The Defense Industry in Perspective
5. Outsourcing of Government Work
The fi nal signifi cant defense-industry structural change for the cold war and post – cold war years was outsourcing. Given the Department of Defense ’ s budget cuts, the military had the choice of either maintaining its existing infrastructure (and having less warfi ghting equipment) or shifting its resources signifi cantly toward warfi ghting needs and cutting back dramatically on infrastructure. To maintain as much as possible of the force structure and equipment, the military cut back
dramatically in other areas. For example, between 1990 and 2000, the acquisition workforce was cut by 300,000 government employees, 62 causing large reductions in many signifi cant management and support functions. The Defense Contract Management Agency was cut in half in that time period.
Because some infrastructure and support functions still needed to be maintained, the DoD followed the path that large commercial fi rms were following. The DoD began to outsource a signifi cant share of its noncore work (that is, work that was not inherently governmental). In the commercial world, this outsourcing was done with both domestic and offshore sources, and in defense, it was limited largely to domestic fi rms.
As the defense budget declined in the post – cold war period, the Pentagon began to take advantage of this outsourcing trend by directly outsourcing or competing (public vs. private) work in areas being done by government workers, but that were “ not inherently governmental ” (such as back-offi ce operations). By the time that the government ’ s civilian workforce was cut by 40 percent, this alternative became more and more attractive to senior Pentagon offi cials. It also fi t in nicely with Vice President Al Gore ’ s effi ciency and effectiveness management push (in the National Performance Review), and when President George W. Bush was elected in 2000, it was one of his top fi ve management initiatives. Recognizing an opportunity for a new, large potential market, the defense industry began to push for increased outsourcing of all government work that was not inherently governmental.
As the DoD downsized and outsourced and as military operations increased (for example, in Bosnia), demands for industry support increased at home and with defense contractors who were working in combat areas (for example, by 2007 there were about 190,000 contractors in the Iraq and Afghanistan combat areas). These conditions introduced new industry issues, such as whether the contractors were covered by the Geneva Conventions on prisoners of war, whether they were allowed to be armed, and whose control they were under (the contracting offi cers or the local combat commander).
The driving trends in the post – cold war U.S. defense industry — the collapse in the defense budgets, the resultant industry consolidations, the changes in the nature of warfare, the shift toward globalization (in technology, economics, and industry), and the changing roles of the public and private sectors — were causing dramatic structural changes in the nature of the defense industry. But on September 11, 2001, a new era began.
After September 11, 2001
In the post – cold war decade, much was written about the changed new world, but the events of September 11, 2001, and their aftermath truly changed the world. The United States found itself at a crossroads, with the need for change obvious to many
but with many institutions still resisting change. When Secretary of Defense Donald Rumsfeld came into offi ce, for example, he stated (prior to the terrorist attacks) that there was an obvious need to transform the posture of American security to recognize the changes that were taking place in technology, potential threats, and geopolitics. But because he could not convince the military of this need, the planning (for example, in force structures and equipment) continued to refl ect essentially what had been set up for the cold war. The argument was that if we prepared for the big war, all other requirements would simply be lesser cases, and the nation would be fully prepared. But many objective observers felt that dramatic shifts were needed in resources, force structures, planning, and equipment. Fighting terrorism on an international basis was going to require cooperation among nations, and as regional issues became more signifi cant, they would require multinational coopera- tion (for geopolitical reasons) and a multiagency perspective within the United States (including the State Department, the Defense Department, the Homeland Security Department, and the intelligence community). From a force-structure perspective, a confl ict such as that in Iraq and Afghanistan would depend heavily on land forces — army, marines, and special operations forces — that were trained for irregu- lar warfare. The most useful airborne elements were the lower-cost, unmanned reconnaissance and surveillance systems. Yet even after fi ve years into the Iraq and Afghanistan confl icts, when the Pentagon did a Quadrennial Defense Review (in February 2006), while it did recommend added expenditures for special operations forces, foreign-language training, and cultural awareness (all things needed for twenty-fi rst-century operations), it requested no increase in the overall U.S. ground- force levels and “ stands pat, on all major Cold-War-legacy weapons systems. ” 63 As former DoD Secretary William Perry and Harvard professor Ashton Carter pointed out in a 2007 article, 64 “ to a remarkable degree, the 50% increase in the DoD baseline (since 9-11-01) has gone to funding the program of record on September 11, 2001 (i.e. the weapons that were already in the pipeline on 9-11-2001). ” After September 11, 2001, the defense budget was increased dramatically to pay for the wars in Iraq and Afghanistan and to fund America ’ s homeland security; but there was not a signifi cant shift away from cold war weapons. The transformation that Secretary Rumsfeld asked for and that seemed to be needed did not take place because there was no resource constraint placed on the planning process. Money was simply added as it was required, and if the basic budget did not cover the expense, then supplemental budgets were added.
From an industry perspective, the changes were also add-ons. All of the major defense fi rms recognized the importance of the information technology that was developed in the post – cold war decade and added a focus on systems integration to their operations. In addition, recognizing the shift taking place toward buying services to support the ongoing confl ict, they also added capability in the profes- sional-service area (in both cases, largely through acquisitions). Finally, because each
of the military services had faced signifi cant personnel cutbacks in the post – cold war era, the fastest way to build up again was through the use of contractors. By early 2009, 266,688 contractors were in the combat area of the Middle East 65 (outnumbering the military and government personnel in the region), and almost all of these contractors were supplying services (including food, housing, equipment maintenance, and logistics support). In fact, the overall Department of Defense procurements shifted to 60 percent services. In just three years, the number of service-contract actions grew from about 325,000 in 2001 to over 600,000 by 2004, 66 and over that same time period, the number of federal professional service contractors grew from 45,000 to 83,000. 67 Although a large number of the service contractors were small fi rms (since the barriers to entry are smaller in the services area than in the hardware area), several major nontraditional defense fi rms increased the amount of defense work they were doing. Traditional defense contractors such as Lockheed Martin, Northrop Grumman, and Boeing were listed in the top fi ve of professional contractors in 2004, and they were joined by Halliburton and Bechtel.
These new entries were brought about by the changed nature of the support required for military operations in the twenty-fi rst century.
Exploding Defense Dollars
After September 11, 2001, there were unprecedented sustained increases in the defense budget (the war in Iraq and Afghanistan lasted longer than World War II) (fi gure 2.8) . Not only were there annual increases in the defense budget, but there also were annual supplemental budget items that by fi scal year 2008 reached $189.3 billion (the total of that year ’ s two supplementals).
Nonetheless, the Pentagon continued to request increased basic budget dollars plus growing supplementals, and not only did the president present those requests to Congress, but Congress often added to them. By 2008, there was a budget request of $625 billion (which was over twice the 2000 budget). The problem was that if the supplementals had to be folded back into the annual budget requests, they would appear to be far too large, and the DoD would have to face the dif- fi cult choice of dropping some cold war weapons to pay for the needed expenditures for twenty-fi rst-century scenarios. Most of the army ’ s maintenance dollars for equip- ment being used in Iraq and Afghanistan were contained within the supplementals, as were the procurements of ground robots (for land-mine removals) and other critical equipment for these operations. If these dollars were put back into the budget, then either the budget itself would have to be increased or some traditional equipment purchases or manpower costs would have to be reduced.
The budget problem was compounded by the fact that the military was suffering from the procurement holiday of the post – cold war decade and badly needed to replace aging equipment from the Reagan buildup in the 1980s. So the defense
$295.5 $315.7 $344.8
$382.7 $400.5 $420 $441.5 $462.8 50.0
70.0
$72.6 $65.3
$75.9
$65.8
$93.4
25.0
$8.6
$19.8
$17.3
2000 2001 2002 2003 2004 2005 2006 2007
$626.2
$557.3
$520.9
$465.8
$455.3
$362.1
$335.5
$304.1
Billions of dollars
Wartime supplementals Wartime bridge funding DoD budget (includes nuclear-weapons funds)
Figure 2.8
Defense appropriations, 2000 to 2007. Source: Offi ce of Management and Budget, research reported in Defense News , February 12, 2007.
budget simply kept expanding, even in the presence of large administration-ordered and congressionally approved tax cuts. The administration, the Congress, the DoD, the defense industry, and even the public seemed far less concerned about broader economic considerations. The country ’ s economic condition was declining because of tax cuts, huge increases in security expenditures (including the Defense Depart- ment and the Homeland Security Department), the supplementals, mandatory increases in entitlements (such as Medicare and social security), and the growing interest on the national debt. The country faced an enormous and growing defi cit, a signifi cant decline in the value of the dollar, and an extremely large trade unbal- ance, and these were compounded by the huge bailouts and stimulus packages that
the government used to counter a widespread economic meltdown in 2008 and 2009.
During this post-9/11 buildup, the Department of Defense was living in a rich man ’ s world since it could afford to buy the kinds of things that it bought in the twentieth century as well as the things that it needed for twenty-fi rst-century con- fl icts. As the Wall Street Journal stated in 2006, “ The U.S. Defense machine is still churning out weapons made for old-style, conventional confl icts, even as it needs new tools to battle terrorists and insurgence. ” 68 Worst still, the estimated lifetime costs of the Pentagon ’ s fi ve biggest weapons systems (in 2006) was 89 percent more than these programs were projected to cost in 2001, 69 and this rising cost trend continued. The GAO noted in 2008 that the planned commitment for weapons ’ programs in 2000, $790 billion, had grown to $1.6 trillion by 2007. 70 But everybody seemed happy to live in this Alice in Wonderland world, and no one chose to look behind the mirror. The services continued to do their planning based on the assump- tion that the budget would continue to go up. As the House Armed Services Com- mittee commented about the navy ’ s plan in the 2007 authorizations process, “ According to the Navy ’ s estimates, execution of this plan requires a signifi cant increase in ship-building funds, from $8.7 billion in Fiscal Year 2006 to $17.2 billion in Fiscal Year 2011. ” 71 Surely a doubling of the ship-building budget in a period when the total dollars for defense were anticipated to decline means that something else will have to give. Yet in the president ’ s request for defense spending in 2008, according to the Wall Street Journal, “ just about every major weapon system is set to get more funding than in the current year. ” 72 The DoD acknowledged (in its Quadrennial Defense Review) that additional ground troops are required to handle scenarios such as Iraq and Afghanistan, but rising manpower costs make this unaf- fordable unless the budget continues to grow signifi cantly. With money pouring into the defense industry, the Standard and Poor Aerospace and Defense 500 Index outperformed the broad market averages from 2001 through 2007. 73
One issue that repeatedly came up during the large increases in the defense budget after 9/11 was the question “ If the world has changed so much, what should we be buying instead of the old ships, planes, and tanks? ” In spite of the huge increase in available dollars, there was a growing separation between the items requested in the defense budget and the items needed for twenty-fi rst-century confl icts. If the budgets were to fl atten out or decline, then there was bound to be a looming DoD fi scal crisis.
New Perspectives and New Organizations
One obvious lesson that could be learned from the events of September 11, 2001, was that national security for the United States requires a multinational perspective.
No single nation can battle global terrorism alone. As Defense Secretary Gates stated
in 2008, our “ ultimate success or failure will increasingly depend more on shaping the behavior of others — friends and adversaries, and most importantly the people in between. ” 74 He went on to say that crafting a military design for more complex wars among civilian populations demands that all the services critically examine their cultures and discard those parts that are barriers to change. Gates also has quoted from Mark Perry ’ s book Partners in Command: George Marshall and Dwight Eisenhower in War and Peace that “ Eisenhower was a commander who believed that building and maintaining an international coalition of democracies was not a political nicety . . . but a matter of national survival. ” 75
On the domestic side, many organizations — including border protection, harbors, airports, and police — interfaced with homeland security, but these each operated independently. It was decided that the government should establish a single agency that would be responsible for homeland security. It would cover natural disasters (such as hurricanes, tornadoes, earthquakes, and nationwide epidemics such as SARS) and security actions (including domestic acts of terrorism and external attacks on the country). The twenty-one agencies that previously were involved in these issues (including the Coast Guard and the Federal Emergency Management Agency) would be integrated into one single organization called the Department of Homeland Security.
A second major organizational change that followed the terrorist acts of 9/11 involved recognizing that having some intelligence agencies focus on domestic issues and others on international issues led to a lack of sharing of information among these organizations. It was decided to integrate the seventeen agencies responsible for collection and analysis of intelligence. This involved roughly 100,000 people in the U.S. intelligence community and an annual budget of around
$42 billion. 76 The objective of the new director of national intelligence was to integrate these seventeen intelligence agencies and to encourage them to share their data and analyses (something diffi cult to achieve with organizations that had prided themselves on their ability to keep secrets). The attempts to integrate the nation ’ s Central Intelligence Agency, the National Security Agency, and other defense- oriented agencies with the intelligence branches of many of the domestic agencies (such as the FBI and the Border Patrol) encountered many of the problems that had been faced in creating the Department of Defense from the old War Depart- ment (the army) and Navy Department. The challenge was to ensure that these individual organizations continued doing outstanding jobs in their own areas as they moved to more of a joint operation (in the way that the military did when technology required the integration of air, land, and sea in military operations).
The Department of Homeland Security and the Offi ce of the Director of National Intelligence would have to create new, integrated cultures for these organizations.
One way that integration for these new organizations will be achieved is through
the industry that commonly serves them. The types of problems and technologies that the Defense Department faces in the twenty-fi rst century are similar to those that are faced by the Department of Homeland Security and the intelligence com- munity. All are heavily information-based. Thus, the industry that supports them will undoubtedly be a national security industry that consists primarily of fi rms that have grown up in the defense industry. This integration on the supply side may help to achieve the desired integration on the demand side — not only within each of the three organizations (defense, homeland security, and intelligence) but between those organizations as well.
One last major structural change was highlighted by the events of 9/11 and the confl icts that followed it: security can no longer be seen exclusively in military terms. The United States will need to have close alliances with friends and allies around the world (which involves the State Department), and most of the nation ’ s regional efforts will include both geopolitical and military aspects. Additionally, the activities will involve not just warfi ghting but also national stability and recon- struction. The State Department ’ s Agency for International Development (AID) has been very much involved in Iraq and is likely to be so for some time. There is now a need for far greater interagency working relationships and coordination than existed in the past. The twenty-fi rst century will need to have many agencies (the Departments of Defense, State, Homeland Security, Commerce, Energy, and Treasury; the Offi ce of the Director of National Intelligence; the National Institutes of Health) all involved in an integrated approach to the nation ’ s twenty-fi rst-century security. This will undoubtedly require structural and institutional arrangements that do not currently exist.
In this new integrated and globalized world, those who are responsible for America ’ s security will need to understand other cultures and languages — those of both its adversaries and its allies. This area has needed increased attention, and incentives have had to be created for its effectiveness. Early in the post-9/11 period, the Department of Defense directed that no future offi cers in the military could rise to the rank of general or admiral unless they spoke a second language and under- stood a second culture. Offi cers were encouraged to speak and learn about cultures such as Arabic, Chinese, and Farsi (rather than languages commonly taught in U.S.
schools, such as Spanish, French, and German). Understanding the cultural behavior of our adversaries and our allies will be critical in the twenty-fi rst century and is an area for the DoD to focus on for the nation ’ s future security.
Cultural understanding will have signifi cant value in establishing international agreements that help to control dangerous pathogens and the proliferation of nuclear weapons. These technologies are increasingly spread around the world, so the only way to keep the genie in the bottle is with multinational agreements that are achieved through multiagency activities, including within each nation.