Cutting the fat from the defense sector provides opportunity

September 14, 2009
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Gavin Brown, president of Michigan Aerospace Manufacturers Association, believes the defense industry will face the same level of stress next year as the health care industry is facing now. The reason: an army of 20,000 auditors sent out by President Obama to cut excess spending from defense procurement.

Brown worries that the auditors won’t know what they are looking for because few will be familiar with the details of how the industry operates.

“I think what (Obama’s) administration is looking for is to have an army of folks that overlook all the contracts coming through,” said Brown. “I would say what’s more important is, do they understand the industry and the procurement — and then be able to effectively analyze that information. I think that is going to be one of the biggest issues in defense spending in 2010.”

Until now, the industry has been relatively unregulated, with little attention to the prices paid to companies providing the product. Brown believes that when it comes to defense spending, there will be a move toward more fixed-price equipment.

“In defense spending, it’s been traditional that it’s not fixed price, so that they can pass along the price increases. The risk then goes on the government. The change with these 20,000 auditors coming on board and the change in the way the government procures will be fixed pricing, so that the risk gets back to the contractor.”

Brown said that companies often bid low to win an account, then tack on additional costs once they receive the account. This tactic often keeps smaller companies from being competitive. Moving to a fixed-cost structure would help eliminate this scenario by putting all costs up front. Ultimately, he said, it will open up the industry to new companies to competitively bid on accounts and save the government money.

“What it will do is, effectively, drop the pricing we pay,” he said. “It quite literally should save the government billions of dollars.”

While Brown believes in the concept, he believes there is a better way to implement it.

“Instead of 20,000 auditors, we need to shift some of those resources to the FBI. The FBI can bring in a talented staff of forensic auditors,” he said. “The reason being, they can look at companies and understand if I say I’m charging X for materials or X for labor, they’re going to have to have people who can say, ‘No, they lied in this area.’”

Brown also believes the reform within the industry could create more personal liability and responsibility.

“You’re going to see a new era of individual responsibility within companies, so they can go after individuals, as well as companies,” he said. “Fines have traditionally been looked upon as the cost of business. When individuals are held accountable, it will change the way they actually do things, and the government has to take that step to see the changes and benefits they’re looking for.”

If done properly, the process could bring billions of dollars back to the U.S. Treasury, said Brown, but there are a lot of questions that still need to be answered. Currently, the process is being led by the Department of Defense, as opposed to a third party. Brown suggested that there may be some deep-rooted relationships between the Department of Defense and the companies that supply the industry, which could become an issue.

The implementation of auditors could come as early as the beginning of 2010.

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