DoD’s ‘vertical integration,’ effort to further pare administrative costs

The Defense Department once again is looking to cut its administrative costs, but this time around, officials would like to do it much more surgically than they have in the past. Officials are promising a more carefully thought-out and more “vertically integrated” approach to reductions within the military’s vast support structure.

The newest round of spending reviews deal with what Pentagon officials often refer to the “fourth estate”-meaning the day-to-day management of the actual five-sided building in Arlington, Virginia, the Office of the Secretary of Defense and the numerous Defense agencies that do not fall within the purview of the Army, Navy or Air Force.

Those DoD elements, like the rest of the department, already have been subject to Defense Secretary Chuck Hagel’s directive to reduce “headquarters” spending by 20 percent. But Deputy Defense Secretary Robert Work said the department thinks it can find more efficiencies by carefully examining all of the fourth estate’s business operations as an integrated whole, rather than simply giving each principal staff agent another arbitrary savings target they must meet.

“In the past, we’ve just told everybody that they need to drop 10 percent from their top line, and you can do it any way you want,” Work said. “So some offices would get rid of contractors, some would get rid of civilians, some would get rid of service contracts. There was really no rhyme or reason to it, and what we’re trying to do now is look for opportunities for vertical integration.”

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A bigger role for the DBB

Work said DoD is looking for those opportunities via “deep dive” reviews that will take place across OSD and the Defense agencies over roughly the next six months. DoD’s Deputy Chief Management Officer (DCMO), with help from the Defense Business Board (DBB), will lead this effort. The DBB, a federal advisory committee, has traditionally studied three or four issues per year and then wrote lengthy reports. But for the purpose of examining the fourth estate, the board will transform into a day-to-day operating unit of the DCMO.

“This board is awash with former CEOs, COOs, CFOs and captains of industry who have a lot of experience, and they’re going to help us benchmark against private-sector business practices,” Work said.

To start the review process, DoD launched two prototype projects: one within the office of its chief information officer, and a second within DCMO itself.

“We were able to identify $16 million in recurring savings each year in one of those offices and $10 million in another. When we looked at the costs, we found a lot of duplication of contracts, and we were spending roughly $200,000 on the average administrative employee. That makes you say, ‘Hmm. I think we can probably do better than that,'” Work said. “Just those two offices gave us great confidence that as we looked at the broader Defense agencies, we are going to find significant savings. We’re too early in the process to guess how much, but I’m thinking billions, not millions. It costs a billion dollars to operate the Pentagon, just to keep the lights on and take the trash out. If we can save 10 or 20 percent, we’re talking about serious money.”

Work, speaking Wednesday evening at Defense One’s annual summit, did not specify the exact measures DoD’s CIO and DCMO took to find their collective $26 million in administrative savings. But it is not the first time those two organizations have worked together in recent months to cut spending.

Budget books missing chapters

Earlier this year, the two offices also piloted a new DoD project to reduce costs specifically relating to expenditures on duplicative databases. A business systems process review identified millions of dollars in duplicative IT just within those two offices, Terry Halvorsen, DoD’s chief information officer, told reporters in September. If extrapolated to the rest of the department, early guesses indicate the potential savings from database consolidations alone could reach $10 billion to $20 billion over five years.

Separately, Work said the Pentagon is trying to improve the way it plans and manages its budget by acknowledging the environment of fiscal uncertainty the government has been living with for the past five years, and adapting its processes to deal with it.

He said the traditional series of steps DoD has used to plan its future, the Planning, Programming, Budgeting and Execution system (PPBE), has broken down somewhat in the face of a budget environment that’s meant the department’s topline is not only unpredictable from year to year, but tends to change several times during the year in which DoD is actually trying to execute its program.

“The programming part of this, how many brigades you’re going to have, how many tactical fighter squadrons, how much you’re going to spend on infrastructure or science and technology, that phase has just kind of blended into the budget phase as we’ve gotten our budget passbacks later and later in the year,” Work said. “As a result, our budget submissions over the past several years have declined in quality, and all of the staffers on the Hill have told us that: ‘What’s going on? Your budget books aren’t as strong as they used to be.’ It’s because of this mishmash of the programming and budget processes. We’re trying to separate them, but it’s very difficult. It forces us to make decisions earlier, and in this charged environment, things leak, and people can immediately start to argue against your decisions before you have a chance to submit your program and defend it. It’s difficult, but we’re trying to get all of our programmatic decisions done by December from now on so that we have a good period of time to really get our budget locked down.”

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