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Fletcher Conference on Strategic Responsiveness
Remarks as Delivered by Deputy Secretary of Defense John J. Hamre , Marriott Metro Central Hotel, Washington, DC , Wednesday, November 03, 1999

Bernie [Dr. Bernard D. Rostker; Under Secretary, U.S. Army], thank you very much. As always, you're overly generous in your introduction, and I'm also a little embarrassed to say I'm probably not going to give the speech you think I'm going to give [laughter] since you anticipated what I would say.

I find myself often in this situation, but it's one of those cases where I have a very, very nice speech that someone else wrote for me. And of course it's gone through careful review and editing, so it doesn't say anything. [Laughter.] Well, I'm not trying to be cruel. I have very good speechwriters, and I hadn't had a chance really to sit down and say what I was interested in saying, so they've written a fine speech but it isn't really what [I want to say]. It would be rather mechanical, I think. So I'm going to depart rather dramatically from that, if I could.

I won't be long because I want to spend some time on questions. But I would like to pick up just briefly where Dr. Rostker brought us with this introduction, when you say that we are at a historic time, a time for real change.

I suppose every generation of leaders says that, but very few generations actually have the chance in life to make their own history. Most of us, after all, are forced to live out the forces that were set in some previous time; forces which we didn't have any control over.

All of us really grew up during the Cold War. None of us were participants in '46 and '47 and '48, in those times and those days that shaped the Cold War period. We inherited those forces and had to make sense out of them and be good stewards of the challenge and the directions that we were given at that time. And we are at an unprecedented period, I think. It's been almost 10 years to the day when the [Berlin] Wall really started to crumble catastrophically. I think it was on the 9th of November when it actually opened up in Berlin.

For the last 10 years, for other reasons, we really haven't stood back to say how we should shape our future. I think it's partly because we didn't know what that future was going to be. And in those wonderful days, '89 and '90 and '91, it looked like such a glowing future. We thought it would be so different than it has turned out. It's so much more challenging and complicated now. And certainly in those days, we didn't have the vision that we now have, and even now I would say we probably don't see all of the details of the new landscape terribly clearly. But we are in a position, I think, to start shaping our future.

We're one of those rare generations that is given a chance to shape his future and to put in place the forces that others will carry on. That's one of the reasons why I admire so much what General [Eric] Shinseki [U.S. Army Chief of Staff] and Secretary [of the Army, Louis] Caldera have done. And may I add on behalf of all the number two's in the world, a special thanks to you Bernie and [Vice Chief of Staff, U.S. Army; General] Jack Keane, who I know are doing the real work. [Laughter.] We have to give credit where credit's due because nobody will give us credit for what we do.

But this is a remarkably important time, and really the future health, and I think in many ways the vitality of the Army, really rests with the successful implementation of this new vision that's been outlined. This new vision may be only a month old in its public accounting, but there are so many details that are going to be unfolding over the next six months, and frankly, the details will be coming out for years to come. And it is so important that all of us realize that this is an historic opportunity for us, for all of us as Americans and friends of the Army and those who are in the Army, to make a new future. The future is ours to make, but also ours to lose if we don't step up to this opportunity.

Secretary Cohen is excited by what he has seen so far. Obviously we have many details in front of us. This couldn't be a worse time to launch such a new direction. There's not enough money, for one. There never has been, though.

I think it was in 1974 and '75 and '76 when the Army was really broken. At that time there were visionary people who said, "We're going to rebuild this outfit," and what did it give us? It gave us the M1 and it gave us the M2, it gave us the Patriots and the Apaches. It gave us the systems that fought so brilliantly in Desert Storm. It also gave us remarkable people. I had a very good friend who said to me, "You know all the good guys left in '74 and '75 and it took the rest of us to build the best Army in the world." I think that's really where we are right now.

These times aren't easy. These are going to be remarkably hard days ahead. Not just the next two months when we put a budget together that implements this vision, but over the next several years when there will be all kinds of pressures. It's going to be very difficult, but it's going to take people's conviction and courage to bring this forward. I think it's absolutely essential for the long term vitality of the Army and I really want to congratulate General Shinseki, you, Secretary Caldera, and all of the people that have been making this possible.

The other thing that I wanted to talk about today is very different. I looked over the agenda and lots of people are here talking about all the important issues. But there's one little issue that wasn't on the agenda and it's something I want to talk about here. That is the health and well being and direction of our industrial base right now.

It's been in the news lately. Unfortunately, some of it is sad news because we see the way that the stock market in recent weeks has pummeled our contractors. It's a very tough time right now. It's caused me to sit back and to think a good deal. I know the forces that come to play in this, but it's caused me to think a good deal about it.

In many ways all of us in the Department are absolutely indispensably tied to the health and well being of our partners in the private sector that have to build these systems that we're going to use. And we're not talking about it at this conference, so I wanted just to say something about it if I could.

As I said, I unfortunately got to thinking about this in light of the pummeling that our companies have been taking in the stock market. I must confess, I am startled by that, and frankly very disappointed. I'm disappointed that the owners of these companies have taken such a short-term view about the importance of defense industry in America.

I must confess, I don't understand the stock market anyway. I can't figure out what real value means when it goes through that process. Companies that don't make a penny of profits have the stock market values absolutely soaring. And then you find companies that have maybe had a disappointing quarter but are producing some of the most astounding technology are just absolutely clobbered.

In part, I think this reflects somewhat the herd mentality that seems to guide so many fund managers who may not know the details but sense that all of a sudden this isn't good. So all of a sudden you get into a real trough, and we're seeing that now with almost all of these companies. I mean, Martha Stewart goes public and makes a billion bucks the first day and all she does is carve pumpkins. You know? [Laughter.] We have to reexamine who's going to defend this country 10 years from now and 15 years from now. It's going to have to be these companies that we work with.

Now there are real consequences from this short sightedness in the stock market. I very much worry that the kind of pressure that this puts senior corporate managers under means that they will make some very serious decisions that will have a negative effect on their long term health so that they look good for the next quarter.

All of a sudden, if you cut back on research and development spending, that's going to have a very serious, long term implication for us, for our national security. But there's a lot of pressure to do that. Or when somebody pressures them to say, "You have to do more downsizing," how do we make sure that doesn't lead to a hemorrhage of scientific and managerial talent that we have to have right now? I must confess, I'm worried about it.

So I think we need to go back to some first principles and say what's important. We're trying to change the way that we work with our industry. We're trying to remove the rules and the regulations and the accounting restrictions, etc., that have created a hothouse defense industry, and we'd like to do as much, as commercial as possible, and as much commercial-like acquisition as possible.

But having said that, we are going to have defense companies. We're not going to be without defense companies. And we can't have a strong defense in the long run if we have wounded defense companies. So this has to be a priority for us at this time.

That means that we in the Department have to do something. We have to focus on our priorities and our first principles. This is one where I did write myself a few notes. So what are they?

First of all, we have to keep steady, stable defense budgets. We cannot have roller coaster defense budgeting, and we've had that here. This is the first year in, I think, 15 years where we haven't been on a downhill path on a defense budget. And we're counting on some increases in the future. I'm very nervous that we are closing out this year without a long-term agreement between the Administration and the Congress on budget resources for defense and non-defense spending. I think that's troubling, and it worries me that we pass a defense bill one week that increases the defense budget and then the next week we pass another appropriations bill that takes away, through across-the-board reductions, the same increase. This is a very hard thing for us to plan for now.

So we need to have stable, predictable, and, especially, investment budgets. We have tended for the last 10 - 15 years, frankly, to accommodate the draw-down and put it on the backs of our acquisition community -- both inside the service and outside the service in the private sector. And we really have loaded an awful lot of the downsizing on them. That's caused this tremendous consolidation in the industrial base. And I don't think that's inappropriate. We certainly had excess capacity.

But there does come a point when you can't lose the design and engineering expertise and talent that we have invested in through our private sector. I think we're at that point. So we've got to hold onto the investment budgets that we've been programming.

Second, I think we have to emphasize stability in the acquisition process, and if ever there was a time when we needed to promote multi-year contracts, now is the time. I mean we had quite a battle here this year. Fortunately, I think we were able to get a lot of that back. But now's the time when we need to make sure that we have stable programs that program managers can count on.

Third, I think we have to be careful that we don't, in the budgetary pressures of the moment, adopt some acquisition practices which turn out to be very tough on industry with unintended consequences. Or worse yet, that we adopt acquisition policies which have inherently great risk in them, like the old days when we had these fixed price development contracts. Those were really a disaster. And we are still digging our way out from under some of that here even now. So we have to at least eliminate acquisition policies that try to put all of the risk on our partners in the private sector. This is a partnership. We have to manage it together.

I think we have to find and improve the way we do decision-making in the Department, so that we integrate acquisition decisions across service lines, so that we don't have an acquisition decision in one service or one agency undermine the industrial base that the other services are counting on. Unfortunately, we're getting close to that. We're going to have to start to focus on that.

Now I also -- I have to be very careful how I say this. I think that the concentration, especially at the prime level here in our industrial base, has gone on about as far as it can go. We'll continue to look at proposals, but we're at a point now where invariably we're losing too much competitive opportunity with concentration. I think it's going to be a very tough test from this point on because we can't afford to slip by default into a sole producer world.

I think there are still opportunities at the second and third tier for realignments and consolidation. So that's not to say we're closing the window. But the test, that we still have competitive opportunities, is going to be very important to us.

If I could say something about international industrial alignments, there's been an awful lot of talk about that in the last couple of weeks and we've had a lot of discussions with our partners in other countries and counterpart industries of defense about this issue. There's a lot of speculation in light of the consolidations that have occurred in Europe that we now are ready for this next step, for some trans-Atlantic mega-deals between defense companies.

Again, I think we need to step back and talk about first principles. I think we have to look at this in the context of what it is going to take for us to be able to hold the [NATO] Alliance together so we can fight together.

Kosovo had some lessons in it beyond the obvious, and [one] was [that] the technological gap between us and our very good allies is widening. It's going to be hard for us to stay together as an alliance and fight together as an alliance with an even wider gap growing over time, technologically, on the battlefield. So alliance interoperability has become, I think, an enormous challenge for all of us.

I think there is an industrial dimension to that. To my mind, we're not going to be able to keep this alliance close together technologically unless we are able to find ways for greater collaboration between our industrial sectors.

I personally don't think that anybody is ready in the near-term for a mega-merger. I think there are two reasons for that. One, [although] I think we're getting close in certain areas, we don't yet have in place the security infrastructure that would let us understand and manage the security challenges, technology and industrial security challenges of a transnational corporation. We're very far along in some discussions with the United Kingdom, and I think those are very promising. We've indicated we're very open for comparable approaches with France and Germany and other countries because that will be essential if we would be able to agree to a transnational, trans-Atlantic industrial alignment.

I also don't think that our companies, or the companies in Europe, are ready right now. Consolidation involves a good deal of hard management, and some turmoil. We're seeing that in our companies here. And that is all in the future for these two big companies that are emerging in Europe. They haven't confronted any of it yet. This is probably not the time that it is going to be possible for anyone to launch into yet another round of even more complicated [trans-Atlantic mergers].

Now I don't think this is a calendar-driven problem. I don't think there's a magic date. Rather it is a situation-driven issue. The next step really is going to have to depend on constructive conditions that emerge, both on the security level -- that's our responsibility as a government -- and then healthy companies that decide that it makes good business sense for them to link up. I think it is in the future and it really depends on these things coming to pass here.

We should use the time we have now to put in place that security infrastructure so that we can indeed see greater alignment of these companies. We should encourage collaborative projects where they make sense. I'm not talking about science fair projects that you do for political reasons. Those usually don't go anyplace. They aren't grounded in service requirements. But I think they ought to be grounded in what makes good business sense and have genuine military merit. We ought to find a way to promote that.

Ultimately, if there are two fortresses that emerge -- a fortress Europe and a fortress United States industrially -- we're going to lose as an alliance. So in this new era that's unfolding, we'll have to find ways to drop the draw bridges and open the gate so that we have stronger commerce going on back and forth between these two communities which are so important to us for our national security.

I think we also need to take a hard look at what we're doing to ourselves. We've made it very hard for alliance interoperability, when it's so hard for U.S. companies to export their components and put them into systems overseas. I was startled during this conference to learn that DASA has put out a directive to their engineers to engineer American components out of their systems because they are having too much trouble getting licenses approved. That's a very bad development for us for interoperability.

All of the words we say at a NATO Summit get undercut if we have those sorts of impediments standing in the way. So we have an awful lot to do. And I think people are realizing that and are stepping up to the challenge. And while this is a very tough subject politically, I find very good people working on it with more energy than I've seen in a long time on the Hill. I applaud that. I think it's very good.

Okay, this was not at all what Bernie thought I was going to talk about but I think it's somewhat related. I don't know that we're going to have a strong defense in the future without having strong industrial underpinnings. You all are certainly depending on that. The globe isn't getting any smaller, and there sure aren't any smaller number of aggressors in the world.

So it's going to take a smaller and more capable Army to cope with the security challenges that we have. We're not going to fix that problem without technology. Technology gives you the knowledge so that every round you shoot is effective; the efficiencies so that we can get the kind of firepower without taking a mountain of stuff to support a deployed unit -- all things that General Shinseki is pushing. I think it's exactly the right direction. It really does depend on these strong partners of ours.