Chapter 13
BUSINESS AFFAIRS, INTERNATIONAL PROGRAMS, AND INSTALLATIONS
Throughout the United States, private firms have sought to reinvent how they conduct business -- in order to produce higher quality products, serve customers better, and reduce costs. At the same time, the government as a whole has sought to streamline and reengineer its operations to increase efficiency, most notably through Vice President Gore's National Performance Review. The Department of Defense is also committed to these objectives. DoD has worked to become a smarter customer -- pushing for efficiency and value from suppliers, and better access to commercial and international suppliers -- while working to ensure that essential defense industrial capabilities are protected. DoD also worked hard to make sure it better manages the resources and installations under its stewardship. Private sector tools like outsourcing, privatization, and competition are important instruments in DoD's efforts to do more, and do better, with less.
BUSINESS AFFAIRS: BEING A SMARTER CUSTOMER
The shift of military mission over the past decade has had a dramatic impact on those industries that produce military-unique items. In the 1990s, declining force structure requirements translated into a need for smaller purchases of weapons. The resulting decline in procurement created a series of challenges for the Department.
Specifications and Standards Reform
As DoD becomes a relatively smaller customer, the Department can no longer afford to rely solely or primarily on defense-unique industrial capabilities. One of the Department's principal objectives is to open the defense market to commercial companies and technology -- not only prime, but subtier suppliers as well. One of the best examples of how DoD is accomplishing this goal is Military Specification (MilSpec) Reform.
Through MilSpec Reform, the Department of Defense is trying to achieve the proper mix of technical documentation to guide the Department and industry in the design, production, and acquisition of weapon systems and items of support. The goals of this reform are to save money, remove impediments to getting state-of-the-art technology rapidly into weapon systems, and facilitate the diversification into commercial markets of firms that have traditionally produced goods primarily for defense.
The Department has reviewed over 30,000 military specifications and standards with the intent of either eliminating them or replacing them with performance or commercial type documents. Since MilSpec Reform efforts began in June 1994, 4,230 military specifications and standards have been canceled; 375 performance specifications have replaced detail specifications; and 1,737 additional nongovernment standards have been adopted.
The Department is currently working with industry to determine which existing nongovernment standards can be used as replacements for military specifications or standards. Where adequate nongovernment standards do not exist, DoD is actively participating with industry to develop suitable documents. Examples of these efforts include the Equal Partner Implementation Committee, comprised of private sector standards developers and federal agencies which seek to foster greater use of nongovernment standards in federal agencies; and the Partnership in Reliability, Maintainability, and Supportability Standards, an information sharing consortium for professional societies, industrial associations, and government agencies interested in the development and maintenance of nationally recognized world-class standards.
Responding to Industry Rightsizing and Preserving Essential Capabilities
DoD is also working to create a climate in which industry can take the necessary steps to operate efficiently and effectively. At the same time, the Department needs to ensure that adequate competition is retained and essential capabilities are not lost.
REVIEW OF MERGERS AND ACQUISISTIONS
The reduction in the Department's procurement budget since FY 1985 has spurred a dramatic increase in the number of mergers and acquisitions in the defense industry. Such transitions permit companies to reduce overhead, eliminate excess capacity, diversify product lines, and thereby cut costs. Over the past several years, the Department has become more active in reviewing the effects of these mergers and acquisitions on the Department's programs.
These DoD reviews address four questions: First, will the merger result in a loss of necessary competition. Second, are there vertical integration issues or significant buyer/seller relationships between the two firms. Third, does the merger present potential organizational conflicts of interest, where one of the companies provides the Department management or advisory services concerning products produced by the other firm or its competitors. Fourth, what costs or savings could accrue to the Department as a result of the acquisition.
In FY 1996, the Department reviewed approximately 14 transactions. The Deputy Under Secretary of Defense for Industrial Affairs and Installations, working closely with the Office of the General Counsel, is the official within DoD primarily responsible for review of mergers and acquisitions in the defense industry. After a detailed review, the Department relays any concerns to the appropriate federal antitrust authority. In the past four years, none of the proposed mergers involving defense firms have been rejected or withdrawn completely. However, in a number of instances, modifications were made to meet the concerns of the Department or antitrust agencies.
While the Department takes great care to monitor the impact of mergers and acquisitions, it has generally been supportive of defense industry consolidation because it provides significant long-term cost savings to the Department as a major customer.
The Department only pays its fair share of restructuring costs resulting from a merger or acquisition after the Under Secretary of Defense for Acquisition and Technology certifies that the overall savings to DoD and to the U.S. taxpayers exceed the expense. Nearly one-third of allowable restructuring costs are related to worker benefits. DoD pays its share of amounts spent for severance pay, relocation assistance, retraining, and retention of medical benefits. DoD does not and will not pay for any portion of the purchase price or cost of making the acquisition, for bonuses tied to the merger or acquisition, or for executive severance packages. Restructuring costs have been certified for three major business combinations since July 1993, and costs have been allowed for one other combination where a certification was not required by law. For these four transactions, the DoD projected share of the restructuring costs was $325 million versus a projected Department savings of $1.448 billion over five years.
PRESERVING ESSENTIAL CAPABILITIES
Industry restructuring and consolidation lead to increased efficiencies and reduced defense product costs. However, these changes also could have important consequences for the Department's ability to meet its future requirements. Therefore, the Department must, and has, developed the policies and procedures necessary to make appropriate judgments about industrial issues and to integrate those judgments into its regular budget and acquisition processes.
On April 25, 1996, DoD published Directive 5000.60, Defense Industrial Capabilities Assessments, and accompanying Handbook 5000.60-H, Assessing Defense Industrial Capabilities. These documents collectively describe the policies, procedures, and circumstances under which DoD will take special action to preserve an industrial capability. The documents require the analysis to verify that the product or service is required to meet current or future military missions, or readiness or sustainment requirements; that the industrial capabilities are essential to making the product or service; that unique capabilities are truly endangered; and that the recommended solutions are the most cost- and mission-effective. No action may be taken nor an investment made to preserve an industrial capability unless it is the most cost- and time-effective alternative to meeting national security requirements.
DOMESTIC SOURCE RESTRICTIONS
Both Congress and the Department have established restrictions on the use of foreign products in defense systems. The restrictions were designed to preserve a domestic mobilization base -- to maintain the industrial capability required to rapidly produce the defense materiel needed to support its wartime needs. For the foreseeable future, this threat has changed. Today, DoD bases its wartime planning needs on a requirement to fight two nearly simultaneous major regional conflicts.
Absent widespread mobilization requirements, in an increasingly global commercial market, and consistent with national security requirements, DoD should take full advantage of the benefits offered by access to the best global suppliers. Additionally, DoD wants to promote consistency and fairness in dealing with its allies, while ensuring sufficient U.S. industrial and technological capabilities are maintained to support defense needs.
In 1996, the Department examined foreign product restrictions contained in the Defense Federal Acquisition Regulation Supplement (DFARS) that were imposed by DoD policy decision. For each restriction, the Department carefully determined if there were national security reasons or supplier reliability, cost, and quality reasons for retaining the restriction.
DoD decided not to retain DFARS subpart 225.7013, which requires that all new major defense systems use domestic sources for Polyacrylonitrile (PAN) carbon fiber requirements. DoD also decided not to retain both DFARS subpart 225.7020, which requires that all new major defense systems use domestic sources for coal and petroleum pitch carbon fibers, and those parts of DFARS subpart 225.71, which imposed restrictions for various ferrous forgings, precision components for mechanical time devices, high purity silicon, and high carbon ferrochrome.
In three cases contained in DFARS subpart 225.71, involving specific ferrous forgings used by the Navy, the Department decided not to rescind administratively imposed domestic source restrictions. DoD plans to indefinitely retain the restrictions for periscope tube forgings and ring forgings for bull gears, and defer for one year final consideration of similar restrictions for ship propulsion shaft forgings. A final decision on foreign product restrictions for ship propulsion shaft forgings is being delayed.
Assuring Affordable Access to Leading Edge Technologies
The Department has long had a major role in fostering technological innovation. The Department had funded virtually all of the early research and development (R&D) in computers and networking, setting the stage for a computer industry that today forms the backbone of U.S. military and economic strength. In the aircraft industry, military R&D led to fundamental advances in airframe design and jet propulsion, including the first U.S. jet engine.
Advanced technology products and much of this nation's technological momentum are increasingly based on developments made by commercial enterprises, both in the United States and abroad. The rapid growth of the commercial industrial sector, driven by a commercial market, has in many areas reduced the once primary role of defense spending as the driving force for technological innovation.
The cycle time of commercial technological innovation is the time it takes commercial firms to develop and market improved products. For many products, this innovation cycle time is about three to four years, and even faster in computers, communications, and electronics. The Department's historical cycle time is 15 years. In the future, the lives of soldiers, sailors, marines, and airmen will depend on how rapidly DoD can get systems that use the best technology. In a global market, where everyone, including potential adversaries, has increased access to the fast-moving commercial technology base, an important military advantage goes to those nations that have the best cycle time to incorporate and field appropriate technologies. The Department has a number of important initiatives to facilitate the incorporation of commercial technology.
To leverage commercial technological advances and reduce innovation cycle times, DoD initiated a dual-use technology strategy as described in Dual Use Technology: A Defense Strategy for Affordable, Leading-Edge Technology. A key element of the strategy is to insert leading edge commercial technologies into military systems.
Although the benefits to be gained from using commercial technologies have been recognized for some time, it often seemed less expensive and quicker to stay with a military technology than to take the time and program funding needed to test and qualify a replacement commercial technology.
To overcome this hurdle, DoD recently initiated a Commercial Technology Insertion Program (CTIP). The purpose of the program is to identify commercial technologies having the potential to improve the performance, reduce the life-cycle costs, or shorten the cycle time of military systems. For example, DoD plans to use the CTIP to support an open architecture approach to software upgrades on the AV-8B Harrier. Open architecture emphasizes the use of commercial practices, products, and interface standards to provide quick access to commercially available technology. Once technologies are identified, CTIP helps defray the costs of testing, qualification, and/or redesign needed to ensure the technology will work. Each military department submitted proposals which are currently being selected, and projects will be initiated during the fiscal year. Complementing the CTIP is Title III of the Defense Production Act, which ensures DoD has a viable production base for important dual use technologies. These authorities were used to enhance military capabilities and establish production capacity in several key technology areas.
FLAT PANEL DISPLAYS
Flat panel displays (FPDs) are thin, flat electronic devices used to display text, graphics, and images. The displays have dramatically increased in performance and capability during the past decade and are quickly replacing heavier cathode ray tube displays in avionics, laptop computers, monitors, and televisions. The new displays are only a few millimeters deep, weigh less than a pound, are completely portable, and are rugged enough for use in aircraft cockpits. These improved features make them vital to the military. The Title III program is being used to install U.S.-produced cockpit displays in the Army's Apache helicopter. The display's smaller volume translates into a better line of sight for the pilots and projected improvements in reliability should result in lower maintenance expense for the entire Apache system. Before Title III funds were made available, program managers planned to install the older cathode ray tube displays in the Apache cockpit. This project is also expected to help domestic suppliers compete in the global market. The Apache alone constitutes a demand of more than 3,200 active matrix liquid crystal displays, plus a potential for 500-1,000 Foreign Military Sales aircraft. In addition to the Apache, the Title III program is being used to install FPDs in other systems like the C-141 Starlifter, F-18 Hornet, and AV-8B Harrier. The military demand for FPDs stimulated by the Title III program will enable U.S. companies to become viable producers able to meet demand by both military and commercial customers.
GALLIUM ARSENIDE WAFERS
Gallium arsenide (GaAs) wafers is an enabling technology for radar, smart weapons, electronic warfare, and communications. The United States did not have an adequate domestic supplier base capable of supporting military requirements. To correct this situation, Title III funding was used to establish the necessary GaAs production capability. Since the inception of the Title III project, demand for GaAs wafers has grown, supported in part by the availability of wafers from Title III contractors. Buoyed by increasing demand from the military seeking sophisticated electronic warfare components and from commercial users to enhance their communications and computing capabilities, the market has been expanding 15 to 25 percent annually.
DISCONTINUOUS REINFORCED ALUMINUM
Discontinuous reinforced aluminum (DRA) is an advanced composite of aluminum alloy and silicon carbide particulate. This material is significantly stiffer, stronger, lighter weight, more wear-resistant to abrasives, and more dimensionally stable than aluminum alloys and many other composites. The Title III objectives are to expand production capacity for DRA, demonstrate the capability to produce high quality material with consistent properties in production amounts at an affordable cost, and to insert DRA performance advantages into military equipment. The Title III material is targeted for applications on the F-16 and C-130. The contractor successfully completed scale-up for production, qualified material against the product specification, and drove the price down significantly. DRA has been selected for use in the F-16 ventral fin to overcome unacceptable material failure in the current material. As a result, the mean time between failure has been raised from 1,000 to 6,000 hours. Another application is the ammunition rack on the AC-130 gunship. DRA allowed for the design of a more durable rack while reducing the weight from 2,100 to 1,300 pounds. With regard to commercial applications, a turbine engine manufacturer expects to save millions of dollars using DRA for exit guide vanes.
SILICON ON SAPPHIRE WAFERS
The Title III program was used to establish an annual domestic production capacity of more than 50,000 high quality four-inch silicon on insulator/silicon on sapphire (SoS) wafers. SoS wafers provide a radiation-hardened substrate on which integrated circuits and electronic devices are built. Many military electronic systems, especially satellites, must withstand extended exposure to radiation (whether natural or from nuclear weapons detonated in space). The wafers now produced have radiation hardness increased by a factor of 10. A purchase commitment by the government using Title III authority motivated the contractor to share the costs and risks of establishing a domestic SoS wafer production capability. Meanwhile, sales of the wafers to other users expanded the manufacturer's market and made the wafers more affordable. The success of this program gives DoD a domestic source of affordable, world-class SoS wafers. Process improvements enabled the manufacturer to penetrate international markets and establish a commercial business base that ensures a reliable source for the U.S. military.
Promoting Small Business Programs
Small business is a key element to the economic security of the United States and an important source of the industrial capabilities supporting defense needs. Small businesses bring critical innovation to the defense marketplace. Additionally, small business is an engine that provides for job creation and ensures that a greater number of citizens receive benefits from defense procurement dollars.
In FY 1995, the DoD completed its most successful year in the history of the small business program, exceeding all FY 1995 small business program goals. In FY 1995, DoD awarded a total of $110 billion to U.S. business concerns, of which $25.3 billion was awarded to small business. This outstanding performance represents a small business achievement rate of 23.0 percent, which has been unequaled in the last 29 years.
In that same year, DoD awarded $6.9 billion in prime contract awards to small disadvantaged business (SDB) concerns. This unprecedented success represents 6.2 percent of total DoD expenditures, and significantly improves its previous high SDB percentage of 5.5 achieved in FY 1994. In dollar terms, the $6.9 billion accomplishment during FY 1995 surpasses the previous high of $6.2 billion in FY 1994 by $700 million. This accomplishment equates to a 12.2 percent increase in real dollars over FY 1994.
In the women-owned small business (WOSB) program, the Department awarded $2 billion in prime contracts during FY 1995. This represents the highest dollar amount and percentage achieved since the inception of the WOSB program in FY 1979. To put this achievement into a historical perspective, awards to WOSB concerns have increased at an annual 8.3 percent rate since the inception of the WOSB program in FY 1979.
In the area of subcontracting, DoD prime contractors awarded to small businesses $19.2 billion, or 42.5 percent against a goal of 38.0 percent. DoD prime contractors' success represents the highest small business subcontracting performance, in percentage terms, since FY 1979.
DoD major prime contractors reported unparalleled success in the SDB subcontracting program. These prime contractors reported $2.6 billion or 5.8 percent in subcontract awards to SDB firms during FY 1995, out of a total subcontracting award base of $45 billion.
This 5.8 percent accomplishment significantly improves on the previous SDB
subcontracting record performance of 5.0 percent in FY 1994. In dollar terms,
DoD's prime contractors have increased their subcontract awards to SDBs by
$350 million over their previous high of $2.25 billion in FY 1994.
In the WOSB subcontracting program arena, DoD major prime contractors awarded $1.2 billion or 2.7 percent in FY 1995. This success surpassed their previous WOSB subcontracting record of $1.0 billion or 2.3 percent in FY 1994.
DoD's small business, SDB, and WOSB program achievements are even more impressive because they come at a time when the Department's total prime and subcontract dollars are decreasing. This success is even more significant when one considers the types of products and services DoD buys for which there are no small business providers. For example, tanks, submarines, and fighter aircraft are systems that only large business can provide.
SMALL BUSINES INNOVATION RESEARCH PROGRAM
In FY 1996, the DoD Small Business Innovation Research (SBIR) program funded $430 million in early-stage R&D projects at small technology companies -- projects that serve a DoD need and have the potential for commercialization in military and/or private sector markets. A May 1996 DoD review of the program found that SBIR research quality has kept pace with the program's expansion since 1992. Previous, independent studies of the SBIR program by the General Accounting Office (GAO), National Academy of Sciences, and others have consistently given the program high marks for research quality and commercialization.
DoD has a number of examples of SBIR-developed technologies that have significantly strengthened U.S. economic and military capabilities. A recent example is the SBIR-developed SaviTag -- a miniature radio transceiver with an embedded microcomputer -- that automatically tracks the location and contents of cargo containers used for transport. The SaviTag has become a central element in DoD's Total Asset Visibility effort and is used on almost all shipments into Bosnia.
In FY 1996, the DoD Small Business Technology Transfer (STTR) program funded $30 million in cooperative R&D projects, each between a small technology company and a research institution (for example, university, federal laboratory, or nonprofit research institution). Early evidence suggests that the DoD STTR awards complement those made solely to small businesses under DoD's SBIR program by harnessing technologies that can be best developed jointly by the company-institution team. DoD believes that the STTR awards serve an important function.
MENTOR/PROTEGE PROGRAM
The DoD Mentor-Protege Program continues to play an important role in the development of technical capabilities in small disadvantaged business concerns and qualified organizations employing the severely disabled. Through the efforts of a large business mentor, these concerns are provided the business and technical assistance necessary to compete more effectively in the complex DoD marketplace.
As of the end of FY 1996, over 160 large business firms have participated in the program as mentors, receiving either reimbursement for their efforts or credit toward their small disadvantaged business subcontracting goals. Over 275 protege firms benefited from their participation under this program. Several protege firms have substantially increased their prime and/or subcontracting awards as a result of the technical assistance they received under this program.
The Department sought and received (with the passage of the FY 1997 DoD Authorization Act) an extension of the period for acceptance of new agreements to September 30, 1998, and an extension of the period for incurring costs which are eligible for reimbursement to September 30, 1999.
LEVERAGING U.S. STRENGTHS THROUGH INTERNATIONAL COOPERATION
In military operations, U.S. forces often fight or work alongside the military forces of other nations. Deploying forces in cooperation with those of other countries places a premium on interoperability -- ensuring U.S. systems are compatible with allied systems. International cooperative efforts offer a real chance to enhance interoperability, further access and influence, stretch declining defense budgets, and preserve defense industrial capabilities.
New Ways of Doing Business with Governments
The Department has renewed its efforts at international cooperative development. Such cooperation can range from simple subcontracting relationships to licensing and royalty arrangements, joint ventures, and bilateral and multilateral cooperative programs. Some of the more notable success stories in international industrial cooperation include the F-16 Falcon, AV-8 Harrier, T-45 training aircraft, CFM-56 engine, the continuing cooperative efforts under the NATO Airborne Warning and Control System (AWACS) program, the Multifunctional Information Distribution System (MIDS), and Theater Missile Defense. The Department is now working with allies in Europe and Asia to explore and implement new possibilities, including Medium Extended Air Defense System, Joint Strike Fighter, and NATO Alliance Ground Surveillance System. The international cooperative R&D program has led to sharing of military technology among allies, as well as to development of joint equipment to improve coalition interoperability. Such items include advanced aircraft, combat vehicle command and control, communications systems interoperability, and ship defense.
As DoD takes greater advantage of the opportunities in international defense cooperation and commerce, it continues to address the risks of the proliferation of weapons of mass destruction and advanced tactical systems. DoD has worked to ensure that agencies understand the nature and importance of the February 1995 Conventional Arms Transfer policy and take its tenets fully into account when pursuing cooperative international defense programs and sales. As a result, both economic security and national security interests are pursued and protected.
DoD has also taken steps to improve the effectiveness and efficiency of international cooperation. An International Armaments Cooperation Handbook has been developed to provide a compendium of current policy, key processes, and points of contact for use by persons working cooperation issues in the Department. In addition, by streamlining the international cooperative agreement review process, the average processing time for such reviews has been reduced from 130 days to 30 days. DoD has several additional efforts underway to improve international cooperation.
International Cooperative Opportunity Groups
The Department is examining the potential for international collaboration on upcoming major system acquisitions. As part of this effort, the Armaments Cooperation Steering Committee (ACSC), the senior armaments cooperation policy and oversight body within the Department, is implementing a disciplined process for identifying new opportunities for international armaments cooperation. The first ACSC initiative deals with the formation of International Cooperative Opportunity Groups (ICOGs) to identify and recommend specific new opportunities for armaments cooperation earlier in the acquisition process.
ICOGs were established in the following areas: major systems (in their early phases), science and technology programs, and Advanced Concept Technology Demonstrations (ACTDs). These ICOGs have identified programs as candidates for potential cooperation based on several factors: the degree of requirements commonality; the extent to which the technologies, strategies, and budgets of the potential partners are complementary; the potential for international industrial teaming; and the perceived benefits and risks associated with execution of an international program.
Defense Cooperation in Armaments
In performing their Defense Cooperation in Armaments (DCA) mission, the overseas Offices of Defense Cooperation (ODCs) provide a direct linkage to the ministries of defense in host countries and to the commander in chief (CINC) staffs in both the European and Pacific Commands. The ODCs are attuned to the requirements of the CINCs and the realities of the defense industrial base in their areas of responsibility. Currently, the DCA personnel assigned worldwide are split between the European and Pacific theaters. With these personnel, DoD has a valuable resource in furthering armaments cooperation. In light of the changing national security landscape, both in government and industry, the steering committee's second major thrust is to evaluate how to more effectively use DCA resources and better align DoD personnel to take advantage of emerging opportunities.
Defense Science Board Task Force on International Arms Cooperation
The Defense Science Board developed a future model for armaments cooperation and defense trade. The Defense Science Board Task Force on International Armaments Cooperation specifically addressed a model for 21st century armaments cooperation that preserves effective competition; methods for preserving effective two-way access to critical military technologies; methods to assure maximum leveraging of the commercial industrial base; and approaches for maximizing the involvement of the CINCs in international cooperative efforts.
Defense Export Loan Guarantee Program
The Defense Export Loan Guarantee Program is a new DoD effort that provides a mechanism for promoting armaments cooperation and defense trade -- one that DoD recently implemented to comply the provisions of the FY 1996 Defense Authorization Act. Many other nations have export assistance programs that support the defense sector, but in the United States, the Export-Import Bank is prohibited by law, with limited exceptions, from financing defense articles and services.
This new DoD program provides U.S. defense industry with access to government loan guarantees for defense exports. DoD has authority to issue up to $15 billion of loan guarantees. Eligible countries include NATO and major non-NATO allies, noncommunist Asia Pacific Economic Cooperation nations, and central European emerging democracies. This DoD program is intended to mirror similar programs of the United States Export-Import Bank and is supported totally by fees collected from users. The program is available to support foreign military sales or commercial defense exports through the Arms Export Control Act process.
OURSOURCING, PRIVITIZATION, AND COMPETITION
To ensure that DoD is able to meet its goal of maintaining readiness, improving quality of life, and increasing funding for modernization, DoD is carefully examining its internal operations and support activities to determine where it can lower costs and improve performance. One key way to achieve these objectives is by drawing on the tools of outsourcing, privatization, and competition.
The Private Sector Experience
In the past decade, fundamental changes have affected the U.S. economy. Increasing globalization and high rates of innovation created a much more competitive environment for U.S. industry. In response, U.S. businesses reengineered their internal processes, invested in state-of-the-art technology, and concentrated on their core competencies. They turned to networking and joint ventures to expand these capabilities. They streamlined their operations to improve their efficiency and enhanced their focus on what they do best. And they turned to outsourcing contracting with other firms to provide the capabilities they need but which are not part of their core capabilities. Outsourcing directly contributed to the ability of many U.S. firms to reestablish their leading positions in the world economy.
Entire new industries -- and companies -- have grown to meet this demand for specialized services across a range of functions: aircraft and ship maintenance, inventory management, accounting and finance, internal audit, data center operations, software maintenance, computer network support, applications development, telecommunications, transportation services, facility management, and benefits administration. In 1996, these outsourced service industries generated an estimated $100 billion in sales.
Why Outsourcing is Important to DoD
DoD must also introduce greater competition into its noncore activities to lower costs and improve the quality of service to the warfighters. Outsourcing will allow the Department to focus on its core missions and improve service quality and responsiveness. Savings from outsourcing and competition also can enhance force capability and increase funding for DoD's modernization program.
CORE TENETS
The opportunities are significant. DoD believes that it can save billions
of dollars a year through outsourcing and competition, and the Department
is taking the actions necessary to make this happen. As the Department
investigates opportunities, it is taking a judicious approach guided by the
following three principles:
PAST EXPERIENCE
DoD has already accrued significant benefits through outsourcing. Between 1978 and 1994, the Department conducted over 2,000 competitions under OMB Circular A-76. These competitions have reduced annual operating costs of their programs by an average of 31 percent, yielding $1.5 billion in annual savings. Government activities win about half of these competitions.
Service Quality and Responsiveness
Creating Incentives. To create appropriate incentives, in early 1996 the Deputy Secretary of Defense signed an important memorandum directing that Services would keep the savings generated by their own outsourcing efforts and that these funds should be used to strengthen modernization.
Actions Underway. DoD has pursued a multipronged strategy to identify opportunities -- examining activities from base operations to material management and from housing to depot maintenance.
Material Management. The Department has made tremendous progress in material management through its prime vendor and direct vendor delivery programs. By allowing private producers to distribute directly to DoD customers, the Defense Logistics Agency has reduced inventories, warehousing, and transportation costs. In the case of pharmaceuticals, costs have fallen by over 25 percent and delivery time has fallen by 75 percent -- so that goods now reach customers in 24 hours. This is not just doing a job more cheaply -- it is doing the job better -- and DoD is now extending this program to other commodities.
Disposal. In 1996, DoD began reengineering disposal operations -- an effort expected to cut costs by at least 10 percent and increase revenues by 50 percent and significantly reduce the need for new capital investment.
Distribution Depots. In 1997, DoD plans to conduct pilot programs to privatize the distribution depots at Sacramento, California, and San Antonio, Texas. In order to take advantage of recent state-of-the-art improvements in distribution technology, DoD will encourage contractors at both sites to reengineer business processes at the distribution depot; the Department will then evaluate the experience and results for potential expansion to other sites.
Inventory Control Points. DoD has recently completed the business case analyses for the Armed Services' Inventory Control Points -- those activities responsible for management of inventoried spare parts, including cataloging, procurement, distribution, and disposal. These analyses will enable the Department to identify those specific functions where outsourcing could lead to cost savings and improved inventory response times, while still ensuring readiness and program management support.
Base Commercial Activities. The Department is currently conducting cost comparison studies encompassing about 150 functions at many different locations. Base operating support services range from food and custodial activities, to maintenance and repair functions, among many others. Over the next two years, DoD plans to dramatically expand the number of functions and locations being studied in search of opportunities to lower costs and improve performance.
Depot Maintenance. The Department's depot maintenance philosophy focuses on maintaining core capabilities in organic facilities. The core concept ensures that critical warfighting capabilities remain under the direct control of warfighters. In the area of depot maintenance, core capabilities ensure a ready and controlled source of technical competence to meet the Joint Chiefs of Staff's contingency scenarios. On the other hand, subjecting noncore depot maintenance to the forces of competition will lower costs and improve readiness. Current law requires that at least 60 percent of all depot maintenance be done by government employees. Because the Services are approaching the 60 percent threshold, DoD will need added flexibility to pursue this avenue as a means of reducing costs.
Education and Training. High technology systems demand highly trained personnel in both operating and supporting roles, placing a premium on widespread and cost-effective training. Technology has also changed teaching and training methodologies. Certain individual training programs can be conducted through the use of telecommunications at remote locations -- a process termed distance learning. Increasing the use of these learning technologies can reduce the need for more expensive classroom training at centralized locations. The Department is evaluating how these new technologies affect training requirements and how private sector providers can help DoD in this area.
The Department is committed to fairness in public/private competitions -- both private sector and government bidders for a project should compete on a level playing field. The Department will not rush to seek the private sector over government providers, but will focus on getting the best value for the tax payers dollar, regardless of who provides the service. In early FY 1997, DoD will issue a new DoD policy to improve the process of public-private competitions in the area of depot maintenance.
INSTALLATIONS: MANAGING FACILITIES BETTER
The Department is committed to improving the management of its installations. DoD needs to realize cost savings at installations just as with other support functions. At the same time, the Department must take into account the critical role installations play in quality of life, morale, and readiness.
The quality of the installations where DoD military personnel, civilian employees, and their families live and work is a key part of retention. The Department is using better management and financial tools to leverage limited resources, improve the quality of support, and lower costs.
The scope of this function is significant. The Department controls the world's largest dedicated infrastructure -- a physical plant worth $500 billion covering 40,000 square miles, roughly the size of the state of Virginia -- which includes not only operational and training facilities but also housing for more than 300,000 families and about 450,000 single enlisted service members.
Revitalizing Military Housing
Quality military housing is central to morale, retention, and therefore readiness. Improving military housing in the United States and abroad is a major priority for the Defense Department. Success is predicated on using sound private sector methods to accomplish the improvements, wherever possible, and increased funding, where needed.
MILITARY HOUSING REVITALIZATION: ATTRACTING PRIVATE CAPITAL
The Department's military housing is old, in need of extensive repair, and below contemporary standards. DoD has estimated it would require 30 years, and perhaps as much as $20 billion, to revitalize its family housing and another $9 billion to revitalize and improve the standard of housing for single service members. Attracting private capital to help speed this revitalization is imperative.
The Department requested new legislative authorities from Congress to accomplish this public-private partnership -- which was enacted in the National Defense Authorization Act for FY 1996. These authorities enable DoD to provide direct loans and guarantees, leasing, investments, rental guarantees, differential lease payments, and conveyance or lease of properties and facilities. With these tools, the Department will be able to leverage military construction (MilCon) significantly and thereby speed revitalization. To prepare for this innovation, the Department established a joint Housing Revitalization Support Office (HRSO) representing all Services. The HRSO serves as a catalyst for DoD housing construction and rehabilitation efforts and uses consultant assistance to develop best practices and to prototype real estate deals.
DoD has already had success working with this new authority. For example, the Department awarded a $9.5 million limited partnership project at Naval Air Station Corpus Christi, Texas, for 404 units of junior enlisted personnel family housing. This action compares to the FY 1995 MilCon project proposed for Corpus Christi which will build 100 units at a cost of $11.8 million. Currently, negotiations are underway for a $6 million partnership project at Naval Station Everett, Washington, to construct 185 units for junior enlisted personnel. The Everett FY 1997 Milcon project would have yielded only 100 units at a cost of $15 million.
Four other revitalization projects are currently under development and 14 additional military sites are being evaluated for future projects. DoD expects to steadily increase the number of sites using these new authorities and consequently the number of units being revitalized using private capital.
OVERSEAS HOUSING
While housing privatization within the United States is successful, the Department recognized its limits, particularly at overseas locations. Overseas housing has a variety of unique requirements which can be addressed by other solutions. The Department is vigorously pursuing alternatives to ensure that the quality of housing improves at locations around the world.
BACHELOR HOUSING -- NEW BARRACKS CONSTRUCTION CRITERIA
The quality of life of unaccompanied service members is a key aspect of military readiness. In November 1995, the Department established the 1+1 standard for new barracks construction to improve barracks housing. This standard addresses privacy, the number one housing concern of single junior enlisted personnel, by including two individual living/sleeping rooms with closets in each module, along with a shared bath and a service/kitchenette area. Where mission and conditions allow, a module will house two junior or one senior enlisted member. The Services are working toward this standard and have accelerated funding to address a quicker elimination of the Department's existing barracks with community bathrooms.
Developing Smart Facilities Investment and Utilization Strategies
As the Department considers changes in future military strategy and forces, it must operate, utilize, and invest in its facilities smarter and better. The Department has chartered a base support study as part of the upcoming Quadrennial Defense Review whose goal is to implement an installations reinvestment strategy that can pay for itself, while ensuring that the quality of existing bases is adequate to meet the requirements of the force.
An example of a project which furthers this goal is the Navy's Military Acquisition Process Improvement Team, which has shaved a year off its military construction cycle and promises to do more. Other innovations DoD will pursue include designing facilities to be more adaptable to changing requirements over time.
Regional Planning and Interservice Support
Regional planning and interservice support between the military departments, defense agencies, and other federal agencies are becoming increasingly important. As major military bases are closed, new efficient sources of support must be found for defense activities at remaining bases, and new methods must be sought for reducing the cost of base support services. Joint Interservice Regional Support Groups have been established in geographical regions with multiple defense activities to identify and facilitate realignment of support missions to the most efficient and effective sources in each region, regardless of which DoD or federal agency currently provides the support.
Energy and Water Conservation
Energy conservation can play a significant role in reducing DoD's expenditures. The Department is the largest centrally managed energy consumer in the United States. DoD's installations consume over 70 percent of the energy used to heat, light, cool, and operate federal government facilities. This costs the Department nearly $3.0 billion a year. The primary long-term goals of the Department's energy conservation program are to reduce installation energy use by 30 percent over 20 years, from 1985 to 2005, and to improve industrial energy efficiency by 20 percent over 15 years, from 1990 to 2005. The Department also is required to identify and accomplish, by 2005, every energy and water conservation measure that will pay back costs in 10 years or less.
Since 1985, the Department of Defense has improved the energy-efficiency of its facilities by over 13 percent. This improvement reduced DoD's utility bills last year nearly $400 million annually. Most experts believe the Department can do even better, but it will take investment. The Department will need to invest $3.0 billion over the next seven years in order to achieve the additional $1.6 billion in annual savings.
Test and Evaluation Infrastructure
Driven by the increasing complexity and performance of weapon systems, and the expanding size of the battlespace, Test and Evaluation (T&E) facilities have become highly instrumented, with intense and complex modeling and simulation. Currently, DoD's T&E infrastructure has a replacement cost of about $25 billion. The land managed by T&E installations and centers that are devoted to T&E activities encompasses about 11 million acres, which is over 50 percent of the total DoD land area in the continental United States. In total, the T&E establishment performs several thousand T&E test projects each year for DoD, for other federal agencies, and in some cases for U.S. allies and commercial users.
DoD is conducting a Vision 21 study in response to direction in Section 277 of the 1996 Defense Authorization Act, which will be a detailed review of T&E needs for the next 20 years and will result in the development of a plan to reach that goal. The study will examine acquisition program performance envelopes, capabilities, workload, capacity, and other measures to meet the needs of the warfighter both now and in the future, despite a changing threat environment and reduced budgets. The plan is based on three pillars: reduction, restructuring, and revitalization. Its focus is upon a requirement based infrastructure needed to support the development and T&E of current and future weapons systems.
Return of Overseas Facilities
Although domestic base closures have been more high profile, the overseas facilities drawdown has been significant as well. Since January 1990, the Department has approved the return or realignment of 961 overseas sites, representing a 58 percent reduction in the U.S. military facilities overseas. DoD will now concentrate on the remaining enduring facilities; their contribution to readiness, operational capability, and quality of life; and their need for facility modernization. These remaining overseas bases support forward deployed forces protecting vital national security interests.
The Department is aggressively pursuing negotiations for compensation from host nations for U.S.-funded improvements at the returned sites. The potential for any compensation varies with each host nation based on applicable agreements. Most of the compensation will be derived from the facilities returned in Europe. As of October 1996, the United States received $136 million in monetary compensation. In addition, European host nations agreed to provide approximately $265 million in construction to satisfy requirements for remaining DoD forces. Ongoing negotiations with several countries should result in additional compensation.
Base Closure and Community Reuse
Within the United States, closing facilities that are surplus to national defense is essential to reducing unnecessary defense expenses. Base closings benefit the bottom line and therefore the taxpayer. However, it is also important to assist the communities that surround closing bases. For that reason, carefully planned reuse strategies are an important part of the base closure process.
REALIZING SAVINGS FROM DOMESTIC BASE CLOSURES
The Base Realignment and Closure (BRAC) process has been the major tool for reducing the domestic base structure. Three principles have guided the Department's BRAC program: improving military effectiveness; saving money by reducing overhead; and achieving these goals through a fair and objective selection process. The 1988 Defense Secretary's Commission on Base Realignment and Closure approved 16 major domestic closures. The independent 1991, 1993, and 1995 Defense Base Closure and Realignment Commissions are responsible for another 81 major domestic base closures. These four rounds of domestic closures and realignments reduced DoD's base structure in the 50 states and territories by 21 percent.
| Table
8 ($ Billions) |
||||
| BRAC 1988 | BRAC 1991 | BRAC 1993 | BRAC 1995 | |
| 6-Year Implementation Costs | 1.8 | 3.5 | 5.9 | 5.9 |
| Environmental Costs | 1.0 | 1.9 | 1.7 | 2.7 |
| 6-Year Savings | 2.4 | 6.5 | 7.5 | 6.1 |
| Annual Savings | .7 | 1.5 | 2.0 | 1.4 |
| Source: FY 1998/1999 Biennial BRAC Budget Submission | ||||
Once all of the recommendations have been implemented, the Department will
realize annual recurring savings of approximately $5.6 billion -- $57.8 billion
over the next 20 years in net present value. Table 1 depicts the costs and
savings associated with the BRAC program.
Rapid implementation of the approved closure recommendations is important to enable base reuse -- speeding the economic recovery of affected communities and realizing the expected savings to DoD and the taxpayers.
REINVENTING THE BASE REUSE PROCESS
The Department continues to make base reuse a high priority and has taken large strides to improve the way former military bases are converted to civilian use. In 1993, President Clinton launched a plan to support faster redevelopment at base closure communities. The National Defense Authorization Act for FY 1994 and the Base Closure Community Redevelopment and Homeless Assistance Act of 1994 substantially improved base closure laws and gave the Department legal authority to implement the President's proposals.
The Department's Community Guide to Base Reuse provides information intended for local officials, Local Redevelopment Authorities (LRAs), and the general public, including practical advice on organizing an LRA and developing and implementing a redevelopment plan.
Faster Base Reuse Process. The new reuse regulations and manual streamlined the federal screening process and created a faster reuse planning and property disposal process. DoD and federal screening are now accomplished concurrently, which enables the community to complete its reuse plan more quickly. Faster reuse planning leads to faster property transfers, which benefit the Department, as well as communities. Also, the Department can now offer prospective interim-use tenants long-enough lease terms to warrant relocation to the base.
Integrated Decision Making for Community Redevelopment. As part of the Department's improvements to the decision making process, local communities are integrated into the federal government's decisions. During the DoD and federal screening process, all interested parties are encouraged to contact and work with the LRA to have their needs considered as part of the comprehensive local planning process. The Department also placed a new emphasis on personal property disposal in accordance with community reuse plans. Accordingly, all decisions on the movement of personal property are made in consultation with the local authority. The Base Closure Community Redevelopment and Homeless Assistance Act of 1994 created a new process for addressing the needs of the homeless at base closure sites where local communities work along with homeless assistance providers to decide how best to address homeless needs. This change shifts control and responsibility from Washington and the federal government to local communities.
Demonstrated Results. Already, the redevelopment of closed bases has created over 30,000 new jobs and over 700 tenant businesses. For bases closed more than one year, nearly 60 percent of the lost civilian jobs have already been replaced. England Air Force Base, Louisiana, and Chanute Air Force Base, Illinois, have become the engines of their communities' economic growth by creating over 3,000 jobs on base less than two years after closure. The former Fort Devens, Massachusetts, has created more than 2,500 new jobs since closure. On the site of the former Sacramento Army Depot, California, Packard Bell is producing computers -- and was doing so even before the final property transfer was completed. The company already employs 5,000 people at this site.
CONCLUSION
The Department will continue to improve its use of proven, best-in-the-class business practices to reduce costs and free funds for modernization. Internally, DoD has consolidated functions and organizations to achieve efficiency and effectiveness. The Department has found opportunities to improve overall support operations at a lower cost by greater reliance on outsourcing, privatization, and competition. Through these initiatives, the Department intends to properly size its infrastructure, support readiness and quality of life, and manage its installations costs. Externally, DoD will work with industry to eliminate unused capacity and lower overhead costs, while ensuring that industrial capabilities are sufficient to meet DoD's needs. DoD will continue improving its relationships with allies through increased cooperation and interoperability. These efforts will not only save money, they will help build the kind of organization DoD wants to be -- an organization that thrives on competition, seizes the opportunities created by innovation, and responds rapidly to warfighter needs.
