As the return of cuts under sequestration looms, the Defense Department is trying to make some headway in preparation for a smaller budget.
Pentagon officials are going after what they say is a small treasure chest of money in back-office operations that could be used for mission and readiness needs.
DoD spends more than $100 billion a year on six back-office business areas, including human resources, procurement, logistics, service contracting, real estate and property management, health care and financial management.
Bob Work, the deputy defense secretary, said he is leading a review of broad business systems and processes to figure out how best to cut costs and become more efficient across all of the military services and agencies.
“We did a 90-day study and over 1 million folks are dedicated to those six business operations and we spend $134 billion a year just to execute them on the management side,” Work said Tuesday at the Credit Suisse and McAleese and Associates 2016 Defense Procurement Conference in Washington. “We brought in a team from outside the government and they said, ‘Look, any businessman is going to look for 20- to- 30 percent productivity improvement, if they can do it.’ I said, ‘’Heck, I’d be happy with 10 percent productivity improvement.’ So that’s what we are doing. We are going into every place and we are looking for productivity improvement.”
This is the second round of trying to squeeze money from back office systems. In 2010, then Secretary Robert Gates told the services and agencies to find $30 billion-to-$40 billion to move from tail to tooth.
The business process and systems review also is related to the Better Buying Power effort led by Frank Kendall, DoD’s undersecretary for acquisition technology and logistics.
Kendall offered a few more details on version three of Better Buying Power.
He said DoD remains a few weeks away from publicly releasing the final strategy and implementation guidance.
Better Buying Power 3.0 is focused mainly on innovation, technical excellence and maintaining technical superiority.
But Kendall said the guidance will not abandon much of its earlier efforts to make contracting officers smarter and to gain efficiencies in how DoD buys.
“We are defining best value in monetary terms. What we have done traditionally, and this is a bit of a culture change for us and we’re still working our way through it, is to define best value in terms of performance, but not in terms of cost, or in terms of value,” he said. “What we are willing to pay for the higher performance, and what are we willing to give somebody credit for in a proposals for a cost reduction, if you will, for a higher performance.”
With the KC-Tanker and the rescue helicopter, DoD has implemented this concept of defining best value in monetary terms on a small scale. Kendall said DoD plans to continue down this path on for other programs in order to get more innovation from contractors.
“It is a learning experience for us to do this. But if we don’t tell you what we are willing to pay for higher performance, you don’t know whether to bid it or not. It’s very easy to default to threshold level of performance and not shoot for something for objective or higher. I think this is fundamental to motivating industry,” Kendall said. “It makes our requirements people think about what they are willing to pay for something, which they don’t usually do. They think about what they want and what they need, and they explain they’d like that, but they don’t really deal with enough the trade-offs or the value of enhanced performance. They know what the minimum they’d accept is, but the question is what would you pay for more?”
Kendall said Better Buying Power 3.0 also will address steps to improve integration with the intelligence community and how DoD takes advantage of commercial innovations.
He said one way to bring more advanced commercial technology into the military is through modular design, as well as reaching out to small startups in Silicon Valley and other areas of the country. In fact, Kendall said he’s setting up a meeting with Secretary Ash Carter with these innovative companies in the coming weeks.
Three approaches to back-office savings
While DoD reviews the 90-day review, the Defense Business Board issued in January a series of findings and recommendations highlighting where DoD can save about $125 billion over the next five years.
The board interviewed about 85 current and former DoD officials, and found a few trends and recommendations.
The biggest trend the board found is the fact that DoD is spending way too much money individually on these back-office functions. Of that $134 billion a year, DoD allocates more than $52 billion annually on logistics management and support, and more than $37 billion on acquisition and procurement support.
The panel recommended three approaches to reducing costs: a conservative one, a medium one and an aggressive one. All three focus on reducing DoD’s costs through cutting support contracts, taking advantage of employee retirements and attrition and by modernizing IT.
The DBB said a big chunk of the savings — anywhere from $49 billion-to- $69 billion — would come from contract optimization by increasing the rigor on vendor negotiations, getting cheaper prices by aggregating spend across the department, reducing contract fragmentation, eliminating unneeded contracts or services and by modifying requirements to get only what DoD needs.
The board said that if DoD can save $125 billion over five years, it could support 50 new Army brigades or 10 Navy strike group carrier deployments or 83 F-35 air crafts. All are part of the readiness and modernization shortcomings officials have been talking about for the last three years.
Work said these types of efficiency savings, while small on the surface, could have a long-term positive impact.
“Even though our end strength continues to go down, our personnel costs went up by nearly $2 billion this year. It’s because our personnel costs continue to outstrip the rate of inflation. And the same thing on our operations and maintenance costs because we have a largely older force and it’s harder to maintain it,” he said. “As Secretary Gates said as early as 2010 and 2011, we need about a 1-to-3 percent real growth each year to maintain a balance between personnel costs, modernization costs and other infrastructure costs. We are out of balance right now. We are out of whack.”
So finding $5 billion a year from back-office efficiencies would help offset increasing personnel costs at the very least.
Even with DoD’s best preparations for budget reductions, Work and other officials continue to beat the drum for Congress to end sequestration once and for all.
In many ways, DoD’s case seems to have fallen on a few powerful, but deaf ears.
Stupid business things
Rep. Mike Turner (R-Ohio), the chairman of the Armed Services Subcommittee on Tactical Air and Land Forces, said members of his committee understand that sequestration is bad policy.
But Turner said others in the lower chamber are struggling to understand how a $33 billion cut to DoD’s $523 billion budget is a big deal.
But Work said it’s not that simple as just a straight forward cut because of the trickledown impact across all of DoD.
“Fifty percent of the money that is in the FY2016 increase from 2015 to 2016 is in the modernization accounts. If you stop putting money into modernization, there will be two pernicious effects which you all are well aware of. It will increase weapons system procurement costs because we will be forced to stretch out programs or delay. We will have to cut multi-year contracts, which are very efficient,” Work said. “It will require us to do stupid business things that no business leader in the U.S. would survive as a CEO or COO or CFO if they allowed that crap to happen in their businesses. It will lead to higher costs to maintain aging, legacy platforms, that means operations and maintenance will go up faster than it’s already going up, which will divert even more money away from modernization.”
The second issue is readiness will continue to take a big hit. Kendall said readiness began to fall off in 2013 and two years later, DoD still is trying to play catch up. Work said the Marine Corps, the Army and the Navy will not return to combat readiness until 2019 and the Air Force not until 2023 under President Barack Obama’s 2015 budget proposal.
Kendall said it’s not just a matter of money, but the training facilities need to have room to host the units and there is only so much throughput those bases can handle.
Work said while he’s hopeful this message is starting to sink in more broadly across Capitol Hill, DoD’s frustration continues to rise, especially around the pushback against another round of base realignment and closures (BRAC).
“From a business man’s perspective, we are carrying about 25 percent excess infrastructure. That is an enormous burden on the department,” he said. “For us to be told we can’t go after that and then be accused of not being efficient, to me, is the height of hypocrisy. I believe we need to go after the BRAC.”
Work said the same goes for the what he calls modest compensation increases and the need to retire weapons systems like the A-10 or the U2 that are end of life. Like BRAC, Congress has prohibited DoD to make any changes in these areas.