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What Will DoD Sequestration Cuts Look Like in FY 2014?

Published: November 13, 2013

BudgetDEFENSEForecasts and SpendingSequestration

The Government Accountability Office (GAO) recently released a report on the Department of Defense's Approach to Sequestration in Fiscal Year 2013. The report reveals that in FY 2013 the DoD hoped against hope that Congress would remove sequestration cuts. When it became clear that this was not going to happen, the DoD then scrambled to implement short term measures to mitigate the impact of cuts. Most of these measures will not be available to the DoD in FY 2014, ensuring that cuts bite deeper than the year before.

The Government Accountability Office (GAO) recently released its Observations on the Department of Defense's Approach to Sequestration in Fiscal Year 2013 and what the report reveals for the future is not encouraging.  According to the GAO, the DoD responded to fiscal 2013 sequestration cuts by reducing spending in some places, reprogramming spending in others, and by utilizing funds that remained from fiscal 2012 to cover shortfalls.  In effect, the DoD waited until the last minute and then implemented a number of short-term measures intended to mitigate the immediate impact of the cuts without dramatically scaling back operations or cutting major weapons systems.  The result of these steps was to postpone some planned equipment maintenance, to reduce some weapon system quantities purchased, and delay some systems development and testing until FY 2014.  All of this was done in the hope that Congress and the President would find a way to reverse the insanity of sequestration cuts.
 
That’s the good news.  The bad news, the GAO reports, is that these same short-term measures will not be available in fiscal 2014, meaning the DoD is now forced to deal with impact of deep cuts in its budget.
 
The implications of this for industry are not pretty.  After years of budgetary expansion, the DoD will be scaling back spending in every area, presumably even in Information Technology.  Cuts in IT are anticipated despite the fact that IT can enable users to “do more with less.”  So, where will the axe fall?  Data contained in the GAO’s report may offer clues.  The following table from the GAO report shows that in percentage terms the DoD’s Procurement and Research, Development, Test, and Evaluation (RDT&E) budgets took some of the hardest hits in fiscal 2013.
 
 
 
How would this picture look using FY 2014 numbers?  Sequestration cuts approximately $52 billion from the DoD’s base discretionary budget of $527 billion, assuming Congress extends the current Continuing Resolution (in itself a disaster) through all of fiscal 2014.  The cuts effectively reduce the DoD’s FY 2014 base discretionary budget to $475 billion.  Looking at the $37 billion “amount of reduction” above it becomes clear that the DoD will need to cut approximately another $15 billion.  The table below approximates how those cuts will look in 2014 if the DoD applies them in roughly the same proportion as it did in 2013.
 
 
The big accounts for IT vendors to keep an eye on are Procurement and RDT&E.  In this scenario those accounts would experience cuts totaling approximately $22 billion.  Not all of these cuts would fall on IT projects, but it is almost certain that many programs will be affected.  These impacts could range from milestone delays and scaled back program scopes to outright program cancellations.
What can vendors do to mitigate the impact of these cuts on their business?
  • Focus business development efforts on programs already in full swing.  These programs will have incumbents so be prepared to fight hard for a piece of them as support contracts come up for recompetition.
  • Incumbents, prepare to defend yourselves.  Stay in your customers’ back pockets.
  • Concentrate on programs mandated by Congress and/or Executive Order, like business system modernization and data center consolidation.  By law the DoD is required to fund these efforts, making them as close to a ‘sure thing’ as is available in this market.
  • Seek out and capture work related to Programs of Record.  Even PoRs are not guaranteed funding nowadays, but you can probably count on them being first in line if funding becomes available.
  • Communicate how your solution or service can save money.  Areas like systems automation, cloud computing, and, to an extent, big data, should be strong plays.
Most of all maintain a sense of perspective.  Even with the cuts the DoD will be spending tens of billions of dollars on IT in FY 2014.