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Remarks at the Professional Services Council

As Delivered by William J. Lynn III, Four Seasons Hotel, Georgetown, Sunday, January 30, 2011

Thank you Stan

I am pleased to be back before the Professional Services Council.  Secretary Gates and I each believe that our partnership with industry is critical to the Department’s success.  Especially now, with troops deployed and budgets tightening, we must work closely together.

To ensure a direct and honest dialogue with the firms who equip our warfighters, we have solicited industry input in major policy decisions.  Professional Services Council has been at the forefront of the conversation, providing thoughtful and actionable recommendations on the Efficiency Initiative and our newly released policy on organizational conflicts of interest.  I would like to thank Stan and all of you for helping to shape these important efforts.  Your participation helps make better policy.

Last March I outlined some of our management goals in a speech before the PSC.  We have made progress on a number of them, including our effort to achieve business efficiencies. 

Today I would like to discuss four crucial topics: The inflection point we have just reached in defense spending; our response to the new fiscal climate; efforts to improve acquisition of services; and the need to understand the changing industrial base.

Let me begin with some historical perspective.

We have arrived at the fifth inflection point in the post-World War II era of defense spending.  By that, I mean defense spending is undergoing a significant shift that will impact department operations for at least the next several years.

The first inflection point happened at the end of World War II.  Similar points occurred following at the end of Korea, the end of Vietnam, and most recently during the late 1980s.

The first three of these transitions were driven by the end of a conflict and the demobilization that followed.  The fourth transition started out in circumstances more like what we are facing today—a fundamentally deficit-driven transition that then continued into the post-Cold War drawdown. 

What these four transitions hold in common is that each time the Department suffered a disproportionate loss of war-fighting capabilities, often for years to follow.  In different ways, the Department managed each transition badly.  So far we’re 0-for-4.

These earlier transitions provide insight into how we can navigate the rough waters ahead.  Broadly speaking, three lessons have emerged.  We must be mindful of each in our decision-making.

The first lesson is to make hard decisions early.  Put simply, the budget pressure is not going to get better.  In fact, it is going to get worse in two ways.  If history is any guide, projected program costs even on well managed programs are likely to rise.  There are some ways to restrain this, but on the whole the future brings cost-growth.  Pressure on resources will also become more acute in the years ahead.  If you cannot afford it now, you will not be able to when funds are even tighter in future years.

The second lesson has to do with how you generate savings.  Simply put, we will not generate sufficient savings—the $178 billion we are talking about—by seeking “pure efficiencies.”  It is possible to increase productivity—to do the same things you are doing but more efficiently.  But it is unlikely that pure efficiencies alone will generate $100 billion in savings across five years.  So a corollary to the rule of making hard decisions early is to eliminate lower-priority activities and organizations.  These are things that have value but are not essential to our military capabilities. 

The third lesson of transitions is to approach the defense enterprise in a balanced way.  It is not possible to succeed by trying to achieve savings in just one area of the budget.  Taking disproportionate reductions from investment accounts leads to gaps in modernization and the aging of equipment.  Similarly, disproportionate reductions from operating accounts place stress on the infrastructure and reduces operational readiness.  Any approach to flat or reduced budgets must be balanced between savings from investment and operating accounts.

Our challenge is to mange this transition without disrupting the abilities, the enormous capabilities and the great qualities we have in the military right now.

The Department has responded to the changing fiscal climate by initiating a comprehensive search for efficiencies, particularly in our overhead, our business processes, and our headquarters and support staff.  The Efficiencies Initiative has yielded significant savings: $178 billion over five years, with $100 billion coming from the military departments and $78 billion from Defense Agencies and the Office of the Secretary of Defense.

Of the total amount of savings, we plan to re-invest $100 billion in high priority military capabilities.  These include unmanned systems, long-range strike, cyber security, space systems and intelligence, surveillance and reconnaissance systems, as well as counterinsurgency and special forces. We have also added funding for programs to improve the health of the force.  The remaining $78 billion of the savings we achieved will be returned to Treasury, for deficit reduction.  As I recently told Congress, we recognize that the strength of our national defense ultimately depends on a strong economy.

I know that for those in this room, service support contracts are a real concern.  I met with Stan Soloway and other industry leaders earlier this month, and would like to share the Department’s thinking on this issue with all of you.

As you know, services contracted by the Department are a particular focus for savings in the Efficiencies Initiative.  We know we cannot operate without contactors.  But the fact is we “over-steered” post-9/11.   We are now trying to find the right balance between the contractor and government workforce.

Within the broader category of services, service support contractors received special emphasis in our search for efficiencies.  Secretary Gates believes the use of contractors to augment staff is a practice that is too widespread in the Department.  By service support contractors, I mean contractors that report to headquarters every morning.  They have a desk, a phone, a computer, and often work as “action officers” writing memoranda and preparing routine briefings.

By service support contractor I do not mean those involved in IT, research, testing, or evaluation.  We are not targeting highly specialized expertise provided to the Department by contractors, nor are we targeting facilities services like utilities & housekeeping.

This issue is fundamentally about managing our workforce.  We should have the personnel and expertise to carry out the Department’s usual duties.  The Secretary’s goal in reducing our reliance on service support contractors is to enhance his ability to manage, and to better balance, our military, civilian, and contractor workforce.

Let me also say that we endeavored to be precise in our assessment.  We surveyed DoD components to determine their contractor populations.  Our review identified $4.3B in service support contractors—approximately 3% of all contract funding.  The bulk of this is found in the services & agencies.  After careful consideration, we elected to pursue targeted reductions—10% per year for 3 years, with the budget held constant thereafter.

We are also improving our acquisition of services, an effort led by Ash Carter, Undersecretary of Defense for Acquisition, Technology & Logistics.  His memorandum to industry last September laid out 23 separate efforts, nearly all of which affect the service sector.  In the lead up to the release of these policies, the Professional Services Council was again helpful.  The PSC facilitated roughly 70 of the 500 individual submissions we received to inform our deliberations.

In reviewing our “tradecraft” of service acquisition and how to improve it, our most important conclusion is the need to encourage more frequent competition in the award of service contracts.  According to our analysis, only about 16% of the services purchased by the Department is up for competition in any one year. 

We recognize that there is an inherent cost to competition and re-competition. So our service acquisition policies must also to balance the benefits and costs that competition incurs. 

Recognizing that buying services requires different expertise among our acquisition personnel is the second primary conclusion we reached.  The business world has already figured this out.  Most of you I am sure have dedicated service buyers.  We are catching up.  Following the Air Force’s example, we are creating a senior manager for acquisition of services in each military department.

Increasing small business participation in providing services is our third goal.  Small business is where so much innovation occurs.  It is why President Obama proclaimed in State of the Union that “We measure our progress…by the prospects of a small business owner who dreams of turning a good idea into a thriving enterprise.”

We know that working for DoD can be a daunting prospect, which is why organizations like the Professional Services Council, which helps orient small business to opportunities in defense contracting, are so valuable.  But our focus is not just about increasing percentage of small businesses that provides services to the Department.  Rather, we see small business participation as improving the capabilities available to us and the strength of competition that deliver them.

We have also committed to continue studying the issue and further fine-tuning our policies.  The Defense Business Board Task Group on Strategic Sourcing just released its report, and the Defense Science Board Task Force on Services Contracting will soon follow suit.  The Department is also undertaking its own survey, which I will describe next.

There is an important second party to the Efficiencies Initiative—and that is industry.  Firms in the defense industry are already reacting to the fifth inflection point I described. 

To ensure our policies continue to cultivate a healthy industrial base, I am leading an effort, together with Ash Carter and Brett Lambert, our Director of Industrial Policy, to assess the long-term health of the industrial base.

As you know, the defense-industrial base is not a monolithic entity.  It is actually a collection of industrial sectors.  Some of these, such as shipbuilding and tracked vehicles, are very mature.  Others, including UAVs and cyber security, are emerging.  More so than before, sectors are intertwined, with cross program dependencies that are often hard to see at a policy level because we have little visibility below the level of the primes.

Our survey will go sector-by-sector, and tier-by-tier, to assemble a long-term picture of what policies in each instance will help the Department fulfill its requirements.  This detailed review will inform our budget decisions, our acquisition decisions, and our industrial policy.  It will also help us determine what stake the Department has in mergers, acquisitions, and industry consolidation.

In our survey, we intend to look beyond the top tiers of our industrial base, to third and fourth tier suppliers.  We will consider supply chain security.  We will examine what global sourcing and financing means for our security and the structure of the industry.  And we will explore how we can create enduring value for the taxpayer in each sector. 

In theory, the government defines requirements, and industry fulfills them.  But in practice, our needs may not match the existing industry structure.  A key question for our review is how to calibrate the industrial capacity of specific sectors to meet future demand.  A related challenge is how to ensure value in sectors where competition is constrained. 

We must ensure the industrial base of tomorrow is able to meet warfighter needs.  And in this time of fiscal austerity, we must ensure we can do so at acceptable cost to the nation.

Each of the issues I have touched on today is an enormous challenge.  And we are taking them on simultaneously, while fighting one war and winding down another.  The road ahead will not be easy.  But as Secretary Gates frequently says, difficult is not impossible.

As we enter the fifth post-WWII defense budget transition, it is critical that we get it right.  We cannot afford to go 0-for-5.  We cannot afford to lose the military and industrial capabilities that we have built over two decades.  We need to take the hard decisions now, and we need to do so together, to ensure a capable and balanced force for the future.

Our cooperation and the careful planning it yields will better serve the warfighter, the taxpayer, and the nation.

Thank you.

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