have to assume you all, when you saw that quote, just 

grabbed this report—we’ll call it a report—and just ran as fast as 

you could up to the White House and handed it to President Trump 

because it’s all about a businessperson’s view of government and focusing on efficiencies and on doing what we do better. 

Let’s talk about the culture because that’s the name of the game 

here: breaking the culture. And I’ve heard you speak, Mr. Klepper 

and Mr. Korb and Mr. Stein, about leadership being important, 

transparency and accountability being important. How high do you 

have to go to get the person who can actually make the change in 

the culture? Is it enough to go to an Assistant Secretary of Defense? You got to get at least to the Secretary of Defense to embrace the change in culture, or do you actually have to get to the 

President, who gets up every day and says, ‘‘The Pentagon has got 

lot of waste and inefficiency in it, and one of the priorities today 

and tomorrow and the next day is going to be for us to attack that 


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and make it work more effectively’’? How high do you have to go 

to find the person who you think can break the culture in a meaningful way? 

You can just start with Mr. Korb there. 

Mr. KORB. Well, I think it’s really got to be your Deputy Secretary of Defense. The Secretary whoever he, and hopefully some 

day soon she, is basically is going to be traveling around the world 

and doing a lot of things. The deputy is the one who has to do it. 

And as I mentioned here, people like David Packard, Charlie Duncan from Coca-Cola, Don Atwood from General Motors, they’ve 

been able to do these things. And I think that’s really where it 

has—— 

Mr. SARBANES. So, in terms of deploying the culture change, you 

need that level. But you would certainly agree, I guess, that if you 

don’t have acquiescence in it or the buy-in or the approval of it 

from the levels above, all the way up to the President, then that 

person can’t be effective presumably? 

Mr. KORB. Well, that’s true. If you take President Trump at his 

word, you would think this is what he wants to do, and if the Secretary, whoever he or she may be, should certainly buy into that 

and then get a strong deputy to make sure that it happens. 

Mr. SARBANES. Other thoughts? 

Mr. KLEPPER. You know, it’s the sponsor model for change, and 

it starts with the President. He is mega sponsor ultimately because, even though the size of the Department of Defense from an 

efficiency standpoint has a bigger potential, it’s an issue across all 

of government. It’s an issue in all of industry. So this is—organization—high-performance organization needs to be reinforced all the 

way from the top. 

Now, that’s delegated, and I would say we had a case in the Department of Defense where the Deputy Secretary was all in. It was 

a change of leadership at the top, and we kind of went dark. So, 

in that situation, it really starts within the Department of Defense 

with the Secretary of Defense because if he’s reinforcing and holding accountable to some tangible metric, organizational efficiency, 

the odds are that those direct reports are going to hold their staff 

accountable, and that’s that cascading chain to where, at any point, 

somebody decides they’re not interested in this and they’re going 

to get evaluated differently, that’s the black hole where change 

goes to die. So that’s a really essential key—— 

Mr. SARBANES. I’m going to run out of time. So I just want to 

emphasize what you said. Culture change can’t happen if it doesn’t 

start at the top, all the way at the top. And this is the Federal Government. The person who’s all the way at the top is the President 

of the United States. So leadership matters from there, but transparency and accountability, if those are going to be standards that 

can accomplish the kind of change you want to see and that you 

worked so hard to produce, to tee up for us, then that commitment 

to transparency and accountability has to begin at the very, very 

top. 

And this committee has had the opportunity just in the last few 

weeks to demonstrate that we’re not seeing that kind of accountability and transparency coming from the very top of this organizaVerDate Nov 24 2008 09:51 Aug 24, 2017 Jkt 000000 PO 00000 Frm 00105 Fmt 6633 Sfmt 6633 H:\26498.TXT APRIL

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tion, which is the Federal Government and, in this case, the executive branch of the Federal Government. I hope we see more of it. 

Mr. DUNCAN. I’m sorry. We have got to go to Mrs. Maloney. I 

apologize. 

Mrs. MALONEY. Thank you. Thank you very much, and I thank 

you, Mr. Chairman. 

And I thank all of you for your service. It’s really, personally, I 

think it’s a scandal. It’s an incredible scandal. Of the 34 areas the 

GAO highlighted this year, seven for mismanagement or high risk, 

seven were in the Defense Department. And basically what your 

report showed, that if you had implemented the findings of this report that you all worked so hard on, you would have resulted in 

125 billion in savings so that the losses that my colleagues are 

talking about for essential services for people wouldn’t happen. 

I think that this is an absolutely scandal, and it seems to me like 

if you can’t, in reading some of the history of this, it’s the Defense 

Department itself that stops the investigations, that stops the reforms, that says the data should be kept secret. It struck me, Mr. 

Rutherford, that you said you couldn’t even get your hands on it, 

and especially what you said, you didn’t know where it was. Do you 

have any sense of how much of the bureaucracy, of the many levels 

that they go through, is in the budget? Is it half of it? Is it a quarter of it? Is it a tenth of it? How much of it is in this permanent 

bureaucracy that has been created of the Defense Department 

spending, would you say? 

Mr. RUTHERFORD. So what we looked at in our work was looking 

at the six core business functions, and within those business functions, we had to pull from 20 different data sets to pool all the information to actually give the transparency that Mr. Klepper is 

talking about so then Mr. Tillotson can move out against that to 

see what they can make adjustments against. As far as the percent 

of that that is bureaucracy, that’s where we started to cut down; 

where can they actually find the savings? And that’s when we came 

away with our 62- to $84 billion number over a 5-year period because it adjusted for a little bit more of a deeper dive into some 

of these sub-functions. 

Mrs. MALONEY. That is amazing. Just to respond, I think if the 

culture can’t seem to change, I think Congress should step in and 

help them change it, Mr. Chairman. Why don’t we pass a bill that 

the data has to be transparent so that people can see it, so that 

people can report on it? If they’re hiding their data, number one— 

number two, on their contract system that the sub of the sub of the 

sub of the sub gets to a small business, why don’t we have competitive bidding to the best qualified? Forget—I read someplace you 

have like 155 contractors. For what? You write up the specs, you 

throw it out, and you see what comes in, instead of going through 

all these processes that end up giving it to the ex-general. So I 

would like to see competitive bidding for all of these processes and 

all of this new equipment. Why do you need all of this new equipment? I think you ought to bring in McKinsey and have them do 

a service to their Nation and run the State Department—I mean 

the Defense Department. 

One thing struck me, that the contracting out of the Defense Department is more than about 10 agencies combined. I mean, it’s 


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huge. I want to ask, Mr. Rutherford, you had slightly different 

numbers than what the Defense Business Board came out with on 

what the final numbers were. Is that true? 

Mr. RUTHERFORD. Yes, ma’am. 

Mrs. MALONEY. Why was that, do you think? 

Mr. RUTHERFORD. So they finished the report in January of 2015. 

We spent then 3, 4 months longer with the DCMO going deeper 

into the sub-functions, so we had the luxury of actually looking at 

some of the lower level data. We actually then brought in different 

types of benchmarks that we used in how you can actually achieve 

productivity gains, and that came up with a number that both in 

terms of the amount of spend came down, but it had more to do 

with the timing on how much you can achieve over a 5-year period. 

Mrs. MALONEY. And your contract spend optimization, do you 

think that that would have potential savings, and how, much and 

what is contract spend optimization? What is that? 

Mr. RUTHERFORD. The contract spend optimization is when you 

look at the contracts every year they come up. Are you actually, for 

rebidding purposes or renegotiation purposes, actually looking at, 

one, what does the Department of Defense really need from a requirements standpoint, and then, two, from a bottom-up standpoint, what should it cost the Department of Defense with more of 

a bottom-up view? And then you get a sense of where your negotiation power is to actually do optimization of those contracts over 

time. So, every year, you’re getting better and better at the contracting process. 

Mrs. MALONEY. Well, see, what I don’t understand—we have the 

greatest military in the world, but they can’t seem to manage anything. We’re the best and the strongest. And how much savings did 

you attribute to aggregating and renegotiating contracts? 

Mr. RUTHERFORD. I’d have to go back and look at the numbers, 

but what we looked for there on the contract spend—that was 

going to be from a year-over-year savings—we were looking at 4- 

to $5 billion every year for our 62 billion. Of that, it was going to 

be about 20 percent to 25 percent of that number would be in the 

contract optimization. 

Mrs. MALONEY. These are huge savings. I have one report that 

they gave me, but it’s from the business group. Could I see the 

original report that McKinsey did? 

Mr. RUTHERFORD. I believe all of our deliverables that we gave 

to the DCMO were provided, but I can go back and check to make 

sure that that happened. 

Mrs. MALONEY. But I mean, you know, I didn’t—could I see your 

report? This is the report that we have. Was that yours? 

Mr. RUTHERFORD. So there’s the DBB report that they did, which 

was published on January 15. Our contract went beyond that, and 

our contract had a number of deliverables that were inputs into 

that report. But what we provided for the DCMO was a set of contract deliverables that looked not only at what the baseline was, 

but what metrics did they use for productivity gains, and then 

what was the estimated savings in each of those categories? 

Mr. DUNCAN. I’m sorry. We have got votes going on on the floor 

now. So I want to thank all the witnesses for taking the time to 


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appear before us today. You’ve been very patient. You’ve been here 

a very long time. 

I ask unanimous consent that members have 5 legislative days 

to submit questions for the record. 

Without objection, so ordered. If there is no further business, 

without objection, the committee stands adjourned. 

[Whereupon, at 1:11 p.m., the committee was adjourned.] 

Æ 


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