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Remarks on Efficiencies at the World Affairs Council of Northern Virginia

As Delivered by Deputy Secretary of Defense William J. Lynn, III, Tysons Corner, Virginia, Wednesday, October 06, 2010

Thank you Frank.

On behalf of the men and women of the Department of Defense, it is my honor to accept this award.

I would also like to commend the World Affairs Council for the discussion of global issues it sponsors.  Earlier this spring I spoke before your Los Angeles chapter.  I am pleased to be with you here today.  

Over my career I have spent time in both government and industry.  I started in Congress working on the Armed Services Committee under Senator Kennedy.  Then the world was pretty clear.  The problem was the Pentagon.  They just did not get it.  They failed to follow Congressional direction.  And they were not responsive.

Then I had the opportunity during the Clinton Administration to serve in the Pentagon.  There, too, the set-up was clear.  Congress was extremely parochial and law-minded.  Congress simply did not grasp the complexity of issues.  It is the people at DOD who had the right perspective. 

Then after the Clinton Administration I worked in industry and realized that, no, it's really neither Congress nor DOD.  They are both too narrow in their vision.  Neither have the breadth that industry has. 

Now I am back in government.  My problem is I don't know who to blame.

What I want to talk about today will require the fluid cooperation of the Department, Congress, and industry.  That is the effort by Secretary Gates to navigate a significant change in the Department’s fiscal and operational environment. 

So let me walk through where we are on the Efficiencies Initiative and then take your questions. 

I would like to begin with some historical perspective. 

We have arrived at the fifth inflection point in the post-World War II era of defense spending. 

The first four significant transitions took place at the end of World War II, 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 conflict and the demobilization that followed.  The fourth transition looked more like what we are facing today—a fundamentally deficit-driven transition.  The fourth transition actually began with the passage of Gramm-Rudman in 1986, but accelerated with the fall of the Berlin Wall and breakup of the Soviet Union.

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.

We are now entering a fifth transition.   Secretary Gates is clearly conscious of the fiscal pressure the nation is under.  He is looking to manage that pressure so as not to disrupt the abilities, the enormous capabilities, and the great qualities we have in the military right now. 

We don’t want to break the force.  We want to use our understanding of prior transitions to help develop a management approach that preserves it.  You will see lessons from prior transitions reflected in the Efficiencies Initiative.

Broadly speaking, three lessons have emerged from the earlier transitions. 

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 costs for any given program are likely to rise.  There are some ways to restrain this, but on the whole the future brings cost-growth.  There will also be even more acute pressure on resources in the years ahead.  If you cannot afford it now, you will not be able to when funds are even tighter.

Second, we will not generate sufficient savings—the $100 billion we are talking about—by seeking “pure efficiencies.”  It is possible to increase productivity—to do the things you are doing more efficiently.  But it is unlikely that pure efficiencies alone will generate $100 billion in savings across five years.  So in a corollary to the rule of making hard decisions early, you have to eliminate low-priority activities and organizations.  These are things that have value but are not essential to our military capabilities.  These are tough decisions but they have to be made.  And this is what makes navigating these transitions hard.

Joint Forces Command falls into this category.  The principal purpose of JFCOM was to ensure that a military which was once service-centric would continue to embrace joint operations and doctrine.   We have come a long way in the decade since JFCOM was founded.  As a matter or practice and necessity, our military has embraced jointness doctrinally, operationally and culturally.  Because of our successes embedding jointness into military culture and operations, we no longer need a four-star, billion dollar headquarters to drive the joint issue. 

The third lesson of transitions is to approach the defense enterprise in a balanced way.  You cannot succeed by focusing all the attention on one area of the budget.  For instance, taking disproportionate reductions from investment accounts leads to gaps in modernization and the aging of equipment.  Similarly, disproportionate reductions from operating accounts places stress on the infrastructure and reduces operational readiness.  Facing operating shortfalls, people will simply not to do the things that are needed to maintain our bases and equipment.

Secretary Gates has designed the Efficiencies Initiative with these lessons in mind. 

Let me also say that this is not something we just thought of this year.  Secretary Gates presaged it with a speech in September 2008 at the National Defense University. 

At the time, he thought he was punting these problems to the next Administration.  He had no idea he would be receiving the punt.

Since staying on, Secretary Gates has taken on his drive for efficiency with incredible energy.  He made early, hard decisions in April 2009 to cut programs that were either troubled, like the Presidential helicopter, or provided redundant capabilities—including, notably, further buys of the F-22.  In many cases it was not that we had no use for the capabilities that were cut.  Rather,the scenarios for when we would use them were so extreme in one dimension or another that Secretary Gates felt the resources they consumed would be better spent elsewhere.  Had these twenty-plus programs been taken to conclusion, they would have cost the taxpayer over $300 billion.

Secretary Gates’s speech at the Eisenhower Library this spring, and his subsequent briefing this August, outline the next step in our effort to transform the Department—an Efficiencies Initiative with four separate tracks.    

Secretary Gates makes clear that in the world we face, we cannot reduce force structure.  We still have 50,000 troops in Iraq, face a significant fight in Afghanistan, and have counter-terror commitments around the world.  These commitments have led us to increase ground forces in both the Marines and the Army and to halt some planned reductions in the Navy and Air Force.  It is our assessment that we will need to sustain these force levels for at least the medium-term.

The savings target of the Efficiencies Initiative—the $100 billion we seek to save—stems from this reality.  Historically, sustaining force structure requires 2-3% real growth.  This modest real growth is necessary for several reasons.  Some of our costs, such as pay and benefits, increase with inflation.  But other significant expenses, especially health care and force modernization, grow even faster than inflation.  So because the total cost of sustaining the force grows faster than inflation, DoD needs real growth simply to maintain present force levels. 

Specifically, we need 2-3% real growth in the warfighting accounts—which constitute roughly 50% of our budget.  By warfighting, I specifically mean modernization, force structure, training, and also quality of life for the military.  However, we can accept lower growth in non-warfighting accounts, including funds for headquarters, administrative accounts, and back-office operations.  This is a slightly different take on “tooth to tail”—one that is at the center of the Efficiencies Initiative.

The challenge for us is that the DoD budget is only projected to rise about 1% for the foreseeable future.  This leaves a 1-2% “gap.”  Given the fiscal climate, it would be irresponsible to ask for more taxpayer dollars to fill this gap.  The Department cannot ask Congress for further increases each year unless we have done everything possible to make the dollars we already have count for more.  So we need to first look for the savings ourselves. And we can do this by shifting tail—the overhead—to tooth—the forces and modernization accounts.

Understanding the Efficiencies Initiative gets even more complicated because not all of our overhead is in overhead accounts.  Another way to achieve productivity gains is to become more efficient at warfighting itself.  This distinction is where the two-thirds/one-third split comes from. 

We told the military departments they can take 1/3 of their savings from the warfighting accounts themselves.  For example, take the F-18 multi-year buy.  We believe we can save over $600 million by doing the buy on a multi-year basis—thereby achieving the same combat power with less cost. 

However, creating efficacies in warfighting accounts does not generate enough savings to reach our 2-3% target, which is why we have mandated that two-thirds of savings must come from overhead accounts.

The effort by the military departments to achieve $100 billion of savings constitutes Track 1 of the Efficiency Initiative, as announced by Gates on August 9.  To ensure this savings occurs, we have told the military departments in no uncertain terms that they get to keep the savings and re-apply them to their warfighting accounts.

To be clear, this not a budget drill meant to reduce the top line.  We are not making across-the-board cuts.  Rather, we are shifting resources and priorities within top line to increase the warfighting accounts at the expense of the overhead accounts.

The military departments are not working with less money in the system.  In fact, they will likely end up working with more.  The savings that accrue from efficiencies in OSD and the Defense Agencies return to the Secretary.  Where to re-invest them falls under his discretion—and he will likely plow any savings back into the warfighting accounts.

Track 2 of the four track Efficiencies Initiative is essentially an “outside pull.”  We have asked others for their ideas—think tanks, scholars, our own employees, outside boards, and Congress.  Our employees have already submitted more than 15,000 ideas.  We are using these outside efforts to ensure we consider diverse perspectives on how to improve our operations.

Track 3 focuses on long-term, systemic change to processes and organizations. Sometimes our own bureaucratic processes make our contractors and our own offices behave inefficiently.  As a first step in track 3, Undersecretary of Defense for Acquisition Ash Carter and Secretary Gates have detailed 23 measures to change our business practices in acquisition.  Let me highlight two of these measures.

First, we need to buy services with the same rigor we buy equipment.  Currently, we spend more than $200 billion per year acquiring services.  For equipment, we have trained buyers who spend their entire career developing, negotiating, and writing contracts.  We need to invest in the same expertise for purchasing services.  Becoming a smarter buyer of services will not happen overnight.  But we believe there is a real opportunity for savings over the long-term.

Second, we need to ensure government and industry incentives converge wherever possible.  In other words, both government and industry should be incentivized to bring programs in on schedule and at or under budget.   Several tools will help strengthen this connection.  Specifically, greater use of fixed-price incentive contracts can align industry’s interests with the government’s.  Our acquisition system has over-learned the lessons of late 1980s and early 90s.  After a few high-profile program failures, we went cost-plus for nearly all development contracts, fueling cost-growth that has marked many of our programs.  Cost-plus contracts are appropriate for programs that involve high technological risks.  Fixed-price incentive contracts are appropriate where the government knows what it wants and does not change its mind, and where industry possesses the technology and has good control of its processes.  In these circumstances, fixed-price contracts help ensure each side is committed to production schedules and cost structures and only deviate from them after a full consideration of the opportunity costs involved. 

The final track of the Efficiencies Initiative—track 4—consists of items to “jump start” the process. 

Track 4 is separate from normal programming and budget process.  In it, Secretary Gates has asked his staff to tackle the area of headquarters and support bureaucracies.  Because DoD is an institution of tremendous size, we inevitably have layering and duplication of effort.  Flattening and streamlining our institutions will unquestionably save money.  But an equally important goal of Secretary Gates in undertaking track 4 is to improve our operational agility.

Gates has identified eight specific initiatives in Track 4.  The first is to reduce the Department’s use of support contractors to augment staff functions.  Contractors now make up 39% of the DoD workforce, up from 26% a decade before.  Support contractors have essentially tripled.  Much of this growth has occurred in what can be called “staff augmentation”—contractors who come into the Pentagon every day, and have a desk and a phone.  The Secretary views this as out of balance.  To address this imbalance, he has mandated a 10% reduction in contractors over 3 years.  And to prevent this support staff from popping out the other way, we have instituted a personnel freeze on civilian positions.

In streamlining Department staff we have placed a particular focus on reducing SES and general officer positions.  In what Secretary Gates refers to as “Brass Creep,” we have added more than 100 flag officers and 300 civilian senior executive service positions since 9/11.  It is not just the extra layers these positions add that is problematic.  It is also the staff that comes along with them.

Track 4 has several other elements.  We are trying to achieve economies of scale across the department, especially in IT.  We are trying to eliminate unneeded oversight reports and studies, and to cut down on the more than 60 outside boards and commissions that often add questionable value.  And by working with General James Clapper, the newly appointed Director of National Intelligence, we are targeting duplication in intelligence organizations.

As parts of Track 4, Secretary Gates has also announced three organizational disestablishments. 

The Secretary has announced the disestablishment of the Business Transformation Agency, which overlaps with another one of our organizations called the Deputy Chief Management Officer.  The Secretary has announced the disestablishment of the NII and its equivalent structure on the Joint Staff, the J-6.  These functions can be better aligned with DISA, the new Cyber Command, and a strengthened Department Chief Information Officer.

Most controversially, the Secretary has announced that he is recommending the disestablishment of the Joint Forces Command.  We are no longer in a “service-centric” military.  Ensuing joint-ness does not require $1 billion, four-star headquarters with 6,000 staff.  The Joint Staff is a more appropriate custodian of the joint mission.

In each of these decisions the Secretary and I are applying the historical lessons of the past four transitions in an attempt to preserve the force through a time of significant fiscal and operational pressure.  To manage this transition, we have had to make hard decisions early; we have had to move beyond seeking efficiencies in our programs to the outright elimination of lower-priority activities; and we have had to ensure we achieve a balance in savings across the defense enterprise, so that neither operational nor modernization accounts are disproportionately impacted.

In conclusion, with forces deployed abroad and fiscal pressure at home, we face a complex situation that will require careful management at all levels of the Department.  Circumstances have created an inflection point in defense spending.  To ensure we maintain our forces in what will be the fifth post-World War II transition, we have to actively achieve savings and reinvest them in our warfighting accounts.

Our effort to seek efficiencies in the defense budget is not a sprint.  It is a marathon.  But it is a race we must win.  The alternative is to mismanage the transition already upon us.  Going ‘0-for-5’ would mean over-programming; the resultant breaking of programs; the further erosion of taxpayers’ confidence that they are getting value for their money; and, worst of all, losing warfighter capability.

So to ensure our forces remain strong through a time of tight budgets, we have designed a program of efficiencies that establish reasonable reduction targets, focus on specific savings, and occur in the aftermath of an era of double-digit growth in which we can more easily identify excess.  The President, Congress, and the Joint Chiefs are all supportive.  I believe we will be successful.

Thank you.

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