INTRODUCTION
The end of the Cold War brought dramatic changes to DoD's relationship with the national and world economies. With significant changes in military missions and sharp reductions in defense spending, the Department must rely increasingly on the broader commercial world, and less on defense-unique industries, to equip its forces. A strong military requires a robust commercial and defense industry. Therefore, economic security is a vital issue for the Department. The Department is determined to respond effectively to this new environment and is adjusting its policies accordingly. It initiated new ways to conduct business -- with the business community, with other governments, and in its own operations. In each case, DoD is changing policies and programs to ensure national and economic security, to guarantee that the military continues to be well prepared to meet future threats.
DoD -- A SMALLER CUSTOMER, CHANGING NEEDS
During the Cold War, DoD developed leading-edge technologies and industrial capabilities to meet unique requirements. Any commercial applications were incidental to meeting national security needs. Today, the Department finds itself in an entirely new environment. First, DoD budgets have declined dramatically in recent years while the global economy continues to grow. Second, many leading-edge technologies that will be critical to success on future battlefields (for example, electronics, computers, information processing, and communications) come from the commercial sectors of the global economy.
As a result, the Department can no longer afford to rely solely upon defense-unique capabilities. To continue to provide U.S. armed forces with the most technologically advanced systems in the world, the Department increasingly must rely on commercial or dual-use technologies, products, and processes. When developing new systems, DoD prefers commercial options. The Department will develop military-unique capabilities only after it has determined that commercial technologies and products will not meet its requirements. Commercial markets are international by nature. Therefore, as the Department turns towards commercial industry, it will necessarily draw upon resources from international suppliers and will seek greater international cooperation with its allies.
THE DEFENSE INDUSTRY RESTRUCTURES
Although reductions in the defense budget have sharply reduced defense industry sales, defense contractors generally remain profitable, in part by restructuring and consolidating. Restructuring and consolidation are normal and traditional business responses to declining demand. Industrial restructuring includes reducing factory size, closing unneeded factories, merging divisions, streamlining operations, reengineering key processes, and cutting corporate workforces. Recent examples of defense industry consolidation include the Lockheed-Martin merger, Raytheon's acquisition of E-Systems, and Loral's purchase of Unisys Defense Systems. Additional consolidations in key industries can be expected for the next two or three years. These steps result in short-term costs for the companies, but much greater long-term operating and overhead savings with lower costs expected for DoD.
IDENTIFYING ESSENTIAL INDUSTRIAL CAPABILITIES
Most defense firms are reducing excess capacity, streamlining processes, and revamping supplier relationships. For example, several prime contractors made a ten-to-one reduction in their direct suppliers, going from thousands to hundreds of suppliers. The sum total of these actions led to increased efficiencies and reduced defense product costs -- a better value for taxpayers.
As this process continues, DoD must actively assess changes in the defense industry to ensure essential capabilities (specialized equipment and facilities, skills, and technological knowledge) needed to meet defense requirements are preserved. Some capabilities required for national defense are defense-unique -- they have no commercial counterparts and must depend upon defense markets for survival. The Department will take appropriate steps when necessary to preserve such essential capabilities. Finally, it is DoD's objective to preserve essential capabilities, not any particular company. DoD neither can, nor should, attempt to preserve all capabilities -- only those both essential and genuinely at risk.
PAST YEAR DOD ACCOMPLISHMENTS
Developed Procedures for Analyzing Industrial Capabilities
DoD is striving to understand the changes underway in its supplier base. It has developed assessment methods to make informed judgments and defined policies for action when required to preserve essential capabilities. DoD is providing the Services and their program offices with the tools to make appropriate judgments about industrial issues and to integrate those judgments into the regular budget, acquisition, and logistics processes. Ensuring consistency in DoD's industrial decision making required developing a comprehensive set of guidelines specifying the conditions under which the Department would take steps to preserve an industrial capability. The military departments are testing these guidelines in the field.
Published Handbook to Guide Implementation
On July 31, 1995, DoD issued a draft directive for analyzing essential industrial capabilities, accompanied by a draft how-to handbook entitled Assessing Defense Industrial Capabilities. The handbook explains the assessment process and circumstances under which the Department will take special action to preserve an industrial capability. The assessment handbook lays out the three questions DoD must answer:
The handbook details the steps DoD managers should take to answer these questions.
The draft directive makes the Service Acquisition Executives responsible for approving all industrial capability preservation investments associated with Acquisition Category (ACAT) programs. In addition, the directive requires the approval of the Under Secretary of Defense for Acquisition and Technology for such expenditures of $10 million or more per year. DoD expects to issue the directive and accompanying handbook in final form in early March 1996.
Completed Important Industrial Sector Assessments
During the past 12 months, OSD and the Services conducted several key assessments of changing conditions in the defense industry. These reports include assessments of the Space Launch Vehicle, Conventional Ammunition, Heavy Bomber, Helicopter, Meal Ready-to-Eat, Torpedo, and Tracked Combat Vehicle industry sectors. Other industrial assessments are in progress.
These different assessments consistently led to similar conclusions. Although significant reductions and downsizing within the defense industry continue, DoD found very few cases where essential capabilities are endangered, even given low production rates. In those few cases, the Department is taking steps to assure essential capabilities will continue to be available. DoD is incorporating industrial considerations as a routine part of its acquisition, logistics, and budgeting processes, and advancing industrial capability education within the elements of the Department. The Department will continue to focus in a timely and cost-effective manner on those industrial capabilities which are at risk and which may require special action to be sustained.
DEFENSE RESPONDS: NEW WAYS OF DOING BUSINESS WITH BUSINESS
In September 1994, DoD submitted a report to Congress describing its processes for addressing industrial issues and identifying progress. The report, entitled Industrial Capabilities for Defense, analyzed the changed environment for defense, and discussed the Department's initiatives to respond accordingly. Key findings in the report focused on:
DoD remains steadfast in its efforts to address these issues.
Achieving Acquisition Reform
The Department's efforts to realign the acquisition process to reduce the use of military-unique specifications and standards, to use simplified acquisition procedures, to increase electronic data interchange/electronic commerce, and to rely more heavily on commercial technologies, manufacturing processes, goods, and services are an integral part of its strategy to adjust to the post-Cold War era. These activities are underway and are described in detail in the chapter on Acquisition Reform.
Taking Advantage of Commercial and Dual-Use Products and Processes
In February 1995, the Department issued a report entitled Dual Use Technology: A Defense Strategy for Affordable, Leading-Edge Technology. This report summarized the goals and objectives of DoD's dual-use strategy and outlined implementation actions. DoD's dual-use objectives are to break down the barriers between the commercial and defense industries, and to realize the benefits of civil-military integration in both research and development (R&D) and manufacturing. These benefits include an increased rate of innovation in defense systems, and reduced cost of such systems.
The strategy for achieving dual-use objectives consists of three pillars:
The Flat Panel Display (FPD) Initiative is an example of the dual-use technology policy at work. The initiative advances R&D of flat panel displays, encourages U.S. industry investment, and inserts the results of that R&D into military systems. One outcome of this program is the replacement of cathode ray tubes used for cockpit displays in several aviation systems with advanced FPDs that provide increased capabilities and reliability at reduced cost. Implementing the initiative will help ensure the U.S. FPD production base, serving both the defense and commercial markets, providing early, assured, affordable access to this vital technology for meeting defense needs.
Key elements of the Department's dual-use efforts are included in Service and Advanced Research Projects Agency Core Technologies research and development, and the Technology Reinvestment Project. The latter seeks to move promising research results into application and make them more affordable to DoD through cooperative dual-use programs with industry.
Encouraging Industry Restructuring
The Department continues to encourage much-needed rationalization in the defense industry. Since excess capacity in defense firms frequently translates into higher weapons costs, rationalization generally brings a clear cost savings to the Department and to U.S. taxpayers. While consolidations and restructuring may create efficiencies that benefit the Department, they also require DoD's active attention and involvement. Consolidation carries the risk that DoD will no longer benefit from the competition that encourages defense suppliers to reduce costs, improve quality, and stimulate innovation. DoD's interests include realizing cost savings; preserving essential research, development, and production capabilities; preserving a core of skilled personnel; and assuring efficiency and quality. Accordingly, the Department has become more active in antitrust reviews of the tradeoffs and risks associated with defense industry mergers, acquisitions, and joint ventures. The Department assesses proposed combinations in terms of cost savings, competition, and industrial and technological capabilities, and then provides its judgment to the Federal Trade Commission or Department of Justice, as appropriate. To date, DoD has found substantial savings in case after case. Where DoD has had issues, it arranged specific business restrictions or contract changes to address them.
The Department realizes that in order to achieve dramatic savings through consolidation and restructuring, it may have to share in restructuring costs. It makes economic sense to consider sharing these short-term costs to realize long-term savings. Under the law, the Department cannot share the costs unless and until it determines the benefit to DoD and U.S. taxpayers outweighs the expense. DoD has established appropriate procedures to allow such costs if they will produce savings. While the leading incentive for corporate restructuring is better corporate performance and profitability, sharing the restructuring costs may result in healthier corporations, thereby improving the economic outlook of U.S. businesses and their ability to meet DoD's needs more affordably.
Balancing National and Economic Security: Export Controls
The Department recognizes national security and economic security issues are increasingly intertwined. One area where DoD has focused particular attention is ensuring that export controls protect U.S. national security interests while avoiding unnecessary burdens on its commercial and defense supplier base. Examples include efforts to rationalize controls in the post-Cold war era. As in 1993, the Administration has again updated controls on computers. In the past two years, rapid technological advances in this sector have progressed to a point at which previous levels of controls are being overtaken by international availability in selected areas. The Administration has also spearheaded the Commerce Department's export control process in ways that improve responsiveness to exporters while strengthening DoD's role in the review of licenses. The Administration has also undertaken a review of the controls on communications satellites and aircraft engine technology with a view toward updating criteria for differentiating jurisdiction of export controls for these items under the State Department Munitions List or the Commerce Department's Control List. DoD is also working with Congress on reauthorization of the Export Administration Act, which has not been updated since 1988.
A New Dialogue: Better Communication with Business
The Department is striving to enhance communication with the business community. DoD requires a better understanding of industry's views to ensure that industry continues to supply the armed forces with military systems of unquestioned technological superiority during this period of dramatic change. To this end, DoD has drawn on the capabilities of the Defense Science Board to provide advice on defense business issues. The Department is also committed to more consultation with industry, through both formal and informal channels.
INTERNATIONAL COOPERATION: NEW WAYS OF DOING BUSINESS WITH GOVERNMENTS
In military operations, U.S. forces often fight or work alongside the military forces of other nations. Deploying forces in cooperation with those of other countries places a high premium on interoperability -- ensuring U.S. systems are compatible with allied systems. This new emphasis on interoperability, to include military operations other than war, is especially important because it comes during a period of declining defense budgets not only in the United States, but also in allied nations. The United States and its allies are being challenged to do more with fewer resources; interoperability provides needed leverage. International cooperative efforts offer a real chance to enhance interoperability, stretch declining defense budgets, and preserve defense industrial capabilities. Thus, the Department has renewed its efforts at international cooperative development. Such cooperation can range from simple subcontracting relationships to licensing and royalty arrangements, joint ventures, and bilateral and multilateral cooperative programs. Some of the more notable success stories in international industrial cooperation include the F-16 Falcon, AV-8 Harrier, T-45 training aircraft, CFM-56 engine, the continuing cooperative efforts under the NATO Airborne Warning and Control System (AWACS) program, the Multifunctional Information Distribution System (MIDS), Theater Missile Defense, and Allied Ground Surveillance. The Department is now working with allies in Europe and Asia to explore new possibilities, including the Medium Extended Air Defense System (MEADS) and NATO Airborne Ground Surveillance efforts.
The international cooperative R&D program has led to sharing of military technology among allies, as well as to development of joint equipment to improve coalition interoperability. Such items include advanced aircraft; combat vehicle command and control, communications systems interoperability; and ship defense.
As DoD takes greater advantage of the opportunities in international defense cooperation and commerce, it continues to address the risks of the proliferation of weapons of mass destruction and advanced tactical systems. DoD has worked to ensure that agencies understand the nature and importance of the February 1995 Conventional Arms Transfer policy and take its tenets fully into account when pursuing cooperative international defense programs and sales. As a result, both economic security and national security interests are pursued and protected.
DoD has also taken steps to improve the effectiveness and efficiency of international cooperation. An International Armaments Cooperation Handbook has been developed to provide a compendium of current policy, key processes, and points of contact for use by persons working cooperation issues in the Department. In addition, by streamlining the international cooperative agreement review process in the Office of the Secretary of Defense, the average processing time for such reviews has been reduced from 130 days to 30 days.
NEW WAYS OF DOING BUSINESS WITHIN DOD
The Department is undertaking several initiatives to give greater recognition to economic and commercial imperatives by restructuring the way it conducts business.
Privatization and Outsourcing
The Department of Defense has embarked on a vigorous effort to more fully utilize privatization and outsourcing for many functions it now does for itself. Private corporations have used a similar strategy to lower costs, improve performance, and refocus their human and financial resources on their core businesses. There are numerous opportunities to privatize and outsource within the Department to achieve greater efficiencies while enhancing effectiveness.
DoD is closely analyzing its own support operations to determine where it can outsource, thereby improving readiness and generating funds for modernization. In August 1995, the Deputy Secretary of Defense established an Integrated Policy Team (IPT) for Privatization and Outsourcing to determine opportunities, identify obstacles, and develop solutions and strategies for outsourcing functions currently being done by government. That team, chaired by the Deputy Secretary of Defense, includes the Vice Chiefs of Staff of the Military Services, the Under Secretaries of the military departments, as well as the heads of key defense agencies.
The IPT is organized into working groups which are assessing initiatives in depot maintenance, materiel management, family housing, base commercial activities, education and training, and finance and accounting services. However, the Department is not limiting its review of privatization to these areas or to those areas highlighted by the recommendations of the Commission on Roles and Missions of the Armed Forces. The Department intends to make the review of privatization opportunities part of its ongoing process to achieve efficient and effective support of joint military operations. In addition to the IPT, a Defense Science Board Task Force on Privatization is examining this area and will make recommendations to the Department for more effective use of privatization and outsourcing.
Preliminary reviews indicate that legislative and administrative changes may be necessary to accomplish some of these initiatives. Consequently, the IPT working groups will include in their detailed reviews recommendations for new legislation or changes to existing laws. The Department is also discussing with the Office of Management and Budget administrative changes necessary to facilitate the utilization of this innovative management tool.
This broadly based initiative of the Department of Defense seeks to free up valuable resources and obtain needed goods and services in the most efficient and effective manner possible.
Base Closing -- Restructuring Continues
Closing military bases no longer needed continues to be a high priority for the Department. DoD is closing and realigning bases in the United States as a result of decisions made through base closure processes in 1988, 1991, 1993, and 1995. The chapter on Installations and Logistics describes the 1995 Base Realignment and Closure process and the Department's efforts to structure and manage its installations, including the use of private capital in housing.
Reinventing the Base Reuse Process
The Department continues to make base reuse a high priority and has, in the past year, taken large strides to improve the way former military bases are converted to civilian use. Not only has the Department created a faster base reuse process, but decision making both in Washington and at the local level has become more integrated. These changes have led to numerous success stories throughout the country of communities redeveloping base property in ways that strengthen local economies and create jobs.
In 1993, after reviewing the historical base property disposal process, the President launched a plan to support faster redevelopment at base closure communities. Title XXIX of the National Defense Authorization Act for FY 1994 (P.L. 103-160) and the Base Closure Community Redevelopment and Homeless Assistance Act of 1994 (P.L. 103-421) substantially improved base closure laws and gave the Department legal authority to implement the President's proposals.
The changes contained in these two laws, along with other improvements to the process, were implemented in regulations issued by the Department along with a Base Reuse Implementation Manual. This manual, developed by a joint Office of the Secretary of Defense and Service working group, provides implementing guidance to speed up and improve the reuse process. In addition, the Department published the Community Guide to Base Reuse which provides information intended for local officials, Local Redevelopment Authorities (LRAs), and the general public, including practical advice on organizing an LRA and developing and implementing a redevelopment plan. For commanders at closing bases, the Department also updated its handbook, Closing Bases Right.
FASTER BASE REUSE PROCESS
The Department of Defense recognizes that to promote economic redevelopment and rapid job creation, it must expedite the process of making real property available for reuse at closing and realigning bases. Accordingly, the new reuse regulations and manual streamlined the federal screening process and created a faster reuse planning and property disposal process.
DoD and federal screening are now accomplished concurrently and begin even before the base closure and realignment recommendations formally become law. By determining what property will be made available to the local community faster, DoD is enabling the LRA to complete its reuse plan more quickly. Faster reuse planning leads to faster property transfers, which benefit the Department, as well as communities. Communities benefit from the quicker economic recovery and DoD benefits when a community takes over the financial responsibility for base protection and maintenance.
Additional legislative changes have improved the process. For example, the Department can now offer prospective interim-use tenants long-enough lease terms to warrant relocation to the base. In the past, redevelopment opportunities were lost because the Department was unable to offer lease terms long enough for the private sector.
INTEGRATED DECISION MAKING
As part of the Department's improvements to the decision making process, local communities are integrated into the federal government's decisions. During the DoD and federal screening process, all interested parties are encouraged to contact and work with the LRA to have their needs considered as part of the comprehensive local planning process. The Department also placed a new emphasis on personal property disposal in accordance with community reuse plans. Accordingly, all decisions on the movement of personal property are made in consultation with the LRA.
The Base Closure Community Redevelopment and Homeless Assistance Act of 1994 created a new process for addressing the needs of the homeless at base closure sites where local communities work along with homeless assistance providers to decide how best to address homeless needs. This change shifts control and responsibility from Washington and the federal government to local communities.
DEMONSTRATED RESULTS
Already, the redevelopment of closed bases has created over 12,000 new jobs and over 300 tenant businesses. For bases closed more than one year, nearly 60 percent of the lost civilian jobs have already been replaced.
England Air Force Base in Alexandria, Louisiana, and Chanute Air Force Base in Rantoul, Illinois, have become the engines of their communities' economic growth by creating over 2,000 jobs on base less than two years after closure. These new jobs replace more than the original number of civilian jobs lost and are spurring further employment throughout the communities.
The former Pease Air Force Base in Portsmouth, New Hampshire, is now the Pease International Tradeport, with more than 1,500 new jobs since closure. The Tradeport currently has 36 lessees occupying over 855,000 square feet of building space. Finally, on the site of the former Sacramento Army Depot in California, Packard Bell is producing computers -- and was doing so even before the final property transfer was completed. The company already employs 5,000 people at this site and is expanding rapidly.
CONCLUSION
DoD's continued need to field and support the most advanced weaponry now and in the future requires it to take advantage of the defense and commercial industrial and technology base. Defense budgets are no longer large enough to accommodate all defense acquisition needs through a defense-unique industrial base. For the U.S. military to continue to have the most advanced weaponry, the Department is adjusting its policies. It must continue to change the way it does business with business, through acquisition reform, dual-use technology policies, and recognition of essential capabilities. It must change the way it does business with allies through increased international cooperation and interoperability. It must build on the gains achieved through initiatives to date. Finally, it must change the way it does business itself through restructuring and community reinvestment. The Department is confident these policy changes will strengthen both national and economic security, and ensure the military continues to be prepared to meet threats of the post-Cold War era.
