Principal / Agent Challenges in the DoD

As I mentioned in a previous post, one of the biggest challenges in working with the DoD is the prevalence of principal-agent problems at almost every level

Lets dive into what that means and how that hinders progress (or just productivity in general).

A principal agent problem is a particular kind of incentive misalignment. Classically it occurs whenever the owner of an asset or the beneficiary of an asset (the principal) delegates decision making authority over the asset to another party (the agent).?

Let’s ground this theoretical issue in a mundane and common life experience, selling a home. You're a homeowner (principal) who wants to maximize the value of your home when you sell. You hire a real estate agent (agent) who wants to maximize their take-home pay which is a function of the total value of the homes they sell in a given time frame minus their expenses in marketing those homes. While commission seems to align incentives, the real estate agent is incentivized to sell a home as quickly and with as little marketing expense as possible. This incentive can drive an agent to underprice a home as underpricing leads to quick and easy sales. The principal and agent are working together but there is tension because their incentives do not fully align.?

In any decision there is (1) the person authorized to make a decision, (2) the person held accountable for the results of the decision, (3) the direct beneficiary or object of the decision and (4) the person who must pay the cost of implementing the decision. In an ideal scenario (from the perspective of incentive alignment and efficiency) a single person wears the mantle of all four roles. In most life situations one person or at most two represent all of those roles and incentives are fairly aligned. I think if you were to boil down what organizational consultants charge major corporations millions of dollars for, it is to consolidate those four roles into one or two individuals for all major decision points.

Why this rather boring lecture on principle agent issues? Because for major AND minor decisions in the DOD those four roles are often occupied by four different individuals and those individuals are often in different organizations, including Congress or other offices of the executive branch.?

Here is a practical, albeit simplified example for how this plays out in the DoD: Congress is deciding whether to appropriate $100M to keep an outdated platform alive. The platform isn’t survivable for the types of missions it is expected to be called upon to perform. There are new solutions for the modern mission set that need funding but those solutions are built by other organizations in other congressional districts. Will Congress keep the program alive?

1. The intended beneficiaries are interests tied to the old platform, which might include contractors, constituents, or folks wedded to old but beloved tech (I’m looking at you A10).
2. The group making the decision might be one or two people in Congress.
3. The cost for keeping the platform around is born by the tax payer and more directly by the war fighter who may be called upon to rely on a tool no longer fit for purpose.
4. The person or group held accountable for the decision will be DoD officials or program executives.

?If we objectively analyze the hypothetical scenario above, should we be keeping around platforms that no longer function? Superficially, the answer is a “no-brainer”, we should discontinue the program and invest in replacement programs. That said, the decision is actually much more complicated. The funding decision is being made by people far removed from the battlefields where the rubber will someday meet the road, those who are paying the cost have no voice in the decision, the accountable parties are responsible for balancing dozens of programs and must make horse trades, and the beneficiaries of keeping the old platform alive are vocal and have a concentrated interest in protecting the old platform.?

To make matters worse, while that foursome is generally required to align in order to pass a decision up the chain, the DoD often places additional foursomes higher in the decision-making matrix. Sound complicated yet? What if you add in a culture where almost everyone gets a veto de-facto if not de-jure on anything new?

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What you end up with is an organization often operating at cross purposes, where accountable doesn't mean responsible, where it is extremely difficult to make the right decisions even where those decisions should be intuitively obvious, and where the war fighter’s voice can be easily lost in the process.?

No simple policy reforms can untie this Gordian Knot. I write about this not because I have a great solution but because as someone who is trying to support founders building for the war fighter and as someone who wants to see the DoD work, I think about these challenges a lot. If you’re a company building for the DoD or an investor who supports them, make sure you know who is in each of the four roles as it concerns your company. It is your job to integrate those people and make sure that their incentives are as aligned as possible.

Ok, I can’t resist offering at least one short-term stop-gap solution: Push more decision-making authority and budgetary control as close as possible to the warfighter. It wouldn’t be a silver bullet, we can’t push enough capital down to solve all our problems without creating a host of even bigger challenges but in thousands of real-world examples, establishing larger unit level flexible budgets would be a solution. If the warfighter were making their own purchasing decisions with a budget they’re responsible for managing, we would collapse the principle and agent into a single unit and I think we’d see faster more efficient acquisition decision making.?