Defense Secretary Robert Gates has tapped Pentagon acquisition executive Ashton Carter with leading a new initiative intended to free up billions annually within the U.S. military budget by more efficiently purchasing weapons and services.

Several hours after Carter briefed industry leaders and military program managers on the effort, Gates told reporters at the Pentagon that DoD officials have determined they must free up enough funds within the baseline defense budget to increase spending by 2 percent to 3 percent on weapons programs and other things that directly support combat.

Gates left no illusions that his war on unnecessary overhead and bloated administrative costs will be won overnight, saying "this will take time." In a memo to all DoD acquisition workers dated June 28, Carter wrote: "It has taken years for excessive costs and unproductive overhead to creep into our business processes, and it will take years to work them out."

Of the Pentagon's $700 billion total budget, about $400 billion is spent on things the department buys — from advanced fighter jets to kitchen services to logistical support to intelligence tasks.

Carter in coming months will issue new, sweeping guidance that will require DoD acquisition managers and professionals, as they "craft and execute the department's contracts in coming years, to scrutinize these terms to ensure that they do not contain inefficiencies or unneeded overhead," according to the memo.

That coming guidance will include monetary targets "to hit in the pursuit of greater efficiency," Carter wrote.

Carter told reporters DoD leaders believe this effort will succeed — unlike the scores of past Pentagon acquisition reform efforts that flopped — because it is focused on "specific outcomes and specific programs" and not just the military's purchasing process.

DoD officials also want to foster "what economists call productivity growth." As an example, he said "every year [consumers] get a better a computer" without major cost hikes. "That's not happening in defense," he said.

During his session with industry executives, Carter made clear the U.S. defense sector must be prepared for smaller annual budgets, adding that he is launching a sweeping review to identify ways the Defense Department can more efficiently buy weapons and services, say industry sources. That meeting was held at the Center for Strategic and International Studies in Washington.

Carter made clear to industry executives that the department and industry must get accustomed to "doing more without more." The message was clear, sources said: Yearly defense budgets will not grow at the breakneck pace they did under the George W. Bush administration.

The era of big growth is over, Carter said, meaning the defense sector must adjust and "play the game that's on the field."

While some industry officials late last week feared Carter would bring down the hammer on industry at the session, sources said the acquisition chief stressed the importance of a strong American defense industry.

Later, he told reporters that a healthy U.S. industrial base is crucial because the Pentagon depends on the private sector for so many things — from major weapon platforms to a range of services.

Carter said several times during the press conference that the intention of Pentagon brass is not to cut into companies' profits. Rather, they intend to use cutting costs — which should swell firms' profits — as a way to incentivize companies to eliminate unneeded overhead. This is "the principal leverage we have," he added.

If companies get more efficient and increase productivity, Carter's message is: "You will win more programs" and swell your bottom line.

As part of this effort, Carter wants industry to examine the efficiency of and need for all of their facilities. For instance, he pointed to the U.S. shipbuilding sector as one that might be over—capitalized, and ripe to shrink.

Loren Thompson of the Arlington, Va.—based Lexington Institute predicts U.S. defense firms won't emerge from Gates' war on overhead unscathed.

"It will take some time before overhead cuts begin to impact industry profits, but you can't decrease weapons spending, insource services and shrink overhead rates without companies feeling some pain," Thompson said. "This is how defense downturns unfold."

One Wall Street analyst applauded Carter's intentions, saying, "It's in both sides' interest to save money," largely because the Obama administration is planning to swell the U.S. defense budget by only 1 percent annually for the next five years.

He said he wants to ensure companies' intellectual property rights are protected while also enhancing the U.S. technology base. Sources said Carter told the group that Pentagon leaders want to work closely with industry — largely through several prominent trade associations — on the push for more acquisition and contracting efficiency.

The efficiency effort is the latest step in Gates' initiative designed to trim $101.9 billion in Pentagon spending over five years. The primary target will be bloated overhead costs that do not bring any additional value to combat operations, Carter said.

Gates declared this war on overhead May 8 during a speech in Kansas. His top lieutenants have been slowly adding more detail as to how the department will find the secretary's desired 3 percent within its own budget.

Pentagon officials want more stable production rates on major systems. "To ensure more programs are in stable, economically favorable rates of production and avoid cost escalation, program managers may not adjust production rates downward without head of component authority," states the memo.

In describing the initiative's focus on "returning affordability" to DoD acquisition, Carter pointed to several programs by name: the Army's Ground Combat Vehicle effort, the Navy's next—generation nuclear submarine and the Air Force's envisioned family of long—range strike aircraft. He also mentioned development of new electronic warfare tools.

On these and other new hardware programs, "cost considerations must shape requirements and design," states the memo.

Pentagon also wants to nix redundant systems and efforts now scattered across the U.S. military arsenal.

Carter announced he will lead a review of Pentagon acquisition and contracting, with all service acquisition executives playing a major role.

The acquisition executive indicated the review, which should conclude at the end of the summer, will culminate with new guidance detailing how the Pentagon can improve its buying practices and increase efficiency, sources said.

The review will include a look at services, typically functions performed by private—sector companies, ranging from logistics support to security tasks to food preparation to intelligence support. Services account for a growing share of the yearly defense budget, with some analysts estimating it has now reached nearly half.

The review will examine how the department can boost its buying power while ensuring industry's productivity remains strong, industry sources said. The study also will seek to ensure DoD programs are run more smoothly, without the turbulence of large funding cuts or costly schedule delays, sources added.

Sources said the acquisition executive told industry brass the review will examine: ensuring "real" competition for contracts, not "direct buys"; locking down requirements and not altering them late in the game, which drives up costs; use fees to reward companies for productivity and innovation; how to ensure more small—business participation in the DoD acquisition process; and ways to bolster the acquisition work force.

On real competition, he cited the Navy's new approach on its Littoral Combat Ship effort.

The initiative also will stress planning for what programs most likely will cost over what they should cost by using more "historically informed independent cost estimation," according to the memo. The Pentagon recently did this to restructure F—35 fighter program plans. This has been a favorite theme Carter and Gates have been sounding for several months.

On services, the department intends to follow the U.S. Air Force's model by establishing a program executive officer to oversee "the procurement of services."

U.S. military exports also will be a part of the review, but to what extent remains unclear.

The department also intends to "reward excellent suppliers," taking a page from the U.S. Navy's "pilot program to provide special benefits to consistently excellent industrial performers."

Finally, former Defense Secretary William Perry told the industry session this effort is nothing like the 1990s Last Supper, a famous meeting where Perry and other DoD leaders urged a major consolidation as defense spending was about to dramatically drop.

To that end, Carter told reporters to think of the efficiency initiative "in contrast to" the Last Supper because "it's a different era" — overall annual defense budgets are projected to grow by 1 percent each year, not drop off a cliff.

In a statement, the Aerospace Industries Association saluted the department's goals. AIA urged the Pentagon to take a number of steps, including:

å Reform our export control regime to protect national security by ensuring stringent controls on sensitive technologies, while adopting more efficient licensing management for programs dependent on allied collaboration.

å Assess and modify legislation that uses the acquisition process to promote policy initiatives rather than seeking the best equipment at the best price.

å Support legislation that will promote U.S. defense industry competitiveness in the global aerospace and defense market and ratify the U.S./U.K. and the U.S./[Australian] defense trade treaties.

å Rationalize oversight to eliminate duplicative and overlapping auditing and reviews.

å Repeal the 3 percent withholding tax that the Department of Defense itself estimates will cost $17 billion over the Future Year Defense Program.

å Stabilize program requirements, procurement plans, budgets and configurations.