Defense Industry Restructuring:

Updated Cost and Savings Information

NSIAD-98-156: Published: Apr 30, 1998. Publicly Released: Apr 30, 1998.

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Pursuant to a legislative requirement, GAO provided information on restructuring costs of defense contractors involved in business combinations since 1993, focusing on the: (1) specific costs associated with workforce reductions; (2) services provided to workers affected by business combinations; (3) savings reached from the business combinations relative to the restructuring costs paid by the Department of Defense (DOD); and (4) budgetary implications of reported restructuring savings.

GAO noted that: (1) the seven business combinations estimated they had spent $1.2 billion at the same time of GAO's review for such restructuring activities as the disposal and relocation of facilities and equipment, consolidation of operations and systems, relocation of employees, and workforce reductions; (2) severance pay constituted the majority of these expenses, with less amounts provided for temporary health benefits and outplacement services; (3) outplacement services included career transition workshops, resume development, career counseling services, job listings, and information on state and federal programs; (4) overall, the business combinations reported that about 18,000 workers or positions were eliminated due to restructuring activities; (5) DOD estimated it would realize a net benefit of about $3.3 billion from certified restructuring activities; (6) further, DOD estimated that as of August 1997 it had realized a net savings of about $1.9 billion, or more than half of the certified amount; (7) however, DOD's figures may overstate the amount that is directly attributable to restructuring; (8) the lack of specific DOD guidance on evaluating savings may contribute to this condition; (9) caution should be exercised when using or interpreting estimates of restructuring savings; (10) in a budgetary context, the $3.3 billion of estimated restructuring savings represents a cumulative amount of savings for each business combination, often spread over a 5-year period; (11) such savings constituted less than 1 percent of DOD's research and procurement budgets over the period for which the savings were projected; (12) with one exception, DOD officials told GAO they did not consider restructuring savings when formulating DOD's budget requests; (13) the one case cited by DOD involved two Air Force and Navy missile programs; (14) while DOD had initially proposed reducing the programs' budgets to reflect anticipated restructuring savings, DOD subsequently agreed with the military services that the projected savings were needed to fund other program-related needs; and (15) in cases in which restructuring activities influenced a particular weapon system's cost, projected savings were often offset by nonrestructuring-related events.

Recommendation for Executive Action

  1. Status: Closed - Not Implemented

    Comments: DOD disagreed on the need to clarify its guidance on evaluating restructuring savings, noting that existing DCAA guidance is adequate to meet the legislative requirement that anticipated savings exceed projected costs. Based on a follow-up inquiry, DOD informed GAO that it planned no action on the recommendation.

    Recommendation: The Secretary of Defense should direct the Director, Defense Contract Audit Agency (DCAA), to clarify DCAA's guidance on evaluating restructuring savings. In particular, the guidance should discuss how to evaluate proposed savings based on activities that were ongoing or planned prior to restructuring or that could have been achieved absent restructuring, such as those achievable by management improvements.

    Agency Affected: Department of Defense: Defense Contract Management Command

 

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