Gates Wants $100 Billion: Why Now?

Posted: August 3, 2010 in Cost Cutting, Cost Savings, Defense Funding, Defense Industry, DoD, Gates, OSD, Robert Gates

The cost-savings and overhead reduction initiative Secretary of Defense Robert Gates is pushing has industry listening, and it only makes sense.  Does the Secretary see his legacy in play?  Perhaps.

After a decade of record-high defense spending, a spending downturn is all but inevitable, barring an impending war with Iran or having to back up Japan or South Korea in a scuffle with the North.

The heart of the matter is an excess in defense industrial capacity which has accumulated as a natural consequence of ten-years worth of increased defense spending.  

When defense demands goods and services, the market creates solutions, to include both growth and new starts.  Given the behemoth that DoD is, satisfying such increased demand tends to favor effectiveness over efficiency. DoD is now looking for more efficiency.

Consider, for example, when the defense industry sells a “service” to DoD. Industry generally has no motive not look at whether or not someone else is already satisfying what the defense establishment is asking for; they just set out to satisfy the conditions they’re being asked to fill.  As Dillinger might say, ‘That’s where the money is.’

This can be a no-risk/high-return endeavor in selling defense services to the government as infrastructure needs like floorspace, computers, phones, and IT support are all often provided as government furnished equipment.  This means there is very little risk to the contractor–every position that can charge billable hours to will yield a profit.

When the music stops however, like it will after a 10-year period of growth, there aren’t enough chairs for everyone.  Sellers of defense goods and services don’t have to necessarily go home, but they might have to make do with less defense business.

Or they may in fact choose to go home.  Some may get out of the less profitable parts of their defense businesses altogether.  Getting out of the service part of the defense industry is the easiest: it entails laying people off. The more difficult part is when a large investment in plant and equipment has been made by the contractor.  Then there is the issue of how to disposition those resources.

I guess DoD was not interested in cost savings (versus cancelling programs or curtailing buys) until this year?  Of course not.  Instead, we’ve just reached the cyclical point in history where the music stops.

  1. […] Secretary Gates saw the writing on the wall and called for the services to lay in some funding cuts of their own.  This was not a trial balloon: it was real, although some programmatic smoke and mirrors are almost certainly present (cost shifting; changes in assumptions about inflation rates; actual savings being in the out years, etc.). […]

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