With the specter of federal budget sequestration delayed until March, companies that depend on contracts with Defense Department branches or their suppliers are wise to continue preparing themselves for a new reality: fewer and smaller government contracts.
While many have warned of drastic consequences if the budget sequester is triggered-which could slash an estimated 9 percent from most Pentagon accounts by Sept. 30-others foresee phased rather than abrupt cuts.
Two factors support the likelihood of gradual cuts: the exit of U.S. combat forces in Iraq and Afghanistan, and the pressure to reduce government spending across the board.
First, a look at historical trends suggests that the U.S. withdrawal of troops from Iraq and Afghanistan could bring a 30 percent reduction in spending. After the Korean War, for example, President Dwight Eisenhower cut defense spending by 27 percent. As we withdrew from Vietnam, President Richard Nixon reduced the Pentagon budget by 29 percent. And Presidents Ronald Reagan, George H.W. Bush and Bill Clinton combined to cut military spending by more than 35 percent as the Cold War came to a close.
Those cuts affected weapons systems, aircraft, ships and troop levels, and it's reasonable to expect similar impacts this time around.
Second, pressure for across-the-board budget cuts will result in reductions-perhaps not cliff-like, but certainly significant. A recent series of memos, discussed in the Federal Times on Jan. 16, illustrates that the Pentagon is likely to manage those cuts "by freezing civilian hiring, laying off temporary workers, considering furloughs for hundreds of thousands of civilian employees, and cutting back on contracts."
The Federal Times reported that Deputy Defense Secretary Ashton Carter told department leaders on Jan. 10 to "plan for the possibility of a yearlong continuing resolution that would generally leave 2013 spending frozen at last year's levels, as well as for across-the-board budget cuts set to take effect at the beginning of March, assuming that Congress and the Obama administration don't strike a deal to head them off."
The publication went on to quote a Jan. 14 memo from Rear Adm. J.P. Mulloy, deputy assistant secretary for budget, to Navy commanders: "If implemented, civilian furloughs will be centrally managed and will be a government-wide effort with limited exceptions." The Times also reported that the Army, Air Force and Defense Logistics Agency are likewise considering planning for large furloughs.
Civilian staffing cuts, though, will constitute only a portion of the reductions. I concur with the analysts and observers who anticipate cuts in weapons programs-not through outright cancellation, perhaps, but through reduced quantities and delays in development and production. In addition, significant consolidation in the number of high-ranking command officers appears likely, while uniformed troop levels may drop only modestly.
Amid all this uncertainty, what's a defense contractor to do?
As the owner of a small business that provides raw materials to the military and to prime contractors, I see a silver lining in this grim scenario. Given that reductions in the military's civilian support staff are nearly guaranteed, supply-chain vendors that can provide more technical, administrative and logistical support for defense procurement may find their services in greater demand.
With fewer seasoned people on hand to carry out procurement tasks knowledgeably and ensure compliance with exacting standards, the burden will fall to vendors to provide expertise-which may require decades of experience in sourcing materials, particularly those that have become difficult to find.
I encourage fellow suppliers to the military to lose no time in positioning themselves to capture more of a shrinking Pentagon pie by beefing up their ability to shoulder procurement support functions.
James M. Terhune is owner, president and CEO of T&T Materials Inc., which delivers customized procurement solutions to the U.S. government, prime corporate contractors and private industry.2/15/13 (c) 2013 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email email@example.com.