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Bad Business for US Defense Department

Across-the-Board Cuts Don't Work

Oct. 10, 2013 - 10:53AM   |  
By GEN. NORTON SCHWARTZ and BRUCE MOSLER   |   Comments
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Why is America’s nondefense private sector largely silent on the topic of the Budget Control Act of 2011 and subsequent sequestration, particularly with respect to the Department of Defense? Is it because the effects, as yet, haven’t been as dire as predicted? Or perhaps it’s the perception that the Pentagon is indeed bloated, overpriced, and has too many employees, contractors and redundant functions, and thus is in need of a haircut?

To our organization, Business Executives for National Security (BENS), the reason is simple: bewilderment. No company facing the equivalent of a 20 percent decline in revenues would hesitate to evaluate its position and choose to restructure to protect its market share. The Pentagon faces a $487 billion budget decrease and an additional $500 billion sequestration decline over a 10-year period, but it is lagging in making such restructuring decisions even as the budget cuts take hold.

And no reasonable board of directors would stipulate that the management team exempt certain operating accounts (such as pay and benefits), maintain excess real property, keep underutilized facilities, etc., yet still meet the cost-cutting quotas. They’d certainly never delay levying the cuts until four or more months into the corporate fiscal year, thus compressing 12 months of cuts into eight or less.

From a business executive’s perspective, if sequestration has taught us anything, it’s that the budgeting approach agreed to by Congress and the administration is no way to run an enterprise. The Defense Department — which accounts for 20 percent of federal spending but is taking a full 50 percent of the sequestration cuts — is cutting expenses without the prerequisite of a business plan to guide the effort.

Defense is not a business the government can exit, but it operates like a business in many areas. BENS popularized the term “tail-to-tooth” in the late 1990s to assert that cost allocations should favor the fighting portion of the military (the tooth) rather than the “back office” support infrastructure (the tail). At the time, the Pentagon sought to restore the tooth with subsequent programs like the Defense Reform Initiative, the “Section 800” acquisition law panel, the Defense Business Practices Implementation Board and the Business Transformation Agency.

It is time once again to look at overhead and infrastructure issues, particularly excessive headquarters costs, starting at the top in the Pentagon.

We should also take another look at the use of contractors, but not from the standpoint that there are too many, which is likely. Rather, what’s needed is an analysis of what truly must be done consistently by government workers vs. what are temporary or predominantly commercial activities that can be done more efficiently by service contract agreements.

Then there are basic management issues, including the cost of carrying too much inventory. A recent inspector general’s report found that some equipment had more than 10 years of spare parts on the shelves. Add to that the funds lost to improper or delayed payments each year, and you get quite a hefty sum.

To the list add auditability of financial records (the military services struggle to implement their Enterprise Resource Planning solutions), establishing energy savings agreements, efficiency in contracting for services, rationalizing the military commissary and exchange systems, and allocating workload between military repair depots and private sector maintenance, repair and overhaul facilities. Underpinning all of these issues is a fundamental need to fully understand the costs of doing business.

All this, however, will not matter if the organization’s strategic goals continue unstated. The chairman of the Joint Chiefs, Army Gen. Martin Dempsey, remarked: “I don’t yet know how much our defense strategy will change, but I predict it will. We’ll need to relook our assumptions. We’ll need to adjust our ambitions to match our abilities. That means doing less, but not doing it less well.”

To which we add, these decisions need to be made before the cuts are imposed, not during.

Good business governance requires that the senior executives (here, the president and secretary of defense) present their plans to the corporate board (Congress) for approval. Let them have a hearing, but then — with transparency and a shared set of expectations — the executives need to be able to execute with few withholds and constraints.

Adjusting to new (lower) levels of defense budget authority is expected following the drawdown from two costly wars — more so in light of our nation’s severe economic challenges. But sequestration is a bad business method for getting there. Across-the-board cuts don’t work in big business; they spare the poorest performing elements from deeper cuts. Better to apply best business practices to improve the business of defense.

Idling fighter jet wings, battle groups and combat battalions impairs readiness, leaving us at great risk to promptly respond where there is a clear and present danger. Rather than run these risks, let’s put national security first by allowing the president and secretary of defense to focus on cutting costs where it makes sense, and investing strategically where we must.

If we do not, at worst, we may well be unprepared to meet some future, but unforeseen, crisis.

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US Air Force Chief of Staff Gen. Norton Schwartz is CEO of Business Executives for National Security (BENS), a nonpartisan organization that applies best business practices to develop solutions to problems in national security. Bruce Mosler is chairman of global brokerage at Cushman & Wakefield and chairman of the BENS board of directors.

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