Thank you Scott.
Now Scott said some very nice things about me in his introduction. But the truth is he really does not understand my job. Scott is not a deputy. He is someone whohas a deputy. In fact, more than half of you in this room are either Presidents or CEOs. I do not see many of your deputies joining us here. They are probably home running the shop.
What happens when you are deputy is that you are not in charge of anything. Issues come up to you. But if there are any easy issues, somebody below you makes the decision, takes credit, puts out a press release. None of the easy issues make it through. I only get the most difficult ones, where the choices range from truly bad to really awful. As a result, I get to choose which of several constituencies to upset. If a really attractive issue or easy decision somehow slips through, the Secretary reaches down, grabs it, takes credit.
So my job is not nearly what you imagine—just ask your deputies.
Our meeting today is the product of a remarkable history.
Prior to the World War II we relied largely on an arsenal system rather than private companies to provide weapons and technology to our military forces. The government itself would design and produce the munitions we need. It was a corollary to our reliance on mass mobilization in times of war—with no large standing army to serve, there was no foundation for a defense industry.
World War II constituted a paradigm shift. In a time of crisis, we engaged the ingenuity of American industrial base, producing a tide of material that won the war. The achievement largely eliminated the arsenal system. The partnership between science, industry, and the military continued through the Cold War. Because of emphasis on skills and technological prowess, American forces have always taken to the battlefield with a technological edge over our foes.
Air power is perhaps the most dramatic example of what partnering with industry can yield. The air superiority we enjoy today began over a century ago, in a garage in Dayton, Ohio. It was a start-up business run by two brothers. They were not well known or particularly well-liked. But they answered a bid tendered by the Army Signal Corps, and delivered a product—the Wright Military Flyer—that exceeded the specified requirements. It was a partnership between industry and the military that was to change the history of warfare.
We are now in a new and more complex era, but the partnership with industry is just as critical to our security today. It must be nurtured and encouraged. We need direct dealings and honest dialogue between industry leaders and those of us in the Department.
Secretary Gates and I have set out to turn over a new leaf with the firms who equip our warfighters. We began from the premise that especially now, with troops deployed and budgets tightening, we must work more closely together.
With the help of Scott, Marion and the efforts of AIA, we are achieving new levels of trust and cooperation that will significantly benefit our warfighters and the taxpayers who invest in our defense. So I would like to thank the members of AIA for helping reset a relationship that is essential for the country. We are committed to a full and direct dialogue and want to make our intensions as transparent as possible.
Today, I would like to talk about three subjects where the DoD-industry partnership is crucial: the Efficiencies Initiative announced by Secretary Gates last spring, the industrial base review that the Department has underway, and our approach to strengthening cyber security.
Let me begin with some historical perspective on the Efficiencies Initiative.
It is important to note that the Efficiencies Initiative did not emerge from a vacuum. It arose in response to significant transition in our fiscal environment. We have arrived at the fifth inflection point in the post-World War II era of defense spending.
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.
We are now entering a fifth transition. The fifth transition is being driven by today’s political climate. Voters are concerned about the economy and the federal deficit. Defense spending will increasingly compete with other priorities.
We are conscious of the fiscal pressure the nation is under. We must take an unsparing look at our own enterprise. We need to manage our resources carefully and justify every dollar we spend on our defense. This was a central motivation of Secretary Gates’ Efficiencies Initiative.
But we also need to ensure fiscal pressure not to disrupt the abilities, the enormous capabilities, and the great qualities we have in the military right now. In short, we need to manage the fifth transition well.
The 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 $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 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. You cannot 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 places stress on the infrastructure and reduces operational readiness. Any approach to efficiencies must be balanced.
Each of these historical lessons is embodied in the structure of the Efficiencies Initiative. But the initiative is shaped by a fourth imperative as well. And that is the need to retain our current force structure over at least the medium-term.
Right now, we still have 50,000 troops in Iraq, face a significant fight in Afghanistan, and have counter-terror commitments around the world. It is our assessment that we will need to sustain these force levels for several more years. This motivates our search for efficiencies in all accounts and underlines the need for savings to be re-invested into the warfighting accounts.
There is an important second party to the Efficiencies Initiative—and that is industry. The fifth infection point in post-WWII defense spending impacts far more than the Department. Firms in the defense industry are already reacting to the transition.
Secretary Gates and I have always known that working with our industry partners is one of the most important aspects of managing the Efficiencies Initiative. The need for us to work hand-in-hand as we confront tough choices is why our Department’s leadership is committed to more frequent and substantive meetings with CEOs and CFOs. It is why the Secretary and key members of his team have already met with so many of you. And it is why I am with you here today.
We are asking industry to join us in our search for efficiencies. We are after performance gains that will be exceedingly difficult to achieve. As part of asking industry to take on the associated managerial and programmatic challenges, we need to be clear about our own intentions, and also to sharpen our focus on the industrial base. The Department depends on a healthy industrial base. We must ensure our policies continue to cultivate one.
As you know, the defense-industrial base is not a monolithic entity, and cannot be approached as one. The defense industrial base is actually a collection of industrial sectors, most of which have changed dramatically since the end of the cold war. Some of these sectors, such as shipbuilding and tracked vehicles, are very mature. Others, including UAVs and cyber security, are still emerging.
The business dynamics present also vary greatly by sector and by tier. Each sector has a different structure associated with it, with differing levels of competition and global sourcing. Each sector is also changing, due to forces such as globalization of production and finance that are quite separate from the Efficiencies Initiative. They are bound to change further as defense spending, and the market for defense goods and services, continues to evolve.
As we confront the changing landscape in the defense industrial base, we must set aside the comfortable, settled understanding of the defense base that has been with us for so long and seek to understand each sector on its own terms. A one-sized-fits-all approach no longer holds, if it ever did. So together with Ash Carter, Under Secretary for Acquisition, Technology & Logistics, and Brett Lambert, our Director of Industrial Policy, I am leading an effort to assess the long-term health of the industrial base.
We are going sector-by-sector, and tier-by-tier, to assemble a long-term picture of what policies in each instance will help the Department fulfill 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. Many of our procurement decisions more closely resemble allocations than competitions. We need to understand how to achieve value for the taxpayer even in these circumstance.
As part of this initiative, I have been meeting with industry leadership. In the coming months, I will tour key sectors and begin a more focused examination of our future policy toward them. My goal is to help formulate a long-term approach to the industrial base. We must look beyond today’s pressures to 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.
Finally, I would like to touch upon another area that will require close collaboration with industry—cyber security.
Our nation faces new and growing threats that result from our extensive use of information technology. To address vulnerabilities in our military networks, the Department is developing a five-pillared strategy.
Our first pillar is to recognize cyberspace for what it is—a new domain of warfare.
Like land, sea, air, and space, cyberspace is a domain where we must be able to operate freely and where we are able to defend our networks from attack. To facilitate operations in the cyber domain, we need an appropriate organizational structure. So last June, Secretary Gates ordered the consolidation of our cyber organizations into a single four-star command, the U.S. Cyber Command.
The second pillar of our strategy is to employ active defenses that can respond to attacks at network speed. Active defenses utilize scanning technology and deflection techniques to detect and stop malicious code. To prevent the most sophisticated attacks on our networks, we need greater agility and defense in depth. In this dynamic domain, relying on a Maginot line of static defenses is as sure to fail now as it did for the French in 1940.
The third pillar of our strategy is to ensure our critical infrastructure is protected. The best-laid defenses on military networks will matter little unless our civilian critical infrastructure is also able to withstand attacks. So in the U.S. we are working closely with the Department of Homeland Security to evaluate how to secure nationally-important networks, including the power grid, transportation network, and the computer networks used by the defense industrial base.
Collective defense is the fourth pillar of our strategy. Given the global nature of the internet, our allies can play a critical role in cyber defense. Indeed, there is strong logic to collective cyber defense. The more attack signatures you can see, and intrusions you can trace, the better your defense will be.
Our strategy’s fifth pillar is leveraging our own technological base, especially to overturn the current dominance of offense in the cyber realm. To do this the scientific community is rethinking the basis of our network architecture—how we can redesign hardware, operating systems, and computer languages with cyber security in mind. Our information technology infrastructure will not change overnight, but over the course of a generation we have a real opportunity to engineer our way out of some of the most problematic vulnerabilities of today’s technology.
The reality is that in a few short years, information technology has transitioned from a support function to a strategic element of power in its own right. Our military networks are far safer than they were just two years ago. But to stay ahead of the cyber threat, the Department must continue to incorporate cyber into our doctrine and organizational structures and extend protection to critical infrastructure. Industry will once again be a key partner in this effort, as it always has been when we confront new and unprecedented threats.
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.
It is important that you understand the individual decisions Secretary Gates and I have taken on a number of fronts. Perhaps more importantly, I want you to grasp the strategic rationale behind them, so we can assemble a common picture of our future course.
The effort to seek efficiencies in the defense budget, to ensure a healthy industrial base, and to secure our networks, is not a sprint. It is a marathon. But it is a race we must win.
As we enter the fifth post-Cold War 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 that will ensure a balanced, capable force in the future.
A strong partnership between government and industry will help ensure this comes to pass. This partnership will help the department be as clear as we can be about our own future directions, while giving you more of a head start on how to meet our requirements, given the country’s fiscal environment.
Together, our cooperation and the careful planning it yields will better serve the warfighter, the taxpayer, and the nation.