Secretary of Defense Donald Rumsfeld has suggested that his department could save $15 billion a year through efficiencies if given the freedom to do so. Numerous studies have also asserted the potential for efficiencies in the Department of Defense (DoD), some arguing that savings could total $30 billion a year or more. Actual savings, however, appear much more modest. Why is it hard for DoD to achieve efficiency savings? How can the department promote efficiencies more effectively?
Past Savings Appear Relatively Modest
In recent years the Defense Department has achieved efficiency savings that are significant in absolute dollars. (In this study efficiencies are defined as initiatives that reduce costs while providing the same or better levels of capability.) Base realignments and closures appear to have cut costs by at least $5.6 billion a year, though some of those savings are associated with force cuts that reflect changes in national security threats rather than efficiencies. Permitting private companies to compete for jobs currently performed by government employees, known as competitive sourcing, may yield savings of $1 to $2 billion a year if all current plans are carried out. Savings from acquisition reform and better business practices have added to the total, though by amounts that are difficult to quantify.
Despite these successes, the efficiency savings achieved in recent years appear to be modest compared with the size of the defense budget and fall well short of the tens of billions of dollars in savings some past studies have suggested might be possible. Nor have efficiencies halted the growth in operating costs. After adjusting for changes in force size and inflation, day-to-day operating costs have consistently and persistently increased for decades. Some of this growth reflects new missions such as peacekeeping operations and in health care costs. But in recent years much of the growth in operating costs has occurred in accounts related to infrastructure, which should be prime candidates for efficiencies. These aggregate budget trends make it more difficult to conclude that large efficiency savings have been realized.
Barriers to Achieving Efficiencies
Resistance to change is part of the reason efficiencies are hard to achieve. But there are also more fundamental barriers.
- Nature of Military Mission: The department’s primary and overriding mission is to deter wars and if necessary, fight and win them. Neither profit nor efficiency appear in this statement of mission, in contrast to most private firms where profit represents a key goal. Not surprisingly, DoD commanders and managers focus on making planes fly and tanks run rather than on efficiency, a focus that will be heightened by the events of September 11. This is the most important barrier to achieving efficiencies in the Department of Defense.
- Pressure to Spend Budgets: Most commanders and managers believe that they must spend all their current budget or face cuts in future years, an attitude that does not promote efficiency. The author’s experience on a government aircraft, which slowed down in flight in order to use all its budgeted flying hours during the year’s final mission, highlights this problem in a tiny but telling way.
- Lack of Incentives: DoD’s field-level managers have little incentive to spend the time and make the hard choices necessary to achieve efficiencies because their units usually do not benefit from the effort. By contrast, in both the private sector and at least some foreign militaries (Australia for example), managers have stronger incentives to promote efficiency.
- Congress Factor: While it does many things well with regard to national security, Congress sometimes blocks or hampers DoD’s effort to improve efficiency. Pork-barrel spending and reluctance to permit changes, such as base closures, do not promote efficiency.
These barriers suggest that DoD should be realistic in assessing the prospects for future efficiency savings. The idea that multiple tens of billions of dollars a year can be saved through efficiencies over the next few years—and used to pay for new programs—is almost certainly unrealistic. Because of DoD’s mission focus, managers tend to translate efficiencies into improvements in performance rather than savings, making it even less likely that large sums will be freed up to pay for new initiatives. Because it is hard to achieve efficiencies, another lesson is clear: DoD should avoid using efficiency savings to fill budget shortfalls until the savings are actually realized.
While formidable, barriers to efficiencies should not be an excuse to stop seeking them. In an organization as vast in size as the Department of Defense, even modest percentage reductions in costs can result in large savings for the taxpayer. Moreover, while it is hard to identify past initiatives that have saved tens of billions a year, history suggests that efficiency savings could total multiple billions of dollars a year—surely a goal worth pursuing.
What initiatives should the department pursue? Based on the judgment of defense secretaries over three decades and recent studies, several categories stand out as worthy of continued or expanded effort.
- Base Closures: DoD estimates that another round of base closures could ultimately yield savings of some $3.5 billion a year. Closing unneeded bases probably constitutes the single largest source of potential efficiency savings. Congress recently granted the needed authority, but not until 2005.
- Competitive Sourcing: The President’s Management Agenda calls for competing 5 percent of eligible jobs by 2002 and more beyond, efforts that could save a billion dollars a year or more.
- Acquisition Reform: Recent efforts to improve the way DoD develops and produces new weapon systems have yielded savings, and further dividends should be possible.
- Best Business Practices: Continued efforts to implement electronic commerce, paperless contracting and automation should yield additional savings. In addition, exploiting web-based learning might reduce training costs. Also promising are public-private partnerships – that is, initiatives that enlist private expertise to solve problems not currently being adequately addressed by the public sector.
The specifics of new initiatives should be left to DoD’s current managers. But they will be more successful in promoting efficiency if they adhere to several broad principles.
- Focus on Incentives: The department should focus on creating incentives so that commanders and managers seek efficiencies. For example, in addition to its existing incentive programs, DoD could institute a matching program that provides funds to commanders and managers who bring about efficiencies, including competitive sourcing initiatives that are hard to implement. These matching funds should be available to meet all legitimate needs at their bases or in their programs.
- Pursue a Top-Down Approach: If efforts to improve the efficiency of DoD’s programs and activities are to be successful, DoD’s senior management will have to be actively involved. DoD’s top managers should focus on initiatives that require their personal attention but can yield large efficiency savings—such as base closures and competitive outsourcing. The current administration appears to be pursuing this top-down approach aggressively.
- Listen to the Field: Senior DoD and Service officials need to listen to field personnel, who often know of many smaller changes that can save money. If they institutionalize efforts to gather up ideas from the field, and find ways to nurture the promising ones with funding and support, these ideas could lead to substantial efficiencies.
- Establish Metrics: Metrics are required by law for major initiatives. They might also prompt the Defense Department to make regular estimates of savings, which will help in future years when defense managers are called upon to assess their efficiency efforts.
Following these approaches will not eliminate the barriers to improving efficiency that exist in DoD and throughout government. However, following them should improve the prospects for succeeding at this important but daunting task.