Efficiency: It Takes Two
(Source: Aerospace Industries Association; published Aug. 5, 2010)

By Marion C. Blakey, President and CEO, Aerospace Industries Association
Supplying the systems and services that support America’s men and women in the military is the most important function of the aerospace and defense industry. Exploring ways to provide for a robust defense within a constrained budget is critical to our national security. In a very recent meeting with our members Secretary Gates made clear his goal is to define and control a viable defense budget with our help.

Over the years, AIA and its member companies have been in the forefront of every acquisition reform effort undertaken by DOD, bringing ideas to the table that would reduce the costs to government and increase industry productivity while providing a fair and reasonable return on investment.

Just prior to the election in 2008, AIA published a report entitled, “U.S. Defense Acquisition: An Agenda for Positive Reform.” Many of the ideas in this report were incorporated into the Weapon Systems Acquisition Reform Act of 2009 and are again on the table for discussion as we work to further improve the acquisition system.

On June 28, U.S. defense industry leaders were asked to join Undersecretary Ashton B. Carter and his team as they rolled-out a new “efficiency initiative,” part of the effort announced by Secretary Gates May 8 at the Eisenhower Library. This efficiency initiative is aimed at delivering better value to the taxpayer and improving the way DOD does business or, as Secretary Carter put it, “doing more without more.” The specific goal of the efficiency initiative is to fund a two- to three-percent net annual growth in warfighting capability without a commensurate budget increase. This annual growth would result from identifying and eliminating unproductive or low-value-added overhead and transferring the savings to warfighting programs.

Members of AIA’s Executive Committee and other member CEOs met with Secretary Gates, Deputy Secretary Lynn, and Under Secretary Carter July 29 to discuss the efficiency initiative. The meeting began with a recognition that efficiencies will not come from further pressure on industry’s profits (now well-below the S&P 500) and delaying industry’s cash flow, but will only come from reducing unproductive overhead. Our CEOs laid out a set of key recommendations that have the potential, if implemented, to really change the cost curve. Those recommendations include the following ideas.

-- Complete reform of export controls. The administration has laid out a path towards success, but DOD has the authority to make changes today on their own in the technology disclosure review process that will ensure more timely decisions and a transparent appeals process.

-- Eliminate low-priority and redundant activities and consolidate shared services. The defense acquisition system is replete with overlapping and redundant activities that create additional, often contradictory requirements, which cause defense contractors to work inefficiently or add staff to ensure compliance. One of AIA’s CEOs said that he has had to increase his staff 20 percent in order to respond to the burgeoning audit requests. Consolidating shared services, such as contacting and, would reduce duplication and allow companies to reduce their overhead.

-- Identify and eliminate government-unique processes and procedures. In 1994 Coopers & Lybrand conducted a study for DOD that found that the government was paying an 18 percent premium as a result of imposing unique requirements on industry. We believe that study needs to be updated to take into account all the requirements that have been added since 1994. Following that, a joint DOD-industry group should be convened to identify and eliminate those processes that are of low-value to the warfighter and taxpayer. Future government-unique requirements should be accompanied by a cost-benefit analysis so that the cost of compliance is recognized upfront.

-- Define and stabilize requirements. DOD needs to define the shape of its future needs so that industry can better plan how to use its independent research and development funds to develop the technologies that the department requires. Requirements for new systems must be based on well-understood technologies and stable production rates that will allow industry to develop and build systems efficiently and with the right type of contract. Configuration steering boards can hold requirements stable if they are established at a high enough level to be effective. Well defined, stable requirements will also allow both industry and the government to identify excess capacity so that industry can be incentivized to close or combine facilities and reduce costs.

We stand ready to work with Secretary Gates and his team to jointly map serious courses of action. If we fail, we are likely to face more sweeping requirements from Congress and the Administration. But if we are willing to make hard choices, working together we can accomplish Secretary Carter’s objectives of improving productivity, increasing efficiencies, avoiding program turbulence, removing government impediments to leanness and realizing cost savings – all while maintaining a vibrant and financially healthy defense industry.

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