Price Wars

As budgets tighten, the Pentagon and its contractors look for ways to cut costs.

The post-Sept. 11 defense spending boom is over. That's the message Defense Secretary Robert Gates sent to Pentagon officials and military contractors this spring when he ordered a "hard, unsparing" review of how the department is staffed, organized and operated.

"The purpose is to significantly reduce our overhead costs in order to free up the resources needed to sustain our force structure, to modernize and to create future combat capabilities," Gates said in June at the Pentagon.

Specifically, Gates wants to find $100 billion in overhead savings over the next five budget cycles, beginning with the 2012 budget, to fund needed equipment and weapons during what is projected to be a period of slowed or flat military spending. "An important part of achieving that goal is working closely with our industry partners and departmental contracting professionals," he said.

In June, Ashton B. Carter, undersecretary of Defense for acquisition, technology and logistics, met with corporate executives and military acquisition leaders to discuss how the department can fund modernization programs by eliminating unproductive overhead and transferring the savings to war-fighting capabilities: "In effect, doing more without more," as Carter put it.

Industry seems to be getting the message. According to a roundup of corporate layoffs published on TheStreet.com, defense giants Lockheed Martin Corp. and Boeing Co. both plan to cut hundreds of jobs this year. For its part, Northrop Grumman Corp. announced in July that it would close one of its seven shipyards and perhaps spin off its entire shipbuilding business.

In addition, Lockheed, the Pentagon's perennial top contractor, said in July it would offer early retirements to top executives as part of a broad effort to streamline management and reduce costs. "Our customers are facing increasing demands with constrained resources, and they are relying on us to give them the very best value within those constraints," Chief Executive Officer Robert J. Stevens said in a statement, citing "the new reality of our business environment."

Not all programs are feeling the budget squeeze, of course. Ongoing operations in Afghanistan and Iraq have ensured there remains a formidable appetite for new weapons systems, such as robotic vehicles and unmanned aircraft, including the Predator and Reaper reconnaissance and strike systems, as well as the long-endurance Global Hawk surveillance system. Likewise, the mine-resistant ambush-protected family of vehicles will continue to see wartime growth.

Current operations notwithstanding, the Pentagon is waging a two-front war in its efficiency initiative, and getting contractors on board with the streamlining program could prove far easier than convincing Congress to lay off the military pork. While cost overruns and technological challenges forced the department to cancel the final seven of 10 planned new Navy DDG-1000 destroyers, the Pentagon continues to face strong resistance to cutting programs it deems unnecessary, especially the C-17 transport program and the alternative engine for the Joint Strike Fighter. The outcome of those battles was uncertain at press time.

New programs, including a ballistic missile submarine to replace the Ohio-class sub, a new Army ground combat vehicle, the presidential helicopter and a new family of systems for long-range strike and electronic attack, all will face unprecedented scrutiny. "We need to make sure affordability and not just appetite is designed in from the start," Carter said.

What the Pentagon is trying to achieve with its efficiency initiative is what economists call productivity growth. "In the rest of the economy, we expect this," Carter says. "You get a better computer every year, and cheaper. But we haven't seen productivity growth in the defense economy. More has been costing more. And we need to reverse that trend and restore affordability to our programs."

Click here for the top 100 Defense contractors.

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