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Improved Business Practices Will Improve Military Effectiveness
Statement of Deputy Defense Secretary John J. Hamre , The House National Security Committee, Washington, Wednesday, March 11, 1998

Last May, the Department of Defense completed perhaps the most fundamental and comprehensive review ever conducted of our defense posture, policy and programs. The Quadrennial Defense Review examined the national security threats, risks and opportunities facing the United States today and out to [the year] 2015.

One main element of the QDR is to prepare now for an uncertain future through a focused modernization effort, development of new operational concepts and organizations to fully exploit new technologies, and efforts to hedge against threats that are unlikely but which would have disproportionate security implications. To meet these demands of the strategy, we need a transformation of our forces -- a "Revolution in Military Affairs."

The extent and pace of the transformation our forces will depend critically on the availability of resources to invest in necessary research, development, testing, experimentation and procurement. In this regard, the secretary envisions the "Revolution in Military Affairs" interlocking with a "Revolution in Business Affairs." Efficient business practices and reduced overhead will not only free up resources, they also contribute directly to the transformation of the department's support structure.

The QDR included a number of significant initiatives to reduce the department's support structure, but the secretary felt we needed a follow-on, more comprehensive effort to fully implement a "Revolution in Business Affairs." As a result, the secretary created a task force on defense reform to bring reform to the business side of the department. The task force members met with top corporate leaders across the country to find out how business has been able to reengineer their practices to put them to the very top of the performance across the globe today. The findings of the task force laid the foundation for the Defense Reform Initiative.

The DRI is aggressively applying to the department the key business principles that American industry has successfully used to become leaner and more flexible in order to remain competitive. The resulting savings will help fund the "Revolution in Military Affairs," to ensure American military superiority in the future. Equally important, the DRI is aimed at ensuring that DoD support elements are agile and responsive to support the warfighters, who are rapidly applying new technologies to change the way they fight.

The DRI has four pillars:


  • Re-engineer by adopting the best private-sector business practices in defense support activities.
  • Consolidate and streamline organizations to remove redundancy and move program management out of corporate headquarters and back to the field.
  • Compete many more functions now being performed in-house, which will improve quality, cut costs and make the department more responsive.
  • Eliminate excess infrastructure.

Another aspect of the DRI is that it captures business reforms already under way in the department. Until the DRI, there was no mechanism to provide a coherent and consistent implementation of these initiatives. Furthermore, there was no overall vision as to how they contribute to reducing the department's support structure and direct resources to modernization. The DRI will provide these reforms with the needed attention from senior leadership to help ensure their success.

To ensure the DRI initiatives are expeditiously carried out and focus senior leadership on the management practices of the department, the secretary established the Defense Management Council. I chair the council, which consists of the vice-chairman of the Joint Chiefs of Staff, the four undersecretaries of defense, the three service undersecretaries and the four service vice chiefs. The Defense Management Council serves as the secretary's internal board of directors for management reform.

The purpose of the DMC is to oversee the steps need[ed] to implement the initiatives in the DRI and ensure they stay on-track, and formulate proposals for additional initiatives to further streamline the department's business operations. In order to lead by example, the first meeting of the DMC reviewed the implementation of the OSD [Office of the Secretary of Defense] downsizing of 33 percent by the end of FY 1999.

Since the first meeting, the DMC has reviewed the implementation of other DRI initiatives, such as the devolvement to the services of day-to-day commissary operations, the services' A-76 plans, and the establishment of performance contracts for the defense agencies. To date, the DMC has met six times. I chair another meeting tomorrow morning.

In addition to chairing the DMC, I have issued a series of memorandums to coordinate the implementation of specific DRI actions. These memorandums typically direct the heads of DoD components, agencies and field activities to implement specific reforms or submit plans for implementation within a certain timeframe.

I would essentially like to give you a status report of where we are making progress, where we are hitting some rough spots and where we need your support.

One of the messages we heard from the private sector is that headquarters should perform policy and oversight functions, not day-to-day program management. I agree with this philosophy and we intend to follow private industry's lead in this area. As a result, the secretary of defense has made a series of decisions to streamline, reduce and eliminate DoD headquarters elements, beginning with those headquarters elements nearest the secretary of defense -- the OSD and the joint staff. We believe it is important to clean our own house first in order to set an example for the rest of the department.

The role of OSD is to promote change, set direction and establish goals, not provide day-to-day program management. As a result, we are reducing OSD staff by one-third in order to create a lean and agile organization that can be responsive to the secretary's needs and adapt to changing environments. There were 3,000 people who worked in OSD, and we will cut 1,000 by the end of FY [fiscal year] 1999. My very first implementation directive on the DRI required the OSD component heads to submit detailed plans for implementing the reductions. I now have those details, and we are on-track for completing the reductions by FY 1999. It has been painful, but it must and will be done.

The Joint Staff is also undergoing a major downsizing and getting out of the program management business. The Joint Staff and the chairman-controlled activities will be reduced 29 percent by the end of FY 2003. Like OSD, the Joint Staff has taken on additional responsibilities since the enactment of the Goldwater-Nichols Act [1986]. As a result, many functions are being devolved to the combatant commanders-in-chiefs. Creating leaner and more agile organizations will improve OSD-joint staff coordination and integration.

As a result of the DRI, we will exceed the congressionally mandated 25 percent reduction for OSD personnel. Substantial reductions have also occurred in the headquarters components of the military departments and the warfighting commands; however, they took place prior to FY 1997. By the end of FY 2002, the military departments and warfighting commands will reduce their management headquarters by 29 percent and 22 percent, respectively, from FY 1992. (This includes the 10 percent reduction mandated by the DRI.)

Since these reductions were implemented in earlier years, they are not reflected in the years covered by Section 911 of the National Defense Authorization Act for Fiscal Year 1998. Therefore, we are seeking repeal of the provision requiring the departmentwide management headquarters reductions. Repeal of this provision will provide us the flexibility to identify initiatives to further reduce, streamline and eliminate headquarters activities.

The DRI, however, is not just a downsizing effort; it is an effort to reshape the organization to better reflect the department's mission and the complicated security environment that has emerged since the end of the Cold War, particularly with respect to the threat posed by weapons of mass destruction. To meet this challenge, for example, we are establishing an agency to better focus and strengthen our efforts to defeat this growing threat. This unified agency will be a consolidation of the Defense Special Weapons Agency, the On-Site Inspection Agency and the Defense Technical Security Administration. The new agency will be operational no later than Oct. 1, 1998.

I have formed a team to develop a blueprint for this new agency's focus and structure, which is currently under review. In order to establish a positive momentum for this agency, I am taking the following immediate actions:


  • Combining the Cooperative Threat Reduction Program activities into a single operation at a single site.
  • Transferring the Chemical Demilitarization Program to the Army. (This has already occurred.)
  • Consolidating the Arms Control Technology Program at DSWA with related arms control activities at OSIA.

I look forward to discussing our progress on this effort with you.

Another lesson learned from world-class organizations is the importance of investing in human resources. As we downsize and re-engineer, it is more important that we teach our civilians how to better manage resources and integrate information technology into their daily work routine to effect the transformation of the department's support structure.

We consider ourselves a world-class organization, but we do not provide world-class education to our civilian personnel. In order to correct this problem, we are creating a new position -- a chancellor for education and professional development. This individual will provide the quality assurance and resource focus to bring world-class education to the department. We are in the process of establishing a team to develop a blueprint to create the chancellorship. We have proposed legislation to create this position. Your support is critical to make this initiative successful.

The above organizational changes will improve the oversight of the department and ensure civilian control while enhancing civilian-military relationships in the department. These reforms will empower managers at lower levels and free policy makers from operational responsibilities.

To carry out our defense strategy into the 21st century with military forces able to meet the challenges of the new era, we will bring world-class business practices to the department. DoD has labored under support systems and business practices that are at least a generation out of step with modern corporate America. Adopting the best practices of the private sector will enable the department to cut operational costs, improve accountability and improve service to the warfighter.

Initiatives to re-engineer DoD business processes are being pursued throughout the department and encompass virtually every aspect of the way we do business -- from the way we move service members, their families and household goods, to the way we acquire and pay for everything from aspirin dispensed in military health facilities to major weapons systems.

Adopting world-class business practices requires rethinking and redesigning how DoD does business. It also means making intelligent use of innovations in technology. After re-engineering business processes to make them simpler and more efficient, smart decisions on how to automate these redesigned processes will enable us to move from paper-based and manual processes to electronic operations.

Today, the department's business operations are literally awash in paper. Indeed, paper is not only driving the business culture of DoD, but it is choking many essential systems. Electronic commerce and related technologies, including the Internet, will allow the department to dramatically reduce the amount of paper received, processed and stored.

Our goal is to become a paper-free acquisition organization by the turn of the century. This requires a transition from paper to electronic transactions in such areas as solicitation, contracting, contract administration, receipt/acceptance processing, invoicing, contract payment and contract closeout. It is a massive undertaking and will not be easy.

For example, the Defense Finance and Accounting Service facility in Columbus, Ohio, processes about $43 million an hour in contract payments. There are huge sorting wheels to sort through the mail in the morning and 15 miles of linear shelf space for contracts. Expanded use of electronic document interchange, electronic document access and other technologies to exchange and access information electronically is critical to eliminating miles of paper and achieving a paperless environment.

Another important example of the department's re-engineering involves the government-wide purchase card, known as the IMPAC card. This program is playing a major role in the department efforts to streamline the acquisition process and cut costs in performing finance and accounting functions.

The department currently processes about 11 million contracts a year. More than two-thirds or 70 percent of those contracts are for less than $2,500. The department does not need to process such small-dollar contracts, especially when it costs us about $200 to write the contract and $130 to process it. Most of these small-dollar purchases can be made with a credit card, a less costly and more efficient way for DoD to buy goods and services.

Just a few years age, DoD's use of the IMPAC card was minimal. However, between FY 1994 and FY 1996, use of the IMPAC card rose from 16 percent to 40 percent. By FY 2000, our goal is for the IMPAC card to be used for 90 percent of our micro-purchases, or those under $2,500. This will greatly reduce the number of financial transactions the department needs to process and save millions of dollars.

In the future, DoD, like American business, intends to conduct much of its contracting and purchasing through Internet and related technologies. This represents the ultimate "democratization" of the acquisition process, with buying decision[s] made by the people who need the products.

To help realize this vision, the department has established an electronic commerce program office for accelerating the application of electronic business practices and associated information technologies throughout the department. One focus of the new office will be to expand on the department's pioneering efforts in the use of electronic catalogs and electronic "shopping malls." The goal[s are] to provide a single point of entry for both DoD customers and private sector companies wishing to do business with the department, and to enable DoD customers to search across DoD, other federal agency and commercial catalogs to look for best value, comparing quality, prices and availability.

Following the lead of private industry, the department has also adopted new approaches to the procurement of readily available items, such as medicine and food products. In the past, DoD would buy huge stocks of medical supplies, for example, and store them at individual hospitals, clinics and government warehouses. This cost the department huge amounts of money due to the storage and handling costs. In addition, some of the stocks would expire, resulting in further inefficiencies.

Beginning in FY 1993, the department began shifting over to direct vendor deliveries, such as the Prime Vendor program, where items are shipped from the vendor directly to the DoD customer, thereby eliminating the need to maintain stocks and the costs of managing warehouses.

For example, if you were to go to Walter Reed Hospital five years ago, there would be a huge room for just storing supplies -- bandages, cotton swabs, aspirin. Obviously, when you have a warehousing operation like that, things are lost, disappear and pass expiration dates.

Today, they have moved to a "just in time" delivery system using Prime Vendor contracting techniques. As a result, Walter Reed has reduced its medical on-hand inventory by about 80 percent and closed six warehouses. About 90 percent of all of our hospitals now are under "just in time" delivery. DoD is expanding the Prime Vendor concept and other innovative contracting techniques to other areas, such as hardware, clothing and base maintenance.

The security environment of the 21st century demands that we re-engineer our processes and leverage the opportunities provided by information technologies to build a department that is every bit as lean, efficient and responsive as American corporations.

Competition is the driving force in the American economy. It forces organizations to improve quality, reduce costs and focus on customers' needs. Continuously spurred by these forces, American firms are now global leaders in innovation, cost performance and technological development. Competition offers the same benefits to DoD and plays a vital role in our reform effort.

Our bases and forces require support in a number of service areas, such as the maintenance of buildings and equipment repair. Many of these commercial-type activities are currently performed by DoD uniformed and civilian personnel, but could be performed by the private sector. In such cases, following the example of the America's leading firms, DoD will benefit greatly by introducing the dynamic forces of competition into the procurement of commercial support activities.

In the FY 1999 president's budget Future Years Defense Plan, we have programmed to study 150,000 positions for competition that are commercial-like activities under the A-76 rule. This is in addition to almost 70,000 positions being studied for competition in FY 1997-1998. As a result, we plan to study for competition a total of 200,000 positions from FY 1997 through FY 2001.

This is projected to result in savings of about $6 billion through FY 2003 and steady-state savings of about $2.3 billion thereafter. The services have directed these savings to higher priority programs, especially our efforts to strengthen the modernization program. Our current defense program -- and our ability to support the strategy -- is heavily dependent on achieving these savings. This is why I will closely monitor the implementation progress within the department and ask your support as well.

In addition to those positions programmed for competition in the FY 1999 budget, we will evaluate our entire military and civilian work force to identify which functions are commercial in nature and could be opened up for competition under the A-76 guidelines. We are currently drafting the guidelines that will be used by the DoD components to conduct this review, which will be completed by Nov. 30, 1998. As a result, we expect to increase the number of positions eligible for competition, thereby expanding our A-76 program past FY 2001.

In order to run the A-76 process more efficiently, we are aggregating and doing competitions on a regional basis. For instance, we are pulling together multiple functions, like base operations, on an installation for competition. In addition, we have established a process to bring in outside industry in when we are crafting the solicitation in order to provide them an optimum way to compete.

We need to realize that the benefits of competition are not a luxury, but a necessity, as we seek to maintain the world's premier military force as we enter the 21st century.

During the 1980s, American corporations from automobile and computer manufacturing to consumer retail reduced their plant and office space as part of their efforts to reorganize, restructure and reform their business practices to stay competitive in the global marketplace. We need to make similar infrastructure reductions.

The department is encumbered with facilities that are no longer needed. These facilities drain resources that could otherwise be spent on higher priorities. To this end, we believe the following three-pronged strategy is required: Close excess infrastructure, consolidate or restructure the operation of support activities, and demolish unneeded buildings.

Sustaining our military strength in the future requires that we spend less of our resources on excess infrastructure and more on modernization. Without two more rounds of base closure, the reforms in the DRI will not generate the savings required to sustain a strong and ready force. We have shown that base closures can eliminate excess capacity, save money and improve efficiency. Efforts resulting from previous base closures will save the department almost $14 billion by FY 2001, with steady savings of about $6 billion per year thereafter.

The high readiness demonstrated by our force today is one dividend of these savings. You asked for a report analyzing the costs and savings of previous BRAC [base realignment and closure] rounds, which we plan to deliver in April. The work done to date indicates that BRAC costs less and saves more than the department originally estimated.

We still have more infrastructure than we need or can afford. As a result, Secretary [William S.] Cohen has proposed two additional rounds in 2001 and 2005 with the expectation that they would approximate the size of the last two rounds.

I know it is very painful to close bases. The BRAC process, however, is set up to be a fair process for communities. In addition, we have a process to help those communities whose bases are slated for closure. If you look at some of the bases we closed during the first BRAC round, they are doing better now than at the time they where closed. For example, at Chanute Air Force Base [Ill.], more people are now working there than when we closed it.

We also need to shed excess utility infrastructure. We spend over $2 billion annually on energy facilities. The department's utility systems provide the electricity, water, steam and sewers critical to the operation of our installations. Many of these systems are old and are in need of significant repair. Here, too, required funding exceeds the department's current and anticipated resources.

One of the key lessons we have learned from the private sector is that a business does not have to own or manage power infrastructure to manage energy efficiently. Local utilities and other entities, by contract, do have the resources to invest in these systems and the expertise to maintain them appropriately. For this reason, the department is embarking on an ambitious program to privatize all utilities infrastructure by Jan. 1, 2000. I created the Defense Energy Support Center to facilitate these initiatives.

The DESC will negotiate omnibus contracts with companies that will become venture partners with us. These companies will do energy demand and supply management at installations. Currently, one contract instrument is in place, and we intend to have four more. By fall, we will have pilot projects in place in California, Texas and the Northeast region to manage installations in those areas as a unit.

This past summer the services surveyed their installations and found that they no longer need 8,000 buildings, totaling 50 million square feet. Disposal of these building[s] will cut costs and improve safety. Our goal is to eliminate these excess buildings by FY 2003. We are increasing funding in the president's FY 1999 budget Future Years Defense Plan by 50 percent to achieve this goal.

We are weighed down by facilities that are too extensive for our needs, more expensive than we can afford and detrimental to the efficiency and effectiveness of our military forces. At the same time, we must better manage key assets on our remaining bases.

Reforming the business practices of the Department of Defense will not be an easy task. It will require continuous and sometime difficult choices; however, the benefits are clear. As we become more efficient in conducting the day-to-day business of the department, fewer people are required for our support elements. The savings associated with these personnel reductions will help provide the necessary resources for our modernization needs and to keep up with operational innovations over the long term.

Equally important, this "Revolution in Business Affairs" will ensure that DoD's support elements are agile and responsive to support the warfighters, who are rapidly applying new technologies to change the way they fight.

One measure of success will be whether we achieve the QDR personnel reductions in the FY 1999 president's budget Future Years Defense Plan. In particular, our plan projects a civilian defense work force of 640,000 by FY 2003, down 40 percent from previous levels.

If these reductions are achieved, we will know that a "Revolution in Business Affairs," a critical component of the DRI, has occurred. Reducing personnel is difficult; however, it must be done if we are to transform our force for the next century with a focused modernization effort. This means we have to drastically change our ways of doing business and reinvent ourselves just like American industry. This means fewer people, better management of resources and greater use of information technology.

Your support is crucial to making the DRI a success. You have conceptually supported such reforms in the past, and your support is needed now to ensure the transformation of our military capabilities to prepare for an uncertain future, by using the savings generated by far reaching business practices and base closures.


Published for internal information use by the American Forces Information Service, a field activity of the Office of the Assistant Secretary of Defense (Public Affairs), Washington, D.C. Parenthetical entries are speaker/author notes; bracketed entries are editorial notes. This material is in the public domain and may be reprinted without permission.