Defense Department Faces ‘Hard Choices’ By Marjorie Censer

Capital Business
September 2, 2013
Pg. 9

The Pentagon’s acquisition staff is preparing to delay and potentially cancel programs in the coming weeks as it readies for another year of significant budget cuts, the military’s top procurement official said in an interview last week.

Frank Kendall, the undersecretary of defense for acquisition, technology and logistics, said he’s already holding off on some spending.

“I don’t know what’s going to happen next year, and I don’t want to make major commitments to contracts that we may terminate once we get into [ fiscal 20]14,” he said. “We’re going to have to make some hard choices, I think, in the next few weeks about what we do with some of our programs.”

Kendall said that he expects the defense industry to bear a disproportionate impact from the automatic spending reductions, known as sequestration, in the coming year.

The Pentagon and Congress, which don’t want to cut military pay, are limited in how quickly they can cut the civilian work force, and have already made significant cuts to operational budgets, he said.

That leaves vulnerable the accounts that fund industry work, from research to weapons production.

In the first year of sequestration, Kendall said the Pentagon found ways to cope. But in fiscal 2014, which begins in October, “we’re not going to be able to do what we did this year,” he said. “We’re going to have to make the assumption that sequestration’s here to stay, at least through ’14, and act accordingly.”

If sequestration does stay in place, he said, companies may start to take more serious steps toward consolidation. Though defense contractors engaged in a flurry of acquisitions and divestitures in the past several years, this year has been far slower.

“Industry to some degree is sort of waiting to see,” Kendall said. “At some point, people will start to make moves.”

Still, Kendall showed no indication of loosening the Pentagon’s restrictions on consolidation. Top officials have made clear that the Defense Department would not back further mergers among the largest companies, such as the wave of corporate marriages that occurred in the 1990s.

“That doesn’t mean there won’t be some repositioning among business lines,” Kendall said last week. At smaller companies, “I would expect to see more activity.”

Among the Pentagon’s initiatives to help struggling contractors, Kendall said, is a pilot effort meant to help companies build their weapons with an eye on exporting them to other countries.

The Defense Department is also weighing how to help squeezed suppliers, from rearranging the timing of its purchases to enlisting larger contractors to help – or in the worst cases, buy – these companies.

Despite the tougher straits for defense businesses, Kendall said he is asking firms that they not cut their spending on research and development, even though this investment does not typically provide immediate profits.

“Companies that are in the defense business need to be in it for the long-term,” he said. “As they manage their way through the next few years, they need to be positioning themselves for the future.”


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