Volume 9, Number 1 – February 2012

The Return of Defense Downsizing:  So, Now What?

It’s been a pretty long time since many American communities have had to deal with the issues of defense downsizing, i.e. the ripple effects that hit communities when the Pentagon opts to reduce spending or cut military bases and facilities.  But, it seems like responding to defense downsizing is going to be on the agenda for many communities in the near future—for better or worse.  While it’s a good thing that we can cut defense spending and bring some troops home, these moves can also mean tough times for workers who build or support weapons systems and the communities where they work and live.

In announcements last month and in the upcoming FY2013 budget, President Obama, and Defense Secretary Panetta have called for major defense cuts. At the same time, they have requested Congressional authority for two more rounds of the dreaded Defense Base Realignment and Closure (BRAC) process to shut down or realign unneeded military bases. 

These budget decisions are going to be felt in regions across the US—plants will close, bases will be shuttered, workers will lose their jobs, and returning veterans will have to readjust to civilian life.   The transition process is going to be challenging.

For those of us of a certain age, this whole thing may sound familiar.  Some of my first extended work in economic development occurred during the debates about defense conversion in the late 1980s and early 1990s.   At that time, we assumed (wrongly, alas) that the need for large military presence would be permanently lessened with the end of the Cold War.  Workers, communities, and businesses also assumed that defense business opportunities were not coming back.  It was restructure, transition, diversity, convert or else. 

The stakes were high and that resulted in some heated political debates.   But it also generated some serious conversations and thinking about how to respond to defense budget cuts.  Some of this experience has colored community responses to military base closings which now proceed via a well-understood process.  It has not been as well used to aid community responses to other kinds of economic shocks, such as non-defense plant closings. 

I’ve been recently revisiting these post-Cold War discussions in relation to several current projects at EntreWorks Consulting.   This effort has required some good old fashioned paper shuffling, as many of the materials and research were produced in the pre-Internet and pre-PDF era of the 1980s and early 1990s.  So, much of the material is not easily found on-line.   However, the Pentagon’s Office of Economic Adjustment’s website is still a treasure trove of useful tips and case studies. 

If you look back at the history of past defense downsizing experiences, there are lots of good ideas and smart advice for communities, workers, and businesses on how to effectively respond to defense downsizing.   Here are some highlights:

Don’t Sweat the Big Stuff:  Defense is a notoriously cyclical industry, and large defense contractors recognize this reality.  While they don’t relish big defense budget cuts or program cancellations, they also recognize that these cycles are a regular part of the defense business.  As such, they are generally prepared and able to adjust to a smaller market through strategies that mix cutbacks, mergers and acquisitions, and more aggressive moves into other markets, especially overseas.  The process is not pain-free, but the big contractors can and will adjust accordingly—and generally, will not require a whole lot of public support or subsidy during the adjustment process.

Focus on the Supply Chain:  The above statement is likely not true for the thousands of smaller and medium sized firms who form the supply chains for large military contracts.   These firms may be very hard hit by a large contract cancellation or plant shutdown.  But, even here, their situations vary wildly.  Many suppliers have a variety of customers, and serve both defense and civilian customers.  They can adjust to a new customer mix. But, others may be less diversified.   In the early 1990s, small suppliers, such as machine shops, or local retailers, like dry cleaners or restaurants, took the hardest hits when local plants closed.   These companies can benefit from business development training and other kinds of assistance to identify and capture new markets. However, the 1990s experience also suggests that diversification (defense conversion) is a very difficult process and will only succeed if the firm’s owners and employees are completely committed to new directions. 

Worry about the Industrial Base:  As the Pentagon cuts back, military leaders must be conscious about preserving key defense industrial base capabilities.  Officials cannot simply be hands-off during the downsizing process.  They must act when necessary to preserve critical design and engineering capabilities that could be permanently lost.  This does not imply that every military contract is essential, but there are key sectors that will not survive without support via Pentagon contracts.  Many of these competencies, such as robotics or specialized manufacturing capabilities, are critical for both defense and commercial industry needs.   (For an excellent review of these issues from the Center for Strategic and Budgetary Assessments, click here.)

Support Worker Transition:  Helping affected workers make the transition to new jobs and careers should be your community’s top priority.   Past experience with defense worker transition produced mixed results as programs were slow to start up and often not well suited to defense worker needs.   Worker retraining and support programs have progressed since that time, but the makeup of the current defense workforce will create some challenging circumstances.  These workers are long-tenured, well-paid and older than average.  The Aerospace Industry Association of America  and the Aerospace Industry Association have both highlighted these workforce issues, noting that, in 2007, 65% of the aerospace workforce was over the age of 45.  As a recent Brookings Institution-sponsored study notes, current workforce and retraining programs are not well-suited to support these high tenured workers.  New approaches will be needed.

Most Communities Recover:  Community defense transitions are never easy, but, in the end, most places recover and build new economic engines to replace lost defense business.   There is no one best way to proceed, but there are hundreds of success stories and plenty of community leaders willing to share their experiences.  In fact, the Association of Defense Communities  exists for this very purpose—to help share lessons learned and effective practices for defense transitions.

What’s the bottom line from these experiences?   I would highlight two important messages:  1) Don’t reinvent the wheel, and 2) Hope is an option.   Lots of communities have responded to and recovered successfully from past defense downturns.   While the upcoming defense downsizing will be challenging, most communities are going to see a similar positive outcome in the end. 

What’s New at EntreWorks Consulting?

We continue to provide more regular news and updates at the EntreWorks blog at http://entreworks.net/blog.  Recent postings have analyzed Obama’s government reorganization plans, some cool business plan competition ideas, and mini-reviews of several new books on economic sustainability. You can also access blog updates at our Facebook page.

In addition, we’ve updated our website with new engagements from across the US.   You will also be able to find us at upcoming speaking and training engagements in Virginia, Vermont, and in Maine.  Hope to see you on the road!