Can DOD Save Billions through Efficiencies in its “Back Office”?
December 6, 2016
The Washington Post recently published an article on an internal Department of Defense (DOD) report alleging that $125 billion could be saved through efficiencies in DOD’s back office, that is, it’s nonwar- fighting activities. Is this really possible? What should a new administration do with this?
Q1: What’s in this DOD report?
A1: The report conveys the findings of a consultant’s study conducted for DOD’s Defense Business Board, a group of outside business experts who provide advice to the department. The report says that as much as $125 billion could be saved from DOD’s “back office” or “overhead” activities. (I’m going to call them “infrastructure,” which is the DOD term, because it better expresses the wide range of such activities.)
The report does not actually identify any specific savings. It recommends that committed DOD leaders develop cross-functional teams to examine performance benchmarks to optimize contracts and increase workforce productivity. It hypothesizes that certain percentages of activities could be eliminated and therefore comes up with the number $125 billion.
Q2: Does DOD really have a lot of infrastructure?
A2: Yes, DOD has a lot of infrastructure in order to maintain a highly complex organization with sophisticated equipment in global operations.
This infrastructure comprises much more than just major headquarters like the Pentagon. It includes medical care, personnel management, central training (boot camp, initial skills, and career education), acquisition organizations (program management, engineering, testing) and labs, acquisition oversight (auditing and contract management), base operations, logistics, and special activities like monitoring of arms control agreements. The consultants used an amount of $134 billion per year in their report. DOD uses a different categorization that is actually larger (“forces” and “infrastructure”), but in any case, the amount is large.
Q3: Are large savings possible?
A3: Yes, but it’s much harder than the article and report imply and unlikely to total $125 billion. All savings involve trade-offs and often the trade-offs are too difficult. Sometimes the obstacles are parochial interests, but more often they involve competing values.
The most obvious efficiency is base closure, called “BRAC” for the Base Realignment and Closure Commission that would identify excess facilities. A DOD study released in March estimated that DOD has 22 percent excess facilities. A new BRAC round would cost about $5 billion upfront and, once fully implemented, produce $2–3 billion in savings annually. It would only close a few percent of the excess, leaving capacity for future force expansion or mobilization. The Obama administration proposed BRAC four years running, but the Congress has refused to act. Some of this is pure parochialism—no member of Congress wants a local base closed—but there are also legitimate concerns about future force expansion, ensuring that savings actually occur, and the need to thoroughly examine overseas bases first. (For a more detailed discussion of BRAC, see CSIS’s recent analysis.)
As efficiencies go, BRAC is relatively straight forward. There’s a track record for the process and prior demonstrated savings. As hard as closing bases is, savings after that get even harder.
For example, the department has considered efficiencies in its medical establishment, downgrading some hospitals to clinics and relying more on the private sector. However, some regard this as a cut to the medical benefit promised to military personnel.
The department conducts a lot of medical research that is not directly related to its mission, for example for breast cancer and childhood diseases. These research activities were put into DOD’s budget because they couldn’t fit elsewhere in the federal budget. Cutting these and transferring responsibility to government civilian medical activities, for example, the National Institutes of Health, would be a sensible realignment. However, proponents of the research worry that there would be a net loss of funding and have opposed any such transfer.
DOD conducts a wide range of base activities, for example, commissaries (grocery stores), base exchanges (shopping centers), day-care centers, and recreational activities (like golf courses, beach housing, bowling alleys, hobby centers, and sports equipment rentals). All of these are “infrastructure.” Few civilian organizations provide these benefits to their employees. Benchmarking DOD against civilian organizations would likely result in a recommendation to eliminate or curtail these activities and rely on the civilian economy as most private-sector employees do and, indeed, as most government civilians do. However, reductions would be regarded by military personnel, retirees, and many civilians as breaking a commitment and reducing the uniqueness of military service. As a result, DOD’s past proposals to cut the subsidy to the commissaries made little progress.
The report recommends “labor optimization” through a “30% increase in [workforce] productivity” and “normalizing the labor pyramid.” Although it does not provide details, it implies a reduction in civil service grades and more employees per supervisor. That might be justified but would have major effects on recruiting for the federal workforce.
Logistics is a major focus of the report. DOD does conduct extensive logistics activities—buying spare parts and distributing them and maintaining equipment from the unit level all the way up to depots, where equipment is rebuilt and upgraded. Most civilians and contractors work in these activities. Efficiencies might be possible, but logistics is a key element in the readiness of military forces. Readiness shortfalls have received a lot of attention from both the military leadership and the Congress and, by DOD’s measures, is only slowly recovering from the sequestration lows of 2013. Cuts, therefore, need to be applied prudently lest the readiness of military forces slip further.
The report proposes reducing the large number of civilians and contractors involved in infrastructure activities. The department has implemented across-the-board cuts in the past and could do so again in the future. Such cuts do reduce headcount but, without making decisions about priorities, can eat away at effectiveness.
Q4: So what should the new leadership in DOD do?
A4: The department needs to move aggressively on finding efficiencies and reducing costs for two reasons. The first is savings. Although savings are unlikely to be anywhere near $125 billion, they could be substantial if the new leadership is willing to make some tough decisions and is backed up by the White House. Every dollar saved from infrastructure is a dollar that can be applied to forces. The second reason is credibility. If the new administration is going to substantially increase the DOD budget, it needs to assure the American people that the money is well spent.
The beginning of an administration offers opportunities for major change, and the Trump administration should seize that opportunity. Here are some proposals that come from the Defense Business Board, CSIS and other think tanks (see, for example, a recent report by former DOD comptroller Bob Hale), and the Government Accountability Office.
The first area for action is BRAC. It is nearly universally supported by defense experts. There are indications that there might be some common ground available with the Congress, so that congressional concerns are met, but the process still goes forward.
The new leadership should take a hard look at the DOD workforce—active duty military, reservists, government civilians, and contractors—as the report recommends. The department may be able to realign some activities to less expensive elements of the workforce. Before doing this, however, it needs to understand the fully burdened cost of all the different manpower categories, that is, capturing not just salary but all of the benefits and support also. The department has already done a lot of work in this area and just needs to pull it together. What it has found, for example, is that active duty military personnel are by far the most expensive and should be reserved for activities that require young, medically perfect, and physically fit personnel. Contractors often look like the most expensive because their costs include all of their support, but government personnel are frequently more expensive when all of their benefits and support are included.
Finishing the (very long) process of ensuring auditability of DOD’s activities would help. It might save some money, though likely not much, but would increase confidence that DOD knows how it is spending its money. DOD has recently said it is on track to conduct its first audit in 2018.
The department might establish a panel of outside experts to make specific recommendations. It did this in the 1990s as the Cold War ended. It was clear then that forces would be coming down substantially and infrastructure—which can be “sticky”—needed to come down commensurately. DOD complemented the outside panel (called the “Odeen Panel” after Phil Odeen, its chairman) with an internal process, called the Defense Management Review.
Finally, when the department allocates any additional budget resources, it needs to target these resources at the highest priority activities that president-elect Trump identified—a larger army, a 350-ship Navy, a 1,200-fighter Air Force, additional missile and cyber defenses. DOD’s leadership should not just turn the new funds over to the military departments, because they will distribute the funds “fairly” to all of their many internal claimants, including support activities that this efficiency effort is trying to reduce.
Mark Cancian is a senior adviser with the International Security Program at the Center for Strategic and International Studies in Washington, D.C.
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