Defense Industry Restructuring

The seven defense business combinations reviewed by GAO estimated that they had spent $1.2 billion on such restructuring activities as the disposal and relocation of facilities and equipment, consolidation of operations and systems, relocation of employees, and workforce reductions. Of this amount, the business combinations spent about $115 million on expenses linked to workforce reductions. Severance pay constituted the majority of these expenses, with lesser amounts going for temporary health benefits and outplacement services. Overall, the business combinations reported that about 18,000 workers or positions were eliminated because of restructuring efforts. Although the Defense Department believes that billions of dollars in benefits will flow from industry restructuring, GAO cautions that those amounts may be overstated.

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.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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