How will the defense industry adjust to new fiscal realities?

• Author: Benes, Thomas A.
• Position: VIEWPOINT

Given the country's current fiscal and political environment, everyone, including defense industry leaders, is expecting changes in military spending and acquisition policy.

Defense contractors are already feeling the first effects of budget tightening and government "in-sourcing," or buying back contract work. All indicators point to a "new normal" for the industry.

Shrinking defense budgets require change but what form will this take and how best to adjust are issues that are still being debated.

The Quadrennial Defense Review received mixed reactions when first released in February 2010 but deserves another look as the main driver for change in strategy. The QDR calls for rebalancing the force for today's conflicts and reforming the acquisition process. The strategy seems to resonate well with the country's overall mood for better government and fiscal restraint.

The nation's renewed interest in reducing government spending will put pressure on any growth in defense top-line dollars and may force a downturn in the 2013-2016 period. This also coincides with a probable drawdown of Afghanistan efforts and a push to realize some form of "peace dividend" especially following the presidential election.

There are internal budget concerns that have been, building within the Defense Department that will also force change regardless of external forces. The biggest factor includes the services' manpower accounts; the cost of sustaining the all-volunteer force has escalated and now exceeds any real growth potential in the budgets. The result is a plan to generate savings of about $ 100 billion over five years from within the budgets to be able to sustain and modernize the force.

There is also a looming reset bill due for the Army and Marine Corps to replace and modernize large quantities of equipment that was damaged or worn out in recent conflicts.

The biggest internal pressure on the procurement accounts will be the need to recapitalize strategic forces--SSBN ballistic missile submarines, B-52 strategic bombers, tankers, and strategic sealift all come due for replacement starting in 2016. These are huge bills, with 12 SSBN Ohio-class replacements anticipated at $7 billion per boat; the tanker replacement costs estimated at $35 billion; a new bomber program requires $1.7 billion for initial development; and, a new fleet of logistics ships has yet to be addressed.

It's too early to predict how specific programs will play out until actual money is...