Defense Restructuring Costs

For every dollar that the government spends to subsidize defense industry restructuring costs it gets back nearly $2.00 in savings, largely from reduced overhead costs, according to GAO's review of five mergers and acquisitions among major defense contractors. This report also provides information on restructuring costs, including specific costs associated with workforce reductions and the services provided to workers affected by business combinations. It also identifies other funds used to help laid-off workers find new jobs and describes why the effectiveness of restructuring costs used to assist laid-off workers in gaining new employment cannot be determined.

GAO noted that: (1) the five business combinations had spent about $849 million at the time of GAO's review for such restructuring activities as the disposal and relocation of facilities and equipment, consolidation of operations and systems, employee relocation, and workforce reductions; (2) of this amount, the business combinations spent about $89 million, or 10 percent, on workforce reductions; (3) about 15,000 workers left the companies as a result of the business combinations; (4) severance pay represented about 89 percent of total worker benefits; (5) expenditures for services to assist laid-off workers totalled $4 million; (6) in addition to those services provided from restructuring costs, GAO identified about $48 million in Department of Labor (DOL) grants made either directly to the contractors or to locations where workers were laid off as a result of the business combinations or normal downsizing; (7) the business combinations were also providing some services that were not included in restructuring costs, but rather were paid as normal overhead costs; (8) GAO was unable to determine the effectiveness of services for workers laid off specifically as a result of the business combinations because information critical to making such a determination is not maintained by the business combinations and is not readily available from other sources; (9) little empirical information is available on specific services that are the most useful and cost-effective; (10) the Defense Contract Audit Agency (DCAA) estimated that, as of September 30, 1996, DOD had reimbursed these business combinations about $179 million toward its share of the $849 million the combinations had incurred for restructuring activities, and that DOD realized restructuring savings totalling $347 million from the business combinations during the same period; (11) therefore, for every $1.00 DOD has paid so far in restructuring costs, DOD has realized savings of $1.93; (12) DOD officials believe that additional savings have been realized, but they did not document those savings; (13) the estimates also do not reflect any costs that may be incurred in subsequent periods; (14) these estimates do not reflect DOL grant expenditures or any assistance from other federal programs or funding streams; (15) of the $179 million paid to the business combinations, DCAA determined that $18 million, or about 10 percent, represented additional costs to DOD as a result of the July 1993 decision to pay for certain restructuring costs; and (16) the percentage of additional costs relative to the total amount paid may not be the same for future business combinations.

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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