NATO: Diversifying the Business of Defense

by Joachim Hofbauer on February 25, 2013

The French intervention in Mali and the 2011 campaign in Libya have shown that European states face significant challenges in sustaining robust, full-spectrum military capabilities. Declining defense budgets in European states will increasingly restrict their ability to acquire new capabilities in coming years. Meanwhile, the United States’ pivot to Asia will increase NATO’s reliance on European member nations for regional security. Recognizing a need for doing more with less, the Alliance has responded with efforts such as the Smart Defence Initiative in an attempt to introduce greater efficiency in the way capabilities are acquired and operated. To do this, member states need to change the way they think about delivering military capabilities. This includes considering business models that constitute a radical departure from traditional defense acquisition methods.

Traditionally, governments acquire military capabilities by purchasing or developing an asset (for instance, a strategic transport plane) that provides a capability (in this case, strategic airlift). The government then retains ownership of the asset and its armed forces operate it to bring the specific capability to bear. However, a variety of non-traditional strategies for delivering capabilities are imaginable.

Such alternative strategies for future capabilities acquisition have already been explored by several countries. The areas in which these alternative delivery strategies are employed differ greatly, ranging from logistics to kinetic effects. The two most common alternatives are the leasing of assets and the acquisition of capability services.

Leasing constitutes a business model with widespread application in the civilian sector. Instead of buying an asset, the lessee enters into a long-term rent contract with the lessor, who maintains legal ownership during the term of the lease. Applied in a defense context, a ministry of defense obtains the right to use a piece of military equipment owned by a third party—a private company or another government—for the duration of the lease. For example, Hungary and the Czech Republic have been leasing—rather than buying—Gripen multirole combat aircraft from Sweden.

The acquisition of capability services, by contrast, constitutes an even more radical departure from the traditional owning-and-operating model. In this alternative model, capabilities are directly provided by third parties who not only own but also operate assets. For instance, the United Kingdom utilizes a private finance initiative to procure bandwidth from communication satellites built to UK military standards, but owned and operated by a private corporation. The operating company can sell excess capacity to other customers, therefore increasing utilization rates of the overall system.

Alternative capability delivery strategies can offer several advantages. The most important is the avoidance of large up-front expenditures when acquiring assets, which usually require full payment upon delivery. Given the current fiscal pressure on defense budgets in Europe and the United States, these high initial costs force defense planners to make painful tradeoff decisions. Alternative strategies might offer a solution to this problem as they allow distribution of the total cost of acquisition more evenly across the life cycle of a capability. This is especially true in cases where capabilities might only be required for a limited amount of time; alternative strategies might therefore lower total cost, since the cost accrued reflects only the depreciation in value of the asset during the time of usage rather than the overall price of the asset. In addition, alternative strategies can provide more inventory flexibility and faster delivery times. Germany’s 2009 lease of three Heron unmanned aerial vehicles (UAVs) constitutes a prime example of this. It allowed the German armed forces to respond quickly to an urgent operational requirement in Afghanistan while minimizing commitment to a specific asset, providing an interim capability and thus affording more time for Germany to plan and validate its long-term UAV roadmap.

In the case of long-term requirements, however, this flexibility in expenditures and inventory management might result in higher total cost over the entire life cycle than the traditional acquisition model. There might also be insurance and contractual limitations associated with the usage of capabilities delivered through alternative strategies. This, combined with possible market limitations, regulatory constraints, and ethical concerns about the involvement of private entities on the battlefield might in fact make these solutions unviable for certain capabilities.

While alternative capability delivery strategies may not always provide superior acquisition options than the traditional owning-and-operating model, they do offer different benefit and drawback structures that can be advantageous in certain circumstances. Understanding these differences constitutes a critical prerequisite for making informed decisions about the best strategy for delivering a specific capability. Given mounting fiscal constraints, it will be imperative that acquisition professionals evaluate alternative capability delivery strategies more systematically and seriously when making future acquisition choices.

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