Pentagon Cost-Cutting Initiative Elicits Bemused Reaction From Defense Industry

The initial public reaction of senior defense-industry officials to the Pentagon’s latest cost-cutting initiative was positive, but behind the scenes executives are confused and worried. They don’t doubt the sincerity or logic of what defense acquisition czar Ashton Carter is trying to do in targeting unnecessary “overhead” costs — in fact, many executives are already implementing similar measures within their own companies — but Carter’s rollout of his initiative was so unfocused that they fear the whole effort will spin out of control. Some industry insiders have begun to refer to Carter’s management style as “academic,” meaning long on big ideas but short on details or practical experience.

The biggest contradiction many executives see in what Secretary Carter is trying to accomplish is that personnel reductions are crucial to cutting costs, and yet his organization is currently engaged in an effort to hire thousands of new acquisition workers. These new hires will raise the fixed costs of the acquisition process by billions of dollars at precisely the time when Carter says cost needs to come out. One senior executive who is struggling to prepare for the coming downturn told me, “I know how you cut costs, you get rid of people — but that is not what they are planning to do.” Indeed. By going on a hiring spree just as the volume of procurement transactions is beginning to fall, policymakers are saddling the acquisition system with a raft of unneeded employees who will burden overhead costs for decades to come.

Other industry types tick off a list of areas Carter didn’t mention where waste is rife, and ask why he didn’t look there for savings. These include the hugely over-capacitized shipbuilding sector, and the public-sector depots which by law must perform fifty percent of all heavy-duty repairs. They know trying to close shipyards and depots would probably provoke a political firestorm, but argue that it will be much harder to generate the $12 billion in annual savings Carter seems to be seeking if the biggest concentrations of waste get a pass.

When it comes to the process changes that Secretary Carter actually did propose, most sector executives seem supportive — at least in principle. Mandating affordability, stabilizing production rates, strengthening civil-service skills and matching contract types to circumstance all make sense to them. But the executives have seen such good-government ideas embraced over and over again by past administrations, and somehow the political system never really implements them. For example, a huge amount of money could be saved by using multiyear contracts to purchase satellites where the government’s long-term production goals are well understood, but year after year the government continues to buy them one by one in a fitful process that drives up costs. Like stable production rates, multiyear contracts are an efficiency tool that the political system can’t seem to embrace with any consistency.

But if there was one topic where Secretary Carter definitely lost the audience Monday in explaining how he proposes to cut costs, it was profits. Industry executives, investors and reporters were uniformly incredulous at his insistence that contract types could be changed and overhead rates reduced without negatively impacting company returns. They understand in theory how costs can be taken out without impacting profits, but they just don’t believe that’s the way the system will operate, and Carter’s insistence it will helps explain why the term “academic” is gaining currency. But of course, Carter isn’t just any academic: he’s a truly gifted, widely admired intellectual. So maybe he knows in his heart of hearts that profits will be hit, just as he must know that defense spending isn’t going to remain stable in the years ahead. Maybe he was trying to take the edge off of what he was proposing so investors wouldn’t overreact. If so, Tuesday’s selloff of sector stocks suggests the tactic didn’t work.