Defence Business Board Warns DoD Is Heading For Chapter 11


The Defence Business Board (DBB), a panel consisting of senior former defence officials, business executives and economists has just published its study of how the Department of Defence (DoD) can reduce overhead costs and improve business practices.

According to the Board, if DoD were a corporation or a nation, it would be on the verge of having to declare Chapter 11. Like GM and Chrysler, DoD’s costs are increasing even as the size of the military shrinks.

The DBB’s characterization of the situation all but likens DoD to Greece. Military retirement requires that the government pay veterans and their families for sixty years based on only twenty years of service. Not only do veterans receive generous, indexed pensions but also lifetime medical care. Almost 25 percent of active duty military personnel serve in commercial activities. Despite fighting two wars, some 40 percent of those in uniform have never deployed anywhere overseas.

The size of headquarters and staffs is increasing relative to the number of war fighters as are their salaries. Like Greece, modern business practices have not been applied to major overhead areas so as to improve efficiencies and reduce costs. Congress has made the problem even worse by increasing the generosity of benefits packages and expanding eligibility, says the DOD in a press release.

The DBB proposes a set of modest corrections to what is a massive problem. It recommends a hiring freeze and reduction in the total number of DoD civilians back to the levels at the beginning of the Iraq War in 2003. Apparently, the Board didn’t notice that the Secretary of Defence is trying to increase the size of the bureaucracy. The Board also recommends eliminating or merging duplicative or redundant organizations, downsizing or eliminating Combatant Commands and OSD agencies and cutting indirect spending. These are straightforward, proven measures, the kind that most sensible companies took at the start of the current recession. In many cases, the rise in profitability by these corporations demonstrates the wisdom of cost cutting.

Much more is needed. Perhaps the model for DoD is the administration’s handling of the catastrophe in the automobile industry. Some combination of Chapter 11, government bailout, protection of union employees and merger with foreign companies might solve the problem. For example, pension and health care costs for current retirees or those nearing eligibility for retirement could be taken out of the DoD budget and placed in a special government corporation. For those now entering the military a new retirement/health care package would be put in place. For DoD civilians, part of their salary would be converted to long-term bonds that would only be vested if their policies proved successful.

This would be particularly useful for the civilian acquisition community. It would either require longer service or reduce benefits proportionately. All non-inherently governmental functions should be sold to the private sector just like in the developing world when they embrace capitalism. These functions would include logistics and maintenance, commissaries, transportation (with certain exceptions for sensitive items and war zones), military medicine and most space launches and intelligence activities.

We could not only cut the number of overseas bases — like the automobile companies cancelling dealer franchises — but even eliminate low payoff territories. Finally, we could seek a partial merger of capabilities or functions with allied nations. Ultimately, we could even agree to a new division of geographic responsibilities in the world. For example, the EU takes over all responsibilities for Europe short of major war and we assume the burden in East Asia.

Boards and panels with ties to the organizations they are assessing often have a difficult time telling their “employers” the unvarnished truth. The DBB has done an excellent job of telling DoD it must reform or go out of business.