Restructuring defense spending for today’s budget reality: Five principles to cutting the defense budget without harming national security

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First, reduction targets must be broadly known, specific and consistent. The Pentagon worked hard to meet a $450 billion reduction target and now faces the prospects of being asked to “double down” once again. The ensuing cuts should be the last ones — for a long time — so it is important to make the best long-term decisions.  Smart reductions align strategy with resources. The nation cannot afford missed shots at a moving target. Continual “starts and stops” across programs drive inefficiencies when the nation can least afford them.  Further, the trade-offs made to meet one target might not be optimal for a different target. Guessing if or when the target will change is not only unproductive, but also leads to churn and uncertainty for both the government and the industrial base.
 
Second, everything must be on the table. Infrastructure, troop levels, benefits, redundant and overlapping organizations, policy enforcement, and similar areas cannot be exempt from consideration. Politics has failed once. Don’t make the Pentagon pay twice by constricting the playing field to protect pet political interests. Up-front exemptions prevent full analyses of the appropriate cost, capabilities, and requirements trade-offs.
 
Third, new delivery models must urgently be entertained and embraced.  Real affordability must be achieved, which means generating far greater and faster productivity gains and innovation.  Slow, complex and bureaucratic internal decision processes are a formidable impediment to achieving the benefits of productivity gains and innovation. The Pentagon must determine how to buy and adapt innovation to short circuit traditionally slow and costly “special purpose innovation” cycle times.  Failure to realize the maximum value per dollar spent translates into program cancellations, volume cuts, and capability erosion.  Innovation must be embraced. Nothing less than a zealous focus by all parties on eliminating waste is required.
 
Fourth, kill the few to save the many. It is better to stop doing a few things entirely than to slow down everything proportionately.  Substantial restructuring requires making hard decisions for the long-term.  Yes, mandated across-the-board cuts are expedient, but treating everything with equal criticality prevents making smart trade-offs.
 
Fifth, cutting supplier profits is a short-term solution that creates long-term problems. Trying to fix a $1 trillion hole on the backs of suppliers will fall short of the target, and ultimately result in a “lose-lose” for industry and the nation’s defense capabilities. While pockets of “excess profits” may exist in the U.S. defense industry, government will not make inroads into its budget challenges by reducing suppliers’ profit margins. For instance, assume annual (pre-cut) defense expenditures are $400 billion on goods and services, and average supplier profit margins are 10 to 15 percent. If supplier profit margins are wiped out entirely, the cumulative 10-year savings are $400 to $600 billion. Clearly, this is not a realistic scenario.  The budget reductions will already have a big impact on the revenue of defense companies that provide for our nation’s defense.
 
Squeezing supplier profit margins will lead either to supplier exits or underinvestment across the supply base. To take real costs out of the value chain, suppliers must be part of the solution—helping to improve productivity and generate innovation. With the right incentives, total costs can be reduced while sustaining profit margins.  Trading cost-based price reductions for higher margins offers a sustainable way to realize higher value per dollar expended.
 
Just like a corporate board accepts/rejects management plans, so should Congress allow defense leaders to make the appropriate trade-offs as part of an integrated plan to provide the most capability for the dollars available. The key is to eliminate barriers to transformational change, not erect them.

In corporate restructurings, shareholder value is at stake. In defense restructurings, national security and lives are at stake. The status quo is not an option for the nation’s defense. We should settle for nothing less than an urgent and rigorous, fact-based analysis of all options, as suggested in these five guiding principles. The stakes are simply too high to settle for less.

Randy Garber is a partner in A.T. Kearney with a focus on the aerospace & defense industries.
Bob Willen is a partner in A.T. Kearney and the leader of the firm’s public sector, aerospace and defense practice in North America.