Defense Secretary Chuck Hagel made it clear Wednesday that he’s no fan of sequestration and that he believes the cuts are harming military capability. But, in his first policy address since being sworn in six weeks ago, Hagel said now is the time for DoD to start preparing for a future with fewer resources and undertake a serious effort to reform the institutional features that make the military an increasingly expensive organization to operate.

Before an audience at the National Defense University at Washington, D.C.’s Fort McNair, Hagel heaped praise on the advances U.S. forces have made since September 2011. The military, he said, has become more deployable, more expeditionary, more flexible, more lethal and more professional.

“But it has also grown older when measured in the age of our platforms. And it has grown more expensive in almost every way,” he said.

But, Hagel said, it’s time for a wholesale reexamination of the main drivers of defense costs, nonetheless, so that DoD can preserve military capability while operating in a budgetary environment that all parties agree will include fewer dollars.

“This effort will, by necessity, consider big choices that could lead to fundamental change and a further prioritization of the use of our resources,” he said. “Change that involves not just tweaking or chipping away at existing structures and practices but, where necessary, fashioning entirely new ones that are better suited to 21st century realities and challenges. In order for this effort to succeed, we need to be steely-eyed and clear-headed in our analysis, and explore the full range of options for implementing our national security strategy.”

Growing imbalance of spending

After a little more than a month on the job, Hagel said it’s already clear to him that while prior efficiency initiatives have gone some way toward reducing the Pentagon’s costs for overhead, personnel and acquisition, much more needs to be done.

“In many respects, the biggest long-term fiscal challenge facing the department is not the flat or declining top-line budget, it is the growing imbalance in where that money is being spent internally,” he said. “Left unchecked, spiraling costs to sustain existing structures and institutions, provide benefits to personnel and develop replacements for aging weapons platforms will eventually crowd out spending on procurement, operations and readiness — the budget categories that enable the military to be and stay prepared.”

Hagel said while the Pentagon has cut its acquisition costs by canceling underperforming and over-budget programs, it still is reliant on an acquisition system that yields weapons systems that are more expensive and more technologically risky than their original plans envisioned. Without spelling out details, he said DoD needs an acquisition system that rewards cost effectiveness and efficiency.

And while he told the NDU audience there will be no near-term cuts to military pay and benefits, Hagel said the department must bring its steadily-escalating personnel costs under control.

“With full recognition for the great stresses that our troops and their families have been under for nearly 12 years of war, and for the essential contributions civilian employees make to the department’s mission, fiscal realities demand another hard look at personnel: how many people we have, both military and civilian?” he said. “How many do we need? What do these people do? And how do we compensate them for their work, service, and loyalty with pay, benefits and health care?”

(Watch Hagel’s full speech. Story continues below video.)

Hagel also suggested it’s time for a reexamination of the way the institution of the DoD is organized, noting the department hasn’t significantly altered its organizational chart since more than a quarter century ago when Congress passed the Goldwater-Nichols Act, breaking down military service stovepipes and institutionalizing jointness across the military branches.

“Cost and efficiency were not major considerations. Goldwater-Nichols succeeded in its purpose by strengthening the Joint Staff and the combatant commands, but it went about doing this by layering joint organizations and processes atop service organizations and processes,” Hagel said. “The elevation of the former did not automatically lead to the diminution of the latter. Today, the operational forces of the military — measured in battalions, ships and aircraft wings — have shrunk dramatically since the Cold War era. Yet the three-and-four-star command and support structures sitting atop these smaller fighting forces have stayed intact, with minor exceptions, and in some cases they are actually increasing in size and rank. More broadly, despite good efforts and intentions, it is still not clear that every option has been exercised or considered to pare back the world’s largest back office.”

That back office is the so-called “fourth estate,” the sprawling combat support bureaucracies that include the Office of the Secretary of Defense, the DoD field activities and the Defense agencies.

Hagel said it’s time to take another look at funding for those activities.

“The military is not and should never be run like a corporation,” he said. “But that does not mean we don’t have a good deal to learn from what the private sector has achieved over the past 20 to 30 years, in which reducing layers of upper and middle management not only reduces costs and micromanagement, it also leads to more agile and effective organizations and more empowered junior leaders.”

Intelligent cuts a must

Hagel said all the changes he wants to examine and potentially implement at DoD will take careful thought, and the department will also need time to implement intelligent reforms, something he said the department does not have under sequestration.

He said the requirement to eliminate $41 billion in spending over the course of seven months has forced the department to take the money from the relatively few areas in which it can reduce its outlays quickly — things such as military training and civilian salaries. If the cuts stay in place over the coming years, they’ll force significant reductions in the uniformed military and weapons platforms, the Pentagon says.

“If we get time and flexibility to implement savings, we could limit the impact of spending reductions on force structure and modernization while still making a significant contribution to deficit reduction. By contrast, these quick and dramatic cuts would almost certainly require reductions in what have long been considered core military capabilities and changes in the traditional roles and missions among the uniformed services,” Hagel said. “Regardless, we will need to take a critical look at our military capabilities and ensure that our force structure and modernization plans are directly and truly aligned with the President’s strategy. That includes taking a new look at how we define and measure readiness and risk, and factor both into military requirements.”

Hagel said the cost growth the Pentagon has experienced in the areas of acquisition, overhead and personnel are not emergencies today, but if the problems are going to be solved, they have to begin to be tackled now.

“We’re not going to be able to sustain the current personnel costs and retirement benefits. There will be no money in the budget for anything else, and we’ll become essentially a transfer agency,” he said. “So how do we do this now so that we have some lead time and adjust to the realities that we know are coming? We’ve got time to get ahead of it, and that’s part of the review. We’ve got to look at everything. I’m sorry. I wish it were otherwise, but that’s a fact of life. And the longer we defer these things, the worse it’s going to be for all of us.”

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