July 08, 2013

The Smart-Shopping Way to Cut Defense Spending

By Michele Flournoy

With more than a decade of war coming to a close and the U.S. government facing daunting fiscal challenges, the defense budget is on the chopping block. Without a budget deal that addresses tax and entitlement reforms, defense spending will play a disproportionately large role in getting the nation's economic house in order. The 2011 Budget Control Act mandated that the Defense Department cut nearly $500 billion over the next decade and crafted the sequestration straitjacket now binding the Pentagon. There is a real risk the U.S. will cut defense in the wrong ways. Historically, almost all postwar drawdowns have resulted in a "hollow force"—that is, too much force structure and overhead with too little spending on readiness and modernization. America has tended to solve its budget problems on the back of the force rather than squeezing savings out of a highly inefficient defense enterprise.

Such savings could be wrung, in part, from the way the Pentagon procures goods, services and weapons. Reforming acquisition practices has long been a Defense Department aim. Since 1960, the U.S. government has commissioned at least 27 major studies on defense-acquisition reform, and more than 300 studies have been undertaken by nongovernment experts.Still, the Defense Department rarely achieves the expected return on its investments. Most major weapons programs run over cost and over schedule, costing American taxpayers billions more while delivering less capability than planned. While the Obama administration has already taken some positive steps to address this problem, such as the Pentagon's "Better Buying Power" initiative, far more can and should be done. In particular, five steps would help the Pentagon get more value for its investment:

First, the Defense Department should take a more disciplined approach to preventing "requirements creep" once weapons programs enter production. Historically, major weapons procurements benefited from an experience curve and economies of scale, which ensured that the 100th plane or ship produced in a given line was far cheaper than the first. Today, many major acquisition programs—from the Navy's newest surface combatants to the Air Force's fifth-generation fighters—have failed to get on this savings curve because new specifications continue to be added even after production gets under way. Holding requirements steady for a period of production and ensuring that contractors share the cost-reducing benefits of experience with their government customers are critical to making major systems more affordable.Second, the Pentagon and Congress must work together to change perverse incentives. Today's acquisition system often penalizes program managers who don't spend every last dime of their budget before the end of the fiscal year. If you don't spend all of the money allocated, Congress will likely appropriate less for your program next year. And presiding over a shrinking program is not a recipe for career advancement.

Imagine a world in which program managers were evaluated on whether or not they could meet program milestones while saving taxpayer dollars. Those who found more cost-effective ways to manage their programs would receive awards and accelerated promotions. This would be one important step toward creating a more cost-conscious Pentagon culture. Third, the Pentagon should be more aggressive in adopting best practices such as spend analysis, strategic sourcing and online reverse auctions across the department. In contrast to the traditional 1970s-era approach to government procurement—an inordinately slow, paperwork-intensive, relationship-based, manual process—these 21st-century approaches have proven far more cost effective.

Consider online reverse auctions, a process where a government buyer solicits competitive bids online from vetted sellers. Several federal agencies are already realizing substantial benefits by using this approach to buy high-volume commercial goods (from building materials to electronics) and services (from phone installation to vehicle rentals) that are available off the shelf. According to FedBid, the largest reverse-auction marketplace used by the Pentagon, defense agencies saved $107 million in the 2011-12 fiscal year, a more than 12% savings rate on $875 million in goods and services, while increasing both competition and transparency. Far more significant savings would be possible if these practices were adopted on a much larger scale.

Fourth, the Pentagon should redouble its investment in professionalizing its acquisition corps. With the baby-boom generation of managers about to retire, the Defense Department needs to expand its efforts to recruit, develop and retain the next generation of men and women who will spend taxpayer money. In addition to being trained to work within the federal acquisition system, next-generation acquisition leaders should also spend time in the private sector to learn best practices for managing large programs and reducing costs.Finally, the Defense Department should work with Congress and industry to create a mechanism to regularly review the laws and regulations governing acquisitions to find out why the desired outcomes are not being achieved and to recommend ways to improve the system. In 1947, the regulations governing major weapons purchases totaled 125 pages; today, they number more than 2,000, adding unnecessary complexity and cost. In this case, less is more.

In a period when the U.S. military must do its part in both defending the nation and addressing America's budgetary woes, a bloated defense enterprise and outmoded acquisition practices cannot be tolerated. The time to fundamentally reform acquisition has finally arrived.