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Israel's Efficiency Contract Under Fire

Officers Say High-Priced Consultants Didn't Deliver

May. 23, 2013 - 11:56AM   |  
By BARBARA OPALL-ROME   |   Comments
Lean Maintenance: A US-based consulting firm said it could save Israel millions of shekels annually on maintenance, but officers say the plan actually raised costs. Here, a mechanic performs maintenance on an Israeli F-16.
Lean Maintenance: A US-based consulting firm said it could save Israel millions of shekels annually on maintenance, but officers say the plan actually raised costs. Here, a mechanic performs maintenance on an Israeli F-16. (Israel Defense Forces)
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TEL AVIV — Israel’s Defense Ministry is slightly ahead of schedule in a 10-year government-mandated plan to save 30 billion shekels (US $8.4 billion) through 2017, but no thanks, uniformed officers say, to the ministry’s high-priced contract with an international consulting firm.

Nearly five years into the plan, high-ranking officers here insist the lion’s share of the 9.2 billion shekels saved thus far stem from internal, self-generated measures, despite costly and — in many cases — unrealistic reforms proposed by New York-based McKinsey & Co.

MoD hired the consultancy in August 2008 to help it reach savings goals prescribed in a government blue-ribbon panel on the Israeli defense budget. Led by David Brodet, a former director-general of the Israeli Finance Ministry, the so-called Brodet Commission called for multiyear budgets, a linkage between economic growth, defense spending and incremental savings of 550 million shekels per year, culminating in 30 billion shekels in savings over 10 years.

A specialized, security-cleared team from McKinsey’s Tel Aviv office focused on three key areas — construction, procurement and logistics — where recommended changes, once implemented, promised potential savings well beyond Brodet-mandated benchmarks. Specifically, McKinsey recommended merging construction branches of the Israel Defense Forces (IDF) and MoD; instituting integrated purchasing teams (IPTs) for bulk procurement; and adopting lean management practices for production, maintenance and logistics functions.

According to an IDF background paper obtained by Defense News, McKinsey claimed merged construction would potentially yield annual savings of 350 million to 450 million shekels on current average yearly expenses of an estimated 3.3 billion shekels.

The consultancy claimed IPT procurement of fuel, ordnance, food and other sectors from initial purchases through life cycle costs would allow a 30 percent cut in personnel while realizing potential annual savings of 800 million to 1 billion shekels.

As for logistics, the McKinsey-proposed transition to lean management of depot maintenance promised potential savings of 140 million to 170 million shekels annually.

In all three areas, according to the document, McKinsey assessed annual savings goals as “ambitious but achievable.”

But a five-month investigation by Defense News reveals that savings in the first two areas have been partial at best, while the transition to lean logistics management raised costs and lowered productivity to the point that — with few exceptions — the IDF General Staff discontinued McKinsey-prescribed reforms.

Moreover, MoD’s contract with McKinsey mushroomed nearly fivefold, sources here say, from 22 million shekels to more than 100 million shekels.

Neither McKinsey nor MoD agreed to answer questions pertaining to the value, duration or scope of their contract, which sources say concluded more than a year ago. Coral Fisher, a spokeswoman at McKinsey’s office here, referred queries to a Tel Aviv-based public relations firm, where Gal Levanon Levy of Scherf Communications insisted only MoD could speak about the contract.

Repeated attempts to elicit MoD responses to written and telephone queries dating back to December were referred by MoD public affairs employees to Zeev Feiner, a consultant whose clients include MoD and who was involved from the beginning in the competitive bid that landed the efficiency contract to McKinsey. In a brief telephone exchange in April, Feiner offered partial information pertaining to MoD-accrued savings, but has since been unavailable to provide promised follow-on data pertaining specifically to McKinsey.

Overall, Feiner said the criticism was based on the military’s resistance to change, and that savings will be less in the early years and will grow as the initiatives mature.

Anemic Results

Col. Sassan Hadad, head of the budget department for the IDF’s Ground Forces Command, said Israel’s largest military branch “really tried to integrate their lean management [process] into the units performing logistics.” He said the Ground Forces Command, known here by its Hebrew acronym MAZI, had nine teams working to shorten maintenance time and reduce overhead.

“But after three years, we determined it wasn’t realistic,” Hadad said. “It was costing more money to achieve the same results. [Eventually], it was dropped from the agenda.”

An IDF brigadier general, commander of an organization slated to reap the bulk of lean logistics savings, confirmed that the IDF General Staff exempted his organization from McKinsey-prescribed logistics reform.

“It has been well known within the IDF General Staff for at least two years now — and recently approved by the deputy chief of the IDF — that without the needed investment in parts, personnel and infrastructure, this process won’t work,” he said.

In two interviews, the general said McKinsey assessed a potential 110 million shekels in annual savings from his organization, a significant portion of which was supposed to show up on 2010 ledgers. Instead, and after considerable effort, the commander said he was able to realize only 100,000 shekels in savings.

While crediting the consultancy with impressive worldwide experience in logistics reform, the general insisted the IDF depot process, which relies on 3,500 noncommissioned officers supplemented by relatively untrained conscripts and reservists, is unique.

“Our depot process works, but it can’t be compared to anything else in the world. Without the people and the parts and the infrastructure, you can’t apply the principles of lean. As soon as tanks started moving down the line, we got bottlenecks because the basic conditions for implementing lean logistics were not delivered.”

Hadad acknowledged better results with McKinsey-prescribed procurement reform. But even in this sphere, he said MAZI was implementing less than 15 percent of McKinsey-projected savings through integrated purchasing teams.

He said McKinsey pegged IPT-generated savings from his department at 190 million shekels per year, with half that amount projected to show up on his books by the end of 2012.

But here, too, McKinsey savings goals proved unrealistic and were subsequently scaled down to 10 percent — 19 million shekels — of initial projections.

“We achieved more than 10 percent of procurement savings goals, and soon we hope to bump that up to 15 percent,” Hadad said. “To put it delicately, we were all skeptical of McKinsey claims. In retrospect, many of their recommendations didn’t deliver the goods… Bottom line, the savings we instituted in house were more significant.”

To be fair, Hadad credited McKinsey for “helping us break down preconceived ways of doing things. They helped us come together and determine for ourselves what works and what doesn’t work.”

Bloated MoD Bureaucracy

In the brief April interview, MoD consultant Feiner said IDF criticism reflects an inherent institutional resistance to change and that McKinsey-prescribed efficiencies will take time to materialize. He said the plan proposed by McKinsey targets savings of 11 billion to 19 billion shekels through 2019, but declined to clarify whether the 10-year contract from 2008 was extended or how much MoD ultimately paid for consulting services.

As for inability to meet what IDF officers found to be unrealistic savings goals, he said: “The numbers in the first years are higher. It’s a gradual buildup that will cost some money in the short term but will bring savings in the long term.”

Hadad conceded “strong resistance” among the military “to bringing McKinsey into our business,” but insisted that after years of good-faith efforts, results have proved anemic, at best. As for claims that McKinsey efficiencies would become apparent over the long term, he said: “It doesn’t strike me as realistic; not at the beginning and not at the end.”

Feiner insisted the ministry and the IDF reached efficiency levels of 9.2 billion shekels between 2008 and 2012, yet declined to distinguish savings accrued through internally generated measures from those credited to the external consultant contract.

“Brodet said the defense establishment needed to make efficiencies of 30 billion shekels over 10 years,” he said. “McKinsey is just part of the overall efficiency effort.”

A retired general on the IDF General Staff said the MoD and the military had already instituted most of the far-reaching streamlining initiatives prior to implementation of McKinsey recommendations in 2010. He said the IDF removed or “civilianized” more than 2,000 permanent non-combat positions, which led to annual savings of nearly 500 million shekels.

The retired general also cited MoD’s move to a unified Enterprise Resource Planning software system, a broad-based energy conservation program and revamped logistics networks. All were self-generated streamlining measures that predated McKinsey’s work.

“McKinsey brought mixed results from the three areas they chose to focus on; and they didn’t do anything on MoD personnel, as mandated by Brodet,” he said.

Prior to the 2008 report, Brodet targeted MoD’s workforce of then-1,750 employees for a 500-person reduction, 300 to be cut in 2009 and 2010 and another 200 to be cut by the end of 2012. Moreover, the government directed MoD to close its high-priced defense mission in Paris and transfer its New York City delegation to Washington. At the time, MoD was funding 33 full-time positions in New York, as well as living and education expenses for their respective families, in addition to 140 local Israeli employees.

However, in the past five years, instead of reducing personnel to Brodet-prescribed levels, MoD’s roster numbers “just over 2,000,” according to a ministry public affairs representative. Moreover, it continues to fund its Paris and New York missions, albeit at slightly reduced personnel levels.

When asked about the apparent bloat in personnel-related overhead, Feiner explained that MoD is responsible for several agencies. He declined to specify how many new personnel are working for these added organizations, but the former IDF General Staff officer said new hires “could not possibly account” for the hundreds that should have been removed by now from the MoD payroll.

As Israelis take to the streets to protest government tax hikes and spending cuts, political sources say defense spending will come under increasing scrutiny by lawmakers who have yet to pass the 2013-14 budget endorsed May 13 by Cabinet ministers.

International Affairs Minister Yuval Steinitz served as finance minister in Prime Minister Benjamin Netanyahu’s previous coalition government. In an interview shortly before relinquishing his Treasury portfolio, Steinitz said Finance Ministry experts were not tracking MoD’s contract with McKinsey per se, but rather bottom line progress toward Brodet-mandated savings goals.

“This is troubling information,” Steinitz said. ■

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