Improving Efficiency:
Miracles Are Not Likely

Cindy Williams, MIT Security Studies Program, 617-253-1825

Background

The Defense Department spends much of its budget on activities that seem more related to business than to military operations, for example, purchasing equipment, ordering and transporting supplies, running bases, disbursing pay, and providing medical care to families. American businesses have vastly increased productivity during the past decade by reducing excess capacity, cutting inventories, consolidating functions, outsourcing, and reengineering. The Defense Department can and should work to save money through similar reforms. Unfortunately, instituting such reforms takes enormous political will, and actual savings often fall short of expectations. Assuming savings before making specific changes can cause big budget problems in future years.

Since the Cold War ended, several expert panels have estimated the Pentagon could reap large savings by reforming procurement practices and infrastructure activities. Proposals for procurement reform include reengineering on the shop floor, using commercial off-the-shelf equipment, streamlining regulations, and eliminating government-unique standards. Infrastructure reform ideas include closing bases, reengineering business processes, outsourcing business-type activities, and privatizing the delivery of goods and services like housing, health care, and groceries to military personnel and retirees.

The 1997 Quadrennial Defense Review assumed the Defense Department could save enough money through procurement and infrastructure reform to offset nearly $20 billion dollars of increased yearly procurement spending. Those savings have not materialized, in part because the Pentagon did not pursue some of the high-payoff but politically difficult reforms like privatizing health care; in part because the reforms it did pursue met with political resistance; and in part because the reforms it instituted brought lower savings than anticipated.

Efficiency Reforms in the Rumsfeld Review

The Bush Administration wishes to improve U.S. military strength and increase spending for military pay and procurement while holding overall defense spending as close in real terms to today's level as possible. In such an environment, getting the most out of every dollar the Pentagon spends is essential. Procurement reform, infrastructure reductions, and other efficiency improvements can reduce costs and improve performance. Unfortunately, the temptation to claim unrealistic future savings before actually instituting the necessary reforms is nearly overwhelming. Especially tempting are broad claims based upon percentage cost reductions across large categories of spending. ("Streamlined processes will cut acquisition costs by 20 percent;" or "outsourcing will reduce the cost of all the Department's business-type activities by 30 percent.") We should be skeptical of large projections of savings from such measures. For example:

• Until recently, Air Force estimates of future F-22 procurement costs assumed substantial savings from improvements on the shop floor and other procurement reforms. The Pentagon's Cost Analysis Improvement Group predicted in 1997 that the Air Force would not achieve most of those savings, because they double-counted the savings that would normally be associated with the "learning curve" (lower costs later in a production run). Recently, the Air Force acknowledged that F-22 costs will indeed rise. Yet other programs hold to artificially low cost estimates based on unrealistic procurement reform savings. It is much more likely that weapon procurement costs will exceed program estimates as the procurement reforms of the past decade fail to reap the anticipated savings, than that they will come in below estimates as new reform measures are instituted.
• The Clinton Administration hoped to save $3 billion a year (after an initial investment period of four or five years) by closing 50 more military bases in the United States. Base closures do save money, but political hurdles may make additional closures difficult. If those hurdles are overcome, long-term savings may fall short of the $3 billion estimate, which is based upon the Pentagon's estimates of likely savings from closures made during the 1990s. Since the Pentagon does not track specific savings from the earlier rounds, and since some of the savings attributed to base closure can also be attributed to other measures (such as the civilian drawdown), projecting future savings based on past closures is problematic. Moreover, it is possible that future closures will save less than past ones, which may already have picked the "low-hanging fruit."
• The Defense Science Board and other expert groups have said the Defense Department could save as much as $30 billion a year by outsourcing business-type functions and privatizing the delivery of goods and services that are part of the compensation package of service members and retirees. Such suggestions have great merit, but most of them face enormous political challenges, either because they change patterns of compensation that many military families and retirees consider inviolate, or because of their effect on local employment opportunities. Following initial great enthusiasm for the benefits of outsourcing and privatization, the Clinton Administration settled on a plan of "strategic sourcing"-outsourcing some activities and eliminating others-that it hoped would save $3.5 billion a year. Even that level of savings may be difficult to achieve, both because of political resistance and because earlier efficiency gains make additional savings more difficult to realize.

Conclusion

Making good on the President's promises to the military without a large increase in defense spending will not be easy. One way for Secretary Rumsfeld to close the gap between expectations and funding is to promise substantial savings from efficiency measures like infrastructure reductions and procurement reform. To be sure, much should be done in these areas. But efficiency is not a magic wand. Estimating large savings from reforms is easy; realizing them is hard.

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