2000 Corporate Ridge McLean,VA 22102-7805 800.213.4817 www.lmi.org Contact: Paul T.Weiss pweiss@lmi.org

LMI 4690 Millennium Drive Suite 200 Belcamp, MD 21017

LMI 5053 Ritter Road Suite 102 Mechanicsburg, PA 17055

LMI Fairview Executive Plaza 1333 Salem Place Suite 105 Fairview Heights, IL 62208

LMI 804 Omni Boulevard Suite 103 Newport News,VA 23606

LMIPark View Center I7104 Ambassador RoadSuite 280Baltimore, MD 21244

LMI10541-43 South Crater RoadPetersburg,VA 23805

RESEARCH INSTITUTE2000 Corporate Ridge McLean,VA 22102-7805 800.213.4817 Contact: Dr. Andrew G. Loerch aloerch@lmi.org

T H E O P P O RT U N I T Y TO M A K E A D I F F E R E N C E H A S N E V E R B E E N G R E AT E R .

www.lmi.org

2006 Annual Report

GOVERNMENT’S NEWMANAGEMENT MODEL:

NETWORKS

Acquisition Organizations & Human Capital Facilities & Asset Management

SOME WORDS FROM OUR CHAIRMAN AND THE CEO 2LEADERSHIP IN GOVERNMENT CONSULTING 4 PERFORMANCE AND CORPORATE GOVERNANCE 6 GOVERNMENT’S NEW MANAGEMENT MODEL:

NETWORKS 8 45 YEARS OF GOVERNMENT SERVICE 12 2006 HIGHLIGHTS 14

Information & Technology Financial Management Logistics

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William S. Norman, Chairman of the Board of Trustees,and Donald L. Pilling, President and CEO of LMI.

SOMEMMWORDSMM

FROMMMOURMM

CHAIRMAN& THEMM

CEOM..”

Government managers have always faced chal-lenges, but those of today are compounded bythe enormous structural changes permeating gov-ernment. Boundaries fade as missions becomemore richly interconnected and increasingly inter-dependent, making collaboration an operationalreality. Consolidations, new technologies, seamlessinformation sharing, emergency preparedness,new compliance requirements, greater accounta-bility, and human capital strategies remain high pri-orities. LMI is helping managers address this newworld with greater precision, predictability, andinnovation. As a result, more agencies are turningto us for more expertise than ever before.

In 2006, we undertook projects of greater scope,complexity, and consequence throughout govern-ment.We helped more civil agencies cut bureauc-racy, improve service delivery, and better measurevalue. Our logistics work for DoD hit peak levelsand expanded dramatically in other federal agen-cies.We made exciting breakthroughs in costmodeling, and our studies and analyses enabledsavings in the billions.This year, we also placedpersonnel on-site in Iraq to support the logisticstransformation planning process.When you readour 2006 highlights, you will see the diverse arrayof complex, sensitive, and urgent challenges thatLMI helped government managers address.Truly, itwas an extraordinary year.

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We also devoted great energy and resources toinnovation and thought leadership through theLMI Research Institute.We continued to investheavily in independent research to discoverbreakthroughs in government management intopics like the application of intelligent agentmodels and methods. As a leader in promotingcross-government excellence, we held severalexecutive roundtable sessions that brought sen-ior government leaders together with those inacademia and industry to address emerging andperennial issues.We doubled the subscriptionbase of our journal of new thinking for govern-ment practitioners, The Public Manager.This year,we also published groundbreaking analyticalwork in a variety of areas, including the develop-ment of a hybrid parametric-analytical model forestimating the mass, volume, and cost of sparesneeded to support NASA human missions in space.

Demand for our services enabled us to continueto grow and improve.We expanded our staffand added expertise in Lean Six Sigma, complexmodeling, commercial logistics, border security,human capital, systems development, and projectmanagement.We expanded our headquarters inMcLean, adding an office suite for the LMIResearch Institute, dedicating the Peter F. DruckerConference Center (for the renowned educator,management consultant, and founding member ofthe LMI Board), and adding office space for newstaff members.We launched the LMI University,offering on-site classes to keep our researchersand consultants on the leading edge of their dis-ciplines.We also expanded our Visiting Scholarprogram, bringing cutting-edge researchers intoLMI to collaborate on and explore emergingcapabilities and methods.

This year’s annual report features an article onthe complexity and necessity of working in thehuman networks that cross organizational barri-ers.This is a primary challenge to our increasing-ly integrated government, one that requires newthinking and behavior by federal managers.Thereport also gives you a brief glimpse into LMI

over the decades as we celebrate 45 years ofservice dedicated to improving governmentmanagement.We have worked across nineadministrations!

Global conflict.The war on terrorism. An agingAmerican population. Immigration demands.Bioterrorism. New educational standards. Socialsecurity. Nuclear proliferation. Crime.Technologyand the Internet. Climate change. Alternative fuelsources. It is a new world, unforeseeable at thetime of our nascence. In it, LMI is emerging as anew kind of consulting firm—a forward-leaningauthority, expert advisor, and go-to resource withoperational insight, analytical ingenuity, and match-less innovation in critical areas. Our ability to con-nect with project managers, collaborate withpartners, and furnish world-class subject matterexpertise and impeccable analysis is empoweringgovernment. More than ever before, LMI is help-ing important decisions take effect, making a dif-ference now and in the future. Helping federalmanagers work better together across bound-aries, borders, and jurisdictions—this is our pathin the new world of government.

The opportunity to make a difference has neverbeen greater.

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LMI Officers pictured left to right:Anthony J. Provenzano, Jeffery P. Bennett,William B. Moore, Donald L. Pilling, Manik K. Rath, and Susan L. Marquis.

LEADERSHIPIN GOVERNMENT

CONSULTING

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At LMI we remain in motion, forward motion,on a constant path to becoming the best strate-gic consultant serving the federal government.Becoming the best is the ideal that keeps usimproving and leaning over the edge of wheregovernment is going. Our 45 years of discover-ing what works and what doesn’t, our urgencyto get things done now, and our belief that thefuture resides in the decisions of today make usleaders in several key areas.

Invention.We continue to break ground in newideas, tools, and models.We invented modelsfor maximizing aircraft operations in the pres-ence of weather disruptions, developed originalapplications for speech server technology, andcreated new models for optimizing militaryweapon system sustainment.We developedmodels for evaluating the impact of air trafficmanagement technologies on the ability of ourair transport system to keep pace with futuredemand.

Innovation.We pioneered a new approach forassessing the commercial viability of militarydesigns, developed a groundbreaking methodfor evaluating future year defense programs,and led the way in modeling and assessing serv-ice delivery balanced with community manage-ment needs.We identified a means for usingthird-party providers to manage domesticfreight programs, saving hundreds of millions ofdollars annually.

Thought leadership.We brought leaders fromdefense and civil agencies together with thosefrom academia and industry to discuss andshare best practices.We dramatically expandedour publishing, professional conference leader-ship, support to the Defense Science Board,and research and development.We collaborat-ed with the Military Operations ResearchSociety to write Methods of Military OperationsResearch.

Customer service.We achieved extraordinarilyhigh customer service rankings, met customer

needs, and maintained excellent client commu-nications. Our ISO 9001 quality managementsystem verified our ability to deliver the qualityof work demanded.We significantly expandedour staff project management professional certifications.

World-class resources.We strengthened ourgreatest asset—our people—expanding our mixof fresh minds and seasoned veterans with high-ly specialized experts, hard and social scienceanalysts, managers, and research professionals.We extended our public policy school, opera-tions research, and industrial engineering net-works by adding the University of Maryland,Howard University, and Georgia Tech.

NOT FOR

FORTUNEORFAME

OR HIDDEN AGENDAS,

NOT FOR BUSINESS

AS USUAL OR

POLITICS AS USUAL,

NOT FOR NAYSAYERS OR

DOOM MERCHANTS OR

CORPORATE GREED,

NOT FOR EGO,

NOT FOR PROFIT,

FOR COUNTRY.

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LMI’s Board of Trustees pictured left to right:Patricia McGinnis, Joseph E. Kasputys, Regina Gindin, Joseph S. Nye, Jr., Jennifer B. Dunn, Douglas Bereuter,William S. Norman(Chairman of the Board), Philip A. Odeen, Donald L. Pilling, Robert F. Raggio,William G.T.Tuttle, Jr., and Daniel P. Burnham.

PERFORMANCEAND CORPORATE

GOVERNANCE

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As a not-for-profit, LMI applies all revenues toits mission of advancing government manage-ment. Funding growth is important as it indi-cates that our work is of increasing value togovernment agencies, which means we aredoing a better job of achieving our mission.Increased funding also gives us the means tocontinually improve and best meet evolving government needs.

FINANCIAL PERFORMANCEThis year, LMI funding hit a record level of $148million, a 5 percent increase over last year andour 11th consecutive funding increase.This isparticularly noteworthy given the dramaticreduction in government discretionary funds.We experienced increases in revenue fromoperations, our research staff, and our competi-tive win rate for contract awards.We also metour corporate performance objectives for cus-tomer satisfaction, indirect costs, operating mar-gin, and personnel management—all distinctmeasures of increasing LMI excellence.

Our capital reserve remains solid. Carefullyaccumulated over years of prudent spendingand efficient operations, this reserve gives LMIthe freedom to invest on behalf of the govern-ment in research, resources, and new ideas. Italso gives us the power to aggressively pursueour mission.

CORPORATE GOVERNANCEOur Board of Trustees continues to serve asthe core of corporate governance by affordingcontinuity and overseeing how managementserves the long-term interests of the organiza-tion. It remains active, informed, independent,and involved—ingredients necessary for ensur-ing LMI’s integrity and long-term strength.Thisyear, under the leadership of our Chairman, Mr.William S. Norman, the board addressed LMIgrowth strategies, operational excellence, andquality-of-work standards.

THE DESIRE TOMAKE IT WORK

THE KNOWLEDGETO GET IT DONE

2000 2001 2002 2003 2004 2005 2006

$160M

$120M

$80M

$0M

FUNDING

~7

GOVERN-MENT’SNEW MAN-AGEMENTMODEL:NETWORKSHOW TO SUCCEED INTHE NEW WORLD OFINTERDEPENDENCE

~8

Success for today’s government requires unprecedented collaboration to manage complex inter-connections and the sharing of resources across agencies and public-private partnerships.Theimperative to increase efficiency and reduce costs has driven this collaboration, and technology hasprovided new tools. Events like 9/11, Katrina, and the emergence of modern warfare have forcedus to accelerate our efforts.The stovepipe system of the federal government is transforming, andthe way people work together is changing dramatically.The shift from independent decision makingto working across the silos has created significant challenges and ushered in a new age of govern-ment management.

In its 2005 report, 21st Century Challenges: Reexamining the Base of the Federal Government, theGovernment Accountability Office states that a complete baseline review of existing federal pro-grams, policies, functions, and activities is needed to address the changing expectations of govern-ment. GAO specifically discusses the require-ment for agencies to work across traditionalboundaries and to find new ways to “integratetheir activities on crosscutting issues … shareaccountability for crosscutting outcomes, andevaluate their individual and organizational con-tributions to these outcomes.”

The new management model often is referredto as “managing by network” or “governing bynetwork.” It emerged in the private sector inthe 1990s as a means to improve efficiency andtransform traditional business models. Othergovernments around the world are also testingthese new approaches. In their groundbreakingbook, Governing by Network, Stephen Goldsmithand William D. Eggers explore the managing-by-network model and the implications for gov-ernment.The book cites numerous examples ofprivate-sector companies—Dell, GeneralMotors, and Cisco—that have harnessed thepower of the digital revolution to lead the wayin adopting new methods of collaboration.

Historically, government has viewed networkmanagement as an abstract concept that appliesonly outside an agency’s core work, but today’sreality is that it is becoming more central toachieving the agency’s mission. Managers areincreasingly required to devote significant timeto crosscutting issues; this is hard work, anddoing it is breaking new ground in managementpractices, that is, network management. Becausenetwork management is a dynamic discipline,

both the government and private sector arelearning it as they go. By sharing experiencesand reflecting on lessons learned, they canspend less time frustrated with unwieldyprocesses and more time achieving results.

WHAT IS A NETWORK?At the most basic level, a network is a groupformed to tackle a challenge that no individualmember can address alone. It can include execu-tive agencies, state and local governments, for-eign governments, non-governmental organiza-tions, citizens, and the private sector. Networksmay be formed to deliver higher-quality, integrat-ed services to the public, to obtain economies ofscale not achievable by any single entity, or toaddress huge problems that would overwhelmone organization.

Networks require members to work acrosstraditional boundaries and to operate outsideformal hierarchical structures; they have nocentral point of command. A network may bestructured or self-forming. It may be designedas temporary or permanent. Although net-works have certain elements in common, eachmust be tailored to the specific purpose thatcreates the need for it.

Of course, none of this should be construed toimply that formal organizational structures willdisappear.They may change over time, andsome of today’s networks may be folded into

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new organizations, but the drivers for changewill create a continuing necessity for new net-works. Managing with a foot in each world ishard work, and at times it can feel schizo-phrenic. It requires a fundamental shift in psy-chological viewpoints, processes, and structure.Over time, we have seen a number of innova-tive efforts directed at collaboration “acrossthe stovepipes.” By studying these efforts, wecan begin to identify the attributes that pro-duce successful outcomes and the flaws thatlead to disappointing results.

THE CHALLENGE OF MAKINGNETWORKS WORKSuccessful networks can wield huge power, andthat power can increase exponentially as newmembers are added to the network. At thesame time, attempting to integrate complexdynamics across multiple parties involves risk.The network risk profile can change dramati-cally with the addition of new members or theloss of a key partner. Network managementrequires acknowledgment of these risks andopportunities, and the skill to balance them.

Although we can learn major lessons from theprivate sector, the lack of a “bottom line” andthe difficulty of establishing meaningful andmeasurable outcome goals combine to createa unique challenge for government. Our gov-ernment was not structured to facilitate collab-oration: notable barriers include laws, politicalboundaries, funding earmarks, protocols, cul-tures, and processes. In addition, each agencyhas different motivations, goals, and priorities,which exacerbate the problem of focusing onone goal.

Perhaps the greatest challenge is establishingaccountability in network management.A net-work operates by co-dependencies, and ideallyeveryone is responsible for themselves and thenetwork.When something succeeds or goeswrong, everyone is accountable—an almostunimaginable concept in the federal government.

The gap between ideally functioning govern-ment networks and today’s reality is wide.Government networks have to perform moreefficiently and do a better job of conveyingwho is responsible for what—before problemsoccur.This requires a level of dialogue and hon-est conversation that is unprecedented. It mustinvolve the direct participants, citizens, andother stakeholders, including Congress andother oversight organizations.

GUIDELINES FOR SUCCESSWhat differentiates a healthy network fromthose that fail? How do people charged withforming them do so quickly, minimize the risks,and maximize the probability of success? Theanswer changes depending on the participantsand what the network is intended to deliver.

Governance is the single most important deter-minant of success for a network. Because it is adifficult issue, resolution of governance concernsfrequently is postponed while other aspects ofthe network are moved forward. Federal man-agers engaged in network development cangreatly increase the likelihood of success byaddressing governance early and bringing con-tentious issues to resolution up front.

By answering some key questions, we canbegin to understand how to design a successfulnetwork.We can identify situations where net-work management may be highly challenging, isoverly burdensome, or requires new legislationor formal reorganizations.

1.Rules.What are the formation rules? Is it adirected, self-forming, or hybrid network?Who is in it and why? How is it structured?

2.Goals.What is the purpose of the net-work? What are the individual and collec-tive outcome goals? How will they bemeasured? How much time does the net-work have to deliver results?

3.Roles.What role does each member play?Is there enough information to analyze the

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ripple effects of different decisions and thereal tradeoffs required of participatingorganizations?

4.Governance.What is the likelihood thenetwork can agree on how to make deci-sions and deploy resources? What happensif there is no consensus? Are there penal-ties for failing to support the network’sdecision?

5.Accountability.What are the risks and con-sequences? How will accountability workon a member level? Where participantshave to sacrifice their interests to thegreater good, how will they be judged byexternal stakeholders? Will Congress bewilling to shift its focus to oversight ofissues, rather than individual agencies?

TRANSFORMING INTO THE FUTURE With technology as the enabler, network man-agement will continue to grow and evolve toaddress problems of increasing complexity thatconfront government at all levels.The jobs offederal managers will change as they spendmore time working within and across networksand become more adept at doing so.The pri-vate sector will play an important role by bring-ing vision, tools, skills, and disciplined processesto help the government achieve success andminimize risk as it explores this new world.

As the government makes this transformation,two macro issues require serious considera-tion. One is whether government has themanagement skills required to perform in thisenvironment.What leadership skills arerequired to successfully manage a networkand produce enduring results? Since networksoperate outside traditional hierarchies, thepower of individual personalities drives theprocess. How do we protect against thepotential conflicts of interest that arise whenindividuals represent both their own organiza-tions and the higher goals of a collaborativenetwork? Are today’s executives prepared?How do we train tomorrow’s leaders?

Second, knowledge management is essential tothe network. Building business cases for net-work decisions, tracking how decisions aremade, monitoring progress, keeping all thestakeholders informed, and ensuring continuitywhen players change are key to successfulnetwork operations. Do we have the process-es, protocols, and trust to enable this kind ofknowledge management? Do we know whatkind of information is needed, what kind oftechnology is required, and what, if any, costsare associated with it?

We are often in the midst of change beforewe know it. Network management is such acase. Once we step back and observe theextent to which government is operatingacross the silos, and the resulting collaborationand interdependence, we can begin to under-stand that new kinds of perspectives,approaches, and skill sets are required to man-age in this new world of government.

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“A NETWORK

OPERATES BY

CO-DEPENDENCIES . . .

EVERYONE IS

RESPONSIBLE FOR

THEMSELVES AND

THE NETWORK . . .

EVERYONE IS

ACCOUNTABLE . . .”

ASK NOT WHAT YOUR COUNTRY CAN DO FOR YOU—ASK WHAT YOU CAN DOFOR YOUR COUNTRY.

From the beginning, LMI was unique. Founded in1961 as a not-for-profit—on a recommendationmade by Secretary of Defense Robert S.McNamara and approved by President John F.Kennedy—we assembled the most experienced,capable, and creative management talent tosolve highly complex and long-standing prob-lems facing the Department of Defense. Overfive decades, we have blossomed into a full-spectrum government consultant.

1960s. LMI undertakes far-reaching studies ofdefense contractor profit and fee policy, life-cyclecosting in equipment procurements, and valueengineering.

1970s. LMI explores the relationship betweenDoD and defense contractors, and assessesDoD logistics systems. Service to civil agenciesbegins to expand.

1980s. LMI becomes a federally funded researchand development center (FFRDC) in 1985.Wemake breakthroughs in predicting spare partsrequirements, reducing procurement lead-times,and decreasing inventory investments.

1990s. LMI experiences unprecedented demandfrom federal agencies, and in 1998, we end ourFFRDC status and return to our original role asa not-for-profit to meet this evolving demand.

2000s. LMI’s core capabilities transform to meet

the mission-critical needs of the governmententerprise.We continue our record-breakinggrowth, achieve ISO 9001 quality managementsystem certification, strengthen innovation withthe LMI Research Institute, and acquire ThePublic Manager as a forum for discussing bestpractices in government management.

Throughout our history, we have remainedsteadfast in our commitment to helping federalmanagers make decisions that enable immediateaction, achieve important outcomes, and deliverenduring value. After 45 years, we have a legacyof courage, idealism, devoted service, andunquestionable character—putting us in a classof our own.We remain dutiful to those whohave placed their trust in LMI year after year andforever grateful for the opportunity to serve.

45 YEARS OF GOVERNMENT

SERVICE

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06HIGHLIGHTS

20As agencies transform to meet the challenges ofa rapidly changing world and to maximize theirvalue to stakeholders, they are seeking freshideas and new approaches. Our combination ofanalytic ingenuity, future focus, historical knowl-edge, and cutting-edge know-how gives agenciesa forward-leaning resource that inspires newthinking, enables powerful action, and deliversenduring value. From helping the governmentsafeguard American citizens and interests while itfights terrorism, to improving our lives throughbetter government services, to increasing thereturn on every taxpayer dollar, LMI continuouslyhelps federal managers make a difference.

BETTERING THE LIVES OF CITIZENS

Properly Disposing of Nuclear WasteThe Department of Energy is constructing theHanford site nuclear waste treatment plant toprocess and safely dispose of 53 million gallons ofaccumulated nuclear waste.Within 2 years ofbeginning construction, the contractor increasedthe project’s baseline cost estimate by $2.6 billionand extended the baseline schedule by 4 years.On behalf of DOE, LMI found that the under-estimation of the baseline cost and schedule esti-mates stemmed primarily from the overly opti-mistic treatment of uncertainty and risk for thedesign of novel technology; quantity, procurement,and availability of physical capital; availability andproductivity of qualified labor; and regulatorycompliance.We also discovered a flawed acquisi-tion strategy and management approach, whichspawned a rush to contract, unrealistic govern-ment cost estimates, and inappropriate exemp-tion from adherence to established DOE projectmanagement practices. DOE received a positivereaction from Congress for the forthright assess-ment.The project is now moving forward with asound budget and timeline.

Making Post Offices Disability-Friendly The Postal Service needed to upgrade 28,000post offices around the country to comply withnew standards for patrons with physical disabili-ties and to determine the cost of that compli-ance.Within 90 days, LMI found a simple solutionto this massive endeavor by equipping 200 fieldinspectors with a hand-held device whose soft-ware replicated their paper-and-pen approach.The device allowed inspectors to collect, consoli-date, and verify assessment data.The sophisticat-ed, self-updating mobile software enabled themto record compliance with accessibility standardsand to upload inspection results, explanatory text,proposed corrective actions, cost estimates, anddigital photographs to a central, web-accessibledatabase.The approach standardized and acceler-ated data collection, simplified analysis, minimizederrors, and ultimately saved the Postal Servicemillions of dollars in contract labor.The mobilesystem became a fast, accurate way to assess thecost of compliance as well as a management toolfor tracking compliance status.

Enhancing EPA’s Grants Management The U.S. Environmental Protection Agencydevotes more than half of its budget to grants touniversities, nonprofit organizations, and state,local, and tribal governments to improve theenvironment. Congress and oversight organiza-tions criticized EPA for the way in which it man-aged its grant programs. LMI assisted EPA inimproving its processes, procedures, and use ofhuman resources for awarding and managinggrants. One of the many challenges facing EPA,which has a complex organizational structureand uses varying grants management processes,is its use of human resources.We thoroughlyassessed the varying organizational and functionalperspectives within EPA.We recommended new

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06ways to distribute the work across the systemusing current resources and developed a meansof determining the need for new resources. Inaddition, we helped EPA develop a statisticalsampling approach for better postaward moni-toring of compliance and system performance.EPA can now better align its resources, achievetighter management of its grants process, ensuregreater success of its grants program, andreestablish congressional confidence—and LMIcontributed to that result.

Modernizing Military Grocery Shopping The Defense Commissary Agency is America’s15th largest grocery chain, representing $5.6 bil-lion in annual sales and serving families of activeand retired military and civil service person-nel—some 12 million people—in 250 commis-saries globally. By replacing obsolete store tech-nology and aging equipment with a new, unified$270 million infrastructure, DeCA aimed to ele-vate the customer shopping experience tomodern commercial standards while achievingnew cost and service efficiencies. LMI helpedDeCA develop an innovative, sophisticated solu-tion and amass the technical, functional, andacquisition requirements of this major procure-ment. From defining requirements throughacquisition, fielding, and testing, we analyzedenormous volumes of data, strictly compliedwith the revised DoD 5000 series acquisitionprocess, received multiple Office of theSecretary of Defense approvals, and supportedthe integrated product team. Simple changes tobusiness processes enabled DeCA’s use of com-mercial technologies and equipment.The projecthas experienced no overruns or delays and,within the year, will give government militaryfamilies a shopping experience equivalent tothat of all Americans.

Optimizing the FLH Workforce The Office of Federal Lands Highway (FLH) fur-nishes transportation engineering services forplanning, design, construction, and rehabilitationof highways and bridges on federal and tribal

lands. FLH wanted to make the most of its pri-mary asset, the workforce—integrating humancapital and strategic business decisions, institu-tionalizing a process for determining futurehuman capital needs, and developing a methodfor continuous workforce planning that address-es emerging business issues.We applied the LMIWorkforce Planning Model to identify FLHneeds over a 5-year planning horizon, helped itfashion a human capital strategy—aligned withfuture business—that addresses needs and gaps,and trained the staff to use the model to con-tinue the process. FLH is now better positionedto attract and retain a high-performing, compe-tency-based workforce, ensuring the availabilityof the skills needed in its very dynamic businessenvironment.

STRENGTHENING CITIZEN SAFETYAND NATIONAL SECURITY

Protecting Americans from BioterrorismLMI is a strategic partner with the Departmentof Homeland Security in standing up theBioWatch Systems Program Office. BioWatch, anearly warning system to detect the airbornerelease of biological agents, is a 24/7 operationalability to detect, mitigate, respond to, and recoverfrom a bioterrorist event.We developed qualityassurance measures to improve system perform-ance related to the collection, tracking, and analy-sis of air samples, and we streamlined the supplychain essential to maintaining the filters, testing,materials, and labs.We used our proprietaryPerformance Risk Assessment MethodTM to findperformance and cost risks.We identified techni-cal requirements to improve the effectiveness,scalability, long-term operations, and maintenanceof the data integration solution.We provided on-site integration of field laboratory and responsepersonnel, including state and local governments,DHS, EPA, CDC, FBI, and the national laborato-ries. Our health experts assisted local health pro-fessionals with emergency response planning. LMIcontinues to play an integral role in this vitalnational security system, improving its effective-ness, accuracy, and efficient expansion.

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A L SI D E

Enabling Better In-Theatre Operations As part of its effort to better integrate opera-tions for net-centric warfare, the Army asked LMIto help develop total, on-demand informationsharing across its logistics systems.The challengeinvolves the creation of an overarching integratedlogistics architecture to define operational, sys-tems, and technical information exchanges andinterface standards—from soldier to factory.Tomove toward a solution, we pioneered a com-prehensive information architecture for diagnos-ing the health of every combat and support vehi-cle in the Army and the sharing of that informa-tion in real time across the fighting forces, provid-ing automated vehicle status integrated into asmart network.This communications and technol-ogy system constitutes the first common logisticsoperating environment for the Army, solving a sig-nificant operational issue experienced sinceDesert Storm.When fielded, the architecture willallow the Army and Marine Corps, for the firsttime, to share operational sustainment in-theatreinformation through unprecedented visibility intothe operational health of critical resources andtheir use in force planning.

Boosting Servicewide Adoption of CPI Proven commercial continuous process improve-ment (CPI) methods, such as Lean and SixSigma, have been sporadically adopted through-out DoD, with pockets of excellence dotting theorganization. A major detractor from more suc-cessful CPI implementation is that governmentmanagers often lack the incentives that makethese tools successful in the private sector.Weidentified the barriers to and opportunities fromCPI and produced the first CPI TransformationalGuidebook, a straightforward how-to manual foreffective CPI in the public sector.The guidebookled to an important DoD policy that created acompelling incentive for CPI initiatives: organiza-tions can keep the savings generated by any CPIinitiative they undertake.The result of the policyis that CPI became a self-funding initiative (costsavings offset initial investment).The new policy,along with the guidebook, is ushering in greater

acceptability of CPI tools and enabling moreeffective implementation of CPI itself.

Building a New Warfighting Capability: SeabasingThe Joint Staff asked LMI to help draft a com-prehensive capability-based assessment forseabasing—an environment where fightingforces must operate entirely offshore. Afterassessing the joint integrated concept and otherplanning documents, we helped craft the criticalseabasing tasks and standards for each phase ofoperations: close, assemble, employ, sustain, andreconstitute.We also helped define and set pri-orities for the necessary capabilities and capabili-ty gaps so that all affected services and agenciescould align resources and acquisitions to oper-ate in a seabased environment.We recommend-ed the functional areas on which to focus andidentified the need for better modeling of oper-ational scenarios. During the process, weinspired new thinking on the overall joint capa-bilities integration and development systemprocess, pioneered use of a database matrixmapping tool to map systems to certain capabil-ity portfolios, and integrated the warfighter’sperspective by using a web-based survey toinvolve combatant commanders. Seabasing con-tinues to evolve from an idea to a realisticfuture warfighting concept with the potential todeliver new warfighting capabilities, furtherstrengthening our fighting forces.

Increasing Interoperability ThroughStandardization Standardization is a key requirement for increas-ing weapon system and operational interoper-ability, reducing the total cost of ownership, andenhancing readiness sustainment. LMI helped theDefense Standardization Program Office movetoward achieving these objectives, creating a sig-nificant body of processes, products, and servic-es for use by warfighters and the acquisition andlogistics communities. Our work has led to theidentification and compilation of thousands ofinternational standardization agreements, stan-dards, and specifications.Through the use of an

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A L S

online tool, program managers can access anduse those resources in developing and executingNATO and other international agreements. Inanother project, we are restoring the concept ofparts management—reinstating it as a contrac-tual requirement, revitalizing it as a systems engi-neering discipline, and making critical parts dataavailable through a knowledge-sharing portal. Ina third initiative, we are working with the aero-space and microcircuit industries to mitigate thedeclining ability of commercial microcircuits tomeet DoD requirements.This effort has result-ed in the development of an international stan-dard for aerospace-qualified electronic compo-nents, significantly improving DoD’s ability toobtain needed components in the future.

FINDING SMARTER WAYS TO MANAGE THE MONEY

Complying with Financial Reporting RequirementsThe Marine Corps Total Force System is astandalone human resource and payroll systemthat annually processes the $14 billion MarineCorps military payroll. LMI assessed whether thisvital, complex system complies with FinancialSystems Integration Office, Defense Finance andAccounting Service, and Chief Financial OfficersAct human resource and payroll performancerequirements and recommended actions need-ed for compliance.We used an innovative ana-lytical process to identify and record 156 specificrequirements, evaluate operating scenario per-formance, and document areas of noncompli-ance.The assessment confirmed a high level ofcompliance, established a performance bench-mark for future assessments, and provided aroad map for correcting compliance deficiencies.

Avoiding a Critical Budget DisasterThe State of Washington intends to undertaketwo multibillion-dollar construction projects—replacing the Alaskan Way Viaduct and StateRoute 520 bridge.The governor and legislatureselected a panel of experts to review the costestimates, finance plans, and implementation

plans. LMI supported this panel with detailedtechnical and financial verification. Early on, wediscovered a flawed cost-estimating techniquethat led to a multimillion-dollar underestimationof costs for both projects. An ineffective use ofprobabilistic risk techniques, combined withinadequate modeling and optimistic treatmentof uncertainty, failed to provide an accurateunderstanding of risk factors and cost relation-ships.We identified the issues and consequencesof the current estimates and assistedWashington State in preparing new ones basedon more sophisticated cost models and a realis-tic level of precision. In addition, we concludedthat the financing plan for the bridge was insuffi-cient and verified that both implementationplans were reasonable. Our final report for thepanel was accepted and the recommendationsare being implemented.

Creating a Better Tool for Predicting Total Depot Maintenance DoD asked LMI to develop a tool to predictthe total financial consequence of a majorchange in any of the depot maintenance costdrivers across the services.We pioneered agroundbreaking model that validates currentrequests and requirements across the servicesand forecasts the funding needed for futureoperational requirements.The model gives theOffice of the Secretary of Defense, for the firsttime, the ability to employ a forecasting toolthat integrates individual service approaches.Our research has already revealed that the costof materials—instead of workload hours asassumed in prior models—is a primary driver ofdepot maintenance costs. Better visibility of thedrivers, more precise answers, and higher confi-dence in those answers makes the model avaluable tool in managing costs DoD-wide.

Saving the Navy More Than $600 Million As part of an ongoing series of manpower allo-cation and alignment analyses, known as the flag-pole studies, LMI provided two innovative cost-saving assessments for the Navy. In the first, we

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assessed the Navy’s total cost of ownership andmost efficient way to maintain the C-130 com-bat cargo capability.We provided options forreducing manpower while maintaining opera-tional readiness and potentially saving $19 mil-lion. For the second, we developed a boldly cre-ative new model for saving hundreds of millionsof dollars in staff costs, not by cutting personnel,but simply by converting their status. LMI’smethod showed that by converting 12,000 bil-lets from military to civilian, while maintainingthe sea-shore rotation, the Navy could poten-tially save $600 million over 5 years. In addition,our model demonstrated the probability offewer turnovers in staff and management,greater institutional knowledge and continuity,and less training.

Identifying the Best Contractor for a New HHS SystemThe Department of Health and Human Servicesis implementing a $200 million Unified FinancialManagement System, one of the largest in theworld.The new system’s operations and mainte-nance organization engaged LMI as a strategicpartner to develop a comprehensive businessplan and acquisition strategy for hiring a long-term support contractor.We prepared adetailed performance-based request for propos-als and created an innovative way to evaluatethe independent cost estimate. Instead of usingtraditional estimates for costs and the numberof anticipated problems, we designed productiv-ity and performance measures that documentwhat the government receives for the proposedcosts.The new key metric comparisons, criticalin this source selection, identified the level ofsupport to be provided and validated theassumptions portrayed in the proposals.Following award, the work enabled the O&Mprogram manager to better negotiate service-level agreements, control stakeholder costs, andmanage contractor performance.

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TO SEETHINGSNOT AS

THEY AREBUT FOR

WHAT THEYCAN BE

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THE LMI CHARTER

We exist to serve our nation’s government; to help civil agency and Department of Defense managersmake decisions and take actions that best serve the public interest.

We measure our value by the utility of our work: its ability to compel effective action and deliver outcomes that make our government better.

Our commitment, as a not-for-profit company, is to government success instead of shareholder profit,producing the highest value work for the taxpayer dollar.

Born of a unique mission, we bring the most capable, creative, and experienced talent available to bear onadvancing government management; we focus on providing innovative solutions that deliver immediateimprovement and enduring value.

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THE OPPORTUNITY TO MAKE A DIFFERENCE HAS NEVER BEEN GREATER.

Through our world-class LMI Research Institute, we foster and encourage the development of management concepts, tools, and techniques that enable our government clients to achieve their goals.

We are concerned with the most important and urgent matters facing our nation,and play a vital role in advising for its future.

Our distinctive virtues of analytical and technical ingenuity, objectivity, and trusted advisory are the cornerstones of our excellence.

The opportunity to make a difference inspires us to passionately pursue improving our nation’s government.

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2000 Corporate Ridge McLean,VA 22102-7805 800.213.4817 www.lmi.org Contact: Paul T.Weiss pweiss@lmi.org

LMI 4690 Millennium Drive Suite 200 Belcamp, MD 21017

LMI 5053 Ritter Road Suite 102 Mechanicsburg, PA 17055

LMI Fairview Executive Plaza 1333 Salem Place Suite 105 Fairview Heights, IL 62208

LMI 804 Omni Boulevard Suite 103 Newport News,VA 23606

LMIPark View Center I7104 Ambassador RoadSuite 280Baltimore, MD 21244

LMI10541-43 South Crater RoadPetersburg,VA 23805

RESEARCH INSTITUTE2000 Corporate Ridge McLean,VA 22102-7805 800.213.4817 Contact: Dr. Andrew G. Loerch aloerch@lmi.org

T H E O P P O RT U N I T Y TO M A K E A D I F F E R E N C E H A S N E V E R B E E N G R E AT E R .

www.lmi.org

2006 Annual Report

GOVERNMENT’S NEWMANAGEMENT MODEL:

NETWORKS