This morning, President Obama signed a Presidential Memorandum that aims to reform government contracting and, he claims, an effort that could potentially save taxpayers up to $40 billion.

President Obama is right to ensure that “the American people’s money is spent to advance their priorities, not to line the pockets of contractors who have figured out how to work the system, or to maintain projects that don’t work.” He is also correct to “reject the false choice between securing this nation and wasting billions of taxpayer dollars.”

Although the new guidelines won’t be introduced until September (begging the questions of where the estimate of $40 billion in savings comes from?), he offered a number of ways he believes cost-savings can be accrued:

  • Stop outsourcing services that should be performed by the government;
  • Ending unnecessary no-bid and cost-plus contracts;
  • Strengthening oversight to maximize transparency and accountability; and,
  • Opening up the contracting process to small businesses.

One of the main reasons the U.S. military was forced to rely on contractors so heavily in Iraq was due to the downsizing of the military in the 1990s (particularly the reduction of service-support units). The unanticipated length and complexity of operations in Iraq and Afghanistan demanded an increase in both contractor support and the occasional use of no-bid contracts to deliver timely services. However, because President Obama plans to significantly drawdown U.S. forces in Iraq over the next 18 months, it is difficult to imagine how a likely parallel drawdown in contractor services will produce further cost savings in the years beyond 2011.

Again, cost-saving measures taken in the 1990s have led to difficulties in defense contracting and cost growth of weapons systems in the past decade. The reduction of the Pentagon acquisition workforce by 50 percent between 1994 and 2005 severed adequate government oversight and created the conditions to outsource core government functions to contractors. Remedying this problem is central to maximizing transparency.

This Congress along with defense leaders must work to better prioritize the use of contractors in combat zones, diminishing their need while taking advantage of the services at which they excel by adopting risk-basked approaches. Encouragingly, President Obama’s memorandum appears to understand the need for such a separation of labor, stating: “Agencies and departments must operate under clear rules prescribing when outsourcing is and is not appropriate.”

Also reducing barriers to entering the defense market and welcoming small business would be a positive way to introduce new competition into the system. However, new regulations on an already over-regulated and consolidated system would only serve to scare these potential businesses away.

Finally, while the President was keen to blame defense contractors and the lack of oversight for the problems at hand, criticisms of Congress were admittedly lacking. Congress must itself learn to exercise self-restraint in the acquisition process, limiting its temptation to micromanage and learning to be a better customer.