Restructuring Savings and Costs

In April 1998, we reported that, for the seven business combinations, DOD expects to save a net of almost $3.3 billion between 1993 and 2000 from restructuring activities, such as laying off workers, closing facilities, and relocating employees and equipment. Table 1 shows DOD’s projection of its share of restructuring savings and costs for these business combinations. We reported in September 1998 that our work had shown that selected restructuring activities at 10 contractor business segments had enabled the contractors to reduce their projected operating costs by hundreds of millions of dollars. We reported in April 1998 that DOD estimated it had realized a net savings of about $1.9 billion from the seven business combinations. Now, DOD estimates it has realized a net savings of about $2.1 billion (see table 2). The estimated savings realized represent about 64 percent of the restructuring savings expected at the time of certification. Determining the precise impact that restructuring activities have on a contract price requires isolating the effect of restructuring from nonrestructuring-related factors. DOD noted that it is not feasible to precisely isolate the impact of restructuring from the impact of these other factors. Other Means to Ensure DOD Receives Restructuring Benefits

While it is not feasible to develop a methodology to precisely determine the impact of restructuring on contract prices, our work has shown that there are other ways to ensure that DOD receives benefits from restructuring activities. 30, 1998). 1, 1997).
Why GAO Did This Study

Pursuant to a legislative requirement, GAO provided information on: (1) the six business combinations for which the Department of Defense (DOD), as of September 30, 1998, had certified that the projected restructuring savings should exceed associated restructuring costs; and (2) on a seventh combination, Hughes Aircraft Company's acquisition of General Dynamics' missile operations.

What GAO Found

GAO noted that: (1) in April 1998, GAO reported that DOD estimated it would save a net of $3.3 billion between 1993 and 2000 from restructuring activities carried out by the seven business combinations; (2) GAO also reported that DOD estimated it had realized savings of about $1.9 billion as of August 1997, or more than half of the expected savings; (3) now, DOD estimates it has realized savings of about $2.1 billion, or 64 percent of the expected savings; (4) while GAO determined that selected restructuring activities had lowered the operational costs of the business combinations by hundreds of millions of dollars, it was not feasible to develop a methodology for precisely determining how contract prices were affected; (5) to make such a determination requires isolating the impact of restructuring from nonrestructuring-related factors, such as changes in business volume, quantities purchased, and accounting practices; (6) DOD, the contractors, and GAO were not able to isolate the effects of restructuring from those of other factors; and (7) however, other methods exist through which DOD can ensure that it receives its equitable share of restructuring savings in a timely manner.