Defense secretary Robert Gates issued a friendly but firm warning to the leaders of the defense industry in a private meeting last week: either get with the program on becoming more efficient, or live with the possibility of more draconian measures coming from outside the Pentagon. The Thursday meeting was the first time Gates had met with CEO’s about his efficiency drive, and was probably set up in part to respond to skepticism from industry types about where the initiative is headed (Deputy Defense Secretary Bill Lynn made some passing remarks at the meeting about the negative tone of public discussion concerning defense moves). Although the leaders of several companies — including Lockheed Martin, Boeing and BAE Systems — have stressed their intention to cooperate with the efficiency push, there has been much concern behind the scenes that the initiative will erode company profits at a time when demand for military goods and services was already softening.
Gates went out of his way at the meeting to assure industry that he understands the importance of sustaining sufficient profits so that companies can continue to raise capital. Pentagon acquisition chief Ashton Carter has stated repeatedly over the last month that his intention is to reward gains in productivity with more profits as the department and its suppliers share in the benefits of greater efficiency. Industry representatives have spent considerable time over the summer explaining to policymakers why sector profits are not out of line with performance, and in fact are trailing the results of commercial high-tech companies like Cisco. Gates and Carter have gotten that message, although it isn’t yet clear what steps they will take to discourage subordinates from using the efficiency drive as a pretext for cutting profits on particular programs. Several companies are already engaged in unpleasant exchanges with program officials who seem to equate cutting overhead with reducing corporate margins.
However, Gates offered the CEOs a powerful inducement for cutting costs even if they have doubts about the profit impact, warning that if the Pentagon can’t make its own moves to stop wasting money then Congress or the White House will impose harsher restrictions on military spending. Gates said that his budget guidance from the Office of Management and Budget is adequate if not ideal, but steady progress on paring military expenses will be necessary to stave off cuts as the Obama Administration turns to deficit reduction. Industry leaders already suspected that Gates was their best protection against big Democratic cuts to the defense budget, so they didn’t have much difficulty believing Gates about the need to show progress on savings. A recent study by Price Waterhouse Coopers found that defense industry productivity gains in the current decade have averaged eight percent annually compared with only five percent for the companies in the Dow Jones Industrial Average, but Gates seems to be saying that industry will have to work even harder to find efficiencies in the years ahead.
The real litmus test determining whether industry fully buys into the Pentagon efficiency initiative will be whether some of its recommendations on improving productivity are included in revised acquisition guidance due out in September. Last week, the Aerospace Industries Association submitted to the government a 12-page compendium of suggestions that included details on streamlining export controls, promoting more efficient use of resources, eliminating government-unique processes, and rationalizing the requirements process. The compendium described a number of ways in which the current acquisition process adds to the cost of military technology without adding to the value. Secretary Gates will send another strong signal this week about his commitment to greater efficiency when he unveils plans for paring the size of his own staff. If he listens to what industry has proposed and demonstrates a willingness to make sacrifices within the Pentagon, then the efficiency drive has real potential to outlive Mr. Gates’ tenure as defense secretary.
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