Friday, June 4, 2010

Presenter: Deputy Secretary of Defense William Lynn; Christine Fox, director, cost assessment and program evaluation; and Robert Hale, undersecretary of defense - comptroller

Presenter: Deputy Secretary of Defense William Lynn; Christine Fox, director, cost assessment and program evaluation; and Robert Hale, undersecretary of defense - comptroller
June 04, 2010

U.S. Department of Defense
Office of the Assistant Secretary of Defense (Public Affairs)

DOD News Briefing with Deputy Secretary Lynn from the Pentagon

BRYAN WHITMAN, deputy assistant secretary of defense for public affairs: (In progress.) Anyway, I want to thank you all for coming to the briefing early this morning. I know that it's a little earlier than, perhaps, we do most of our briefings. But I want to welcome back to the briefing room Deputy Secretary Bill Lynn and his colleagues Christine Fox, who is the director of cost analysis and program evaluation, and of course Bob Hale, undersecretary of defense - Comptroller.

Again, today we're here to talk about the efficiencies initiatives and reduction of overhead that the department is going to undertake. And the deputy secretary, leading that effort here, is going to explain a little bit about how we're going to go about doing that and then take your questions on it. So again, sir, welcome back to the briefing room. Thank you.

MR. LYNN: Thanks Bryan.

What I -- what I thought I'd do is make a few opening comments and then spend most of the time taking your questions. And at that point I'll ask Christine and Bob to come up to answer the hard questions.

As Bryan said, what I -- what I want to do today is try and lay out a bit more detail about the process and the approach that we're going to take to implement the secretary's initiative to reduce overhead and support.

The reason for the timing, just so you know, is that we will be putting guidance out in the next day or so to the services and to the Defense components and the combatant commands about what kind of expectations the secretary has and what the process is. So you'll start to see those. These aren't going to be classified documents. You'll start to see those. So this will help you put some of that in context.

Let me start by saying that the way to look at this, I think, is this is not one process but three -- three -- at least three lines in a process, the first of which is -- which has gotten the most notice out of the Abilene speech of the secretary, is that we are seeking to reduce nonessential programs, the overhead programs that the Defense Business Board is calculating approximate about 40 percent of our budget. We're trying to reduce that and shift the resources into the force structure and modernization accounts, so that -- with a specific target, so that we can increase those force structure and modernization accounts at a rate of 3 percent beyond inflation -- 3 percent real growth.

The -- currently, the actual top line of those accounts goes up at about 1 percent. So you're looking for that additional 2 percent from a transfer from the overhead accounts into those force structure and modernization accounts.

So that's -- that is the first line and the first process, and you'll -- and we can talk a little bit more in detail about how we're implementing that in a second.

The second line is within the force structure and modernization accounts; we are looking to develop efficiencies inside those accounts.

And that is actually -- this is the track on which we are furthest along, I would say. That -- in other words, last year, the ending of production of the F-22, the cancellation of the VH-71 this year, the end of the alternate engine and the end of the buy on the C-17 all would be part of that track, where we're trying to eliminate overhead in programs, trying to reduce redundancies, stop programs where we think we have enough capability. Those are all efficiencies inside those modernization and force structure accounts. And that indeed is the second track.

And you'll see that track, although we -- I think the furthest along on that track, you'll see that we still have -- we think there is still ground to be gained on that track, and we -- and that is going to be part of this overall initiative. And you'll see how that fits in the process in a second.

The third track in this process is to improve the operating efficiencies of the department itself; in other words, to improve the agility of how the department operates, how the forces operate. And in that, we're talking about a flatter organization, fewer headquarters, smaller staffs, generally more efficiency.

And the secretary gave the example of the dog team going to Afghanistan and how many four-star headquarters had to -- had to sign off on that. That would be an example of that kind of -- of that third track.

Now, on the money, the first and second of those tracks are clearly about the money. And we're talking about developing -- transferring money from the overhead accounts into the force structure and modernization accounts, and we're talking about efficiencies within those.

The third track, money may be a by-product.

In other words, reducing staff or eliminating headquarters may save you some money. Indeed it should.

But the primary goal there is agility, is better operations. And so that -- just to make clear that that is -- it isn't -- all of this isn't just about the money, although the money is very important.

Let me say an additional think about the money, just to be clear. This is not an effort to reduce the Defense budget. This is an effort to operate within the Defense budgets that we've been given -- which are, over five years, about 1 percent real growth -- in a world where we think -- given that we're in two conflicts, very difficult to alter or reduce force structure.

And history tells us that we need 2 to 3 percent real growth, to maintain the war fighting capability of the forces and to continue the advances in those capabilities, to give the troops what they -- what they need to do their very best.

So this is not about reducing the top line. This is about operating within a constrained top line and trying to get enough resources into that war fighting end, in addition to developing that operating agility that I talked about.

Overall the -- I think we're going to give you a handout. We'll give you some of the numbers. But we're talking about -- we're going to -- in terms of the process, we're going to be sending out, as I said, guidance to all of the military departments as well as all of the other defense components.

They will get targets. They will get specific targets to hit in this -- in this budget cycle. The targets -- everybody wants a number. There will be a number on the sheet. It will be -- the total over five years will be just over $100 billion.

And that's divided up across the whole department.

Two-thirds of that number we are trying to get to be a direct transfer from the overhead account, and you'll see this in the guidance when you see it. Two-thirds would be a direct transfer from the overhead account into the -- into the force structure and modernization accounts. And one-third would be developing efficiencies within the force structure and modernization accounts.

So these are clearly just targets. We will -- you know, it's the initial step. But it's important to set -- these are pretty ambitious targets -- to set ambitious targets in order to accomplish the direction that the secretary -- the secretary wants to achieve.

An additional point about the process is the military departments will be keeping the savings they generate. An important incentive in the system is that they will -- they will, themselves, redirect the savings from the overhead accounts into the force structure and modernization accounts, and that will -- that will be how that -- that's done.

In terms of timing, the -- this will be part of the program budget process. The POMs are due July 31st, so that's when we'll have the initial service efforts on this regard -- in this regard. In addition to that POM process -- and all of the defense components will be part of that, too. They all get targets as well. In addition to that, there are a couple of other things that we'll be doing.

One is, all of the COCOMs will be asked to develop operating efficiencies. They are not being given budget targets; indeed, they do not have large budgets. But we are looking for their help in terms of identifying these operating efficiencies, in terms of the way the department operates, the staffing of the headquarters and overhead, support functions and so on.

Finally, there will be a cross-department process -- a cross- cutting department process to look for efficiencies. We will -- this will be in the nature of a front-end assessment. We already have eight of them going on. This will be a ninth. And it will be focused -- there are six or seven groups looking at things like personnel policies, including medical costs, TRICARE, as the secretary mentioned in the -- in a speech; organizational restructuring, acquisition practices, logistical efficiencies and so on.

So it -- we're going to the Defense components, starting with the services, looking for savings and initiatives. We're going to the combatant commands looking for efficiencies. And then we have a cross-cutting set of groups that are looking at broad, department-wide issues. And these'll be led by the OSD staff.

With that, I think I've kind of covered the main points of how we're going to do this. Maybe Bob and Christine, if you want to come up at this point.

And I think we'll go to your questions.

Q JIM WOLF. Many critics will argue that this is a time that 2 or 3 percent real growth in Defense spending, in force structure, in modernization is not enough to meet the challenges we face in the United States. Is that the number that you embraced as appropriate for the force modernization and force structure needs? Or are you compromising because of budget and fiscal realities?

MR. LYNN: The -- our assessment is that we need the force structure we have. And we've increased the -- particularly the ground forces to meet the needs: the increase in the Army end strength going on right now, an additional increase -- or previous increases we'd instituted in both the Marine Corps and the Army. And we'd halted previously proposed reductions in the Navy and the Air Force.

So we think we have the force structure that we need to meet the nation's national security needs.

What -- I think what the criticism and what you're saying is, in order -- if you're holding your force structure constant, generally what you think you need over time is 2 to 3 percent real growth in order to service that force structure, keep the -- refresh the technology, recapitalize the force, modernize the force. I think that judgment of 2 to 3 percent has been proved over history and is generally right.

What the -- what we are trying to do here is to get that 2 to 3 percent in the accounts where it's needed, force structure and modernization, without asking for an increase in the top line, so that if we're able to reduce overhead accounts, where we don't need those increases, shift it to the force structure and modernization accounts, we can get that 2 to 3 percent, and we can do what we think we need to do in technology refresh, modernization, protecting quality of life and all those critical factors.

Q Your understanding of how much the administration plans to increase the top line -- is it 1 percent over the next five years? Is that your understanding?

MR. LYNN: The -- I mean, the plan -- the plan we have now and the plan we expect to have is, it was -- it was a 2 percent increase – actually, from fiscal '10 to '11, 1.8 percent. And then -- but the five-year number -- if you look at the five-year number over the plan, starting in '12, it is about a 1 percent increase. And so that -- those are the numbers that we're building the budget on. Goes back to your point. Generally, you think, over time -- and not so much in any given year, but over time, you need 2 to 3 percent. This is an effort to develop that 2 to 3 percent with these internal changes, these efficiencies and these reductions in overhead and infrastructure.


Q Every secretary of defense to one degree or another has attempted this, and they all either get distracted by higher priorities or run out of time. Why is it going to be any different this time?

MR. LYNN: Well, I mean, we heard exactly that same thing last year when we proposed to end several major programs, starting with the F-22 and the VH-71, and same thing: Everybody cries, "Nobody succeeds." We succeeded. So I think you've got the example of success.

I think that this effort -- I would -- I think what -- the -- history tells you this will be very hard, and I agree with that. I think what makes -- distinguishes this effort is, one, what I said, is the leadership of Secretary Gates. He and I are personally engaged in leading this effort, and we'll be -- we'll continue to through the -- all the way through the fall developing and then the execution of the budget.

And in particular, the secretary has shown the ability, the leadership to take the tough choices, because ultimately you're not going to get savings like -- that we're proposing here with simply the easier move. So you will find some pure savings. I mean -- in other words, there -- by pure savings, I mean you can find things; you can do the same thing better and more efficiently, get the same outcome at lower cost. You can sometimes -- you can find those. I don't think we're going to find $100 billion. To get -- to get $100 billion, you're going to have to identify lower-priority programs that are not going to be part of future budgets. The secretary has shown an ability to take those tough choices.

Second, it's what Jim was talking about, is the necessity here. We're in a fiscal situation where it is -- it is difficult to shift additional resources to any budget, including Defense.

And we feel it's our responsibility, before we would even consider asking for any more resources, to go through this drill as strongly and as comprehensively as we -- as we can.

Third, I think a difference here is the comprehensiveness of this effort exceeds at least most of the past efforts I'm aware of; that we're engaging all of the different aspects of the department, all of the components, all of the military departments, the combatant commanders, the OSD staff.

Finally -- just a couple of other points -- is I think the incentive structure here is important: that the services are keeping their savings, so they have every incentive to find them. And then finally, is the context that we're in. We're in a -- in an era where we've had almost 10 years of substantial increases in the Defense budget. In that kind of era, you will tend to find that you've developed over time, with substantial increases -- that there are going to be inefficiencies in the way you've operated. Just after 10 straight years of large increases, there will be -- there will be efficiencies that can be -- that can be found.

So we don't take credit for it, but there are examples of -- we don't tend to get credit for it, but there are examples of efficiencies that the department has achieved and past secretaries have achieved. Let me give you a couple of them.

BRAC is an obvious one. We intend to save 4 to $6 billion a year once BRAC is fully implemented; we think this round will be around four. Twenty years ago, if you'd gone to every base, you would have found maybe a couple of million dollars of cash, and people handling that cash. Now we use travel cards. There's almost no cash at our bases. Twenty years ago, if you bought a can of paint, you had to do a purchase order. Now we use a -- the purchase card and, like all Americans, we hand that credit card over.

And those are just a few examples. We do achieve some efficiencies. So we need to keep pushing. I think the secretary is absolutely right to try to finish this initiative.

Q This hinges on the ability of the secretary of defense to make tough choices. Why aren't the people who have a stake in business as usual -- just gonna look at -- how long he's committed to serve -- and sit back and wait him out?

MR. LYNN: Well, I think the secretary is committed to serve -- I don't know that he's set a date on when he's leaving. (inaudible) I don't think he's set a -- I think he hasn't set a date.

Q (Off mike.)

MR. LYNN: But I think this will be more than just the secretary. I mean, he's discussed this with the president. The president's behind this. He's discussed this with the director of OMB. The OMB -- director of OMB is fully supportive. And I think that what we need to do is set in train this progress. As I said, the incentives are with the services to find these savings. I think we're -- have a very strong start on this process.

Q In this process, Mr. Secretary, what guarantees are there that the funds are actually going to shift to where the biggest gaps are, since they will stay within the services?

MR. LYNN: Well, I mean, obviously, most of the force structure modernization accounts are within the services, and that's where they would shift them to. You will always have the regular fall program budget review, so the service decisions will be reviewed in the normal course of the process. And the secretary always reserves the right to shift resources to the priorities as he sees them. So that we still have that process.

But to the initial step, I mean, in -- to put it differently, in other efforts, sometimes what's happened is, the savings are gathered up, brought into a central account and then decided how they've spent.

In this case, the service gets the initial input on deciding. And then the changes would be by exception. That's I think a pretty different incentive structure. But it doesn't rob the secretary ultimately of the final decision on where it goes.

Q The one-third from force structure and modernization, will that be split evenly among the services? Or will that be weighted? I mean, you've got things like ground force reset costs, et cetera, you know, out there and coming closer every day.

MR. LYNN: The initial targets are just -- are split -- are split evenly. And then once you get the programs in, you review and make adjustments as you -- as you see how it fits the strategy.

MR. HALE: (Off mike) -- put their money where they think it's most important -- (off mike) -- extra vehicles -- (off mike) -- as opposed to some other thing, they'll have that authority.

Q In the guidance, will there be any language stressing this capability area over another, as they're shifting that money around?

MR. LYNN: Well, not -- in the guidance that we're putting out on the overhead and efficiencies, no. But there -- I mean, we've just completed a QDR. And then there's Defense planning and programming guidance.

I mean, the services will be expected to follow that. But the secretary's emphasis on putting more resources into support of the wars that we're fighting, that kind of guidance still exists. And that we'll expect to be followed. That's the QDR. The overall lines of the QDR are still in place.

Q Secretary Gates -- (off mike) -- health-care costs. (Off mike.) Is there any realistic chance that you can somehow, you know, control health-care costs?

A lot of it is outside of the department's control.

MR. LYNN: Some of it is outside of the department's control. Some of it is within the department's control, working with Congress. And we intend to work with Congress. One of the -- I talked about the cross-cutting group.

One of the groups will be focused on personnel policies, and a central part of that group will be looking at TRICARE and TRICARE costs and looking at what the secretary mentioned in the Eisenhower speech, that we haven't changed co pays and premiums and deductibles in TRICARE for retirees since the TRICARE program started, and that was back in the '90s. So that -- we need -- we need to treat our troops and the -- and the retired forces fairly, given the sacrifice they've made. Does that mean we can't, you know, change any medical benefit ever? I think, no, that isn't what it means.

But I take your point. It's -- it -- it's -- this isn't something the department's going to be able to do unilaterally. We're going to have to work closely with Congress to accomplish that.

MR. HALE: We have had some successes. We're -- we have had some successes in TRICARE. For example, we were allowed to use the VA drug pricing scheme, which has saved us several hundred million dollars. We are implementing the Medicare prospective payment rates for inpatient services -- or outpatient services, I should say.

So there have been some efficiencies. I think Mr. Lynn is right. This is struggle, but it's a struggle that we need to continue. We need to slow the growth in health-care costs while maintaining high- quality services.

Q Mr. Lynn, on your opening comment, you included things like the second engine for Joint Strike Fighter among the efficiencies that you're going to gain this year. Are you confident that you can beat back Congress if money's in one bill, not yet in the other?

MR. LYNN: I mean, I think the secretary and the president have said in the strongest possible terms that they will not accept a bill with the alternate engine in it.

Q (Off mike) -- question, but I just want to clarify it first. I assume OSD as a department itself will undergo the same kind of review and we would see potentially the third track you mentioned, like personnel savings, potentially a purging of extra people within the OSD office itself?

MR. LYNN: Yes. I think you should -- OSD is clearly part of this. I think you will -- you will surely see changes in the office of the secretary of defense, and reductions in the size of the staff and other changes, yes.

Q When would we expect to see the results of what the -- each of the departments and the services all have come up with? I mean --

MR. LYNN: We're going -- we're going to see the -- kind of the initial effort. I don't know the -- whether you will see it. We will see it on July 31st -- (chuckles) -- and maybe you'll see it, too. We'll see it on July 31st when the -- when the services submit their programs and budgets. We will then take the rest of the year essentially to shape that into a budget submission for fiscal '12.

But I think the secretary very much wants to get started early and establish momentum for this, so I think you will see decisions, over the course of the summer and the fall, at least start down the path -- the path of overhead reductions and efficiency savings.

Q (Off mike) -- quick. I assume that -- and you -- (inaudible) -- force structure -- the services could take the paring knife to their own size, right? And potentially we could see if they're going to -- as an incentive to reduce the own size of their services. Do you expect to see that?

MR. LYNN: We're not -- we're not really -- I mean, I don't want to say you can't make any adjustment at all, but, no, we think that the combat force structure we have right now is what we need, at least to meet the threats in the current environment. So no, I would not expect to see major force structure changes in this effort.

Q You said that to get to 100 billion you're going to have to identify some programs that aren't going to survive. Let me ask you about the biggest single acquisition program, the F-35. The latest estimates from the Pentagon have it going potentially as high as 382 billion through 2036.

That compares to an estimated price tag of only 328 billion just two months ago. Is there any possibility that that program may be scaled back?

MR. LYNN: I -- that I don't think is going to be the focus of this, in terms of scaling back the program. But would the Joint Strike Fighter be a candidate in terms of trying to find efficiencies? You know, could we -- can we do with -- you know, can we do the program more efficiently, more effectively? That would certainly be a possibility. I mean, I think nothing is off the table, but we're not looking at fundamental changes in the Joint Strike Fighter program.

Q Okay. What about those numbers? Ms. Fox, since you're here, could you just elaborate a bit on how did it happen that the estimated price tag rose so much from just two months ago, after you implemented these changes designed to put the program back on track, adding time for development, money and test aircraft?

MS. FOX: Let me try to answer your question. I know you're referring to the Nunn-McCurdy review that was just released. The -- at the time that we talked about the cost of the program, as the budget was submitted in February and Dr. Carter and I testified on the program, we presented a range of values for the unit cost, and the unit cost with procurement included. The numbers in the Nunn-McCurdy review are in that range.

Now, they are at the high end of the range, which is not pleasing to the department -- to anyone -- but nevertheless, it is within the range. So it's not that our estimate of two months ago is just off from what it is now. And that's why we gave a range two months ago, because we knew we would be doing this work to refine the number. So that's just point one.

But that doesn't mean we're satisfied, just because it's in the range of what CAPE would estimate. That's not exactly what we had in mind for this program, as you well understand.

So we are looking now, as the secretary said, for efficiencies to drive those numbers down, not changing the numbers that we're procuring -- we need those jets -- but to try to reduce the inefficiencies that we're looking for in the program, which is part of this efficiency review, looking at all acquisition programs and structures and looking for efficiencies. That will certainly apply to the JSF program.

Q I'm surprised to hear you say, though, that that was within the range that you presented in February, because if I recall correctly, the 328 billion was the upper end of the range that you presented at that time, and that that's now been superseded and that the upper range has gone to 382 billion.

MS. FOX: I'm sorry. You know, in my head I have the numbers, the average procurement unit cost numbers in '02 baseline dollars, which is the basis of the Nunn-McCurdy. And so at the time, we were looking at a range there of 79 to 95, and it came in at 92. And so then as we added up across all the program and all of the things, there was a corresponding range. And those numbers I don't have in my head in the big numbers; I was focused on the numbers associated with the Nunn-McCurdy.

Similarly for the number with the procurement costs. We gave a range, and the number is also within that range, as well. I'm not arguing that the numbers are (sic) staggering when you add them all up. Not at all. Again, I just wanted --

Q They're not staggering?

MS. FOX: No, that they ARE staggering. I'm not arguing that they are not. They are staggering numbers. But as I said, we understood when we submitted the budget that there was uncertainty in the number. We put even in the report that we gave to Congress, the SAR, it had ranges in there, as well, because we knew we were going to be completing the Nunn-McCurdy review.

Now that we've completed it, we know where we are in the costs, we've got a lot more information, and we're going to go after targeting whatever we can for efficiencies to get the cost of that program down.

MR. WHITMAN: We'll probably have time for maybe one more. And let's try to keep it on this topic.

(Cross talk.)

Q Mr. Secretary, do you recall the savings targets for FY '12 for the services?

MR. LYNN: I have them in front of me.

MR. HALE: (Off mike.)

MR. LYNN: Seven billion.

Q To follow up on the acquisition workforce, how does the push to increase the size of the acquisition workforce relate now to your pressure to downsize?

MR. LYNN: Well, a substantial part of the increase in the acquisition workforce was actually in sourcing. Half or a little bit more than half was in sourcing. And actually we think that will save some money by bringing people on the government payroll.

The other part where we're just adding acquisition, we think that that is going to make the department a better buyer. And we think that we over steered in the '90s essentially and in the last decade, in terms of taking too much expertise out of the acquisition workforce.

So in order to get the kinds of efficiencies and overhead savings that we want on the -- on the acquisition and the investment side. We're going to need those people. So I think that those people are going to be an investment. And we'll get a many fold return on their expertise.

Q Can you clarify, sir, there's not a separate reporting requirement with this initiative. This July 31st date that you're talking about is part of the standard budget process, is that right?

MR. LYNN: Yes.

(Audio break.)

MR. HALE: Oh, we will ask. We will ask -- MR. LYNN: We will ask for them to give us -- to identify in -- say, in the fiscal '12 numbers you asked about, each service has 2 billion in savings to identify. We'll ask them to identify specifically what they -- what they've done.

So that will be part of their program and budget submission.

MR. WHITMAN: Let's make Otto's the last one.

Q (Off mike.)

MR. WHITMAN: I guess you didn't have one.

Q (Off mike) -- identified, you know, that you have to work with Congress to get this done.

How are you going to involve Congress? Are they going to get briefings? Are you going to give them an early presentation on the budget? I mean, how will you get Congress's cooperation?

MR. LYNN: I mean, we'll do all of that, and we're -- we need to continually engage with Congress at each step of the way. It's not just Congress, frankly. It's Congress, it's the White House, it's OMB, it's -- I mean, obviously, the groups within the -- in the department, and then industry, outside groups. So this has to be a transparent process to succeed.

Q Have you gotten anything back from Congress on the Abilene speech so far?

MR. LYNN: I mean, I think the general reaction to the Abilene speech has been very positive. I know I saw comments from Senator Levin that applauded the secretary's speech, and I think -- I think the general reaction has been -- and -- been very positive.

MR. WHITMAN: All right. Thank you, ladies and gentlemen.

MR. LYNN: Thank you.

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