NASA outgoing Administrator Sean O'KeefeThe House of Representatives will vote on the 2014 National Defense Authorization Act later this week. Sequestration will be the giant hiding behind the door as the House Armed Services Committee has marked its bill to the Obama budget request, which means that the effects of sequestration are ignored by the bill (as they are ignored by the administration’s budget.)  Into this vacuum steps the chairman of the National Defense Industrial Association, who heads EADS NA, the North American subsidiary of the European defense giant. See what Sean O’Keefe believes must be done. The Editor.

 By Sean O’Keefe

Forrest Gump was right. “Stupid is as stupid does.” It is coming as no surprise that “sequestration,” the dumbest fiscal management policy ever conceived, is already producing some pretty mindless results.

As bad as the damage is from enduring automatic salami-slicing of budget line items, perhaps what is worse is the evisceration of already low public confidence in both legislative and executive branch leadership, coupled with the complete demoralization of the career public service facing furloughs on a regular basis for the next several months.

Sequestration was created by frustrated budget negotiators who felt that the pain it might portend would be so great that surely wiser heads would prevail and a budget deal would be achieved. Clearly, the negotiators underestimated our government’s capacity for sustaining self-inflicted wounds. It is as if the now-recognized “Mayhem” guy of Allstate commercial fame has found a new job.

The reports are just beginning to come in, but you don’t have to look hard to find plenty of near-term decisions that will make savings at the margin only to create larger bills in the future. Public leaders don’t try to make nonsensical decisions — but there is something about the current budgetary environment that makes such actions more likely. It is as if we have rendered null and void Winston Churchill’s observation, “Gentlemen, we have run out of money, now we have to think.”

Whether talking about how a government which pays for studies of duck genitalia and cuts funding that allows school kids to tour the White House, cancels deployment of an aircraft carrier to the Middle East at a time of heightened tensions with Iran, the federal government abounds with examples of head-scratching decisions. As chairman of the National Defense Industrial Association, an organization of nearly 2,000 corporations, big and small, dedicated to the defense of this country and our allies, a day doesn’t go by where I don’t hear of another example of bad ideas adopted in the name of efficiency.

The uncertainty hits particularly hard on some of the smallest but critical parts of our industrial base. Chief of Naval Operations Admiral Jonathan Greenert said at a recent congressional hearing, that 90 percent of the Navy’s nuclear components come from smaller companies that are a sole supplier. “If it’s not the prime [contractor] it’s below the prime, it’s the second or third. It’s Bob’s nuclear valve shop, Jimmy’s nuclear.”

And yet an over-reliance on single sources of critical supplies seems to be a growing trend. A recent GAO report found that DoD is increasingly forgoing contract competition in its purchases. According to the report, only 37.1 percent of Air Force contracts were competed. There are some instances where sole-source contracts may make sense or are the only unique supplier – but 63 percent of the time?

The Defense Department unveiled its “Better Buying Power 2.0” policy just a few months ago to promote effective competition, eliminate wasted time on process steps, and control costs. The time to press hard for these reforms is now. Although no sane person should welcome the constraints imposed by sequestration, government officials can make chicken salad out of what they’ve been given and find ways to revamp the procurement system, suspend autopilot application of reams of regulations, and take advantage of competition and innovation.

Numerous studies have documented that products sold to the Defense Department cost 15-20 percent more than they do when sold to commercial customers. The overhead of doing business with the government accounts for much of that cost differential. Instead of trying to figure out how to buy more for less, maintaining the status quo is a surefire way to get less for more.

The uncertainty of the budget situation makes the jobs of acquisition officials particularly difficult. Heidi Shyu, the Army’s acquisition chief, said not long ago, “I don’t know what my budgets are going to be. I’m standing on quicksand right now.” That has the unintended consequence of prompting industry to withhold investments that would otherwise improve performance or effectiveness. And that, in turn has the effect of compromising the very goals of the Better Buying Power initiative.

Reform advocates need to think several moves ahead. Some of the “savings” achieved by cuts in the immediate future will just drive up procurement costs just down the road. As difficult as the current budget environment is, the crisis does present opportunities for leaders to seize the opportunity to make structural and regulatory changes that in a normal time would be impossible to achieve. Adopting the recommendations of the Defense Business Board report on process reforms would be a great start.

Sean O’Keefe is chairman of the National Defense Industrial Association and is CEO and chairman of the board of EADS North America.

 

Comments

  • Don Bacon

    1.Sequestration was never intended to be a fiscal management policy — it was intended as a threat to cause a sane policy. While it failed as a threat it squeezes the Pentagon gravy train a bit — that’s good.

    2. The administration was supposed to, by law, have their revised budgets in last September, and they still won’t do it. Break the law, then suffer the consequences.

    3. Effect on industry? –headline: “Sequester dawns, [stock] market yawns”

    4. The elephant in the acquisition room, that nobody will talk about, is corruption. There’s a reason for all those sole-source sweetheart contracts with their high prices, aided and abetted by revolving-doors in the Military-Industrial Complex that Ike warned us about.

  • squidgod

    Did someone just randomly delete words and punctuation from this piece? Sure reads like it.

  • Lop_Eared_Galoot

    From about 1988 onwards, the only contracts which are allowed to be streamlined (and thus avoid the ‘overhead’ as contractual red tape that is mentioned above) are those which are under 25 million and can be fixed priced as a single acquisition of known assessed risk and ‘reasonable profit’ for both sides.

    Guess what kinds of contracts those are? Yup. Small mom and pops style supply chain people. Nothing big is ever efficient because there are too many stumbling blocks of snowplowing unknowable unknowns.

    ‘Better Buying Power’ is a joke in MilSpec dominated procurement world where as soon as someone makes the grade, you instantly betray that won-trust by forcing them to compete with another second-source, often using rules that give the new comer all the breaks in things like securing their databases and meeting production standards using _your developed system approach_. One which only works if you have a certain guarantee of production lots as total profit ratio. While the new guy can get by on even the lesser split.

    To me, this sounds like the opposite to what is being suggested. It’s not an attempt to find efficiencies in procurement but to remove competition altogether.

    As military primes come to understand that the halcyon days of big budget supplying the active warfighter are truly done and _there will be no reversion_ to new-system acquisition as the peacetime force-fill alternative, they are seeking to suck up all the tiny incremental ‘keep small fabrication jobs in the shop as money flowing in to the Skunkworks division’ (Ben Rich quote on how the Skunkworks stayed alive supporting other peoples activities rather than pioneering their own once the F-117 was done.).

    It’s The Big Squeeze Out.

    Which is really nothing short of angels-dancing-on-pins ludicrous because it only attacks those who are not able to fight back. While big systems (electronics especially) remain OUTSOURCED to foreign suppliers who are not even subject to military registered supplier regulations.

    For myself, the real deal will come by the end of 2014 when all the last currency Easement (heretofore largely sitting in bank currency reserves) finally starts to enter the markets and have a truly monumental five year downstream effect.

    If the USD loses 50% of it’s market value we will see the U.S. Armed Forces drop to single divisions for the Army and Marines active maneuver forces, 10-12 fighter wings and 2 wings of bombers and maybe 6-8 carriers. I suspect that USN SSBNs will remain as secure second strike strategic forces but we will lose half or more of our remaining landbased silos (even though they are much cheaper to operate). All because the lies of Keynesian economics are finally being seen for what they are in the face of a ‘next near peer’ threat that simply refuses to play the game of martial one-upmanship.

    At which point the Defense Industrial Base will implode.

    Militarily, this may not be ‘bad’ (outside the uniform career community where it will sound like the trumpets of Gotterdammerung) in and of itself because we are in a time of peace and historically, large drawdowns like this allow for major reshapings of force structure as later cheaper-better-lighter remodernization.

    But the military serves another purpose than active defense. It serves as the liver of society, drawing in young people from the rural and urban poor who otherwise have no hope, giving them a way up and out as purified, purposeful, disciplined citizens. You dump several hundred thousand trained killers with limited civilian job skills on an already saturated, shakey, jobs market and you will see major unrest as increases in organized criminality across the board.

    And this, I hope, is why Congress is acting like Sequestration doesn’t exist. Not pork.

    The problem is that we -still- don’t have floor debates on as much as 90% of the key budgetary legislation flowing through Congress and indeed, may no longer have the organizational structure as brains with which to make informed decisions on national policy, on a timely basis and within either party.

    This leaves an inordinate amount of legislation by decree as policy-making-in-committee where special interests and political ‘aides’ rule. There is the real source of gamesmanship and corruption in the governmental bureaucracy. Because it allows for backroom deals between DOD and seated committee members whose seniority gives them total oversight of Key defense related Sees.

    Whether a funded program survives or not then becomes a function of quiet agreement on what issues of line-item funding will be looked at in what order of bill markup for later vote on the floor. If they ever reach it.

    Until you change this, preferably with a separate acquisition and R&D development agency whose purview is completely beyond the Pentagon as active service intercession, we will continue to have topsy-turvy acquisitions of systems we then starve into obsolescence in favor of the next new thing.

    Either way, in two years, we should expect deep cuts in the size of the extant armed forces. And it will come whether we close our eyes and refuse to listen or not. Because the USD is going to tank and nobody will take our IOU markers anymore.

    DeMint On Congressional Irresponsibility
    http://www.youtube.com/watch?v=damfYX3W_PA

    Aftershock And The Next Dip
    http://www.youtube.com/watch?v=UseYKxDLnOw