July 19, 2011Major weapons builders must adjust to shrinking defense budgets but need not take major hits in profitability, Defense Department acquisition chief Ashton B. Carter told an industry gathering Monday.
"Whatever you're doing for us, make it possible for us to continue to afford it," he said at a conference hosted by the National Defense Industrial Association. "Together, let's bend so we don't need to break our programs and activities."
Marking the first anniversary of the Pentagon's 23-point Better Buying Power initiative, the undersecretary of Defense for acquisitions, technology and logistics described how his department is helping to achieve President Obama's goal of cutting $400 billion from the agency's budget over the next 12 years.
"The way government and industrial leaders think must change," Carter said.
This generation "has grown accustomed over the post-9/11 decade to circumstances in which we could always reach for more money when we encountered managerial or technical problems or a difficult choice," he said. "Those days are gone."
The Better Buying Power initiative is designed to economize through improved in-house management of the largest projects. "For every 30 cents we spend to develop and acquire a defense system, we spend 70 cents to sustain them," resulting in a $100 billion annual maintenance budget, Carter said. "For every 45 cents we spend on goods, weapons systems and things, we spend 55 cents on services," for a total of $200 billion.
But Carter sought to reassure the major weapons builders, saying, "Cutting capability and adjusting strategy might be necessary, but they are where we should go only after examining all the options."
As reported by Federal News Service, Carter said, "Profit is the incentive that will get us, on the government side, the result we're looking for. We would be foolish to look there for economies rather than for leverage. In that way, our incentives and your incentives are aligned. Profit is not the point, cost is the point."
Asked to respond, a spokesman for the Boeing Co. told Government Executive: "Boeing certainly recognizes the need for this focus on productivity and incentives for change and the fact that we are in a new era of fiscal constraint. When the initiative was first introduced last year, we welcomed the opportunity to be part of the process to increase productivity and control costs. Boeing has been taking significant steps in this direction with our Accelerating Change initiative to reduce costs, improve efficiencies and enhance capabilities for future growth."
What is curious about Carter's comments, said Guy Ben-Ari, a fellow and deputy director of the defense-industrial initiatives group at the Center for Strategic and International Studies, is that the Defense Department, "being a monopsony, or sole buyer, happens to control profit policy." The industry has little choice but to get leaner or leave the business, he noted.
"But we can't expect all of the industry to stay healthy and profitable over the next 10 years, so Defense will have to prioritize."
That would require two key steps, Ben-Ari said. The department "would need do go through an internal exercise to decide what are the crown jewels, what we would like to have but is not first tier etc. And second, it must send the right demand signals to industry about the next generation of technology it will be investing in," he said. "That's a lot of responsibility on Carter, his acquisition, technology and logistics division and the Pentagon."
July 19, 2011