Naturally, we all saw this coming, right? We’re not only talking about article after article published on this website, predicting and warning of upcoming DOD budget problems, but also the rather sudden national realization that, yes indeed, spending more than the country takes in—year after year after year—is not sustainable in the long-term. (And also the rather sudden realization by many that the long-term was now defined as essentially today.)

Despite the claim of many that their commitment to fiscal conservatism dates back as far as 1980, we think the reality of the situation is that the economic downturn of 2007-2008, coupled with the bailout of both the U.S. automotive industry and major financial institutions, coupled with the election of a new Presidential Administration ostensibly dedicated to changing many of the prior Administration’s practices, sparked a sea-change in the priorities of many U.S. voters. Instead of focusing on ensuring security at any price, voters decided that they’d had enough and wanted to see cut-backs in Washington, D.C.—similar to the cut-backs they’d made to their personal spending. And that change of heart led to electing new Legislators who would commit to similar priorities. Thus, here we are in January 2011, looking at looming cuts to U.S. defense spending.

As part of understanding where we are, let’s do a quick recap of some recent history.

During 2010, Secretary of Defense Gates created initiatives designed to generate $101 Billion in internal savings that would be used to fund DOD programs whose cost would otherwise drive budget increases. We posted several articles on the DOD “efficiency” and “affordability” initiatives. Although SecDef Gates should be commended for a proactive approach to heading-off budget cuts, the reality is that his gambit was, at best, only partially successful. DOD spending was simply too big a piece of the discretionary spending pie; it was too big and too obvious, and even otherwise conservative “red state” Legislators who believed in a strong defense seemed to feel a need to talk about Defense spending cuts—if only to show their constituents something tangible in the way of deficit reduction.

At year-end 2010, reports began to emerge of White House-mandated DOD budget cuts. For example, on December 23, 2010, Federal Times carried a story that reported, “White House budget officials have ordered the Pentagon to shed $78 billion from its annual budgets over the next five years, starting with a $12 billion cut in 2012.” The Federal Times article included this interesting tidbit—

Meantime, a hot piece of speculation around Washington is the Defense Department will not submit a 2012 funding request until April or May. That's because Congress, which just passed a continuing resolution that funds all federal government agencies and programs at 2010 levels through March, likely will not approve a defense funding bill until the spring months, sources said.

‘It will be hard to know how much money programs need in 2012 without first knowing how much they actually received for 2011,’ said Loren Thompson of the Lexington Institute. ‘So the administration could wait until after the continuing resolution expires and it gets a real 2011 budget before it sends its request for next year to Congress. Some think the 2012 request might not make it to the hill until May.’

(Readers may recall that we often report what Dr. Thompson has to say, because we like his “contrarian” viewpoint and think that he often makes a lot of sense.)

On January 6, 2011, SecDef Gates delivered a speech entitled, “Department Budget and Efficiencies.” He recounted the savings each military service had “proposed”—which, in the aggregate, totaled roughly $99 Billion. The “proposed” savings included—

• Air Force ($34 Billion)

• Army ($29 Billion

• Navy ($35 Billion)

There were some details underneath those numbers but, quite candidly, we wonder how credible they were. Readers can find those details by following the link above.

In addition to the foregoing military spending cuts, SecDef Gates said that the DOD bureaucracy had generated additional internal savings (projections) of $54 Billion. Much of those savings will come from reductions in contractor support staff, according to SecDef Gates. (Never mind that studies indicate contractors are cheaper than full-time government employees.) At the same time, the DOD plans to cut its workforce. For example, SecDef Gates said—

I have approved the elimination of more than 100 general officer and flag officer positions out of the roughly 900 currently on the books.  Of those, 28 are billets that were created after 9/11, primarily for the wars in Iraq and Afghanistan, and they will be reduced as appropriate as major troop deployments wind down.  More than 80 general or flag officer billets in the services, OSD, and the Combatant Commands will be eliminated or downgraded.  Additionally, I have directed the elimination or downgrading of nearly 200 civilian Senior Executive Service or equivalent positions out of a total of 1,400 civilian executives. 

Moreover, SecDef Gates announced the termination of several on-going programs. Program terminations include—

• SLAMRAAM surface-to-air missile (US Army)

• Non-Line-of-Sight launch system (US Army)

• Marine Corps Expeditionary Fighting Vehicle (US Navy)

Consistent with his previous messaging, SecDef Gates asserted that not all of the DOD savings would be returned to taxpayers. Instead, some $70 Billion will be spent on “high priority military capabilities.” Where will the funds be spent?

• Increase procurement of Evolved Expendable Launch Vehicles (US Air Force)

• Replace mechanical scanned array radars on F-15s with active electronically scanned array radars (US Air Force)

• Initiate a new program for a long-range, nuclear capable penetrating bomber (US Air Force)

• Modernize existing ground vehicle forces (US Army)

• Accelerate tactical communications network (US Army)

• Procure more MC-12 reconnaissance aircraft (US Army)

• Accelerate acquisition of Grey Eagle UAVs (US Army)

• Initiate a new program to develop a vertical unmanned air system (US Army)

• Accelerate development of next generation electronic jammers (US Navy)

• Develop a “new generation of sea-borne” unmanned strike and surveillance aircraft (US Navy)

• Procure more F/A-18 fighters (US Navy)

• Purchase addition ships—including “a destroyer, a Littoral Combat Ship, an ocean surveillance vessel and fleet oilers.” (US Navy)

Okay, so are there any lessons in the foregoing?

The first lesson is one we have asserted many, many times on this site:  program execution matters. Some of the terminated programs had cost and schedule problems. For example, the Marines’ EFV came in for some criticism from SecDef Gates. He said—

The EFV’s aggressive requirements list has resulted in an 80,000 pound armored vehicle that skims the surface of the ocean for long distances at high speeds before transitioning to combat operations on land.  Meeting these demands has over the years led to significant technology problems, development delays, and cost increases.  The EFV, originally conceived during the Reagan Administration, has already consumed more than $3 billion to develop and will cost another $12 billion to build – all for a fleet with the capacity to put 4,000 troops ashore.   If fully executed, the EFV – which costs far more to operate and maintain than its predecessor – would essentially swallow the entire Marine vehicle budget and most of its total procurement budget for the foreseeable future.

To be sure, the EFV would, if pursued to completion without regard to time or cost, be an enormously capable vehicle.  … As with several other high end programs cancelled in recent years, the mounting cost of acquiring this specialized capability must be judged against other priorities and needs. 

Moreover, SecDef Gates also singled-out the F-35 Joint Strike Fighter program for some special scrutiny, putting one of its three versions “on two-year probation”. He said—

The Joint Strike Fighter program received special scrutiny given its substantial cost, ongoing development issues, and its central place in the future of U.S. military aviation.  In short, two of the JSF variants, the Air Force version and the Navy’s carrier based version, are proceeding satisfactorily. By comparison, the Marine Corps’ short take-off and vertical landing variant is experiencing significant testing problems.  These issues may lead to a redesign of the aircraft’s structure and propulsion – changes that could add yet more weight and more cost to an aircraft that has little capacity to absorb more of either.

As a result, I am placing the STOVL variant on the equivalent of a two-year probation.  If we cannot fix this variant during this time frame and get it back on track in terms of performance, cost and schedule, then I believe it should be cancelled.  We will also move the development of the Marine variant to the back of the overall JSF production sequence. 

So what does this all mean? Where do we go from here?

Well, according to this story, one analyst sees Gates’ speech as good news for some contractors. Raytheon, Boeing, Northrop Grumman, General Dynamics, Lockheed Martin, L-3 Communications and RTI International were identified as likely winners based on Gates’ budget priorities. (Readers may note those seven companies are among the biggest of the big defense contractors.)

In addition, defense contractors continue to prepare for their worst-case scenarios. In recent news, ITT Corporation announced it would separate into three separate and independent companies (much like Northrop Grumman plans to spin-off its shipbuilding business). One of the new ITT businesses will be its Defense and Information Solutions business segment. According to the ITT press release—

… the existing Defense & Information Solutions segment will be renamed and rebranded as a new standalone company that is an industry-leading provider of innovative technologies and operational services to meet the enduring requirements of the global military, government and commercial customers. The company's products and services will include premier technologies such as next generation night vision, integrated electronic warfare, networked communications, force protection, radar, global intelligence, surveillance and reconnaissance systems, composite structures, space-based satellite imaging, weather and climate monitoring, and navigation and imaging systems, as well as maintenance, engineering and professional services. The business will continue to focus on growth beyond the core Department of Defense customer, with nearly 30 percent of revenues already coming from adjacent markets, such as air traffic management, information and cyber security as well as strong international growth prospects.

Pro forma 2011 revenue for the new defense and information solutions business is estimated at $5.8 billion.

On another front, leaders of defense contractors recently called on President Obama to establish “an industrial base policy” that would “help defense firms grappling with tighter defense dollars” reduce their uncertainty regarding how much and were to invest their scarce independent research and development (IR&D) dollars—according to this story at GovExec.com. Noting that defense companies will be “leery” and “choosy” about IR&D spending, the article quoted Jim Albaugh (President and CEO of Boeing’s Commercial Airplanes business) as saying—

‘Let's make sure we're all putting our money in the right areas. Without a road map, we're guessing where we need to put the [research and development] funds that we have. There's a lot of uncertainty now, I think, on the military side. I think companies will take a real hard look at where they want to make their investment.’

The article also reported—

While recognizing the potential for changing defense priorities, Albaugh also raised concerns about declining investments in several areas, including the lack of plans for a new manned aircraft program to follow the F-35 Joint Strike Fighter, which is now in testing. Other areas of concern, he said, include the ability to design and produce new space shuttles and communications satellites without any plans for specific programs in those areas.

‘Certainly our industrial base has had a lot to do with our success,’ Albaugh said. ‘We want to make sure that doesn't get destroyed over time.’

Readers of this site may recall that Mr. Brett Lambert (Director of DOD’s Industrial Policy Directorate) has the responsibility for establishing policy to address “loss of critical skills during the upcoming defense spending downturn” and maintenance of the “skills necessary to support our war fighters in the near term and long term.”  It’s not at all clear how much progress the IP Directorate has made on that important tasking. Instead, we suspect Mr. Lambert and his apparatchiks have been focused on helping the DOD respond to SecDef Gates’ call for internal cost savings. One of the facts that support our assertion is that, since December 2009, there have been no new presentations added to the DOD IP website. On any topic. Yet, in mid-2010, Mr. Lambert published guidance on implementation of Gates’ initiatives.

Look, we get that it’s difficult to focus on both the internal and external at the same time. (For example, try managing audits by both internal and external auditors at the same time. While responding to DCAA audit requests. See? It’s not so easy, is it?) Yet multi-tasking is a way of life these days. So where is the DOD on managing its industrial base?

We’ve asked the question before. In our rant reasoned analysis, we quoted an op-ed piece by Lt. General Larry Farrell (USAF, Retired), in which he said—

It is not yet apparent that senior policy makers have begun to assess what industrial capabilities must be preserved. Ensuring that the United States is able to maintain core industrial competencies must be a priority before a fiscal downturn becomes reality.

We, like General Farrell and his National Defense Industrial Association, like Jim Albaugh and its Aerospace Industrial Association, are still waiting for answers from Mr. Lambert and his Directorate. And time has just about run out, as far as we can tell.

We note, however, a May 2010 report from the DOD IP Directorate to Congress (as required by statute), that promises a more “forward-leaning” approach to managing the defense industrial base. The report states—

In order for the defense industry to remain a source of strategic advantage well into the future, the Department and our nation require a consistent, realistic, and long term strategy for shaping the structure and capabilities of the defense industrial base. Toward this end, the Department is committed to being more forward-leaning in its ongoing assessments of the industrial base – refocusing our efforts on our future needs, not just our past performance; closer OSD cooperation with the Services to foster an integrated approach to the overall industrial base; and placing transparency and dialogue with industry at the forefront of our agenda.

Well, what can we say? One can forward-lean into the ribbon to win a race, or one can forward-lean into a buzz saw. It’s all about the results. Ultimately, the market and the companies that comprise the defense industrial base will react as they always have: in their best interests (as they see them). Whether those actions ultimately align with the DOD’s best interests, or the Presidential Administration’s best interests, remains to be seen.

If the foregoing is too airy-fairy for you practical business types or applied engineers, let’s offer a differ tack. Perhaps you should let the funding games play out as they may, trusting that your political action committees and lobbyists will do their jobs while you do yours. To that end, may we suggest (once again) that program execution and supply chain management be your priorities. In this new age of fiscal slash-and-burn, with a new (and perhaps newly focused) Congress sensitive to taxpayers’ concerns, nobody wants any more bad news. Your program’s on-time delivery and on-budget spending will be the good news that may guarantee you continued funding, now and into the future.