Originally Broadcast Saturday, June 2, 2007

Washington, D.C.

Welcome to The Business of Government Hour, a conversation about management with a government executive who is changing the way government does business.

The Business of Government Hour is produced by the IBM Center for the Business of Government, which was created in 1998 to encourage discussion and research into new approaches to improving government effectiveness.

You can find out more about the Center by visiting us on the web at businessofgovernment.org.

And now, The Business of Government Hour.

Mr. Morales: Good morning. I'm Albert Morales, your host, and managing partner of the IBM Center for the Business of Government.

President George Bush's mandate for defense transformation was "to challenge the status quo and envision a new architecture of American defense for decades to come."

Over the past several years, it is becoming increasingly clear that defense transformation is not simply a response to global terrorism, but rather a way to leverage the core strength of the U.S. armed forces, which is its ability to adapt and change.

As the rate of change of technology continues to accelerate, it will be even more important that the U.S. military keep pace.

With us this morning to discuss this critical challenge is our special guest, Terry Pudas, Acting Deputy Assistant Secretary of Defense for Forces Transformation and Resources.

Good morning, Terry.

Mr. Pudas: Good morning. Thanks for having me.

Mr. Morales: And joining us is in our conversation is Chuck Prow, IBM's Defense Industry leader.

Good morning, Chuck.

Mr. Prow: Good morning, Al, Terry.

Mr. Morales: Terry, to provide our listeners an overall context on the subject of military transformation, could you give us a sense of the history, mission, and evolution of the DoD's Office of Forces Transformation and Resources, as well as its predecessor organization, the Office of Force Transformation?

Mr. Pudas: Sure, I'd be glad to. Let me just sort of go back in time, so maybe 5-1/2 years ago, when we first embarked on this journey. The President had declared transformation as a key priority. Secretary Rumsfeld clearly was charged was transforming the military for the new world, the new global security challenges in the 21st Century. And so my former boss, the late retired Vice Admiral Art Cebrowski, was asked to take the challenge up. The way we did that initially, of course, was we created an office that was intended to be a catalyst and a focal point for transformational thinking, and tried to jump start that kind of activity within the Department.

And so we went from that idea to creating a fairly modest office of about 15 people or So began to develop concepts of transformation. What was it, first of all? Everybody was kind of confused by this word. What do you really mean by transformation? And why do we need to do it? And of course, change is always very frightening for a lot of people -- how is it really going to affect me? And so that was a lot of the work we did in the first several years.

And besides just sort of the developing the concept, we tried to look at what are some alternative views of the future, perhaps with some alternative logic for the decision-makers as we run through this transformational activity. And then we actually created some sort of what we called experimental articles along the way as sort of tangible examples of those things.

So we went from there to last year, when we realigned the office within the Under Secretary of Defense for Policy to continue that kind of work within the Department. So essentially, we went from sort of this what is this and how is this going to affect me to the culture of the organization actually changing in a way where you can move this activity from outside and more closely align it with the formal processes within the building.

And so that's where we find ourselves today. We're a fairly young organization, obviously, but we're getting our portfolio together and developing the new relationships and making decisions about where you engage in certain processes and the things you can do to continue the work.

Mr. Morales: Now, certainly this area of transformation is very broad, so I'm curious, what is the size of the budget that you manage, and have you moved up from the 15 employees in your organization today than you were 3-1/2 years ago?

Mr. Pudas: Well, actually, the budget's remained fairly constant over the last several years, and it's fairly modest. I mean, we have probably around $5 or $6 million dollars that we use to catalyze projects with and research and studies and war-gaming kinds of events, and we always do that in collaboration with other partners, so we don't embark on these with ourselves. We try to develop a large community of interest in these things.

And the size of the office is about the same. We have about 15 to 20 folks comprised of sort of government employees and military officers as well as some outsourcing support, which we've done.

And so the question is, how do you do this with such a modest budget and few people? Well, you develop a lot of relationships with other folks. And so we have relationships with many of the think-tanks in town, and FFRDCs, or Federally Funded Research places, as well as academia, and quite frankly, with industry. We have -- all the large industries have groups of people that think about strategy and the future, and so we try to team with them as well. So you leverage a small amount of people and build a large virtual team.

Mr. Prow: Please describe your specific responsibilities and duties as Deputy Assistant Secretary of Defense for Forces Transformation and Resources.

Mr. Pudas: Well, I'll try to be as definitive as I can. The vision is really to align the transformational thinking, mainstream it within the Department, as I said, and be connected to some of those formal processes that look at the future strategic environment, think about what future capabilities might look like, and then participate in the processes along the way that lead to the fielding of those kinds of things. And so that's a major undertaking. As well as to continue to sort of push the envelope and look at alternative futures, look at alternative capabilities, look at what technology opportunities might be out there from a policy perspective.

And then part of my tasking is to be sort of the policy point of contact for all of those good transformation issues that are going on at the Joint Forces Command in Norfolk, and of course, Allied Command Transformation down there as well.

So that takes up a significant amount of time, and then, of course, we want to look broadly across all the general purpose forces to look where those interdependencies might be, and highlight those kinds of things.

Mr. Prow: What are the top few challenges you face in your position, and how have you addressed those challenges?

Mr. Pudas: If you've ever worked in a large organization, which I'm sure both of you have, that catalyzing change is always very, very difficult. And so that's one of the specific challenges, obviously, to do that. A large organization has a tendency to be bureaucratic, and so you have to find ways to deal with that and still be effective.

For me personally, not having been within the mainstream here for some time, that's a challenge for me to understand how that works, and so we're doing that. And then of course, it's always a challenge because there's very many competing priorities. But we are not necessarily charged with worrying about the near term. Our job is to be somewhat custodians of the future. And so to have that mix and still be relevant to some of the current things that are going on is always somewhat of a challenge.

Mr. Morales: Terry, we had a few moments prior to our show to talk a little bit about your career, and some time that you spent with the German Navy. I'm curious, how did you get started in your career, and how did you start with Defense Transformation?

Mr. Pudas: Yes, it's very interesting. I had a career as a naval officer for 32 years. At one point there during Desert Storm, I was working for a fellow named Capt. Art Sebrowski, who I got acquainted with very well in a particular job that I had, and it was very interesting. And anybody that knows of him or has been around him knows he's a very unique individual. And so that was the beginning of my association. We then parted ways and went on our own careers, and we ended up working together again up at the Naval War College in his capacity as president, and he asked me to be somewhat of a special assistant.

At the time, his charge was to sort of catalyze transformation in the Navy, and so we worked very closely together for two or three years, and then of course, he was asked to come and take this post, and he asked me if I would be willing to help him do that. And it's pretty hard to pass up a chance like that, to really have a chance to contribute, and of course, it's very hard. He used to talk about what he had spent his professional career doing, and he used to describe it as working at the intersection of national security and large-scale change. And there isn't any more difficult task, but there also isn't one that's more rewarding than that.

That's sort of how I've evolved into this position, and then of course, he stepped down a few years ago, and then I became acting for a couple of years, and we continued the mantra, and then I ended up where I am today.

Mr. Morales: Well, that sounds like a very busy intersection you just described there.

Mr. Pudas: Yes, it is.

Mr. Morales: You used the term "catalyzing change," and so I'm curious, how has your previous experience, your 32 years as a Navy officer and as a pilot, how do you think that's prepared you for your current leadership role and informed your managed approach and leadership style?

Mr. Pudas: Well, first of all, to be a good leader and manager, you have to have some competence in a particular subject, which is always key. And I learned a lot from my former boss, obviously -- you've got to be able to craft a vision for people. And then you have to be able to inspire them towards that vision. And so those three big pieces right there are the areas you have to work very hard at.

I had been in leadership positions in the Naval service and large organizations, and so I had some experience with managing people and different things. I alSo of course, had a history of making my own changes. And so some of the things that I learned were that you have to make change a very inclusive activity; you can't expect people to sit at their desks and wait for permission to think. And so what you do is you invite people into the process, you try to inspire them towards this vision, and then you invite them in to help craft their own future or participate in the transformation. And so I think some of those things that I learned while I was in Naval service, some of those I learned with my former boss, but those have been things that have sort of served me quite well.

Mr. Morales: That's great.

What is the Defense Transformation?

We will ask Terry Pudas, Acting Deputy Assistant Secretary of Defense for Forces Transformation and Resources, to share with us when the conversation about management continues on The Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with Terry Pudas, Acting Deputy Assistant Secretary of Defense for Forces Transformation and Resources .

Also joining us in our conversation from IBM is Chuck Prow, Defense Industry leader.

Terry, could you define transformation and transformation rate within the military context? What are some of the keys to transformation, and how has transformation changed from when then-Defense Secretary Rumsfeld first established the transformation office?

Mr. Pudas: Well, defining transformation is somewhat difficult. I think what I'd like to do is maybe try to describe it for you.

Our concept at Transformation is really about doing those things that allow you to continue to have a competitive advantage. And so the concept is really based on the fact that if you are in a competitive environment, whether it's in a national security context or whether you're in industry, and you're not doing this thing called transformation or constant creativity and improvement, you soon find yourself in a very big pickle here.

You are essentially a strategic fixed target. And if you think about it, there's lots of industry examples, and of course, in history in our nation-state examples. So the concept is to this continuum of constant innovation and creativity, seeking those things that are going to be the source of your competitive advantage. And it's really at the high level, it's really about strategy. It's really about choosing a competitive space and then going about the work of creating organizations, capabilities, policies, those sorts of things that influence that competition in the space.

So if you think from your side in industry, it's really the same thing, right? You're not interested in chasing the emerging market; you really want to create the next market. It's about creating the future. The future that you would like. So that's the competitive space. So essentially all the activities come under that sort of large, large strategic concept.

There's a number of things you do. You try to understand the future security environment. People like to look at it through the lens of technology. But it's really much broader than that. It's about new concepts, new organizations, doing things differently with different technologies. It's about trying to understand underlying principles, right? Which all strategists do; they look out there and they say that's really interesting that this is happening, but why is it happening? And is there a way that I could influence this particular trend in a useful way to my advantage?

So things like that. What's going to be the source of perhaps your next competitive advantage kind of thing, and there's some big examples in the past. There's the one from the Army that I always usually use is when the Army, several decades ago, said we want to own the night. Okay, well, we turned that vulnerability into an enormous competitive advantage for the U.S. today.

And it's looking for things that are game changers, changing the game and changing the rules. Changing the basis for competition. When we, for example, decided to compete on the basis of precise navigation and timing, that yielded GPS, Global Positioning Satellite, right? It not only changed the battlefield, but it changed the world. So are there things like that out there that we should be thinking about as well?

But really, and this gets to your question about rate, but it really is about people, it's about the culture of the organization. And all senior leaders know that that's where the real competitive advantage comes from. And so the ability to facilitate what you call a learning organization, one that has the ability to outlearn your competition, so this is about learning rate. And then of course, taking that learning and translating that into some kind of actionable kind of capability or organization or something. That's a real key to it as well, and if you listen to what very successful industry CEOs have done and other people, they really do focus on this learning rate piece.

Mr. Morales: That's interesting.

Now, recently, Defense Secretary Robert Gates has underscored that military transformation, and I quote, "is a major charge from the President that must continue."

I'm curious, how does the recent realignment of your office within the Under Secretary of Defense for Policy support this charge?

Mr. Pudas: Well, I think that we're there now to -- we're more closely along the line with the processes. We were more -- I guess I would characterize us as an influence organization, which would try to create some new logic and try to influence the larger processes, where now we are more closely aligned with the formal processes, and so it really has changed.

I mean, since I've been at this from the beginning, I remember trying to participate in certain forums to try to provide some alternatives, and that was met with mixed success sometimes. But now it's accepted. The views may not be accepted, but the views are always welcomed. And so I think that's a big change in the Department's culture, and so as I said, we're supposed to continue to do this. I mean, my job is to always be somewhat dissatisfied and impatient.

Mr. Morales: You just let out all your secrets.

Mr. Prow: Terry, the core of the U.S. defense strategy focuses on force security challenges outlined in the Department's national defense strategy.

Can you describe DoD's ongoing shift to enhance capabilities and forces needed to address irregular catastrophic and disruptive challenges?

Mr. Pudas: Yes. I mean, there's a tremendous amount of work going on here. Clearly, we had focused on what we called the traditional challenge. The Department of Defense is very, very comfortable in that particular quadrant and sort of took ownership of that, but when you step back and look at the larger competitive environment, you'll see that there's a dynamic that happens, and that is, as you create more and more capability to deal with what we call the traditional challenges, competition moves to the others. And that's part of what you're experiencing now. And so the question is, what kinds of capabilities and organizations and those sorts of things -- you need to deal with those, and so that's a great deal of the work right now. And of course, it's very complicated.

The traditional challenges were usually owned by the Department of Defense. The other three had a larger national security component to them where you now operate in interagency kinds of constructs, and so the team is much larger, so lots of work going on in developing those relationships and what do they look like, how do they contribute? And in many cases, you go from what people talk about as kinetic solutions to non-kinetic solutions, because it's really about behavior.

So what are those kinds of things that we need to be able to do to be more successful in that particular area? I mean, you hear lots of people talking about strategic communications, which is sort of the term of art today, but how much do we really know about that? How do we know about the cause and affect of those things. So that leads you to say, well, if we really want to understand that, then perhaps we need to bring in this group of cognitive sciences and cultural anthropologists to help us understand that particular dynamic.

The catastrophic things, those things are of course very troublesome because we are in a very globalized construct in the world today, where we are very interdependent, which brings with it an enormous amount of brittleness. What might trigger a shock through the system that we hadn't thought about? I sometimes refer to the SARS event in Singapore, right, which was in 2003. Our major focus was preparing for the Iraqi campaign. But the result of that had major disruptions in economics around the world. I think we had a couple of major airlines here in the U.S. that were on the brink of bankruptcy, and we all know what happened to the tourist industry in Canada. And so this catastrophic, cataclysmic kind of stuff is quite troublesome, so how to think through what might be the consequence management of those things.

Disruptive challenges are sort of another category. How do you think about those, and what kinds of things could you do deliberately to help mitigate those kinds of threats? And we have a construct, and if you're interested, we could share it with you. I know time is limited, but this is where rate of change comes in. If you're on a linear sort of path of modernization, a prospective opponent can get a bead on you at some point and disrupt whatever that is you're trying to create, and so being able to modulate rate of change becomes a very useful construct.

Mr. Prow: How can the U.S. military reduce its vulnerability to disruptive threats by increasing investments in programs that accelerate transformation?

Mr. Pudas: Yes, I just sort of touched on that a little bit, but clearly, there's lots of work going on in the Department to work on the processes. I mean, I don't think anybody would come in and say that we're really happy with our processes now and they're just fine, we don't need to change them. Because everybody acknowledges that the rate of change is causing us to re-look at how fast we can do things. So that's going on.

But how do we do other things that help influence our thinking about what are the kind of capabilities that we might want, and how would we use them and that sort of thing, and so this notion of experimentation really becomes a very powerful tool; creating sort of tangible capabilities or experimental articles, as I like to call them, putting them in the hands of operators, bringing the science and technology community together; and then on a very rapid cycle, the developing concepts and requirements and that sort of thing. And so I think that that's a very powerful activity which is very useful, this experimentation business.

Mr. Prow: Can you please elaborate on the concept of transformation chairs?

Mr. Pudas: Sure. I'd be glad to. That's something that sometimes is underappreciated and overlooked, but I talked about it briefly in the opening segment, which was this notion of culture. How do you fundamentally get at the culture of an organization? And of course, one of the key levers of that is education.

Several years ago, we said what could we do to effect that, and so what we decided to do was help facilitate the creation of transformation academic chairs at all of the departments, institutions, and as most people know, we have junior- and senior-level colleges. We have the academies; we have Naval post-graduate school; we have acquisition universities, a whole number of these.

So how can we catalyze transformational thinking in those institutions as sort of a focal point to insert certain things in the curriculum, help influencing how people think about things? And the chairs are interesting, but the real interesting piece is that they come together every quarter and they collaborate with one another, and they share experiences, and so it's sort of a large community, and it's been quite successful.

Mr. Prow: Very good. It sounds like you're creating new models in dealing with the academies and researchers.

Mr. Pudas: Yes. Yes, that's exactly the idea. This notion of collaboration is a different kind of construct in the Information Age. It means different things. And so to be able to facilitate that in this transformation chair network -- and we also have some affiliate chairs, both international and from other folks, too. So it's taking off.

Mr. Morales: Terry, you've used terms like "rate of change," modulating change, you talked about learning, you've talked about behaviors in culture. So I'm curious, to what degree has the DoD developed metrics for measuring the capabilities of transformed military forces and the effectiveness of transformational military services, and is DoD using these metrics in making decisions about programs and resources?

Mr. Pudas: Yes. Of course, that's really the hard question, isn't it; right?

If you're in industry, you can measure bottom line, but here, you're measuring behavior or outcomes that are very difficult to quantify, so they're normally qualitative, subjective kinds of things. And so there has been a significant amount of effort on doing that. It's difficult. We need to continue that effort.

We, of course, were great advocates, and continue to be, of this notion of networkcentric operations, or whatever term you want to use. Everybody seems to buy into that, and they like that, and it's no longer debated; it's how do you actually do it? But then of course, you always run into the question with the resource people, right, and everybody has this: so tell me about the return on investment. Okay, so you have to try to articulate that. And so we've done a number of case studies sort of things to look at different units and how their effectiveness was changed and different things, and so that's been a useful activity.

I actually have a personal metric that I use. And it's used to sort of judge the culture of the organization. Language conveys culture. So the words people use say a great deal about how they've changed, their attitudes about things. And so when I think back when we started, a great deal of talk always about coordination and deconfliction and those sorts of things, but you don't hear that anymore. You hear sharing and collaboration. People use those terms a lot. We used to talk about interoperability, and now we talk about interdependence of those systems. And so for me, that's a fundamental metric for judging how the culture is changing.

This is a tough subject. Metrics have always been the Holy Grail. But we continue to work at it.

Mr. Morales: Well, as you mentioned, it's really all about driving behaviors, and behaviors historically have always been difficult to measure and quantify.

Mr. Pudas: Absolutely.

Mr. Morales: What about efforts in military innovation?

We will ask Terry Pudas, Acting Deputy Assistant Secretary of Defense for Forces Transformation and Resources, to share with us when the conversation about management continues on The Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with Terry Pudas, Acting Deputy Assistant Secretary of Defense for Forces Transformation and Resources.

Also joining us in our conversation from IBM is Chuck Prow.

Terry, the Defense Science Board recently released its summer study on 21st Century strategic technology vectors.

Could you elaborate on this study, and what are your views on some of the key recommendations outlined in the study, specifically on the Board's new version of Observe, Orient, Decide, Act?

Mr. Pudas: Over the last decades or so, we had been very, very successful in sort of creating some sort of vectors in terms of precision, stealth, and a couple of others, which really, really served us well. But as we've been talking about, the world changes and the rate of change continues to grow. And so what are those things that we ought to really be looking at?

My personal view is that there are a whole number of exciting technologies out there which some people are calling revolutions in science, and in that category are things like robotics, nanotechnology, bioenergy information, and those are all really, really exciting. But historically, many times, the big advances have come when two or three or those collide in a very clever way or intersect, and you are able to do things that you didn't imagine before.

So I think we always want to be looking at these sorts of things, and I'm glad that they did this, and I'm sure that's going to be very useful to the Department to get their views. These are some very, very bright people who've got a lot of experience and are grounded in these sorts of things. But my view is that sometimes we also need to look at the intersections of these.

Mr. Morales: So do you have a perspective on what some of these new vectors should be, going back to precision stealth joint operations and so on?

Mr. Pudas: Well, these are personal views, but I think that there are things that are going to be very interesting in the future, and perhaps some small investment might be very, very useful.

For example, I already mentioned sort of this notion of the cognitive sciences. I mean, I believe there are many people that believe that is real science now. There were a lot of skeptics that wouldn't allow those into the scientific club, but I think that that's becoming less of a problem. I think that if we don't begin to look at things that affect logistics and sustainability, those sorts of technologies, that we're going to find ourselves out of balance. We have invested enormously in networking the force to allow the force to operate differently in sort of this large dispersed way, and so what are the things that are inhibiting us getting the maximum return on investment out of that?

And then I think that one of the things that of course is going to be extremely disruptive in the future are things in the category of directed energy. Anybody that follows that knows that it's a very interesting area, and lots of work going on there. You just have to look at the reports in the open press to know that there I think have been over 400 incidents of commercial laser kinds of things trying to dazzle airline pilots that are being used by criminals and things like that. And so I think that's an area that's going to be interesting to follow.

Mr. Morales: So again, it goes back to the novel ways of trying to drive behaviors, whether that's in a kinetic or a non-kinetic fashion.

Mr. Pudas: Right. Exactly.

Mr. Morales: Great.

Mr. Prow: Terry, have the fundamental rules of combat, meaning mass surprise, logistics in unity of command, given way to the rules based on information and knowledge?

Mr. Pudas: Yes. I mean, that's a very interesting question. I think that we're beginning to learn more about that. I mean, most people in uniform or that have been in uniform intuitively know that battles are won and lost in the minds of your opponent. It doesn't necessarily have to do with kinetic sort of stuff unless your strategy is attrition. And so what are those things then that affect the cognitive domain of your opponent?

Being surprised, being outmaneuvered, creating closely coupled events. Confronting someone with a situation for which they have no mental model, and so it is really about this notion of creating an information advantage and turning that into a competitive advantage. And so we have I think done a lot in that area.

There's still a lot to understand. It's really interesting to talk to commanders who have been in command of large network organizations and how they have admitted that they had to kind of think through their philosophy of command. All of a sudden, we have the ability for these chat rooms to pop up, and the horizontal sharing of information at lower levels, which isn't necessarily the old command paradigm, when things went up and down the chain. Now they can go across.

And so I look for sort of manifestations of different behavior kinds of things to give me clues to that. What do commanders want to command now? Commanders now want to command bandwidth, which is quite interesting, right? It used to be a back office function, moved to the front office because there's so much -- that's a source of power, and so I guess the rules or the goal hasn't necessarily changed, but I think the way we use information as a real source of advantage has become more appreciated, and people now are understanding how to use that.

Mr. Prow: Given your projection of future challenges to the nation's national security, what is the proper balance between conventional and special operations forces?

Mr. Pudas: Yes. I guess I couldn't give you an exact answer, but if I look at what happened most recently over the last several years and you see how those two conventional and unconventional forces have been operating in concert in many ways, we've always talked about being able to be more soft-like. I mean, that's been sort of the term.

What does that really mean? Well, I mean the ability to -- ease of employment and sustainment, having an appreciation for the local area that you're operating in. I mean, the Special Operations Forces have spent a lot of time doing that sort of thing. I mean, I don't know what the right balance is, quite frankly. I mean, we have to make sure that we have enough sort of capability to deal with any potential high-end kind of thing. And at the moment, of course, we're doing very labor-intensive kinds of operations, and I mean, there's been a lot of emphasis on language training and cultural awareness skills and those sorts, and those are all really, really good things.

I can tell you, though, that there are a lot of people engaged in this particular question. What exactly is the right balance? Are there synergies between the two, et cetera? And so I'm not trying to duck the question, but I don't have an exact answer for you.

Mr. Morales: Okay. Terry, I want to take us back to something that we talked about earlier around this notion of a return on investment. And certainly, calculating the potential cost of defense transformation is not a non-trivial matter. And skeptics have argued that the cost of transformation, both in the near-term and long-term, are uncertain, and that transformation therefore might not necessarily be less expensive than, say, routine modernization.

Could you elaborate on the efforts to really understand the costs associated with transformation within the military, and is it possible to reduce the defense budget and improve the Department's ability to carry out its current and future mission simultaneously?

Mr. Pudas: Let me answer it this way: I think that associating transformation to cost may not be the right metric, because it's really about making choices. Some of the choices that you make have enormous payoff to be able to operate differently than you could before, but are relatively cheap in terms of the overall system. And of course, there are some legacy things that very hard choices have been made over. I mean, you remember the big debate about Crusader and Comanche and all those sorts of things, so it's not necessarily tied to more money, it's tied to the choices that you make.

I'll give you a personal example here: so I'm trying to make the decision on my internet connectivity in my house, so the decision was do I buy this new computer, which was fairly expensive at the time, or do I invest in the high-speed internet? So I invested a modest amount in the high-speed internet, and the productivity in the household went up enormously. So it's not necessarily about buying some new high-end piece of stuff, it's how you use it that really makes a difference, and so making specific choices and understanding the return on investment I think is the real key here.

Mr. Morales: So it sounds like people are drawing an equation that transformation is equal to cost reduction, and that's not really what this is about.

Mr. Pudas: No, not necessarily. Transformation can allow you to do things more efficiently. And that's what the question is about; it's not about numbers, it's about capability. A brigade combat team today can do significantly more than one could a decade ago. And it's just like with airplanes. We used to have 200 sorties per target in World War II, and now we have targets per sortie. And so yes, you can create some efficiencies and effectiveness as you go down this transformational journey.

Mr. Morales: Terry, I only have another minute left, and we talked a little bit about this, so I'm curious, how are we using joint professional military education to transform the mindset and culture of the U.S. joint force community, including our allies and our industry partners?

Mr. Pudas: Well, of course, we talked a little bit about the transformation chairs, and that's a good thing, but one of the things that we also do is we sponsor what we call a transformation short course, which the National Defense University puts on for us. And of course, we invite everyone in the Department, as well as the other agencies, as well as members from industry, but it's pretty much opened up to just about anyone, and to sort of help catalyze this transformational thinking.

So that's been really successful, and most recently over the last -- I would say half year -- we also began a course on what we're calling stability and reconstruction. There's been a great deal of dialogue about that kind of capability and what it really is and how to think about that. And so education is a really powerful tool, I think, to get at this whole piece.

Mr. Morales: Great.

What does the future hold for the DoD transformation efforts?

We will ask Terry Pudas, Acting Deputy Assistant Secretary of Defense for Forces Transformation and Resources, to share with us when the conversation about management continues on The Business of Government Hour.

(Intermission)

Mr. Morales: Welcome back to The Business of Government Hour. I'm your host, Albert Morales, and this morning's conversation is with Terry Pudas, Acting Deputy Assistant Secretary of Defense for Forces Transformation and Resources.

Also joining us in our conversation from IBM is Chuck Prow, IBM's Defense Industry leader.

Terry, we talked a little bit about behaviors and habits, and so I'm curious, how do you make something like transformation a habit? And given your efforts over the years, could you elaborate on DoD's culture of innovation?

Mr. Pudas: You're right. I mean, people are creatures of habit. It's difficult to catalyze change, and you have to remember that the product of the Department of Defense is national security. And so you have to be careful. I mean, you have to do the appropriate due diligence and all those sorts of things, because it is a really big deal.

But I think the Department's leadership has done a lot over the 5-1/2 years when I look through my lens, in empowering people to propose alternative solutions and different -- my experience is that everybody probably at every desk has some ideas on how to improve things. And so having the ability to listen and empower those people to go ahead and make some change, and be able to do informed risk taking I think is very powerful, and so when you look on the industry side -- I don't like to use too many industry examples because I get criticized for that -- but other large organizations, they're successful, they have that sort of culture. That's what they try to instill, so I think that great strides have been made. It's something that you always have to pay attention to because it's very easy to retrench, and of course, that's not what you want to do.

Mr. Morales: Terry, the integration of the DoD policy directorate was just one of the many changes to take place within the DoD policy directorate. Can you tell us about some of the other changes, and how these changes illustrate the core transformation principle of creating a more adaptable organization?

Mr. Pudas: Well, I can try. I mean, I'm fairly recent to the organization, and this effort was started sometime before we actually arrived, but I know that the leadership of the organization felt that there hadn't been a major transformation within that organization for quite some time. There was sort of some evolutionary steps that were done, and so I believe that they felt that it was time to sort of realign the organization to reflect the global environment of today post-Cold War, and be able to be much more effective in the future, as well as looking at things that could be done to make the organization more effective from a business perspective and management perspective.

And then also, there's a human capital strategy component of this. And so the idea was then to create a different organization that would be much more effective and perhaps more efficient for the future, as well as to create an organization which we call somewhat adaptable. The ability to then change as things unfolded or as new requirements came up and to create an organization where the whole is greater some of the parts.

Mr. Prow: An emerging area of DoD's vision for defense transformation are actions to reduce DoD's energy requirements and to develop alternate energy sources.

What is your role in this effort?

Mr. Pudas: Well, this is something we took an interest in probably three years ago, perhaps even longer than that, because it was our sense that at some point we were going to have to start thinking seriously about this issue, and so we did a couple of modest efforts, a couple of studies, and we actually co-sponsored with Under Secretary of Defense for Acquisition Technology and Logistics a seminar series that meets once a month. It's open to anyone that wants to attend, to look at the energy issues broadly, and it's a very complex thing.

Clearly, there are technology issues, there are policy issues, there are cultural issues. There's a whole number of things involved, but you can see that if you look just on the operational side of the house, how it's becoming a significant deal. It's part of the logistics burden I talked about earlier. And so what we'd like to be able to do is operate in this very dispersed sort of network environment that we've created, but we don't want to spend all of our time protecting convoys of petroleum, for example. So it's both a cost issue and an effectiveness issue.

And then of course, lots of people are talking about peak oil and when is peak oil really going to come, and how's that going to affect the world economy, and there's a competition for energy resources, so there's many dimensions of this, as well as environmental and all of those things. So we are still working on this. I have a couple of studies going on right now that they're trying to look at this through different lenses, trying to create some data for the decision-makers on how to think abut this big issue.

Mr. Prow: Transformation creates new competitive areas and competencies. What qualities will be needed in the warfighter of the future?

Mr. Pudas: We talked about the complexity of the potential future competitive space. Right now, we see our folks being put in very, very complex environments. They're very, very difficult. And so I think there are a couple of pieces of this.

One is clearly, there's a cultural dimension on all this stuff with language training and different things, and how do you think about these complex environments? And then also, of course, there's a capabilities piece of this, something which I call sort of how do you move from binary solutions to something that has a scale of effects? So we give our folks very, very good binary solutions, put them in very complex environments, and then perhaps they have to accept either enormous risk or they do something and there's unintended consequences. And so I think that things in that particular category that have a capability from sort of a non-lethal to a lethal capability would be somewhat useful.

Now, having said that, that is not a simple issue. There's incredible policy issues and cultural issues that go along with that when you start going down that trail, but I think that's an area that we have to start thinking about.

Mr. Prow: It sounds like there are significant human capital issues associated with this subject. What is the Department doing to attract and retain the highest quality workforce?

Mr. Pudas: I think they're doing a lot. I mean, I am not that familiar with the national security personnel system that was just put in place recently. But clearly, that was an attempt to be able to manage the human capital better, because everybody recognizes that that's really what we have to pay attention to. And so how can you unburden some of the previous burueaucratic things and large organizations have those, and so people don't necessarily want to be subject to those and in that kind of environment, so to make the environment much better, and I think that they're working very hard to attract people into government.

Mr. Morales: Terry, we're coming to the end of our time here, but I do have one more question I'd like to ask you.

You've had a very successful career in the Navy, and now supporting the DoD transformation efforts. I'm curious, what advice could you give to a person who perhaps is considering a career in public service today?

Mr. Pudas: I would tell them to do it, because I think there's no higher calling than to serve your country, whether in uniform or in the civil side. And it's very, very rewarding. It's difficult in some cases, but I believe it's a very worthwhile effort, and no matter what kind of day I've had at the office, at the end of the day, I always feel good about that I was contributing to something that was very worthwhile, so I'd like people to consider it very seriously.

Mr. Morales: That's fantastic. Thank you.

We have reached the end of our time, and I do want to thank you for fitting us into your busy schedule. But more importantly, Chuck and I would like to thank you for your dedicated service to our country both as a naval officer, and now leading the DoD's transformation agenda.

Mr. Pudas: At the end of every time I talk to someone or give a presentation, I always like to put a little plug in for our website. You can find us at www.oft.osd.mil, and we're always looking for your comments on our website. We try to keep it updated, and we do answer the mail that people send to us.

So thank you very much.

Mr. Morales: Great.

Thank you, Terry.

This has been The Business of Government Hour, featuring a conversation with Terry Pudas, Acting Deputy Assistant Secretary of Defense for Forces Transformation and Resources.

As you enjoy the rest of your day, please take time to remember the men and women of our armed and civil services abroad who can't hear this morning's show on how we're improving their government, but who deserve our unconditional respect and support.

For the The Business of Government Hour, I'm Albert Morales. Thank you for listening.

This has been The Business of Government Hour. Be sure to join us every Saturday at 9:00 a.m., and visit us on the web at businessofgovernment.org. There, you can learn more about our programs and get a transcript of today's conversation.

Until next week, it's businessofgovernment.org

Arlington, Virginia

Friday, October 4, 2002

Mr. Lawrence: Welcome to The Business of Government Hour. I'm Paul Lawrence, the co-chair of The Endowment for The Business of Government. We created The Endowment in 1998 to encourage discussion and research into new approaches to improving government effectiveness. Find out more about The Endowment by visiting us on the web at www.businessofgovernment.org.

The Business of Government Hour features a conversation about management with a government executive who is changing the way government does business. Our conversation this morning is with Dr. David Chu, Undersecretary of Defense for Personnel and Readiness for the Department of Defense.

Good morning, David.

Mr. Chu: Good morning, Paul.

Mr. Lawrence: And joining us in our conversation is Bill Phillips.

Good morning, Bill.

Mr. Phillips: Good morning, gentlemen.

Mr. Chu: Bill, how are you?

Mr. Lawrence: David, what's the mission of the Office of the Undersecretary for Personnel and Readiness?

Mr. Chu: We're the 'people' people of the Department. That is to say, we manage everything ranging from what the pay table is going to look like for military personnel, through the health care system that provides for them and their families, all the way through to questions of overseeing the readiness of our units, in terms of the training that they get, and where they get that training and how it's going to be conducted.

Mr. Lawrence: And how does it fit in the overall mission of the Department?

Mr. Chu: People, as you all I think appreciate, are the heart of the Department. And of course, there are a lot of people. We have about 3-1/2 million people when you count the active reserve and the civil force of the Department, in terms of the direct employee workforce of the Department.

And without those people, who are quality people, who are well-trained, well-motivated to do the kind of job that the nation needs, there really isn't a military. So this is the heart of the Department's capacity to fulfill the nation's needs.

Mr. Lawrence: David, as the Undersecretary for Personnel and Readiness, what are your specific duties?

Mr. Chu: My job is really to set policy within the framework that the Congress provides by its statutes and consistent with the administration's aims and agenda. Now, in some cases, we'll go back to the Congress and ask for a change of policy.

But to give an example, we supervise the health care system for the military. We buy somewhat over half of the health care services that our people need from the private sector. We have contracts through which this is managed. In fact, at this very moment, we're re-bidding those contracts.

And so my job is to set the parameters that are going to describe those contracts. How many regions are we going to have, how many contracts are we going to pursue, what degree of competition should we aim for, what's going to be the nature of those contracts, what are going to be the incentives that those contracts contain.

I don't actually run the programs myself. The office doesn't run the programs directly. But it may administer the programs, or it may administer the agency that actually carries out the task at hand. That's an example, again, from the health care sector. We have the so-called Tricare Management Activity that actually runs the contracts for us.

Mr. Lawrence: Tell us about your career prior to this appointment.

Mr. Chu: I spent most of my life in and around the Defense Department in some fashion. I came in as a young Army officer during the Vietnam War. I got my chance to visit Southeast Asia, as every Army person I think in that era got to do. And coming out of that experience, I looked around and was fortunate enough to be hired by RAND, which is a research corporation, headquartered in Santa Monica, California.

And quite by accident, I started working on military manpower questions. I was originally trained as an international trade and development economist. But this was the focus of great deal of attention, this question of military manpower, in the early 1970s. Because as you remember, the country had made a decision to go to a volunteer force. Big experiment. No one had ever attempted to put together this big a military composed completely of volunteers before. The British had a volunteer force. Much smaller scale.

And so the Department of Defense engaged RAND, among others, to help it think through how are we going to make this successful? How are we going to make this work? And it was a big challenge. And you may remember some of those years in the '70s. The volunteer force didn't do so well at first, in fact, almost failed. Partly because they set the pay numbers wrong in the mid-1970s. And the quality levels of the force fell, and in fact fell further than people managing the Department of Defense understood to be the case, because they'd made a technical mistake. They had misnormed the so-called Vocational Aptitude Battery tests, the Armed Services Vocational Aptitude Battery tests, the ASVAB.

And the managers thought they were getting reasonably qualified people, maybe not quite the level they'd like to have. The sergeants kept saying, you know, these people aren't like the ones we used to get. They just aren't very good. It turned out the sergeants were right. It turned out they were taking in large numbers of people only marginally qualified for military service, by mistake in the mid-'70s.

Congress reacted to all this by setting standards for the military, in terms of the quality of recruits enlisted in the military. And part of RAND's job was to help the military and say, okay, if these are the standards, how are we going to get from here to there? How are we going to make this successful?

I came to work in Washington in 1978, at the Congressional Budget Office, where I ran the section responsible for national securities issues broadly. And I was invited by the Reagan administration to become what's called the Director of Program Analysis Evaluation, which is the sort of inside think-tank in the Pentagon. It's there to advise the Secretary on choices, on alternatives.

In some ways, it's the black hat of the Department. Your job is to be the Secretary's set of intellectual shock troops, to advance new ideas, ideas that may not be popular, in fact, generally aren't popular, but later come to be received wisdom.

I'll take an example. One of the issues we took on in that period of time is who should conduct the air defense mission of the United States? In that era, it was the air sovereignty mission. In other words, the airliner comes to the United States, you know, appropriately, who goes up and checks it out kind of thing. And it was being done by active Air Force units, even though it was a mission that we thought could be done equally well, and at somewhat less expense, by Reserve companies, Air Guard, Air Reserve units.

And you would have thought that we were heretics for raising this possibility that the Reserve components could do this. Well, after a long battle, the Air Force grudgingly agreed to try out using more Reserve component crews for this purpose. And of course, quite ironically, I came back to the Department, having been there from '81 to '93, came back in 2001 to discover we now had, at that time, all the air defense being conducted by Reserve component units.

So part of your job in that post is to get new ideas tried, to get them advanced, get people to look at them. I served in that post for almost 12 years, left as the administration left office in January of '93, Bush 41, as people call it. And I returned to RAND, as it turned out. I worked in RAND's Washington office, which I was the head of for a while, and then later ran one of RAND's major units, the ROIA (?) Center, which is the unit that advises the Army. And then I was invited by the present administration to come back in the post I now hold in June of 2001.

Mr. Lawrence: Given that career, what made you decide that you wanted to come back this time?

Mr. Chu: I have always found public service extremely rewarding. I recognize financially, often people take a significant step down in income to take these positions. But the psychic rewards, the sense of contribution that one gets, and the opportunity to help the nation do its business, is tremendous compensation. It gives you a tremendously good feeling about what you're doing with your life. And so it's that more than anything else that I think makes public service attractive.

Of course, the Defense Department, as I think you know, is a great place to work. It's a terrific set of people, highly motivated, very mission-oriented. Polite (?) did a survey of federal employees recently. You may have seen this piece of research. And while we have our faults -- and he pointed some of those out -- nonetheless, he was really struck by the degree to which morale in the Defense Department was not only good but getting better over time after the events of September 11th, because it's so mission-focused.

And it's just a great set of people to work with. It's a real sense of community, a real sense of pulling together, common purpose. And of course, in some sense, defending the country and its interest is the ultimate public service, the ultimate reason one had a central government.

Mr. Lawrence: It's interesting that you mention that it's such a great place to work, because the Department of Defense is the largest of the federal government agencies. And I'm just wondering with things of that scale, how do you communicate? How do you do the traditional management functions on that size?

Mr. Chu: Well, you use every instrument at your disposal, including programs like this, obviously. Part of it is just very straightforward. It's a bit like Woody Hayes and 3 yards straight up the middle. You write the memos; you make the announcements.

More important I think is getting out and talking to people, if not face to face, at least in some way that they can ask you questions, they can express their concerns. I am struck that many of the problems of the Defense Department -- and I think it's true of any large bureaucracy -- arise from miscommunication. As the military would like to say, what's the commander's intent? What are we trying to do here? What are we trying to accomplish? And why did we pick this way of getting to that goal?

And I am impressed at the power of just sitting down and talking with people. And of course, in an organization that large, a lot of what you need to do is talk to the leaders of subordinate units, to convey to them what are we trying to accomplish here? Why did we choose this method?

And of course, even better to have talked to them before you've made a choice, to engage them in thinking through how might we solve this problem? How might we address this issue? And I have always found that if you can get the leaders together like this, that you may come in the room with no idea of what to do about the problem at hand. And I am impressed at the number of times you leave the room with the outline of an answer, with the framework with which you can proceed. Because each person has contributed his or her particular insight.

And so I find the meeting -- I know people laugh a bit about meetings as being the bane of their existence. Actually, I find the meeting extremely productive. And with the tasks I have to be responsible for, a terrific way to get them to explain what we have to do, and to get them help tell us what a solution might look like.

Mr. Lawrence: That's a good stopping point. Rejoin us in a few minutes as we continue our conversation with David Chu of the Department of Defense.

Human capital transformation is a key part of the President's management agenda. What's the Department's plan to address the human resource issues? We'll ask David when The Business of Government Hour returns.

(Intermission)

Mr. Lawrence: Welcome back to The Business of Government Hour. I'm Paul Lawrence, and today's conversation is with Dr. David Chu, Undersecretary of Defense for Personnel and Readiness for the Department of Defense.

And joining us in our conversation is Bill Phillips.

Mr. Phillips: David, can you talk to us a little bit about the efforts at the Department's human capital transformation process? How do the different pieces fit together, and how is that going to impact the overall mission of the Department?

Mr. Chu: I'm delighted to do so. Let me start with why we are trying to change things. We recognize this is a different world than the one that characterized the Cold War. The Cold War is over. The United States, as we all know, faces different military problems. We have to have the right kind of people, the right set of skills that are appropriate to that new set of problems.

The other thing of course that has changed is American society. It's a society a lot more educated than it was true before. It's a society where families have different aspirations than might have been true in earlier years. One of the most important changes is that most young Americans now want to go on to college reasonably soon after they finish high school.

In the old days, so to speak -- I'm almost old enough to be able to say that -- most high school graduates went out and got a job. And so the competition, so to speak, was not college. It was the job market.

Given all these changes, we have to change both what we're aiming at, and how we're going to get there. And that's what the human capital transformation is all about. To do that, what we've tried to do is to borrow from the business playbook, develop a set of strategic plans that look forward. In other words, instead of back to what our past practices were, let's look forward to what our future practices ought to be.

And separately for the military and civil forces of the Department, we have a set of efforts that are intended to give us those strategic guidelines. And I can say more about that in just a few minutes.

At the same time, for both the civilians and military, we recognize that a key part of why someone would want to join and stay with our organization, and really work hard and contribute with our organization, is the set of understandings between us and them of what this position, what this commitment is going to be like, what the social compact is, so to speak, emphasizing that we're all in this together. This is not us versus them, not employees versus management. We have a combined interest here.

And so, yes, we're going to ask you to do some difficult things, and to take on some fairly significant burdens, in particular in the military case, to risk your life or your health in the process. But at the same time, we're prepared to do various things to make sure that you're well taken care of. And part of what we want to do for both the civilian and military forces in the Department, is to make sure that that social compact is in good shape, that we are appropriately taking care of you.

That doesn't mean coddling people. It means being sure that their circumstances are what they find attractive that makes them want to come to work in the morning, want to contribute.

The terrific spirit we saw on September 12th, when the Secretary of Defense made a decision that if at all possible, the Pentagon would reopen after that attack. And I was really struck at the awe in the tone of media reporting, that my God, all of these thousands of civilian and military personnel are trooping back into the building while the building was literally still burning. And no one had any hesitation about coming back to work.

That kind of dedication is why you want to be sure that people are well taken care of.

Mr. Phillips: You mentioned the strategic plan and linking the human capital. Could you tell us a little bit about that strategic plan?

Mr. Chu: Yes. We start by asking ourselves, both military and civilians, what kind of skills are we going to need in this future world that we face? And then of course -- and that's a large debate. Obviously, there are going to be different opinions about that debate. I think the common element for both military and civil personnel is this is going to be a more educated force in the future. And so the old view that a high school diploma was enough, and that on the military side, let's say, and that we didn't really care very much if you got any further formal education or not, that's out.

We recognize that both for our good and for your -- to meet your desires, most young people enlisting in the military want to continue their education, since we have a whole set of programs designed to respond to that. And part of the strategic plan issue is how do we position these programs correctly. So, how much do we do on tuition assistance, for example.

The Army has a wonderful program called Army College Online, in which, if you meet various criteria, they will give you a "free computer" that allows you to do courses from various universities on an online basis.

Impressive results. I happened to be at Fort Lewis the day they were giving out the computers. Even though they had emphasized there were plenty of computers for everybody, that you didn't have to wait, people were there in line at 4:00 a.m. in the morning to make sure that they were going to get their computers. And these were not just privates. There were people wearing quite a lot of stripes on their arms who were there, making sure that they got the computer, and saw them signing up for their courses, and so on and so forth.

So there's a terrific thirst for continuing education on the part of our people. We want to slake that thirst, because we recognize it's also in our own interest. So defining what we need, thinking through what we're going to have to do to attract, retain, and motivate those people is the essence of what these plans are all about.

And so what they consist of is a series of, as we were phrasing it, lines of operation. In other words, areas we have to pay attention to. And then within each, the specific steps we'll need to take in order to achieve the results that we want.

Mr. Phillips: Let me just extend that thought a little bit. You've talked about some of the challenges you face with respect to college as an alternative to the military. You've talked about some of the programs that the Army has in place. What are the key things that the Department needs to do to continue to attract young people to the military?

Mr. Chu: Well, one of the first things that you have to do always, is to make sure that your compensation package is fair, competitive. No one's going to get rich serving in the military. But they shouldn't have to absorb undue financial burden either. And so you have to constantly pay attention to what are we competing against? And that's one of the big changes taking place that we have to react to.

Twenty years ago, the standard for thinking about enlisted compensation in the military was what could a high school diploma make in the American economy? That's no longer relevant. If most young Americans, particularly the ones that we want, seek to go on to college, the standard is what could someone with some college education, let's say a year or two, make in the American economy. That's a very different set of numbers. It's a higher set of numbers.

The President has responded to that by saying that a part of our pay raise in the last 2 years should be targeted to the mid-range in terms of experience of our both enlisted and officer communities, because in both those areas, we're kind of weak, when you, on the enlisted side, vet it against some college earnings line. We were not competitive, and we still aren't as competitive in that regard as we wanted to be. So we're slowly trying to bring our compensation level up.

But it also means, back to what you mentioned earlier, that we have to convince young people regarding college, it's not either/or. The military is not an alternative to college. We have to give you the chance to continue your education while you're in the military. Or the military could be the vehicle by which you accumulate the savings -- the Montgomery G.I. bill being the example -- so that you can, post-military service, resume a college education.

So we're trying to position ourselves so that it's not either/or, that you can do both, you can have your cake and eat it, too, and that's what we're trying to tell young people.

Mr. Phillips: You mentioned earlier the strategy for civilian members of the Department of Defense. Could you contrast that with the military strategy for H.R.?

Mr. Chu: We are starting from a much lower base with civilians. I think it's true of the federal government at large, and certainly the Department of Defense that we have not thought about our civilians as the kind of strategic resource they truly are. And one of the things I think that's giving everybody a wake-up call on this front is the coming wave of federal retirements. Everyone understands that because the civil workforce has been on a decentralized basis, what we have is a workforce with a lot of people nearing retirement age. Standard numbers are in 5 years, half the federal workforce could retire. That number applies to DoD as well.

Now, not all the people are going to retire when they become eligible. So it's not upon us quite as rapidly as some of the doomsayers may assert. But certainly in the next 10 to 15 years, the way we see it strategically as a problem within Defense, we have to recruit a number of people equal to approximately half our current workforce. That's a huge challenge.

It's also a different mindset. The last 10 to 15 years of DoD workforce management, true I think in most federal agencies as well, has been how to move off the payroll. How to downsize. How to shrink. We are not in the recruiting business. I'll take a very simple kind of issue. Do we have a booth ready to go to job fairs? Well, a few weeks ago, we didn't have a booth ready to go to job fairs. So, if I would call up and say "You know, XYZ is having a job fair. Where is our booth?" I would sort of get blank looks, because until recently, that hasn't been our problem.

Now, it is our problem. And we want to approach it strategically. We don't just want to wait for the retirements to swamp us and to drain all the talent at once. What happened, in fact -- you may recall this episode in New York City, when Mayor Lindsay let the senior workforce of New York City subway system maintenance unit all retire at once.

Well, a funny thing happened. For the next several years, the trains didn't work. Because not everything was written down in the manual. And it was those senior guys, mostly guys -- some gals, I suspect, though not many in that era -- who knew how to -- who knew those tricks, who knew how to make the trains actually run. And we don't want to let that problem happen to us. So we're trying to get ahead of that problem.

On the civil side, we're just beginning this journey. We're just starting to put the tools in place necessary to achieve these objectives. And one of them, a very simple one, is simply being candid with ourselves. How many people do we need to hire each year? Up to now, we'd never set a goal. We decentralized it, told, you know, component managers well, it's your problem Bill or Paul. You know, here are the civil service rules, here are the lists. You go hire someone.

We think we have to take a more strategic approach than that, in order to be successful.

Mr. Lawrence: That's a good stopping point. Rejoin us in a few minutes as we continue our conversation about management with David Chu of the Department of Defense.

This is The Business of Government Hour.

(Intermission)

Mr. Lawrence: Welcome back to The Business of Government Hour. I'm Paul Lawrence, and today's conversation is with Dr. David Chu. David is the Undersecretary of Defense for Personnel and Readiness for the Department of Defense.

And joining us in our conversation is Bill Phillips.

Mr. Phillips: David, in our last segment, you were talking about strategic planning with regard to human capital transformation and a number of those things. Your current planning talks about a capabilities-based workforce, and that model. Talk to us about that, and how is it changing the way the Department does its business?

Mr. Chu: Of course, in the Cold War, we faced a single -- or often thought we faced a single major opponent. And we had a well-defined idea about how that opponent might act and threaten our interests. And so, if I may use sort of an economist's jargon, we had a point solution to every problem. We could optimize. We could pick what we thought was the best answer, because we thought we knew what the problem was we had to solve.

Now we face different problems, where the threats are not as clearly defined, where we may face over time a very different kind of problem, and one that we can't fully now foresee as I think the events of September 11th illustrated. So we're much more into a portfolio management problem, if I may continue the analogy, where we have to hedge against a variety of possible outcomes.

I'll give you an example, a practical example that I'm struggling with right now. Language training. What kind of language capacity do we want our military and civil workforce to have? Indeed, what kind of language resources will the Department of Defense need over time?

Now, 15-18 months ago, no one would have forecast that finding the Pashtun speakers in the military ranks would be a high priority task for the personnel system. Now of course we'll take every Pashtun speaker we can discover. And yet, you can't keep every possible language on hand. So, how do you get the capability here to interact with a variety of societies, some of them very different from the United States, certainly very different from Western European notions of what's the state, what's the role of government, so on and so forth. How would you function in this society?

And we need to be able to solve that problem to have the capability to operate wherever on the globe the President might send the military forces of the United States. So, it is a matter of being able to act effectively in a wide range of circumstances, whose specific parameters we cannot foresee that now constitutes the problem that we've got to solve. And what we're really coming to is I think a conclusion that to do so, you've got to have a range of capacities within your institution, not just something optimized for one particular problem.

If you're optimizing one problem, you know, it's like the watch that is stopped. It will be accurate twice a day, but it will be useless the rest of the time. Much better to have a timepiece that's perhaps not quite so precise, but that's more or less on the mark across the entire 24 hours. And that's where we want to try to take the Department.

Mr. Phillips: You have a number of initiatives in place to improve quality of life. Could you talk to us about those, and describe how they're impacting readiness and recruiting and those elements?

Mr. Chu: That's a critical issue for both the military and civil personnel in the Department. On the military side, I think it's something that's long been recognized. The military has a saying that goes something like retention decisions are made at the kitchen table, that it really isn't the retention officer that's doing the job. It's what the family decides is right for them. And that means it's not simply a matter of what is the work responsibility of the military member. It's also what happens to the family.

And that affects all aspects of their lives. Several are of course more salient than others. One is housing. The state of military housing is not good. The President spoke to that during his campaign and has emphasized it since. It's one of his personal interests. Our problem is that we have an old housing stock for those who use military houses. It was built, much of it, to the standards of the 1950s.

And to think back on what those standards were, I think we usefully recall what was a Levittown house. Levittown, as you know, was the late-'40s, Long Island, first suburbia kind of development. And it had just under 1,000 square feet. And it had one bathroom. There was no such thing as a family room, breakfast nook, or any of that sort of thing. There was only a one-car garage. That's not the standard that American families aspire to today.

What have we done? Starting in the last administration -- and I have to give a lot of credit both to Congress and our predecessors in this -- they realized that we couldn't do that all ourselves. And it was time to turn to the resources of the private sector, and to offer them essentially a long-term lease kind of proposition on government land, in which they would build the houses, and we would give them a preferential opportunity to rent those houses to our people. So we have a vast set of housing privatization efforts out there right now.

What does that do for us? First of all, it brings the capital of the private sector to bear so the government doesn't have to raise the capital outright. Second, it brings the skill of the private sector in figuring out what the housing -- what do people really want in a house? We're not necessarily all that good at it, and we shouldn't probably be writing those specifications. We want a result, which is we want a happy set of families. You tell me what they're going to like. Here's how much money they can spend, because everyone knows what the housing allowance is going to look like.

What's in it for the developer? Well, we have a good set of customers. Our people pay on time. Because in fact what we'll do is just send the housing allowance directly from the Treasury to developer if you want to buy the house. The developer still has to compete, typically, in these arrangements. He has to build a house, or a condo type unit that's attractive enough that the military members want to say, yes, I'd like to live in this. And so he's got a strong incentive to build a good community. And typically in these arrangements, he has a 25-year lease maybe with an option to roll over for another 25 years and certain refreshment stands. They're fairly complex vehicles.

But they're very imaginative. And the results, at least so far, are extremely promising. You can go to these various bases. An excellent set at Fort Carson, as one example. They're great houses. Military families are delighted to live in them. They're nice communities. The developer has a strong interest in making a successful community, because he wants to fill it with these high-end families that come on with their housing allowances, which means there's no vacancy rate, there's no cash flow problem, there's no delinquent payment issue for him. It's a win-win situation for everyone.

So that's just one example of how we have to respond to what our people aspire to. We can't just stick them in a 1950s Levittown, even if it's "free," and assume they're going to be happy.

Mr. Lawrence: Health care costs are rising throughout the country, and I'm assuming the Department of Defense is no exception. What are the major concerns about health care in the Department?

Mr. Chu: Well, the big transition in health care in defense was the move to a managed care like paradigm in the late '80s, early '90s, which we call Tricare. The early years, to be candid, were not a happy situation. We had a lot of performance issues. We're proud of how far we've come over these last 10 years. We treat this just as a private sector health care operation, where we do survey of our patients after their last visit. We send them a questionnaire and say what about this last visit? How did you feel about it?

We're very proud of our scores. We're right up there just about where the better private plans are in terms of patient satisfaction with the encounter that they've had. We do face the same challenge the civil sector faces, and that is the rapid rise of health care costs, although we're very proud of the fact that this past fiscal year, for the first time in 4 or 5 years, we finished the year within our budget.

And that relates to a major management effort we've made as the Congress likes for us to optimize the mix of resources we bring to delivery of health care, to improve how well we use both the contracts we have, as well as the set of military treatment facilities, hospitals and clinics that are government-owned and government-operated and staffed by government personnel.

Often we had a bad match in a particular local market. And increasingly, the way we're going to try to deal with the cost issues over time is to view the health care system as a set of important local markets. Each one has different conditions. For defense, there are 15 or 20 really big ones around the country. Washington, D.C., is an example; Norfolk, Virginia, is another example. San Diego is an example. Fort Hood is an example. San Antonio is an example.

In other words, a place where we've got a lot of people, and we have a significant number of assets, both government and purchase character. And the issue for us is how to put those together in the best possible fashion. We'll be appointing a set of market leaders, market managers, really, who will be the guru for that area, and with certain powers to reallocate resources, and reapply resources within that small region to get the best outcome for our people, and the best deal for the government.

Mr. Phillips: Does the changing nature of the population, its age and its size, pose different complexities for managing health care?

Mr. Chu: Absolutely. We have an older patient population now than was true 20 years ago because a lot higher fraction is composed of retirees and their families. And of course as you know, Congress made a decision 2 or 3 years ago to extend the Tricare benefit to those who are otherwise Medicare-eligible. Prior law had said once you became Medicare-eligible, you dropped out of our system, except insofar as we had space available in a military hospital.

That led to an outcry on the part of the retirees as they reached 65. Congress reacted by saying, okay, they're eligible, too. So, within the last 18 months, we've rolled out what's called Tricare for Life, starting October 1st a year ago. The pharmacy part actually started a little bit before that.

It is I think a great tribute to the people working with our health care system. They made this all work. This is a huge -- this is hundreds of thousands of additional households, for which we suddenly became responsible and the whole issue of paying their bills as second payer to Medicare. So it was a significant financial transaction operation to manage here. And then it's gone, I think, at least we believe, quite well. In terms of the transition, people are generally satisfied with the outcome.

But yes, it is a population that's much older on average than was true before. And we suddenly added all these much older families, so we've got a whole new set of issues to deal with in terms of how we manage the system, including -- you know, some of these things you don't think of in advance, in terms of what public administration requires -- including the whole question of eligibility.

And the way the military medical system works, to be eligible, you have to have a military ID card. Well, many older retiree families, especially surviving widows, haven't had an ID card in years. In fact, had no idea they were supposed to apply for an ID card, because there was no benefit to them doing so. So we had a big effort to get the word out, and to help people who haven't had an ID card to get one so they can be in the system. And it's not so much the card per se that's critical. They have to be in our automated register, so to speak, so that when you come to a treatment facility, they say oh yes, here's Bill. He's on my list. We'll pay his bills. We'll cover his care.

Mr. Lawrence: That's a good stopping point. It's time for a break. Rejoin us in a few minutes as we continue our conversation about management with David Chu of the Department of Defense.

This is The Business of Government Hour.

(Intermission)

Mr. Lawrence: Welcome back to The Business of Government Hour. I'm Paul Lawrence, and today's conversation is with Dr. David Chu. David is the Undersecretary of Defense for Personnel and Readiness for the Department of Defense.

And joining us in our conversation is Bill Phillips.

Mr. Phillips: David, in the last segment, you clearly demonstrated a passion for the quality of life and the social compact with the military. Talk to us about education of children of military dependents.

Mr. Chu: I think this is one of the sleeper issues out there. And it illustrates the fact that what people worry about in terms of our quality of life shifts over time as the aspirations of Americans change.

And one of the things people aspire for now, as we all appreciate, is good quality education for their kids. We've done a terrific job overseas with Department of Defense educational system. Our schools overseas, if we were a state, and you gave us a standardized test -- and we do actually do take these tests like everybody else we'd be between 1 and 5 in the nation, in terms of test score outcomes, which is I think a terrific record.

But as I go around the country and I ask people stationed at Base X or Camp Y, how is the school system, too frequently, I get poor answers. I get answers where you recognize from their behavior that they are not satisfied. We have, in many locations, people either living a fair way away from the base in order to find a school system that they find adequate for their kids, or actually sending their kids to private schools. And it's not just officers. We now have some senior enlisted personnel, who, while we pay them decently, I don't think we're really paying the level where they can typically afford a private school, who are saying I'm going to somehow find this money, because the situation is unacceptable.

This is a big issue for the Department. The Department, of course, should not be running the schools in the United States. We do, for historical reasons, run a small set on the few bases around the country. But we shouldn't be in the school business because that's a local responsibility. And one of our big challenges in the Department of Defense is to find a way to work with local communities so they can improve the school system for everyone, but importantly including the children of our military personnel.

Now, one of the improvements which we seek all around the country, both from strong school systems as well as others, is being sure that they're sensitive to the needs of kids of families who move around a lot. One of the difficulties that occurs is, you know, tryouts for the sports are let's say the last week in August. Well, if you don't show up till September, you may not be considered by the school system.

Likewise, each school system has its prerequisites in order to take the calculus course, let's say. Well, if you didn't quite meet those, you know, you might not get that chance. And so we've got an organized program, importantly advanced by Mrs. Reimer (?), the wife of a former Underchief of staff, to try to sensitize school systems and school system leaders to the need to think about how your rules will affect an important part of your student body in those communities where you've got a lot of military children.

And I'm delighted many school systems are responsive to that overture when we make it, and start to think about how they could do things a little bit differently so that our kids have an equal chance as someone who has lived for 20 years in the same place.

Some of it's hilarious, and the local school superintendent can't do anything about it. One of the problems, as you know, in many school systems, is you have to take a course on the history of the state in which you live. And some of our children have taken the history course for several states, which is more I think than anyone really anticipated.

Mr. Lawrence: Many have wondered I think about the relationship between the Department of Defense and the Department of Veterans Affairs. Now, as I understand it, you're part of an Executive Council that's looking into the coordination between the two. I wonder if you could tell us about the goals of that Council?

Mr. Chu: This is something that Leo Mackay, the Veterans Affairs Department Undersecretary and I put into place within the last year to respond to the President's interest in seeing better coordination between the two departments. But obviously share, in some sense, the same population. The veterans are all graduates, alumni, so to speak of the Department of Defense.

VA runs a big medical system, as we all know, of course, to deal with veterans' problems, which are somewhat different from the active force. In some locations, we have facilities in the same place. And so one obvious issue is shouldn't we collaborate more? Shouldn't we find a way to work together? We also have issues of how we organize the benefit program so it's easier for them to deal with those programs. For example, could we not make the exit physical from the military the same physical that VA uses for assessment of disabilities?

Well, in the past, the physical didn't do all the tests the VA needs to have. So it's a matter of making sure that we have the same form, that the record can be read by both institutions since all records are now increasingly electronic, and that we make sure we cover all the testing VA has.

Some of it is quite straightforward. Some of it is quite complex, in terms of how we do things. And I'll give you an example. We already do a fair amount of business where they take care of our patient, we take care of their patient. An example in Honolulu is Tripler (?) Army Hospital has a VA outpatient clinic on its grounds. And if you need inpatient care, you go to the Tripler Hospital.

But each of these has to be crafted one by one as a separate agreement between the two institutions. A lot of argument of what the costs are, who's supposed to pay for each element of cost. And what Dr. McKay and I agreed was let's find a way to cut through these arguments so that the two institutions can work together more easily. And so what we did was simply say if you take care of my patient, there is an externally established schedule of prices. Essentially it's an extension of the Medicare schedule.

And we'll both agree to accept that, because we want to be able to meet -- actually, accept it minus 10 percent because there ought to be some savings here for the government and the taxpayer -- and let's not argue over exactly whether I used one more bandage on your patient than would be normal, and therefore I've got to charge you a little extra. It will all come out in the wash in the end.

And the idea behind this is to release the energies of the local leaders so they can come to the agreements, which they typically seek and want, because they want to do the best thing for their patient population.

Mr. Lawrence: David, let's shift and talk about the future. You talked earlier about the challenge of the pending retirement over the next number of years, significant people leaving. As you look out, what are the most significant personnel and readiness issues and challenges that you face and the Department faces?

Mr. Chu: It's how you sustain the contemporary success of the volunteer force. As American society changes, and the aspirations of young people change, and as we're conducting a probably long-term global war on terrorism -- this is not a short conflict, this is a long haul event, much like the Cold War in some respects, I think is the way we ought to think about it. That ought to be our mindset.

And how do you keep this force as it is today the best military in the world? Important because it's got the best people in it, and they are motivated and properly trained to do their job. And that's the other big challenge. How units will operate in the future, as I think operations in Afghanistan demonstrated, is going to be very different from the past. It's a much more, as the military like to say, joint operation.

So you had Army Special Forces operatives on the ground calling in air strikes from Air Force and Navy aircraft. And we don't practice enough for real, so to speak, in peacetime, in the peacetime settings with those kinds of joint operations. Not that services don't work together well, not that they can't work together - not that they can't improvise well. But our standard is and should be not to improvise.

In other words, this should be second nature. It shouldn't be okay, I've got to solve this problem on the aircraft on the way to the theater because I'm now facing the enemy. I should have done this over and over, so it's automatic, so I know what I'm doing, and I know how to work with someone from a different service, a different kind of weapons system than my own service provides.

And providing that joint national training capability is one of the Secretary's premier objectives. My orders are, stand this up by 1 October 2004.

Mr. Lawrence: Given all the conflicts you alluded to, what's going to happen to the size of the Department if that's --

Mr. Chu: Our expectation is the number of people in active service will probably be relatively constant over the foreseeable future. We need to realize the challenge the secretary has issued to the Department. Don't just solve the problems, react to the pressures of the present day by adding without thinking about what you're going to subtract. In other words, if I have a new, high priority mission, what older mission that maybe isn't quite so important, can I take off the table? What can I stop doing?

And why does the secretary want to do that? The obvious reason is we do not have an unlimited budget. Although we have a big budget, there is a constraint out there. And the secretary has to do two things with the budget. He has to win the current conflict, and he has to invest in those transformational articles that will change the face of the Department for the future.

If he allows new missions simply to be added on top of everything else we're doing, he'll never have any money with which to transform. And so my clear instructions are figure out what we can drop off, what's low priority, what doesn't have a real payoff in this environment, which might include civilianizing the function, which might include going to a contract to provide that function.

The constant question that I'm charged with examining is does this need to be uniformed personnel, which is our most expensive resource in the Department.

Mr. Lawrence: What advice would you give to a young person who is now considering an opportunity for career service?

Mr. Chu: Well, first of all, I'd congratulate him or her, because I think it's a terrific choice. Second, I'd emphasize pick something that interests you. Because if you don't have a passion for it, if you don't enjoy it, if you don't like it - there are a lot of vicissitudes that come with public service. There are a certain number of burdens. I don't want to be unclear about this.

And so you've got to love what you're doing. I think it's less important to chart a career in some kind of managed sense. If you do well, my take on the federal government is if you do well, you'll get a great chance, a great set of chances. So start with something interesting. Start with a set of issues that turns you on. Start with a set of people that you like to work with, especially pick a boss that you respect and that you think you can learn from, and it will take care of itself from there.

Mr. Lawrence: David, we're out of time. Bill and I want to thank you for being with us this morning.

Mr. Chu: It's my pleasure. Thank you.

Mr. Phillips: Thank you very much.

Mr. Lawrence: This has been The Business of Government Hour, featuring a conversation with Dr. David Chu of the Department of Defense.

Be sure and visit us on the web at businessofgovernment.org. There, you can learn more about our programs, and get a transcript of today's very interesting conversation. Again, that's businessofgovernment.org.

This is Paul Lawrence. See you next week.