I know that when taking over a troubled company a knowledgeable chief executive officer takes a quick look at the teeth to tail ratio, as they say in the military, and undertakes a review of the company's assets and resources and properly divests those that are not central to the future success of the institution.

I mention in my testimony the example of Sears Roebuck where recently they have focused on their basic businesses. This is a very large institution, $50 billion. They sold some 20 percent of Dean Witter in an initial public offering and then spun the rest of it out. They sold 20 percent of Allstate Insurance in the second largest IPO in history, and then in June 1995 will spin off the remainder. Sears sold Coldwell Banker Residential Services. They are going to sell Homart and Prodigy as well. The effect of all of that was that Sears employees moved from 420,000 in December 1990 to an estimated 240,000 today, still a large number, but a vastly lower number. Sears stock, interestingly, went from some $25 a share in 1990 up to what it would be equal to over $70 a share today had Dean Witter stayed a part of the enterprise. I mention that because obviously the investors rewarded that institution for facing up to its problems.

As overseers of the Federal Government, an institution which, for the sake of discussion, I would say is arguably in Chapter 11, the Congress will need to treat the job of restructuring in the same urgent, tough-minded manner. The goal must be to earn back the confidence of the taxpayers who are the real stockholders of the Federal Government.

I read a piece by Peter Drucker where he cautioned that this isn't going to be accomplished by simply tinkering. He pointed out that in any institution other than the Federal Government the changes being trumpeted as reinventions would not even be announced except perhaps on the bulletin board in the hallway. They are the kinds of things that a hospital expects floor nurses to do on their own, that a bank expects branch managers to do on their own, that even a poorly run manufacturer expects supervisors to do on their own without getting much praise, let alone extra awards.

I read an article recently, which I cited in my testimony, which is worth mentioning by a man named Dunlop who did the skillful restructuring of Scott Paper Co. He said do it once, do it severely, and get it over with. When a company says it is going to restructure over the next 3 years, it won't happen. You end up paralyzing the company by repeated cuts that are of too small a size. I think that is sound advice for the Congress as well.

If, in fact, one happens to cut too much in a specific area—and that is almost unprecedented-it is relatively easy to add it back, but it is harmful to keep cutting repeatedly. It is like cutting a dog's tail off one inch at a time hoping it doesn't hurt so much.

The balanced budget plan drafted by the House committee I noted is certainly remarkable in its specificity and scope. In my view, however, it possibly runs the risk of ignoring the principle of cutting decisively and rapidly. In some instances it talks about phasing things out over 3 to 5 years. It seems to me that if something is outmoded and inefficient, phasing it out over a 3-year period will not make it less inefficient or less outmoded. I don't see

quite why one would want to inflict on these programs the death of a thousand cuts.

I suspect I've used up the better part of 5 minutes. I would only mention that what I'm describing at Sears Roebuck or Scott Paper is something that we did at G.D. Searle in the late 1970's and early 1980's, it is something we did at General Instrument. Incidentally, Mr. Chairman, I've left General Instrument Corp. and would want the record corrected on that. I served there from 1990 to 1993. We divested five or six businesses, sold a number of assets, downsized and focused on the core businesses, and dramatically reduced the size of corporate headquarters, with the result that investors and owners of the company moved the stock from about $15 a share to $50 a share, judging it the right thing to have done, and, as I say, there are hundreds of companies doing the same thing.

With that, I will be happy to stop and respond to questions. [The prepared statement of Mr. Rumsfeld follows:]

PREPARED STATEMENT OF DONALD H. RUMSFELD, FORMER SECRETARY OF DEFENSE

THOUGHTS FROM THE BUSINESS WORLD ON DOWNSIZING GOVERNMENT

Thank you, Mr. Chairman, and members of the Committee. I was pleased to accept your invitation to discuss some corporate approaches to organization and downsizing and their possible relevance to the federal government. I believe I do have a somewhat unusual perspective on this issue, having spent roughly 20 years in the federal government and another 20 years in the corporate world.

I am pleased to be back in these chambers. As a young member of the Congress during the 1960s, I had the opportunity to serve on this Committee when it was known as the Government Operations Committee. At the beginning of my tenure, the government we oversaw was much smaller and simpler than the complex and overwhelming behemoth that so many of you in this Congress have pledged to reform.

With your permission, I thought what I would do this afternoon would be to merely summarize some of the concepts in my prepared text, which all of you have received in advance, and then allow the maximum amount of time for questions.

If my memory serves me correctly, one of the issues of my time in Congress was whether or not to close a dairy at the U.S. Naval Academy. That example may be good for a laugh today, but those who tried to sell off the dairy were accused of not understanding the importance of a captive milk supply for the Midshipmen. Heaven forbid that the Naval Academy would have to buy milk from the private sector like everyone else.

While that may seem like a trivial example compared with the sacred cows that must be challenged today if you are to balance the budget by 2002, the fact remains that the federal government is one of the few institutions that still thinks itself able to afford the luxury of sentimentality at taxpayers' expense. Businesses eventually cannot afford to hold on to activities, people, practices, divisions or subsidiaries that have become not central to the core business, outmoded, inefficient or a financial drain on the rest of the company. Rather, they have to figure out what they should and should not be doing and then take decisive action to get their financial affairs in order. If they fail to do so, they die.

When taking over a troubled company, a knowledgeable CEO checks his or her "teeth to tail" ratio, as they say in the military. It involves undertaking a thorough review of the company's assets and resources and then promptly divesting those that are not central to the future success of the institution. This forces the company to focus on its "core" business and to avoid wasting manpower, time and money on ventures that are secondary to what is vital to the long-term health and success of the company.

A good example of a corporation recently undergoing such a top-to-bottom restructuring is Sears, Roebuck and Company. Sears in recent years decided to move from a widely diversified company to a company focused on its core businesses. During this restructuring it closed a hundred unprofitable stores, took Dean-Witter, Discover, Allstate Corporation, PMI, and S.P.S. public, sold off unneeded assets and even disposed of the famed Sears Tower in Chicago. Some of the cash raised from

these sales was used to buy out thousands of middle managers and the rest was plowed back in to strengthen its basic businesses.

One of the most painful and visible aspects of their restructuring was the decision to close Sears' catalog division-the business on which Sears was built. The truth is that the catalog division was unprofitable and a drain on the company's main businesses. As difficult as it was, however, this break with the past told Sears stockholders that management was serious about fundamentally restructuring the company and putting it on a path for growth.

The experience at Sears, and the experiences at hundreds of other companies, including two I helped to downsize-G.D. Searle & Co., a pharmaceutical company, and General Instrument Corporation, an electronics company-can provide valuable lessons on how to and how not to downsize and overhaul the federal government. There is no one formula for successfully reorganizing a major corporation or the federal government, beyond the fact that it requires making tough, serious decisions, and it is often easier for someone from outside the institution who understands that this is his or her assignment to do it than it is for an insider. Also, not surprisingly, it is best done by someone who knows how to do it.

DEFINE THE "CORE" BUSINESS

As overseers of the federal government, an institution which, for the sake of discussion, is arguably in Chapter XI, Members of Congress will need to treat the job of restructuring it in the same urgent, tough-minded manner so many corporations around the country are now doing. The goal must be to earn back the confidence of the taxpayers, who are the real stockholders of the federal government. This does not mean simply "patching," as management guru Peter Drucker has characterized Vice President Gore and his associates of doing. The reason National Performance Review (NPR) efforts have received so little public attention, said Drucker, is that:

In any institution other than the federal government, the changes being trumpeted as reinventions would not even be announced, except perhaps on the bulletin board in the hallway. They are the kinds of things that a hospital expects floor nurses to do on their own; that a bank expects branch managers to do on their own; that even a poorly run manufacturer expects supervisors to do on their own-without getting much praise, let alone any extra rewards.1

Certainly the NPR is a worthwhile effort-a good idea. But, much more is needed. Techniques such as Total Quality Management, procurement reforms, or streamlining middle management will improve government, but they will only affect the problems in government programs at the margins. Well-intended corporate managers have used the same sort of techniques and still failed or suffered. It is vital that many of these things be done, but only after one has decided and dealt with the more central issues of what businesses to be in.

The first task is to decide what the core business is. Once this decision is made, then everything else is secondary. For the federal government, the four basic departments-State, Defense, Justice and Treasury-have a solid basis for existence. The other departments were either more narrowly based, were an afterthought, or both. Some had utility when they were established, but no longer do. Others, in my view, probably did not have a need to be at the Cabinet level even when they were first established. A number of them were recommended and created less for organizational reasons and more to gain favor with a particular interest group. Once one has determined the core functions to be performed by the federal government, all other activities should be scrutinized for elimination, downsizing, reorganization, movement to state and local governments or privatization.

I begin with the conviction that the first place activities should be undertaken is with the individual citizens and private organizations; next, if government must be involved, by local governments, state governments, and only last by the federal government. In the past, this was not a workable principle in some instances because of the issue of civil rights, even though in theory it was compelling and rational. It was clear that if some activities were left to local or state governments or to individuals there would not be appropriate protection against discrimination. Given the many civil rights laws on the books today and the progress that has been made, it is no longer the problem it was in earlier periods. Today government services are being delivered to minorities in a nondiscriminatory manner.

My conviction is that as overseers of the federal government Congress ought to use federal solutions only as a last resort. The question must be asked whether a

1 Peter F. Drucker, "Really Reinventing Government," The Atlantic Monthly, February 1995.

problem is truly a federal responsibility, or can it better be handled privately, by voluntary organizations, by local governments, or state governments. I understand how difficult this is in Washington, D.C., given the fact that all the institutional pressures seem to run the other direction. But I'm reminded of a sage warning former Missouri Congressman Tom Curtis once said, “Public money drives out private money." And it does.

CUT SHARPLY AND RAPIDLY

I read an article recently which set out some useful advice on downsizing from CEO Al Dunlap, who apparently did a skillful and swift job of restructuring Scott Paper Co. On downsizing, he said:

Do it once, do it severely, and get it over with. When a company says it is going to restructure over the next three years it won't happen. Don't do it! You paralyze the company.2

This is sound advice for the Congress as it undertakes the massive task of balancing the federal budget by the year 2002. Cut severely and rapidly. Don't wait. Whatever it is you do the odds are overwhelming that you should have done more, rather than less, and that you should have done it sooner, rather than later. There are so many pressures in Washington, D.C., to keep the status quo, that the most frequent mistake is to make too few changes or to cut too little. If in fact one cuts too much, which is very rare-indeed probably unprecedented-it is easy to add back. But, once you cut and then find you have to go back and cut again, it is harmful to an organization. Do it once. Do it well. Don't under do it. And then let people get back to work. Don't try to cut the dog's tail off one inch at a time, hoping it won't hurt as much.

And, a caution. After the reductions have been accomplished, don't turn your head for a second or you will find the waste moving right back in. It is inevitable that it will happen, and fast, unless the overseers are vigilant. As the saying goes, “If you're coasting, you're going down hill."

Although the balanced budget plan drafted by the House Budget Committee is remarkable in its specificity and scope, in my view it ignores the principle of "cutting decisively and rapidly," in that it proposes phasing out some programs and agencies over a period of three to five years. If a program or agency is outmoded and inefficient, phasing out its funding over a period of years will not make it less so. For instance, I agree with those who propose to eliminate taxpayer funding for Amtrak, the Corporation for Public Broadcasting and dozens of other programs that are not, or are at least no longer appropriate federal responsibilities. But why inflict on these programs the "death of a thousand cuts."

If Amtrak, for example, should be given the flexibility and the challenge to compete in the private sector, then why can't it be done sooner, say over the next 12 months, rather than over the next five years. My advice is to sever public ties with much greater speed.

The Small Business Administration continues to dodge reform. It was not even ten years old during my freshman term, yet, in a 1963 article on pork barrel spending, Life magazine exposed the SBA as a new "device for soaking up money and getting rid of it." Based upon its early track record, we should have had the good judgment to close down the SBA decades ago. I hope that this Congress will have the courage to act this year. It is never to be desired, but given the current budget situation, good intentions and throwing money at problems hoping some of it will stick and do some good is unacceptable.

DOWNSIZE

I also recommend that Congress move swiftly to cut management and get personnel costs under control. It is guaranteed that there are more managers and more staff in the federal government than are needed. In less than seven months, Scott Paper eliminated 11,200 people, one-third of the workforce. The company cut 71 percent of the headquarters staff, 50 percent of management, and 20 percent of the hourly employees. They discovered they really weren't needed.

Another example is G.D. Searle & Co., where I served from 1977 to 1985. There we reduced the centralized corporate activities down to about 20 percent of their prior size, divested some 30 to 35 businesses, sold a variety of assets, downsized the company to close to 65 percent of its prior employee base, with the not surprising result that it worked better, earned more, and investors and owners moved the stock from about $12 a share to $50 to $60 a share.

2 Al Dunlap, "If You're Going to be a Director. . .", Directors and Boards, Winter 1995.

So too at General Instrument Corporation where I served from 1990 to 1993. There we divested five or six businesses, sold a number of assets, downsized and focused on the core businesses, and dramatically reduced the size of corporate headquarters, with the result that the investors and owners of the company moved the stock from below $15 a share to $50 a share.

There are hundreds of companies that are doing the same thing. Some do it after they should have, others do it ahead of the curve. Some wait too long and they suffer and die. Clearly the U.S. Government is well behind the curve.

No doubt the federal government suffers even more waste on a percentage basis throughout the bureaucracy than even poorly run companies. According to the NPR, the federal government has over 280,000 persons formally classified as "supervisors, managers, and executives, all of whom perform control functions, costing billions of dollars." "At times," reports the NPR, "the federal government's management control system resembles a theater of the absurd."3 To make a point, if one used the Scott Paper model on downsizing as a guide, theoretically some 140,000 of these managers could be cut immediately, saving taxpayers billions of dollars. For example, I see fewer and fewer companies where every manager has a special assistant or two. But in government, it seems even special assistants have assistants. Don't get me wrong. I used to be one and I used to have one or two. And I suspect many of you do. Indeed, some are needed. But, the revolution in information technology has changed the way work can be done so that excessive layering of organizations can be avoided.

REORDERING THE FLOW CHART

There are a variety of ways to merge federal agencies and departments, and certainly no one way is perfect. For example, over 20 years ago, Richard Nixon and the Ash Commission recommended that there be four basic areas: defense, foreign policy, the economic, and domestic. One can find powerful reasons for either merging or terminating many of the newer departments. Some of their functions will, of course, need to continue, but certainly much of the overhead is not necessary.

While I have no special insight as to which is the preferred way to reorganize our government, I am persuaded that probably one-half to two-thirds of the non-central departments are no longer needed in their current form. For example, the Republican proposal to close down the 93-year-old Department of Commerce seems reasonable to me. It lacks a clear sense of mission and the fact that it duplicates the work of dozens of other departments and agencies is a sign that taxpayers could do without it in its present form. The same could likely be said for others of the newer departments, such as Energy, HUD, Education, Transportation and Veterans Affairs, as well as the Appalachian Regional Commission and EDA. For example, the veterans were served before the VA was made a Cabinet rank department, as they should have been. And they can be well-served, possibly better served, if it were to move out of the Cabinet and have some of its functions turned over to the private

sector.

DON'T MICROMANAGE

There is no one perfect organizational arrangement. The right people can make a poor organizational structure work well, and wrong people will assure that the best possible organizational arrangement will work poorly. People are the key. That is why the delays in the Presidential appointment process have been so damaging. In many cases, cabinet and sub-cabinet posts have not been filled until after a nontrivial fraction of their entire term is over.

An important rule for a corporate board is to avoid trying to micromanage the CEO and the company. Boards need to give management the direction to be sure, but also the freedom to run the company in the most effective and profitable way they see fit, and then hold them accountable. One of the problems in government, and something that contributes to waste and mismanagement, is legislative micromanagement of the Executive branch. My recollection from my days in the Executive branch is that Congress imposes so many restrictions, requirements and requests on the Executive branch, no one of which is debilitating, but in the aggregate are like the threads the Lilliputians used to prevent Gulliver from moving. This was certainly a problem at the Pentagon and I suspect still is, because of the blizzard of requests for studies and the directives and rules generated by the multiplicity of Congressional committees and subcommittees. I want to commend you for taking

The National Performance Review, "Streamlining Management Control," Creating a Government that Works Better and Costs Less: Accompanying Report of the National Performance Review, September 1993, p 1.