Panel: Pentagon should freeze hiring, slash management

The Defense Department must make several difficult choices if it wants to significantly reduce its overhead expenses and increase the efficiency of business operations, according to a draft report an independent panel of corporate executives presented on Thursday.

During a morning briefing with Pentagon executives, the Defense Business Board offered its initial proposals on how the Pentagon can cut $100 billion from its budget over the next five years. Arnold Punaro, who chairs the group tasked with making recommendations to Secretary of Defense Robert Gates, said many of the problems have been ignored for years.

"The task group is identifying many of the tough choices that must be made, not only because it is good business management, but today's fiscal environment and future warfighting requirements will not tolerate these inefficiencies," said Punaro, who recently retired as executive vice president of Defense contractor SAIC and now runs a Washington-based consulting firm.

The department spends about $200 billion annually in overhead costs, larger than the entire economy of Israel, the report said. But, that spending generally ignores proven business practices.

The board recommended the active military divest itself of several noncore functions that could be performed less expensively by Defense civilians. The panel calculated that nearly 340,000 members of the armed forces are performing commercial activities at an annual cost of $54 billion.

"We are using the most expensive personnel to perform activities that could otherwise be performed by less expensive personnel," Punaro said in his presentation. "Furthermore, freeing up the uniformed personnel makes them more available for the inherently governmental and military activities."

The group also urged Gates to consider major reforms to the department's retirement system, often considered the military's sacred cow. For example, the system encourages members of the military to exit after 20 years, but then pays them, their families and their survivors for another 40 years, Punaro said. "All of this has become more and more expensive as military entitlements have expanded and should be considered as part of the nation's mandatory spending challenges," he said.

The report recommended the Pentagon also cut several layers of redundant management. The panel called for a hiring freeze at the Office of the Secretary of Defense, the Joint Chiefs of Staff and Combatant Commands, and a 15 percent cut to the total Defense civilian workforce levels.

The task group also argued Defense contract spending is unsustainable -- an observation that Pentagon officials have made repeatedly in recent months. In fiscal 2009, the Pentagon spent $376 billion on supplies, equipment and services. By applying sound business practices to acquisition areas such as supply chain management, information technology and knowledge-based services, the department could achieve Gates' target savings in less than five years, Punaro said.

In late June, Defense Acquisition Chief Ashton B. Carter met with industry leaders, urging them to trim the fat from their overhead costs and to run their operations in a more cost-efficient manner.

The board noted the importance of looking inward during procurement reform. The organization doing the most business with Defense is not an industry giant like Lockheed Martin Corp. or Northrop Grumman Corp., but rather the department's own Defense Logistics Agency, the panel found. In total, five of the 12 largest Pentagon providers are Defense agencies, the report said.

"Most of these Defense agencies would rate in the Fortune 250 and several are in the Fortune 50," Punaro said. "Yet again, they are not managed as businesses even though one is a grocery business, another is a worldwide communications provider, another is one of the world's largest and most expensive health care providers."

The task group, which is expected to issue its final recommendations in October, also suggested Defense reduce its travel and conference budget and modify its end of year use-it-or-lose-it funding policy.