The legislation required, in part, that a senior DOD official certify that projections of restructuring savings are based on audited cost data;
DOD’s share of projected savings exceeds allowed costs; and the Secretary of Defense reports to Congress on DOD’s experience with defense contractor business combinations, including whether savings associated with each restructuring actually exceed restructuring costs. Restructuring after a business combination includes a wide range of activities, such as the disposal and modification of facilities, consolidation of operations and systems, relocation of workers and equipment, and workforce reductions. Of the $1.2 billion in estimated restructuring costs, disposal and relocation of facilities and equipment was the largest cost category. The business combinations also reported that, at the time of our review, about 18,000 workers or positions had actually been eliminated (see table 3). Costs of Benefits and Services Provided to Laid-Off Workers

The seven business combinations estimated they spent about $115.4 million—or about 10 percent—of the total restructuring costs for benefits and services associated with workforce reductions. The majority of these costs were for severance pay, with less amounts for temporary health benefits and outplacement services. Outplacement included such services as career transition workshops, resume development, career counseling services, job listings, and information on state and federal programs. Overall, DOD estimates that it should realize a net savings of about $3.3 billion from restructuring activities (see table 4). As a result, DOD estimated that it has realized a net benefit of about $1.9 billion, or more than half the $3.3 billion in net savings certified for the seven business combinations. Caution should be exercised when interpreting the reported savings. Also, even when restructuring activities influenced a weapon system’s cost, the impact was often offset by nonrestructuring- related events or used to fund other program-related needs. DOD’s estimate of restructuring savings—which includes those savings that may not be directly related to restructuring—represents a cumulative amount of savings, often spread over a 5-year period, for each business combination. Consequently, DOD’s share of certified savings constitutes less than 1 percent of DOD’s budgets. DOD subsequently agreed not to reduce the proposed budgets to reflect restructuring savings. We did not, however, independently verify the information provided. To determine the budgetary implications of restructuring savings, we compared DOD’s share of certified restructuring savings to DOD’s actual or projected budgets for the period over which the savings were expected to be realized. Comments From the Department of Defense

	GAO Comments

1. 2. 3.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO provided information on restructuring costs of defense contractors involved in business combinations since 1993, focusing on the: (1) specific costs associated with workforce reductions; (2) services provided to workers affected by business combinations; (3) savings reached from the business combinations relative to the restructuring costs paid by the Department of Defense (DOD); and (4) budgetary implications of reported restructuring savings.

What GAO Found

GAO noted that: (1) the seven business combinations estimated they had spent $1.2 billion at the same time of GAO's review for such restructuring activities as the disposal and relocation of facilities and equipment, consolidation of operations and systems, relocation of employees, and workforce reductions; (2) severance pay constituted the majority of these expenses, with less amounts provided for temporary health benefits and outplacement services; (3) outplacement services included career transition workshops, resume development, career counseling services, job listings, and information on state and federal programs; (4) overall, the business combinations reported that about 18,000 workers or positions were eliminated due to restructuring activities; (5) DOD estimated it would realize a net benefit of about $3.3 billion from certified restructuring activities; (6) further, DOD estimated that as of August 1997 it had realized a net savings of about $1.9 billion, or more than half of the certified amount; (7) however, DOD's figures may overstate the amount that is directly attributable to restructuring; (8) the lack of specific DOD guidance on evaluating savings may contribute to this condition; (9) caution should be exercised when using or interpreting estimates of restructuring savings; (10) in a budgetary context, the $3.3 billion of estimated restructuring savings represents a cumulative amount of savings for each business combination, often spread over a 5-year period; (11) such savings constituted less than 1 percent of DOD's research and procurement budgets over the period for which the savings were projected; (12) with one exception, DOD officials told GAO they did not consider restructuring savings when formulating DOD's budget requests; (13) the one case cited by DOD involved two Air Force and Navy missile programs; (14) while DOD had initially proposed reducing the programs' budgets to reflect anticipated restructuring savings, DOD subsequently agreed with the military services that the projected savings were needed to fund other program-related needs; and (15) in cases in which restructuring activities influenced a particular weapon system's cost, projected savings were often offset by nonrestructuring-related events.