Defense Consolidation: The End of In-Sourcing?

3 mins read

Daniel Gordon, OFPP Administrator
Daniel Gordon, OFPP administrator

In March, the Government Accountability Office released a report updating long-term fiscal projections and predicting an “unsustainable” growth in the federal deficit – reaching World War II highs as early as 2020.

To trim the budget, Robert M. Gates has cut $340 billion in life-cycle costs from the Pentagon’s long-term outlook, but will rising fiscal deficits stall future efforts to bring services inside government?  Or will government customers look to the private sector to help it do more with less?

While Gates’ plans to move 10,000 acquisitions jobs inside DoD will likely remain unaffected, the current fiscal climate have already ended efforts to cut the contractor support workforce by 33,000.  The problem was that no cost savings were realized by bringing contractors into the DoD workforce, defeating the purpose of the initiative.

Stan Soloway, chairman of the Professional Services Council, “welcome[d] Secretary Gates’ acknowledgment that the Defense Department’s savings assumptions associated with insourcing have been vastly overstated and based on incomplete analyses at best,” adding that “effectively addressing the department’s mission and budgetary challenges must be a holistic and strategic exercise.”

Ashton Carter, undersecretary of defense for acquisitions, emphasized competition as a tool to drive prices down for DoD, citing $55 billion in last year’s contracting dollars that only received one qualified bid.

“Competition is the single, most powerful tool to drive productivity,” he told Congress last week.  “We must stop deluding ourselves that two bids is real competition.”

Carter said the only way to cut spending while continuing to provide goods and services is to “fundamentally change” how DoD does business.

DoD’s tone has shifted considerably over the past two months.  Since August, when the first reports that preliminary in-sourcing efforts failed to realize any cost-savings began trickling in, DoD spokesmen have stopped talking about reducing the contractor workforce and started talking about stepping up competition.  As OFPP Administrator Dan Gordon opined, government should prioritize in-sourcing of “inherently governmental” functions like acquisitions rather than across-the-board, “quota-driven” in-sourcing.

Since an industry consolidation is likely ahead, the Pentagon might not be able to count on increased competition to drive prices down in the future. DoD will have to balance its budget without sacrificing force effectiveness, a task that might be complicated by firms exiting the market or being absorbed by competitors.

Hopefully, DoD will emerge from this process leaner and more effective.

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