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i it 497 March 26, 1986 HOW TO SAVE MONEY AT THE PENTAGON INTRODUCTION The President's Blue Ribbon Commission on Defense Management--the so-called Packard Commission-reported its findings on how to \{ mprove Pentagon management to Ronald Reagan at the end of last month A couple of days earlier, Reagan had appealed to the American people to support his military program to counter the growing Soviet threat.

These two events are related closely. For intelligent defense management reform pays off double: it not only saves money; but more important, it improves the combat capabilities of the U.S. military forces. Such improvement is essential if the U.S. is to counter the continuing buildup in Soviet nuclear and conventional military force.

Pentagon management and procurement reform is long overdue No longer can Congress or the Defenne Department Giving it particular urgency is the Gram-Rudman-Hollings deficit r eduction law ignore the need to make changes in the way the Pentagon purchases weapons, supplies, and other materials. If a budget were not passed in time to prevent the Gramm-Rudman ax from falling, indiscriminate and severe cuts in defense spending coul d impair U.S. security.

The good news is that defense savings can be achieved without harming national security. Some $14 billion to $15 billion could be saved in this year's defense budget alone by such rigorous defense management and procurement reforms as multiyear contracting, greater 1. An Interim ReDort to the President bv the President's Blue Ribbon Commission on Defense Management (Washington, D.C The White House, 1986 hereinafter referred to as the Packard Commission Iuse of commercia12products, a n d contracting out more Pentagon business to private firms. Savings could total tens of billions of dollars over the long-term-b'f these and such other reforms as closing down unnecessary bases, improving inventory management, and making weapons procuremen t mxe competitive were instituted for Congress and the Defense Department to have the courage to change those practices that are inefficient and wasteful I All that is required is A DEFENSE STRATEGY FOR GRAMM-RUDMAN The overriding principle governing defen s e spending in the Gram-Rudman environment is to address first the threat to national security and then to construct a defense budget meeting this threat the most cost-effective way. Reforms in the way the Pentagon develops, buys, and manages weapon system s , moreover, can lead not only to enormous savings but to improved weapon systems. If the Pentagon could be persuaded to see the need to combine improved military effectiveness--i.e., better use and organization of forces-with improved efficiency in the pr o curement of weapons, the net result cculd very well be more military capability for less money in This can be achieved by 1) Increasina defense sDendina bv at least 5 Bercent (after inflation) in fiscal 1987: The Soviet threat is still growing. It does no t dimhish proportionately to the rising U.S. deficit. Real increases in U.S. defense spending also are necessary to persuade America's West European allies to meet their commitment to NATO for a 3 percent rez.1 annual defense increase.

AdoDtina riaorous ma naaement and procurement reforms now is no doubt that the Pentagon's procurement system needs improving. Concluded the Packard Commission: IlWith notable There 2. This is a conservative figure because it is derived only from known estimates. It is based o n a Heritage Foundation staff proposal for cutting defense spending, which includes restructuring the retirement system, consolidating and/or closing military bases, and reforming the procurement system. The $14 to $15 billion figure includes the fiscal ye a r 1987 Heritage defense reduction proposal 13.3 billion) plus additional annual savings between $1 and $2 billion) accrued from general management reforms applied specifically to the Department of Defense. For more on the Heritage proposal (especially the recommendations regarding the retirement system see Slashinn the Deficit: Fiscal Year Deficit: Fiscal Year 1985 (Washington, D.C.: The Heritage Foundation, 1984 pp. 27-29 Washington, D.C.: The Heritage Foundation, 1986 p. xxiii; and Slashine the 2-excepti o ns, weapon systems zake too long and cost too much to produce process of the Gram-Rudma:.i deficit' reduction amendment must be avoided. Such a mindless across-the-board cut ignores strategic tactical, and operational priorities Too often, they da not per f orm as promised or expected.ll 3) Avoidina across-the-board cuts: The automatic sequestration 4) Cuttina force levels must be a last orioritv: Reducing weapons programs and U.S. force levels or changing U.S. strategic priorities to meet budget constraints should be at the bottom of the list for meeting Gram-Rudman deficit reduction targets.

PROCUREMENT REFORMS Perhaps the greatest defense savings can be gained from making changes in'the way the Pentagon purchases its weapons, equipment, and supplies. From procurement reforms alone as much as 8.3 billion could be cut from this year's deficit; fonsiderably more could be saved over a three or more year period Although complex, most procurement reforms are relatively easy to adopt since they require only a dir e ztive by the Secretary of Defense and his insistence that the Pentagon follow throug-h with them. .Among the most important procurement reforms are 1) Multivear Procurement Multiyear procurement. contracts reduce weapons costs. They allow more efficient p lanning and thus lower administrative costsd also allow materials to be purchased more cost effectively.

Multiyear procurement permits contractors to purchase components on a large scale from subcontractors and store them for future production.

Most curre nt. defense contracts extend only one year at a time average cost savings from procurement contracts that extend three years arf estimated at 10 to 20 percent of the cost of weapons systems They The 3. Packard Commission, p. 13 4. Slashing the Deficit: Fi s cal Year 1987, p. xxiii 5. Robert Rector Getting Value for Money in Defense Taming the Federal Budget: Fiscal Year 1986 (Washington, D.C.: The Heritage Foundation 1.985 p. 29 6. Ibid, Also see Robert Foelber, "Cutting the High Cost of Weapons Heritage Fou n dation Backgrounder No. 72, March 16, 1982, p. 7; and "The Advantages of Two-Year Budgeting for thc Pentagon," Heritage Foundation Backarounder No. 391, November 5, 1984 3 The Pentagon began using multiyear procurement coptracts in 1982 And the Packard Co lrmission endorses the expansion and estimates that 6.2 billion has been saved so far. The Department of Defense plans to expand its multiyear procurement program this year of the multiyear procurement program for "high-priority systems.

Competition and Du al Sourcinq As a general rule the more competition-involved in a weapon's research, development, and production, the cheaper the weapon will be. Companies already are required to compete during the inltial research and development phases of a project, but competition normally ends once the contract is awarded. Some procurement reformers believe that competitiop should extend into the production phase of the weapons system. This approach, called "dual sourcing," has some drawbacks of scale, and it may also r equire higher stprt-up cost save about 30 percent in the overall costs of weapons. On balance therefore, dual sourcing makes sense, particularly for wehpons with long production runs It can eliminate savings accumulated from large economies Yet it may 3) B etter Cost Estimates In 1982 the Department of Defense calculated that errors in projecting the cost of weapons systlems resulted in underestimating weapon unit cost by some 9 percent source of cost overruns. The rising annual cost of a weapons program ve r y often can be traced back to an or!.ginal underestimation of the weapon's cost. This can be remedied by 1) establishing new baseline cost estimates before full-scale production (Milestone 111) begins; 2 always using the higher estimate when rtore than on e exists; and 3 holding False cost estimates are a 7. Caspar W. Weinberger, Annual F:eDort to Conpress: Fiscal Year 1987 (Washington, D.C Department of Defense, 1986 p. 104 8. Packard Commission, QD. cit, p. 18 9. Rector, 90. cit pp. 31-32 10. Jacques S. G a nsler, "We Can Afford Security," Foreign Policv, Summer 1983, p. 81 11. This figure, however, does not include the effects of inflation, changes' in weapon design, or production rate changes, all of which can raise the unit cost of a weapon 4 back interna l Pentagon cost estimates during bidding 2 dissuade contractors from proposing unrealistically low prices 4 Increased Standardization of Weapons and Spare Parts The use of common components, equipment, and scbsystems in different weapons systems would redu c e costs greatly and streamline the weapons procurement process savings from increased standardization could amount to as much as 2.3 billion a year demanding that managers most closely associated with the various weapons programs have a greater role in re p orting standardization progress a The Grace Commission estimates that Greater standardization could be achieved by 5) Improvement in Quality .of Procurement Officers Military officers managing procurement projects average less than three gears in their as s ignments field. It is difficult, moreover, to attract high quality officers to procurement because military promotions are awarded primarily for command experience and not for "business functionst1 like contract work. This can be corrected by 1) establish i ng a centralized, civilian-operated agency to take over weapons procurement from the services 2) creating an dite corps of Wrocurement officers who are assured of status and promotions civilian contracting personnel more professional status by16selecting t hose with good business-related education and experience Many lack prior experience in the and 3) giving Weapons Testina Improvement Experience teaches that some U.S. military equipment will not operate effectively or at all in combat. Malfunctioning weap ons systems not only waste money but, more important, endanger combat 12. The Department of Defense has already launched a number of initiatives to improve the pricing system, including the use of more realistic inflation factors in cost estimates.

For det ails see Weinberger, Annual ReDort to C onmess: Fiscal Year 1987, p. 106 13. Rector OD. cit, p.35 14. Armed Forces Journal, September 1984, p. 92; and C. Lincoln Hoewing, "Improving the Way the Pentagon Acquires Its Weapons," Heritage Foundation Backaroun der No. 396 November 28, 1984 15. Senator Dan Quayle (R-IN) has proposed a bill to create an elite civilian procurement bureau. See "Quayle Bill Would Create Elite Corps Of Civilian Program Managers at DOD,"

Defense Newt February 24, 1986, p. 6 16. Packard Commission, pp. 16-1 7 5troops. Weapons testing could be improved by 1) adopting the Packard Commission recommendation to begin operational testing of a weapor early in the advanced stages of development and to continue throuqh full-scale development usi n g prototype hardware;'l weapons under realistic conditions and with the support of the logistical structure that actually will accompany the weapon in the field 3) evaluating weapon systems not according to some hypothetical or abstract criterion but acco rding to existing alternatives 2) testing 7) Use of More Commercial Products The Pentagon habitually develops weapons, equipment, and combat supplies that require components of special design or manufacture.

This drives up costs because it requires a great deal of expensive specialty work and reduces economies of scale.

Department of Defense already has been given a directive (5000.87) to use more Itoff the shelf1' commercial items and products, the services generally circumvent it. Using commercial produc ts could reduce the cost of many items by an estimated 50 percent or more. Total savings could reach nearly $1 hillion per year if practiced throughout the Department of Defense Although the DEFENSE BUDGET REFORMS There is a growing consensus that somethi ng needs to be dons about the way Congress allocates funds to the Department of Defense.

Complained Ronald Reagan at the release of the Packard Commission Report: "We are the only major country in the world that rewrite its defense budget every year, somet imes making detailed revisions two or three times a year The result is waste and confusion in the weapons procurement process.

One way to remedy the problem would be a multiyear defense budget annually. The result: Congress wrestles with the defense budget for most of the year. Defense spending becomes highly politicized, and the task of providing for the military security of the country becomes mi.red in such peripheral fiscal questions as how much higher defense spending might be than it was the previous year. E, multiyear (say two-year) defense budget would make the weapons procurement process Under the present system the defen s e budget must be approved 17. Packard Commission, p. 17 18. Foelber m~ p. 11 19. "Reagan Hails Proposals on Pentagon Management The New Yotk Times, March 2, 1986 p. 25 6much more stable and thereby reduce its cost by introducing a greater degree of predic tability into the planning, design, and production of weapon systems.

MANAGEMENT REFORMS The Department of Defense clearly needs management reform. This was recognized by Reagan in 1985 when he formed the Packard Commipsion on Defense Management Reform. Bu t the Pentagon did not wait for the Commission's findings it launched reforms on its own. These include internal management review programs, a strict auditing program under a newly created Inspector Genzral, and a special investigative unit to seek out pr ocurement fraud.

Whereas procurement reforms reduce the cost of buying weapons and supplies, management reforms reduce the cost of maintaining them.

Some management reform ideas are 1) Consolidate the Acauisition Process The Packard Commission Kecommends creating a new Under Secretary of Defense for Acquisitions. This is to streamline the procczement process by consolidating responsibility in one authority, a new and powerful Under Secretary only one level below the Defense Secretary A secondary aim is to reduce the influence of the individual services on the weapons procurement process 2) Consolidate Contract Administration The Grace Commission calls for consolidating all Pentagon contract administrative activities into a single organization reporting to t he Under Secretary of Defense for Research and Engineering. The Grace Commission estimates that this would save 185 millign over three years, with most of the savings coming in the third year 3) Contract Out A myriad of regulatory obstacles now inhibit th e Pentagon from hiring private firms to provide services, a process known as 20. Weinberger, Annual ReDort to Congress: Fiscal Year 1987. p. 114 21. Packard Commission g ciL p. 16 22. President's Private Sector Survev on Cost Control: ReDort on Procurement / Contractsl Inventorv Manaeement Spring-Fall 1983, p. 103 7-contracting out commercial and industrial activities could save between 450 million and $1.3 billion &his fiscal year and as much as $4.5 billion per year after five years. One way to increase con t racting out is suggested by Senator Warren Rudman, the New Hampshire Republican. He plans to introduce a bill requiring that all commercial activities in the Department of Defense be subject to contracting out. Though this may seem Draconian, it may be th e only way to achieve the optimum savings from contracting out An expanded Pentagon program for contracting out 4) Reform Automatic Data Processinq If the services were willing to make a relatively high initial investment in new automatic data processing s y stems, significant net reductions could be made in the long run. Example: the Grace Commission estimates that a net 5 billion could be saved in the next decade, or an average of $500 million annually, if2,the Navys automatic data processing systems were m o dernized. For &he Army Grace estimates $827 million in savings over three years. And for the Ai& Force, the savings could amount to $580 million over three years 5) Im?xove Manaaement of Inventorv The Grace Commission estimates that reducing Pentagon inve n tories could result in very large savings save as much as 6 billion over three2,years, with savings coming mostly in the second and third years Reducing inventory levels could The Pentagon claims that 23. The lower figure of $450 million is based on the f u ll implementation of a Pentagon contracting out program for employees scheduled for this fiscal years A-76 review, i.e for 35,000 positions. The higher figure is based on contracting out 100,000 positions which would require an expanded A-76 review progra m . See Office of Management and Budpet: Management ReDort (Washington, D.C 1986 p 74. Some information from the National Council of Technological Service Industries, Washington, D.C 24. Presidents Private Sector Survev on Cost Co ntrol: The DeDartment gf t h e Navv, p. 126 25. Presidents Private Sector Survev on Cost Control: The DeDartment of the Armv, p. 121 26. Presidents Private Sector Survev on Cost C ontrol: The DeDartment of the Air Force 9D. Cit 27. Presidents Private Secto r Survev on Cost Control: R e Dort on the Office of the Secretarv of Defense, 9 cit, Section 2 8-improvements in the way that it handles spare parts already have saved more than 2.5 billion over the past two years. Making other management hprovements in inventories, such as extending t he tours of officers in inventory and providing new automated systems, could save 1 billion mer five years for the Navy alone would be start-up costs for the automated systems accrue from inventory reductions, fewer losses of inventory items, and the redu c ed personnel requirements arising from greater automation Thsre, of course Savings would ReDeal Conaressional Obstacles to Manaaement Efficiencv Legislative obstacles impede efficient management of the Pentagon. The Service Contract Act, enacted in 1965, requires payment of prevailing wage rates to workers covered by a service contract.

The Davis-Bacon Act of 1931 requires that workers on public works projects, too, be paid prevailing wages. Repealing these bills would result in significant savings. Though estimates vary, savings could exceed $3 billion a year i applied to all contracting employees of the Department of Defense.

CONGRESSIOKAL OVERSIGHT REFORMS A majcbr contribQtion to Pentagon inefficiency and waste is congressional micromanagement and inte rference. Advises Ronald Reagan: IIInstead of scrutinizing every paperclip, bolt and bullet Congress should give more thought to our overall defense needs and strategy 11 This could be remedied by 1) Consolidatina the Conaressional Authorizina and Amromia t lons Committees To consolidate the oversight and spending responsibilities of congressional defense committees, reformers have recommended 28. Weinberger, Annual ReDort to Conmess: Fiscal Year 1987, p. 108 29. President's Private Sector Survev on Cost Con t rol: The DeDartment of the Navy, p. 107 30. This figure is derived from Grace Commission estimates for the Air Force extrapolated over the entire Department of Defense. See President's Private Sector Survev on Cost Control: The DeDartment of the Air Force 31. "Reagan Hails Proposals on Pentagon Management QD. cit 9-consolidating the congressional aukhorizing and appropriating functions into a single committee. Supporters believe that combining the authority o approve and appropriate defense budgets into a s ingle committee, or simply stripping the appropriations defense subcommittees of, some or most of their authority to outlay funds, would reduce the steps in the budget process and also the time Congress spends reviewing the defense budget the budgeting pr o cess by bringing a single perspective to bear on the many budget items It also may reconcile 2) Reducina the Pentaaonls Regort Load The Department of Defense spends an enormous amount of time reporting to Congress. This costs a great deal of money and div e rts top Pentagon officials from their primary duty of establishing and managing national defense policy reformers suggest that each member of Congress bg allocated a certain amount of llreports moneyt1 for Pentagon requests. A Congressmanls request for Pe n tagon.reports would be restricted by how much it costs to comply. If the cost of compliance exceeds the preestablished ceilings on Inreports money,Il then that request will be denied limited amount of reque-st money, each member presumably would request o n ly the most needed information from the Pentagon To correct this problem some With a 3) Focusina Conaressional Hearinas on Missions Instead of Budaet Items Congressional hearings focusing on specific military missions-such as nuclear deterrence, force pro j ection, air superiority, antisubmarine warfare, and the like-instead of on defense budget items would introduce a degree of rational consideration of strategy to the way Congress allocates funds for weapons systems already geared toward m:'.litary mission s -such as the Senate Armed Services Subcommittee for Seapower and Force Projection-such others as the House Armed Services Subcommittee on Military Installations are not Although some armed services subcommittees are 32. Representative Jim Courter (R-N.J h a s proposed a bill that would transfer most of the authorities for appropriating defense funds of the House Appropriations Defense Subcommittee over to the House Armed Services Committee. See "Courter's Procurement Reform Bills Would C..ut Hill Oversight B u reaucracy," Defense News, February 10, 1986, p. 29 33. Theodore Crackel, "Pentagon Management Problems: Congress Shares the Blame," Heritage Foundation Bjwkerounder No. 405, January 22, 1985, p. 9 10 CLOSING BASES AND.SELLING EXCESS REAL 'ESTATE The Depar t ment of Defense maintahs 5,600 separate installations and properties throughout the world; some 4,000 are in the U.S Many of these are inefficiently operated or redundant estimated that 2 billion could be saved this fiscal year if unnecessary military bas e support operations gere consolidated and superfluous bases either closed or realigned It is CONCLUSION Reagan's much needed military program should not be jeopardized by misunderstanding the also critical campaign to eliminate waste and fraud in the Depa r tment of Defense as a way of enhancing the nation's security, not a's an excuse to cut the defense budget to dangerously low levels. Nor should calls for reforms, such as those by the Packard Commission, be viewed as an indictment of Defense Secretary Cas p ar Weinberger. The Pentagon's procurement problems are systemic and decades old time to assign blame for them; now is the time to do something about them Responsible reform should be seen Now is not the The Gram-Rudman budget ceilings offer an opportunity and incentive to revamp Pentagon management systems in a way that strengthens the nation's defenses U.S. force levels or weapons systems, therefore, need not be cut to help balance the budget. To be sure, some weapons programs may be candidates for cuts-- t he proposed C-17 cargo plane, for example, which is not the right aircraft for the strategic airlift mi&sion. But all such cuts should be based mainly on military grounds nation's strategic priclrities should be the very bottom priority in the struggle to slash the deficit efficient and cost-effective, to streamline the management of the nation's defense resources, and to improve the way Congress oversees and allocates funds for defense Such reforms could save $14 to $15 billion this year alone and billion s more if effectively implemented over years to come Eeducing force levels or changing the The first priorities must be to make the procurement process inore 34. Slashinp the Deficit: Fiscal Year 1987, OD. cit p. 13 35. Slashine the Deficit: Fiscal Year 19

87. OD. ciL. p. xxiii; pp. 13-14 36. See Kim R. Holmes Closing the Military Airlift Gap," Heritage Foundation Backaround No. 482, January 3, 1986 11 In the end, the deciding factor in the analysis of the defense spending levels should be the growing power of the Soviet Union MOSCOW'S military strength and that of its allies which must determine the level of U.S. defense spending, not the size of the deficit It is Kim R Holmes, Ph.D.

Policy Analyst 12