A nalysts and officials at the Center for Strategic and International Studies’s defense acquisition event last week agreed on one point: Things are not good. ¶ With the automatic spending cuts known as sequestration looking more permanent and a grand bargain on the budget seemingly out of reach, panelists argued that it’s a tough time to improve a troubled procurement system. Still, some found glimmers of hope. Marjorie Censer

Frank Kendall, the Pentagon’s top procurement official.

Kendall started the event off by contending that the budget environment today “is one of the worst environments I’ve ever seen.”

The problem, he explained, is that within the next three to four years, the Pentagon needs to significantly reduce its budget but cutting military or civilian employees can’t be done that quickly.

That, he said, means deeper cuts in areas such as procurement and research and development.

Even without confirmation that sequestration will continue into fiscal 2014, Kendall said the department is trying to spend at a level that assumes it will happen.

In the meantime, the uncertainty is creating its own problems. The worst scenario, Kendall said, is to “lurch from budget crisis to budget crisis.”

To manage the unknown, Kendall said he is trying to find flexibility.

“Where I can defer some work [or] not make a final commitment, I am doing that,” he told the audience.

Arnold Punaro, a former Science Applications International Corp. executive and retired Marine Corps general who now runs his own consulting firm.

Punaro only piled on to the pessimistic outlook, warning that automatic spending cuts are “shredding” the military’s readiness and technology.

Sequestration, he quipped, has “gone from stupid to dangerous.”

One of the key problems facing the industry and the Pentagon, he said, is that the political environment is no longer as favorable to defense. On Capitol Hill, he said, “spending cut hawks” have more clout than defense hawks.

And Punaro said it’s highly unlikely that a deal emerges to spare the Pentagon further cuts. Indeed, it’d be a cold day in hell, he joked, if a grand bargain — or even a “baby bargain” — were made next year.

Pierre Chao, managing partner of Renaissance Strategic Advisors and a longtime aerospace and defense analyst and adviser.

Chao made it clear from the outset that the defense industry is seeing a downturn.

But he offered up a more hopeful note, arguing that the decline creates a “window of opportunity.”

The acquisition system now, he said, is one in which officials would rather spend $1 billion on a program with 5 percent profit margins (for the contractor) than $600 million on the same program with 20 percent margins — even though that would be a better deal for taxpayers.

The current system rewards bad performance, he lamented. Program managers who deliver under budget see the saved money taken away for other needs, whereas program managers whose efforts exceed their budgets receive more money.

But the budget crisis means that for the first time in years, he said, Pentagon officials and members of Congress are talking about incentivizing companies to perform better.

“I’m the hopeless optimist,” Chao said of his desire for change in the way the Pentagon purchases equipment and services. “You’re beginning to hear, I would argue, the right kind of terms.”